Sonic Foundry Inc. Annual Report 2012

FY2012 Annual Report · Sonic Foundry Inc.

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©2013 Sonic Foundry, Inc. All rights reserved. Sonic Foundry
and the Sonic Foundry logo are registered trademarks of Sonic
Foundry, Inc. Mediasite and the Mediasite logo are registered
trademarks of Sonic Foundry, Inc. All other trademarks are the
property of their respective owners.

sonic foundry annual report 2012Dear Fellow Shareholders,

As I reflect on fiscal 2012 I see it as a year of recommitment.

We recommitted to innovation, shoring up our existing product line and
expanding the breadth of our technology. This allowed us to deliver the most
robust product offerings to date, and the ability to explore new markets and
reach our customers in new ways. We expect to see the benefits of that
investment in 2013 and 2014.

We recommitted to our customers. They have a choice on where they spend their dollars, and our
strong relationships continue to give us a competitive advantage. By democratizing content creation
and giving them the tools to work smarter in more dynamic, connected environments, we are
deepening those mutually beneficial relationships.

I believe the resources spent in these critical areas will ultimately serve to improve the fundamentals
of the company. And that is our recommitment to you, our shareholders. Increasing value to you
over the long term is the top priority of the management team and board of directors. We laid the
groundwork over fiscal 2012 to strengthen revenue and net income growth in the next year. Our
three-year objective is to grow revenues to greater than $40 million and achieve a 15% net pre-tax
income rate and all signs indicate we are on the path to success.

In spite of being on track to show great progress in 2013, last year was not without its challenges.
Revenue generation lagged for several reasons including:

• Lengthened sales cycles meant the delay of closing several deals from fiscal 2012 to 2013. I’m
pleased to tell you that those opportunities have now closed and our results for the first quarter of

fiscal 2013 reaffirms that the industry is growing.

• While we continue to cultivate several large international deals in the pipeline, none of them closed
in fiscal 2012. However all of these opportunities are still active and are likely to begin producing
revenue in 2013.

• We are selling against the headwinds of an uncertain global economy.

• Higher education, in a post-stimulus world, has been challenged to find resources to be able

to adopt technology.

Throughout 2012 we made great progress on several key initiatives and achieved many successes.

• Our investment in innovation increased by 30% over the year prior. We reached our development
plan while achieving net income improvements.

• With the release of Mediasite 6.1 we have the strongest, broadest, most versatile product
offering in our history.

• Our Japanese partner, Mediasite KK, continues to show strong revenue growth and profit.

• The most highly respected organizations in our key verticals endorse us as the best option
for preserving their video content, including EDUCAUSE, InfoComm, UBTech, Professional

Convention Management Association (PCMA) and Meeting Planners International (MPI).

• Frost&Sullivan named Sonic Foundry the Market Share Leader in Lecture Capture Solutions

for the sixth consecutive year.

• We sponsored the first comprehensive research on hybrid events with Meeting Professionals

International Foundation.

The industry of video is poised for change. Video is being created at an astronomical rate and
the enterprise is challenged to secure, search and manage those assets. The explosion of mobile
devices and changing video standards will require customers to be more flexible when it comes to
format, resolution and size when transmitting video over diverse networks.

Online education is growing rapidly and traditional brick-and-mortar schools are working to enhance
their curriculums to retain students and improve their outcomes. Higher education is adopting new
teaching methodologies that fly in the face of what happens in traditional classrooms. The industry
is buzzing about Massive Open Online Courses, otherwise known as MOOCS, which allow anyone
with an internet connection to attend for free, and flipped classroom instruction, a method of teaching
that involves students watching a pre-recorded lecture before class so that class time is dedicated to
dynamic discussions. We have emerged as a trusted advisor for our customers looking to find their
place in this new landscape. When and if they decide to adopt these trends, Mediasite will be part of
that story for them.

We’ve advocated and perfected wide-scale capture of the knowledge shared in classrooms and
conference rooms for more than a decade. We know what is required for widespread adoption of
user-generated content creation, and because of that, we’ve removed most of the barriers that have
been keeping online video from reaching its full potential.

Which brings me to a final point about recommitment – that of our customers to Mediasite. As we
spent the last year preparing for the changing video landscape, we’ve been gratified that our
customers have decided to recommit to us. The next step on the journey, upgrading to Mediasite 6,
required investment. They had to renew licenses, refresh hardware and increase server power
to prepare for the advanced feature set in our product. They stayed with us and doubled down,
committing to expand even more in 2013 and beyond.

