<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q
(Mark One)
 {X}  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended  March 31, 2001
                                ---------------

                                      OR

 { }  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

Commission File Number  1-14007
                        -------

                              SONIC FOUNDRY, INC.
                              -------------------
            (Exact name of registrant as specified in its charter)

                MARYLAND                                      39-1783372
     -------------------------------                     -------------------
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                      Identification No.)


                    1617 Sherman Avenue, Madison, WI 53704
                    --------------------------------------
                   (Address of principal executive offices)

                                 (608)256-3133
                                 -------------
                            (Registrant's telephone
                          number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes  X    No    .
   -----    -----

State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
                                                       Outstanding
                    Class                              May 11, 2001
                    -----                              ------------
           Common Stock, $0.01 par value                22,117,135
<PAGE>

                              SONIC FOUNDRY, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                         QUARTER ENDED MARCH 31, 2001


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                      PAGE NO.
                                                                      --------
<S>                                                                   <C>
PART I    FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements

          Consolidated Balance Sheets - March 31, 2001 (Unaudited)
            and September 30, 2000..................................      3

          Consolidated Statements of Operations (Unaudited) -
            Six months ended March 31, 2001 and 2000 and the three
            Months ended March 31, 2001 and 2000....................      5

          Consolidated Statements of Cash Flows (Unaudited) -
            Six months ended March 31, 2001 and 2000................      6

          Notes to Consolidated Financial Statements (Unaudited)....      7

Item 2    Management's Discussion and Analysis of Financial
            Condition and Results of Operations.....................      9

Item 3    Quantitative and Qualitative Disclosures
            About Market Risk.......................................     16

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings.........................................     16

Item 2.   Changes in Securities and Use of Proceeds.................     16

Item 6.   Exhibits and Reports on Form 8-K..........................     17
</TABLE>

                                       2
<PAGE>

                              Sonic Foundry, Inc.
                          Consolidated Balance Sheets
                     (in thousands except for share data)

<TABLE>
<CAPTION>
                                                                       March 31,         September 30,
                                                                          2001                2000
                                                                   -------------------------------------
Assets                                                                (Unaudited)
<S>                                                                <C>                <C>
Current Assets:
 Cash and cash equivalents                                           $       10,327   $         21,948
 Accounts receivable, net of allowances of $2,127 and
   $1,209 at March 31, 2001 and September 30, 2000                            5,819              9,075
 Accounts receivable, other                                                     249                355
 Revenues in excess of billings for software license fees                       184                105
 Inventories                                                                  1,291              1,906
 Prepaid expenses and other current assets                                      701              1,591
 Prepaid advertising                                                          1,000              1,000
                                                                   -------------------------------------
Total current assets                                                         19,571             35,980

Property and equipment:
 Land                                                                             -                 95
 Buildings and improvements                                                   2,357              3,186
 Equipment                                                                   15,635             15,370
 Furniture and fixtures                                                         536                504
 Assets held for sale                                                            77                  -
                                                                   -------------------------------------
   Total property and equipment                                              18,605             19,155
 Less accumulated depreciation                                                3,900              3,071
                                                                   -------------------------------------
Net property and equipment                                                   14,705             16,084

Other assets:
 Goodwill and other intangibles, net                                         58,228             73,632
 Capitalized software development costs, net                                    273                518
 Long-term investment                                                           514                514
 Other assets                                                                    47                 97
                                                                   -------------------------------------
Total other assets                                                           59,062             74,761
                                                                   -------------------------------------
Total assets                                                         $       93,338   $        126,825
                                                                   =====================================
</TABLE>

See accompanying notes.

                                       3
<PAGE>

                              Sonic Foundry, Inc.
                          Consolidated Balance Sheets
                     (in thousands except for share data)

<TABLE>
<CAPTION>
                                                                   March 31,         September 30,
Liabilities and stockholders' equity                                  2001                2000
                                                                --------------------------------------
<S>                                                             <C>                  <C>
Current liabilities:
 Accounts payable                                                  $        2,415       $      5,231
 Accrued liabilities                                                        2,317              2,819
 Accrued restructuring charges                                                487                  -
 Current portion of long-term debt                                          4,843              4,300
 Current portion of capital lease obligations                               1,411              1,477
                                                                --------------------------------------
Total current liabilities                                                  11,473             13,827

 Long-term obligations, net of current portion                                215                923
 Capital lease obligations, net of current portion                          1,085              1,703
 Other liabilities                                                             28                  6

Stockholders' equity:
 Preferred stock, $.01 par value, authorized 5,000,000
  shares, none issued and outstanding                                           -                  -
 5% preferred stock, Series B, voting, cumulative,
  convertible, $.01 par value (liquidation preference at
  par), authorized 10,000,000 shares, none issued and
  outstanding                                                                   -                  -
 Common stock, $.01 par value, authorized 100,000,000
  shares; 22,147,285 and 21,904,574 shares issued and
  22,117,135 and 21,876,824 outstanding at March 31, 2001
   and September 30, 2000                                                     221                219
 Common stock to be issued                                                  5,579              5,579
 Additional paid-in capital                                               147,437            148,290
 Accumulated deficit                                                      (72,338)           (42,388)
 Receivable for common stock issued                                           (26)               (72)
 Cumulative foreign currency translations/adjustments                        (137)               137
 Unearned compensation                                                        (12)            (1,249)
 Treasury stock, at cost, 30,150 and 27,750 shares at
  March 31, 2001 and September 30, 2000                                      (187)              (150)
                                                                --------------------------------------
Total stockholders' equity                                                 80,537            110,366
                                                                --------------------------------------
Total liabilities and stockholders' equity                         $       93,338       $    126,825
                                                                ======================================
</TABLE>

See accompanying notes.

                                       4
<PAGE>

                              Sonic Foundry, Inc.
                           Statements of Operations
                                  (Unaudited)
                   (in thousands except for per share data)

<TABLE>
<CAPTION>
                                                        Three Months Ended                      Six Months Ended
                                                              March 31,                             March 31,
                                                        2001               2000              2001              2000
                                               ------------------------------------------------------------------------
<S>                                            <C>                     <C>               <C>               <C>
Revenue:
Software license fees                               $    4,534         $    5,635        $    8,522        $   10,684
Media services                                           2,730                367             5,260               403
                                               ------------------------------------------------------------------------
  Total revenue                                          7,264              6,002            13,782            11,087

Cost of revenue:
Cost of software license fees                            1,790              1,166             3,194             2,220
Cost of media services                                   1,957                370             4,290               474
                                               ------------------------------------------------------------------------
  Total cost of revenue                                  3,747              1,536             7,484             2,694
                                               ------------------------------------------------------------------------

Gross margin                                             3,517              4,466             6,298             8,393

Operating expenses:
Selling and marketing expenses                           2,759              4,029             7,987             8,067
General and administrative expenses                      2,187              1,706             5,871             3,158
Product development expenses                             1,793              1,522             4,627             2,712
Amortization of goodwill and other intangibles           7,009                  -            14,027                 -
Restructuring expenses                                       -                  -             3,782                 -
                                               ------------------------------------------------------------------------
  Total operating expenses                              13,748              7,257            36,294            13,937
                                               ------------------------------------------------------------------------
 Loss from operations                                  (10,231)            (2,791)          (29,996)           (5,544)

Other income (expense):
Interest expense                                          (185)               (59)             (372)             (226)
Interest and other income                                  139                379               418             1,095
                                               ------------------------------------------------------------------------
  Total other income                                       (46)               320                46               869
                                               ------------------------------------------------------------------------
 Net loss                                           $  (10,277)        $   (2,471)       $  (29,950)       $   (4,675)
                                               ========================================================================

Loss per common share -
  Basic                                             $    (0.46)        $    (0.15)       $    (1.36)       $    (0.31)
  Diluted                                           $    (0.46)        $    (0.15)       $    (1.36)       $    (0.31)
                                               ========================================================================
</TABLE>

See accompanying notes.

                                       5
<PAGE>

                              Sonic Foundry, Inc.
                     Consolidated Statements of Cash Flows
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                                     Six months ended
                                                                                                           March 31,
                                                                                                    2001               2000
                                                                                              ----------------------------------
<S>                                                                                               <C>               <C>
Operating activities
Net loss                                                                                         $  (29,950)        $   (4,675)
Adjustments to reconcile net loss to net cash used in operating activities:
 Amortization of goodwill and other intangibles                                                      14,027                  -
 Depreciation and amortization of property and equipment                                              1,785                466
 Amortization of capitalized software development                                                       245                284
 Noncash charge for common stock warrants and options                                                   234                204
 Amortization of debt discount and debt issuance costs                                                    -                163
 Amortization of unearned compensation                                                                    -                 50
 (Gain)/Loss on disposal of assets and investments                                                    1,477               (650)
 Changes in operating assets and liabilities:
  Accounts receivable and revenues in excess of billings                                              3,282             (2,659)
  Inventories                                                                                           615               (140)
  Prepaid expenses and other assets                                                                     958               (807)
  Accounts payable and accrued liabilities                                                           (2,271)               694
                                                                                              ----------------------------------
Total adjustments                                                                                    20,352             (2,395)
                                                                                              ----------------------------------
Net cash used in operating activities                                                                (9,598)            (7,070)

Investing activities
Fees related to acquisition, accrued in prior year                                                     (679)                 -
Notes receivable-affiliates                                                                               -             (2,000)
Acquisition, net of cash acquired                                                                         -               (146)
Purchases of property and equipment                                                                  (1,723)            (2,831)
Sale of assets and investments                                                                            -              1,000
Sales of property and equipment                                                                       1,205                  -
                                                                                              ----------------------------------
Net cash used in investing activities                                                                (1,197)            (3,977)

Financing activities
Proceeds from sale of common stock, net of issuance costs                                               110             50,632
Borrowings (Payments) on line of credit, net                                                            571                  -
Payments on long-term debt and capital leases                                                        (1,507)               (66)
                                                                                              ----------------------------------
Net cash used in financing activities                                                                  (826)            50,566
                                                                                              ----------------------------------

Net decrease in cash                                                                                (11,621)            39,519
Cash and cash equivalents at beginning of period                                                     21,948              5,889
                                                                                              ----------------------------------
Cash and cash equivalents at end of period                                                       $   10,327         $   45,408
                                                                                              ==================================