The groundwork has been laid, and the next three years holds enormous promise for Sonic Foundry.
There is no question that our industry is at the brink of major growth and change and with our
investment in advancing webcasting and video content management we are positioned to deliver.
We will see more video transformed into dynamic, interactive, indexed rich media with the use of
Mediasite, making video as useful as text. Through our innovative User Generated Content module,
we’ll see more flexibility in creation, workflow and management, giving more enterprises than ever
the opportunity to purchase and standardize on Mediasite. Our long-term focus on innovation,
including the ability to stream and capture multiple video streams and advanced search, will help our
customers achieve their goals, drive our success and deliver long-term value to the shareholders.

Respectfully,

Gary Weis, CEO of Sonic Foundry

SONIC FOUNDRY, INC.
222 West Washington Avenue
Madison, Wisconsin 53703

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held March 7, 2013

The Annual Meeting of Stockholders of SONIC FOUNDRY, INC., a Maryland corporation (―Sonic‖) will be held at
the Monona Terrace Community and Convention Center, One John Nolen Drive, Madison, Wisconsin 53703 on March
7, 2013 at 9:00 a.m. local time, for the following purposes:

To elect two directors to hold office for a term of five years, and until their successors are duly elected and
qualified.

To ratify the appointment of Grant Thornton LLP as our independent auditors for the fiscal year ending
September 30, 2013.

To transact such other business as may properly come before the meeting or any adjournments thereof.

All the above matters are more fully described in the accompanying Proxy Statement.

Only holders of record of Common Stock at the close of business on January 10, 2013 are entitled to notice of, and to
vote at, this meeting or any adjournment or adjournments thereof.

Please complete and return the enclosed proxy in the envelope provided or follow the instructions on the proxy card to
authorize a proxy by telephone or over the Internet, whether or not you intend to be present at the meeting in person.

By Order of the Board of Directors,

Madison, Wisconsin
January 25, 2013

Kenneth A. Minor
Secretary

─────────────────────────────────────

If you cannot personally attend the meeting, it is earnestly requested that you promptly indicate your vote on
the issues included on the enclosed proxy and date, sign and mail it in the enclosed self-addressed envelope,
which requires no postage if mailed in the United States or, follow the instructions on the proxy card to
authorize a proxy by telephone or over the Internet. Doing so will save us the expense of further mailings. If
you sign and return your proxy card without marking choices, your shares will be voted in accordance with the
recommendations of the Board of Directors.

─────────────────────────────────────

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SONIC FOUNDRY, INC.
222 W. Washington Avenue
Madison, Wisconsin 53703

PROXY STATEMENT

January 25, 2013

The Board of Directors of Sonic Foundry, Inc., a Maryland corporation (―Sonic‖), hereby solicits the enclosed
proxy. Unless instructed to the contrary on the proxy, it is the intention of the persons named in the proxy to vote
the proxies:

FOR the election of Gary R. Weis and Brian T. Wiegand. as Directors for a term expiring in 2017;

FOR the ratification of the appointment of Grant Thornton LLP as independent auditors of Sonic for the fiscal
year ending September 30, 2013.

In the event that the nominees for director become unavailable to serve, which management does not anticipate, the
persons named in the proxy reserve full discretion to vote for any other persons who may be nominated. Proxies
may also be authorized by telephone or over the Internet by following the instructions on the proxy card. Any
stockholder giving a proxy may revoke the same at any time prior to the voting of such proxy. This Proxy
Statement and the accompanying proxy are being mailed on or about January 31, 2013.

Each stockholder will be entitled to one vote for each share of Common Stock standing in his or her name on our
books at the close of business on January 10, 2013 (the ―Record Date‖). Only holders of issued and outstanding
shares of Sonic's common stock as of the close of business on the Record Date are entitled to notice of and to vote at
the Annual Meeting, including any adjournment or postponement thereof. On that date, we had outstanding and
entitled to vote 3,905,514 shares of Common Stock, held by approximately 5,000 stockholders, of which
approximately 4,600 were held in street name.