Supplemental cash flow information:
 Interest paid                                                                                   $      192         $       62
Noncash transactions -
  Capital lease acquisitions                                                                             86                261
  Reclassification of goodwill to fixed assets upon final appraisal of International Image            1,281                  -
  Cancellation of unvested stock options classified as unearned compensation upon
   acquisition of STV                                                                                 1,249                  -
  Issuance of warrants for consulting services                                                           19                  -
  Conversion of subordinated debt and associated debt issuance costs and accrued interest
   into common stock                                                                                      -              4,271
</TABLE>

                                       6
<PAGE>

                              Sonic Foundry, Inc.
                  Notes to Consolidated Financial Statements
                                  (Unaudited)

1.  Basis of Presentation and Significant Accounting Policies

Interim Financial Data

The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's annual report filed on Form 10-
K for the fiscal year ended September 30, 2000. In the opinion of management,
all adjustments (consisting only of adjustments of a normal and recurring
nature) considered necessary for a fair presentation of the results of
operations have been included.  Operating results for the periods presented are
not necessarily indicative of the results that might be expected for the year
ended September 30, 2001.

Inventories

Inventory consists of the following (in thousands):

                                                 March 31,        September 30,
                                                   2001               2000
                                              ---------------------------------
   Raw materials and supplies                    $   660            $  1,121
   Work-in-process                                   325                 213
   Finished goods                                    306                 572
                                              ---------------------------------
                                                 $ 1,291            $  1,906
                                              =================================

Net Loss Per Share

The following table sets forth the computation of basic and diluted loss per
share:

<TABLE>
<CAPTION>
                                                            Three Months              Six Months
                                                           Ended March 31,          Ended March 31,
                                                         2001         2000         2001        2000
                                                    ---------------------------------------------------
   <S>                                              <C>            <C>          <C>         <C>
   Denominator
   Denominator for basic and diluted loss per
    share - weighted average common shares            22,103,804   17,027,306   22,019,690  15,202,123
                                                     ===================================================
   Securities that could potentially dilute
    basic earnings per share in the future that
    are not included in the computation of
    diluted loss per share as their impact is
    antidilutive (treasury stock method)
         Options and warrants                          1,567,034    3,131,559    1,375,651   3,549,099
</TABLE>

                                       7
<PAGE>

Accounting Pronouncements

In May 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 00-14, "Accounting for Certain Sales Incentives."  EITF No. 00-14 requires
cash rebates to be classified as a reduction of revenue rather than a marketing
expense.  Historically, the Company has recognized revenue for products with
cash rebates on a gross basis at the time of the sale, and cash rebates expected
to be claimed were charged to marketing expense.  Adoption of EITF No. 00-14
affects the presentation of rebates in the statement of operations, but does not
affect the loss from operations reported.  EITF No. 00-14 is required to be
adopted beginning July 1, 2001, however, the Company has elected to make it
effective October 1, 2000.  Prior periods presented for comparative purposes
have been reclassified to comply with the new presentation requirements.  For
the quarter ended March 31, 2001 and 2000, rebates were $727,000 and $26,000,
respectively.

2.   Restructuring Charge

As a result of rapidly changing market conditions, in December 2000 the Board of
Directors authorized management to make a 40% workforce reduction in order to
improve cash flow.  The restructuring charges were determined based on plans
submitted by the Company's management and approved by the Board of Directors
using information available at the time.  As a result of this reduction, the
Company recorded restructuring charges of $3,782,000 during the first quarter of
fiscal 2001 and recorded a restructuring accrual of $2,557,000.  During the
second quarter of fiscal 2001, the restructuring accrual was reduced by
$2,070,000 and no additional restructuring charges were recorded.

3.   Subsequent Events

In early January 2001, a $4 million note was due to the former shareholders of
International Image.  We withheld paying the note pending the resolution of
certain disputed representations made during the acquisition.  In January 2001
the noteholders initiated litigation against us in Toronto for payment of the
note and in March, 2001 we initiated a counter action for damages incurred.  In
April 2001, we paid the minority shareholders $500 thousand, which was in full
settlement of $700 thousand plus accrued interest originally owed.  Litigation
with the majority shareholders is still pending.

                                       8
<PAGE>

Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

The following discussion of the consolidated financial position and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this form 10-Q and
the Company's annual report filed on form 10-K for the fiscal year ended
September 30, 2000. In addition to historical information, this discussion
contains forward-looking statements such as statements of the Company's
expectations, plans, objectives and beliefs. These statements use such words as
"may," "will," "expect," "anticipate," "believe," "plan," and other similar
terminology.  Actual results could differ materially due to changes in the
market acceptance of our products, market introduction or product development
delays, our ability to effectively integrate acquired businesses, global and
local business conditions, legislation and governmental regulations,
competition, our ability to effectively maintain and update our product
portfolio, shifts in technology, political or economic instability in local
markets, and currency and exchange rate fluctuations.


Overview

In accordance with FAS 131 disclosure on segment reporting, the SEC's guidance
has been to present financial information in a format that is used by the
Company's management to make decisions.  We view the Company as a digital media
solutions provider with two primary revenue centers: a software product
division, with a full suite of software products utilized by both producers and
consumers of digital media; and a media services division, which provides
broadcast conversion, tape duplication, audio and video encoding, video-on-
demand production work and consulting services.  We analyze these two revenue
centers, along with their respective production costs, independently from each
other.  However, because the majority of our operating expenses support both
revenue centers, we analyze all items below gross margin on a combined basis.


Results of Operations

The following chart has been presented to add clarification only and should be
read in conjunction with the consolidated financial statements.

<TABLE>
<CAPTION>
                                         Three Months Ended March 31,      Six Months Ended March 31,
                                             2001             2000            2001            2000
                                      ------------------------------------------------------------------
<S>                                   <C>         <C>    <C>       <C>    <C>      <C>   <C>       <C>
Software license fees                    $ 4,534  100%   $ 5,635   100 %  $ 8,522  100%  $ 10,684  100 %
Cost of software license fees              1,790   39      1,166    21      3,194   37      2,220   21
                                      ------------------------------------------------------------------
  Gross margin-software license fees     $ 2,744   61%   $ 4,469    79 %  $ 5,328   63%  $  8,464   79 %
                                      ==================================================================


Media services                           $ 2,730  100%   $   367   100 %  $ 5,260  100%  $    403  100 %
Cost of media services                     1,957   72        370   101      4,290   82        474 (118)
                                      ------------------------------------------------------------------
  Gross margin-media services            $   773   28%   $    (3)   (1)%  $   970   18%  $    (71) (18)%
                                      ==================================================================
</TABLE>

                                       9
<PAGE>

Total Net Revenue

Total net revenues increased 21% to $7,264 for the three months ended March 31,
2001 from $6,002 in the comparable period of 2000.

Total net revenues increased 24% to $13,782 for the six months ended March 31,
2001 from $11,087 in the comparable period of 2000.

The overall net increase in revenue for both periods is due to our service
businesses, which we acquired in the second half of fiscal 2000.  The revenue
from our traditional software business decreased, primarily because of a decline
in revenues from our OEM partners.

Net revenues from international customers accounted for 27% and 12% of total net
revenues for the six months ended March 31, 2001 and 2000, respectively.

For detailed information on revenue recognition principles, see Note 1 to the
audited financial statements in the annual report filed as part of Form 10-K for
the fiscal year ended September 30, 2000.


Revenue from Software License Fees

Revenues from software license fees consist of fees charged for the licensing of
Windows based software products that are built on the principle of "Create" (the
ACID/TM/ family), "Edit" (Sound Forge/R/, Sound Forge Studio XP, Vegas/R/ Audio,
Vegas/R/ Video, VideoFactory/TM/ and "Deliver" (Siren/TM/ Jukebox and Stream
Anywhere). These software products are marketed to all levels of both consumers
and producers of digital media.  We reach both our domestic and international
markets through traditional retail distribution channels, our direct sales
effort and OEM partnerships.

     Three months ended March 31, 2001 ("Q2-2001") compared to the three
     months ended March 31, 2000 ("Q2-2000") and the six months ended
     March 31, 2001 ("YTD-2001") compared to the six months ended
                          March 31, 2000 ("YTD-2000")

Net revenues from software license fees decreased $1,101 from Q2-2000 to Q2-2001
and decreased $2,162 from YTD-2000 to YTD-2001.  Both the quarterly and the
year-to-date decline resulted from the following items:

Revenue from our domestic retail channel declined $625 from Q2-2000 to Q2-2001
and $1,160 from YTD-2000 to YTD-2001.  The decline is due primarily to an
overall weakening in the consumer channel, which impacted sales of both ACID and
Siren, as well as an increase in cash rebates to drive sell-through in the
retail channel.

Revenue generated from OEM partners decreased $2,439 from YTD-2000 to YTD-2001.
This is due primarily to a recent trend towards OEM's bundling much larger
volumes of a scaled-down

                                       10
<PAGE>

version of our product with their hardware or software in exchange for mass
marketing opportunities intended to drive upgrade revenues. In addition, Q2-2000
included significant one-time licensing transactions from Sony Pictures and
revenues from a now expired deal with Hewlett Packard.

Direct revenues increased $1,505 from Q2-2000 to Q2-2001.  This increase is due
to the release of Sound Forge 5.0 in late February 2001, which was heavily
marketed to our end-users via an email campaign.


Costs of Software License Fees

Costs of software license fees include product material costs, contracted and
internal assembly labor, freight, royalties on third party technology or
intellectual content, and amortization of previously capitalized product
development and localization costs.

         Q2-2001 compared to Q2-2000 and YTD-2001 compared to YTD-2000

Cost of software license fees increased $624 from Q2-2000 to Q2-2001 and $974
from YTD-2000 to YTD-2001.  Both the quarterly and the year-to-date increase
resulted from the following items:

     .    In response to poor sell-through in the weakening consumer channel,
          significant returns of ACID Hip Hop and ACID Latin were received from
          our retail distributors in Q2-2001. These products were discontinued
          and removed from inventory.

     .    The YTD-2001 increase was impacted by strong sales from VideoFactory
          Deluxe, a lower margin, video editing product bundled with a video
          capture card.

     .    Both the quarterly and YTD increase were impacted by the decline in
          high margin OEM revenue.


Revenue from Media Services

In October 1999, we announced the formation of our Media Services division by
offering audio and video encoding services from our Madison location. In April
2000, we added additional encoding capabilities, hosting, streaming syndication
and a California presence to our list of digital offerings with the acquisition
of STV Communications, Inc. ("STV").  In August 2000 we finalized the
acquisition of International Image ("II"), which added tape duplication, video-
on-demand production and broadcast conversion services to our Media Services
division.  Since the beginning of fiscal 2001, we have sold, terminated or
reduced our emphasis on efforts such as syndication, content hosting, webcasting
and dot.com encoding in order to concentrate on higher gross margin business;
primarily audio and video production, video-on-demand production work and our
Enterprise Content Management initiative.

                                       11
<PAGE>

         Q2-2001 compared to Q2-2000 and YTD-2001 compared to YTD-2000

Net revenues from media services increased $2,363 from Q2-2000 to Q2-2001, and
increased $4,857 from YTD-2000 to YTD-2001.  Both the quarterly and the year-to-
date increases are due to the acquisition of II.

Costs of Media Services

Costs of media services include compensation and benefits for direct labor,
depreciation on production equipment, and other general expenses associated with
production personnel.

         Q2-2001 compared to Q2-2000 and YTD-2001 compared to YTD-2000

Costs of media services increased $1,587 from Q2-2000 to Q2-2001, and $3,816
from YTD-2000 to YTD-2001.  Both the quarterly and the year-to-date increase in
dollars resulted from the acquisition of STV and II.  As a percentage of media
services revenue, overall service margins improved to 28% for Q2-2001 and 18%
for YTD-2001.  These improvements were led by higher margin video-tape services
and the elimination of a permanent production workforce for encoding services.

Operating Expenses

The following chart is provided to add clarification by presenting items as a
percentage of total revenues.  This should be read in conjunction with the
unaudited consolidated financial statements presented in this filing.


<TABLE>
<CAPTION>
                                                              Three Months Ended                Six Months Ended
                                                                   March 31,                        March 31,
                                                              2001          2000             2001              2000
                                                   ------------------------------------------------------------------
   <S>                                             <C>                      <C>            <C>                 <C>
   Total revenues                                              100%          100%            100%              100%
   Cost of revenues                                             52            26              54                24
                                                   ------------------------------------------------------------------
     Gross margin                                               48            74              46                76

   Operating expenses
   Selling and marketing expenses                               38            67              58                73
   General and administrative expenses                          30            28              43                28
   Product development expenses                                 25            25              34                24
   Amortization of goodwill and other intangibles               96             0             102                 0
   Restructuring expenses                                        0             0              27                 0
                                                   ------------------------------------------------------------------
     Total operating expenses                                  189           120             264               125
                                                   ------------------------------------------------------------------
    Loss from operations                                      (141)%         (46)%          (218)%             (49)%
                                                   ==================================================================
</TABLE>

                                       12
<PAGE>

Selling and Marketing Expenses

Selling and marketing expenses include wages and commissions for sales,
marketing and technical support personnel, our direct mail catalog, co-operative
advertising with our software distributors, print advertising and various
promotional expenses for both our products and services.  Timing of these costs
may vary greatly depending on introduction of new products and services or
entrance into new markets.

         Q2-2001 compared to Q2-2000 and YTD-2001 compared to YTD-2000

Selling and marketing expenses decreased by $1,270 from Q2-2000 to Q2-2001, and
decreased by $80 from YTD-2000 to YTD-2001.  This decrease can be attributed to
the following items; 1) significant staff reductions in the sales and marketing
department in December, 2000; 2) a greater attention placed on the media
services division, which requires less expensive, more targeted forms of
marketing; which coincides with 3) a lesser focus on more costly brand marketing
such as tradeshows and media advertising.  We will continue to focus on our
direct mail effort and co-operative advertising with our retailers and
distributors to drive software sales, as well as more targeted forms of
marketing to reach our media services clients.

General and Administrative Expenses ("G&A expenses")

G&A expenses consist of personnel and related costs associated with the
facilities, finance, legal, and information technology departments, as well as
other expenses not fully allocated to functional areas.

         Q2-2001 compared to Q2-2000 and YTD-2001 compared to YTD-2000

G&A expenses increased by $481 from Q2-2000 to Q2-2001, and by $2,713 from YTD-
2000 to YTD-2001.  The increase from 2000 to 2001 is primarily attributable to
expenses associated with newly acquired companies and management of multiple
locations.

G&A expenses increased from 28% of total revenues in Q2-2000 to 30% in Q2-2001,
and by 28% of total revenues for YTD-2000 to 43% for YTD-2001.   The larger YTD
increase is primarily due to G&A expenses incurred in Q1-2001, which were 57% of
total revenues.  The decrease from 57% in Q1-2001 to 30% in Q2-2001, is due to
the company-wide restructuring that occurred at the end of Q1-2001.  This
restructuring reduced G&A expenses by eliminating duplicate positions,
consolidating facilities and eliminating underutilized assets.

Product Development Expenses

Product development expenses include salaries and wages of the software research
and development staff and an allocation of benefits, facility and administrative
expenses, net of product development expenses capitalized pursuant to SFAS No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed."

                                       13
<PAGE>

         Q2-2001 compared to Q2-2000 and YTD-2001 compared to YTD-2000

Product development expenses increased by $271 from Q2-2000 to Q2-2001, and by
$1,915 from YTD-2000 to YTD-2001.  As a percentage of total revenues, product
development expenses remained at 25% for both Q2-2000 and Q2-2001, however the
YTD percentage increased from 24% for YTD-2000 to 34% for YTD-2001.  The YTD
increase is primarily due to product development expenses incurred in Q1-2001,
which were 43% of total revenues.  The decrease from 43% in Q1-2001 to 25% in
Q2-2001, is due to the company-wide restructuring that occurred at the end of
Q1-2001.  As part of the restructuring, we eliminated low volume, niche products
such as CD Architect, Soft Encode and Audio Anywhere.  As a result, we reduced
engineering staff positions in Q1-2001.

In accordance with SFAS Number 86, the Company capitalizes the cost of
development of software products that have reached technological feasibility.
No development costs for our core product line were capitalized during the
current period.  Going forward, we believe software development costs qualifying
for capitalization will be less significant, and, as such, we expect that we
will expense most or all research and development costs as incurred.


Restructuring Charges

As outlined in footnote 2 to the unaudited consolidated financial statements
included in this report, a restructuring charge of $3,782 was incurred in Q1-
2001 consistent with management's plan to reduce costs in response to weak
market conditions.  This restructuring charge primarily consists of: 1) an
accrual for 60 days of severance and benefits for domestic employees terminated
on December 20, 2000; 2) severance and other expenses associated with closing
our office in the Netherlands; 3) an asset impairment charge related to the
sale, disposal or write-down of PCs, office equipment and other assets no longer
required; 4) operating and lease termination costs related to the consolidation
of facilities; 5) and miscellaneous charges such as forfeited tradeshow
deposits.  We have not yet completed the disposal of underutilized assets and
may incur additional restructuring charges in the future when we dispose of
these assets.


Amortization of Goodwill and Other Purchase Intangibles

The amortization of goodwill and other purchase intangibles consists of expense
associated with the purchases of STV and II.  STV's total purchase intangibles
consist of assembled workforce of $1 million amortized over a one year period
and goodwill of $70 million amortized over a three year period.  II's total
goodwill consists of: 1) assembled workforce of $2.2 million amortized over a
five year period; and 2) goodwill of $12.9 million amortized over a three to
seven year period.  In the quarter ended December 31, 2000 we received a final
appraisal of II's fixed assets and, as a result, reclassified $1.2 million of
the purchase price from goodwill to fixed assets.

Liquidity and Capital Resources

Cash used in operating activities amounted to $9,598 for YTD-2001 and $7,070 for
YTD-2000. Increased use of operating cash in 2001 consisted primarily of
operating costs prior to the

                                       14
<PAGE>

December 2000 restructuring. On a quarterly basis, significantly less cash of
approximately $2,000 was used in operations in Q2-2001, when compared to both
Q2-2000, which used $4,678 and Q1-2001, which used $7,751. Contributing to this
decrease in Q2-2001 were the following items; 1.) Loss from operations improved
by $9,534 from Q1-2001 to Q2-2001, 2.) Improved collections, which were driven
by increased credit card sales in our direct channel, and 3.) Reduced inventory
balances, which were driven by a write-off of obsolete products. Of the cash
used this quarter, approximately $1,400 was for severance payments made as part
of our restructuring plan. The majority of these and other residual
restructuring related payments ended in February, 2001.

Cash used in investing activities was $1,197 for YTD-2001 and $3,977 for YTD-
2000.  Investing activities in the current year related to $679 of legal,
accounting, and other professional fees accrued in the prior year for the
International Image acquisition, $1,723 for fixed asset purchases relating to
our media services effort and leasehold improvements and $1,205 for sales of
property and equipment no longer fully utilized.  In YTD-2000, fixed asset
purchases of $2,831 - primarily for the media services effort - were partially
offset by the December 1999 sale of real estate no longer needed in the
Company's operations.

In YTD-2001, $826 was used in financing activities, with $1,507 used for
payments on debt and capital leases.  The majority of the increase in debt and
lease payments from last year relates to financing for Media Services equipment
obtained in the STV transaction.  Cash provided by financing activities includes
$110 received from the sale of common stock and a $571 draw on our line of
credit in Toronto.

In response to the tightening of the market for both software and media
services, we have taken steps to significantly reduce our operating expenses.
In November and December of 2000, we reduced headcount across all departments,
eliminated certain sales and marketing programs and discontinued non-core media
services efforts such as syndication, streaming and webcasting.  None of these
cuts are anticipated to impact future revenue generation or the quality of
products and services we provide. Although we believe these efforts will allow
us to generate positive cash flow from operations in the near term with
available resources, there can be no assurance we will succeed.

We may pursue cash in the equity market with key strategic partners or private
investors. We are also reviewing other financing activities such as debt, sale-
leaseback and subleasing arrangements and the sale of underutilized assets.
There can be no assurance that we will obtain additional debt or equity on
satisfactory terms.

In early January 2001, a $4,000 note was due to the former shareholders of
International Image.  We have withheld paying the note pending the resolution of
certain disputed representations made during the acquisition.  In January 2001,
the noteholders initiated litigation against us in Toronto for payment of the
note and in March 2001, we initiated a counter action for damages incurred.  In
April 2001, we paid the minority shareholders $500, which was in full settlement
of $720 including accrued interest.  Litigation with the majority shareholders
is still pending. It is too early in the litigation to assess what the ultimate
outcome or potential liability may be.

                                       15
<PAGE>

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Because our cash equivalents consist of overnight investments in money market
funds, we will not experience decreases in principal value associated with a
decline in interest rates.  Although we license our software to customers
overseas in U.S. dollars, we have exposure to foreign currency fluctuations
associated with liabilities, bank accounts and other assets maintained by our
offices in Canada.  We currently do not hedge our exposure to foreign currency
fluctuations, which have historically been immaterial.

PART II   OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

In early January 2001, a $4,000 note was due to the former shareholders of
International Image Services, Inc..  We withheld paying the note pending the
resolution of certain disputed representations made during the acquisition of
the stock of that company.  On January 30, 2001, the noteholders initiated
litigation against us for non-payment of the note.  The case, entitled 1456096
                                                                       -------
Ontario Limited, et. al. v. Sonic Foundry (Nova Scotia), Inc., et. al., was
------------------------    ------------------------------------------
filed in the Ontario Superior Court of Justice as 01-CV-204669CM.  The
plaintiffs in the case, along with 1456096 Ontario Limited, are 1456097 Ontario
Limited, Dan McLellan, RoyNat, Inc., DGC Entertainment Ventures Corp., and Bank
of Montreal Capital Corp.  The defendants in the case are Sonic Foundry (Nova
Scotia), Inc. and Sonic Foundry, Inc.  Plaintiffs are seeking relief in the form
of principal, interest and legal fees on the note.  Dan McLellan was, at the
time of the filing of the complaint, Senior Vice President and General Manager
of Media Services for Sonic Foundry, but has subsequently resigned.  In March
2001, we initiated a counter claim for, among others, breach of the purchase
agreement we signed with the shareholders of International Image Services, Inc.
In April 2001, we paid RoyNat, Inc., DGC Entertainment Ventures Corp. and Bank
of Montreal Capital Corp. a total of $500, which was in full settlement of the
$700 we allegedly owed such plaintiffs plus accrued interest.  Litigation with
the remaining plaintiffs is still pending.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) None

                                       16
<PAGE>

Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits (see exhibit list)

(b)  Reports on Form 8-K - None


ITEM 6(a)


NUMBER                         DESCRIPTION
------    ----------------------------------------------------------------------

 3.1        Amended and Restated Articles of Incorporation of the Registrant,
            filed as Exhibit No. 3.1 to the registration statement on amendment
            No. 2 to Form SB-2 dated April 3, 1998 (Reg. No. 333-46005) (the
            "Registration Statement"), and hereby incorporated by reference.

 3.2        Amended and Restated By-Laws of the Registrant, filed as Exhibit No.
            3.2 to the Registration Statement, and hereby incorporated by
            reference.

 10.1       Registrant's 1995 Stock Option Plan, as amended, filed as Exhibit
            No. 4.1 to the Registration Statement on Form S-8 on September 8,
            2000, and hereby incorporated by reference.

 10.2       Registrant's Non-Employee Directors' Stock Option Plan, filed as
            Exhibit No. 10.2 to the Registration Statement, and hereby
            incorporated by reference.

 10.3       Commercial Lease between Registrant and The Williamson Center, LLC
            regarding 740 and 744 Williamson Street, Madison, Wisconsin dated
            January 20, 1998, filed as Exhibit No. 10.3 to the Registration
            Statement, and hereby incorporated by reference.

 10.4       Employment Agreement between Registrant and Rimas Buinevicius dated
            as of January 1, 2001.

 10.5       Employment Agreement between Registrant and Monty R. Schmidt dated
            as of January 1, 2001.

 10.6       Employment Agreement between Registrant and Curtis J. Palmer dated
            as of January 1, 2001.

 10.7       Digital Audio System License Agreement between Registrant and Dolby
            Laboratories Licensing Corporation dated July 28, 1997, filed as
            Exhibit No. 10.7 to the Registration Statement, and hereby
            incorporated by reference.

                                       17
<PAGE>

 10.8       Digital Audio System License Agreement between Registrant and Dolby
            Laboratories Licensing Corporation dated July 28, 1997, filed as
            Exhibit No. 10.8 to the Registration Statement, and hereby
            incorporated by reference.

 10.12      Software License Agreement, effective as of September 29, 1998,
            between Registrant and Hewlett-Packard Company - CONFIDENTIAL
            MATERIAL FILED SEPARATELY, and hereby incorporated by reference.

 10.14      Business Note Agreement, dated March 3, 1999 between Registrant and
            Associated Bank South Central, filed as Exhibit No. 10.15 to the
            Quarterly Report on form 10-QSB for the period ended March 31, 1999,
            and hereby incorporated by reference.

 10.15      Convertible Debenture Purchase Agreement dated September 13, 1999
            between Purchasers and the Registrant filed as Exhibit No. 10.17 to
            the Current Report on form 8-K filed on September 24, 1999, and
            hereby incorporated by reference.

 10.16      Commercial Lease between Registrant and Tenney Place Development,
            LLC regarding 1617 Sherman Ave., Madison, Wisconsin dated October 1,
            1999, filed as Exhibit No. 10.18 to the Annual Report on form 10-K
            for the period ended September 30, 1999, and hereby incorporated by
            reference.

 10.17      Registrant's 1999 Non-Qualified Stock Option Plan, filed on Form S-8
            on September 8, 2000, and hereby incorporated by reference.

 10.18      Commercial Lease between Registrant and Hargol Management Limited
            regarding 23 Prince Andrew Place, Don Mills, Ontario, Canada dated
            January 15, 1990, filed as Exhibit No. 10.20 to the Amended Annual
            Report on Form 10-K/A for the year ended September 30, 2000, and
            hereby incorporated by reference.

 10.19      Commercial Lease between Registrant and the Richlar Partnership
            regarding 1703 Stewart St., Santa Monica, CA, dated August 10, 1995,
            filed as Exhibit No. 10.21 to the Amended Annual Report on Form 10-
            K/A for the year ended September 30, 2000, and hereby incorporated
            by reference.

 10.20      Commercial Lease between Registrant and Thomas Seaman regarding
            12233 Olympic Blvd., Santa Monica, CA, dated January 23, 2000 filed
            as Exhibit No. 10.22 to the Amended Annual Report on Form 10-K/A for
            the year ended September 30, 2000, and hereby incorporated by
            reference.

 10.21      Agreement and Plan of Merger, dated as of March 15, 2000, by and
            among the Registrant, New Sonic, Inc., and STV Communications, Inc.,
            filed as Exhibit 2.1 to a Current Report on Form 8-K dated April 18,
            2000 and hereby incorporated by reference.

                                       18
<PAGE>

 10.22      Stock Purchase Agreement, dated January 18, 2000, by and among the
            Registrant, Jedor, Inc., and certain principals of Jedor, Inc.,
            filed as Exhibit 2.2 to the registration statement filed on Form S-3
            on May 12, 2000 and hereby incorporated by reference.

 10.23      Share Purchase Agreement dated as of June 1, 2000, by and among the
            Registrant, Sonic Foundry (Nova Scotia) Inc., Charles Ferkranus,
            Michael Ferkranus, 1096159 Ontario Limited, 1402083 Ontario Limited,
            Dan McLellan, Curtis Staples, Bank of Montreal Capital Corp., Roynat
            Inc. and DGC Entertainment Ventures Corp., filed as Exhibit 2 to the
            Current Report filed on Form 8-K on September 12, 2000, and hereby
            incorporated by reference.

 10.24      Stock Restriction and Registration Agreement, dated as of March 15,
            2000, among the Company, Jan Brzeski, Jeffrey Gerst, David Fife, and
            Fife Capital, L.L.C., filed as Exhibit 4.2 to the Registration
            Statement filed on Form S-3 on May 12, 2000, and hereby incorporated
            by reference.

 10.25      Voting and Option Agreement, dated March 15, 2000, among the
            Company, certain of its stockholders, and Jan Brzeski, David Fife,
            Jeffrey Gerst, and Fife Waterfield, filed as Exhibit 4.3 to the
            Registration Statement filed on Form S-3 on May 12, 2000, and hereby
            incorporated by reference.

 10.26      Subscription Agreement dated February 8, 2000 between Subscribers
            and the Company, filed as Exhibit 10.19 of a Current Report on Form
            8-K dated February 14, 2000, and hereby incorporated by reference.

 10.27      Registration Rights Agreement, dated February 8, 2000, by and among
            the Company and certain investors, filed as Exhibit 4.5 to the
            Registration Statement filed on Form S-3 on May 12, 2000, and hereby
            incorporated by reference.

 10.28      Registration Rights Agreement, dated March 31, 2000, among the
            Company and Sony Pictures Entertainment Inc., filed as Exhibit 4.6
            to the Registration Statement filed on Form S-3 on May 12, 2000, and
            hereby incorporated by reference.

 10.29      Share Exchange Agreement, dated August 24, 2000 among the
            Registrant, Sonic Foundry (Nova Scotia), Inc., Charles Ferkranus,
            Michael Ferkranus, 1096159 Ontario Limited, and 10402083 Ontario
            Limited, filed as Exhibit 4.2 to the Registration Statement filed on
            Form S-3 on November 7, 2000, and hereby incorporated by reference.

 10.30      Buyer Non-Voting Exchangeable Share Option Agreement, dated August
            24, 2000, among the Registrant, Dan McLellan, Curtis Staples, and
            Sonic Foundry (Nova Scotia), Inc., filed as Exhibit 4.3 to the
            Registration Statement filed on Form S-3 on November 7, 2000, and
            hereby incorporated by reference.

                                       19
<PAGE>

 10.31      Support Agreement, dated August 24, 2000, between the Company and
            Sonic Foundry (Nova Scotia), Inc. filed as Exhibit 4.4 to the
            Registration Statement filed on Form S-3 on November 7, 2000 and
            hereby incorporated by reference.

                                       20
<PAGE>

                                  SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                              Sonic Foundry, Inc.
                              -------------------
                                 (Registrant)


May 14, 2001                         By:   /s/ Rimas P. Buinevicius
                                           ------------------------
                                           Rimas P. Buinevicius
                                           Chairman and Chief Executive Officer

May 14, 2001                         By:   /s/ Kenneth A. Minor
                                           --------------------
                                           Kenneth A. Minor
                                           Chief Financial Officer and Secretary

                                       21