QUORUM; VOTES REQUIRED

Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspector of elections appointed for
the Annual Meeting and will determine whether or not a quorum is present. Where, as to any matter submitted to
the stockholders for a vote, proxies are marked as abstentions (or stockholders appear in person but abstain from
voting), such abstentions will be treated as shares that are present and entitled to vote for purposes of determining
the presence of a quorum. If a broker indicates on the proxy that it does not have discretionary authority as to
certain shares to vote on a particular matter and has not received instructions from the beneficial owner, which is
known as a broker non-vote, such shares will also be considered present for purposes of a quorum, provided that the
broker exercises discretionary authority on any other matter in the Proxy. A majority of the shares of Common Stock
issued, outstanding and entitled to vote at the Annual Meeting, present in person or represented by proxy, shall
constitute a quorum at the Annual Meeting. The election of the Director requires a plurality of the votes present and
entitled to vote. Therefore, the director who receives the most votes will be elected. Neither an abstention nor a
withheld vote will affect the outcome of the election. The ratification of the appointment of Grant Thornton LLP
requires the affirmative vote of the holders of a majority of the votes cast at the Annual Meeting. If you abstain
from voting on this proposal, it will have no effect on the outcome of such proposal.

The New York Stock Exchange ("NYSE") has rules that govern brokers who have record ownership of listed
company stock held in brokerage accounts for their clients who beneficially own the shares. Under these rules,
brokers who do not receive voting instructions from their clients have the discretion to vote uninstructed shares on
certain discretionary matters but do not have discretion to vote uninstructed shares as to certain other non-
discretionary matters. A broker may return a proxy card on behalf of a beneficial owner from whom the broker has
not received instructions that casts a vote with regard to discretionary matters but expressly states that the broker is
not voting as to non-discretionary matters. The broker's inability to vote with respect to the non-discretionary
matters with respect to which the broker has not received instructions from the beneficial owner is referred to as a
"broker non-vote". Under current NYSE interpretations, the proposal to ratify the appointment of Grant Thornton,
LLP as our independent auditor is considered a discretionary matter.

DATE, TIME AND PLACE OF ANNUAL MEETING

The Annual Meeting will be held on March 7, 2013 at 9:00 a.m. (Central time) at the Monona Terrace Community
and Convention Center, One John Nolen Drive, Madison, Wisconsin 53703.

PROPOSAL ONE: ELECTION OF DIRECTORS

Our Amended and Restated Articles of Incorporation and Bylaws provide that the Board of Directors shall be divided
into five classes, with each class having a five-year term. Directors are assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. Vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes may be filled by either the affirmative vote of the holders of a
majority of the then-outstanding shares or by the affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum of the Board of the Directors. Newly created directorships resulting from any increase in the
number of directors may, unless the Board of Directors determines otherwise, be filled only by a majority vote of the
entire Board of Directors. A director elected by the Board of Directors to fill a vacancy (including a vacancy created
by an increase in the number of directors) shall serve until the next annual meeting of stockholders or until such
director’s successor is elected and qualified.

Our Amended and Restated Articles of Incorporation provide that the number of directors, which shall constitute the
whole Board of Directors, shall be not be less than three or more than twelve. Our currently authorized number of
directors is seven. The seats on the Board of Directors currently held by Gary R. Weis and Brian T. Wiegand are
designated as Class V Board seats, with terms expiring as of the Annual Meeting. The Board of Directors has
nominated Gary R. Weis and Brian T. Wiegand as Class V Directors for election at the Annual Meeting.

If elected at the Annual Meeting, Mssrs. Weis and Wiegand would serve until the 2018 Annual Meeting and until their
successors are elected and qualified or until their earlier death, resignation or removal.

Gary R. Weis

Mr. Weis, age 65, has been Chief Executive Officer since March 2011, Chief Technology Officer since September
2011 and a Director of Sonic since February 2004. Prior to joining Sonic, he served as President, Chief Executive
Officer and a Director of Cometa Networks, a wireless broadband Internet access company from March 2003 to
April 2004. From May 1999 to February 2003 he was Senior Vice President of Global Services at AT&T where he
was responsible for one of the world's largest data and IP networks, serving more than 30,000 businesses and
providing Internet access to more than one million individuals worldwide. While at AT&T, Mr. Weis also was CEO
of Concert, a joint venture between AT&T and British Telecom. Previously, from January 1995 to May 1999 he was
General Manager of IBM Global Services, Network Services. Mr. Weis served as a Director from March 2001 to
February 2003 of AT&T Latin America, a facilities-based provider of telecom services in Brazil, Argentina, Chile,
Peru and Columbia. Mr. Weis earned BS and MS degrees in Applied Mathematics and Computer Science at the
University of Illinois, Chicago.

Brian T. Wiegand

Mr. Wiegand, age, 43, has been a director of the Company since July 2012, and is a serial entrepreneur who
successfully founded and sold several internet-based companies. He is currently the founder and CEO of Hopster, a
company that links digital marketing efforts with real-world shopping behavior by rewarding consumer purchase
loyalty, engagement and advocacy. Mr. Wiegand is also the co-founder and executive chair of the board of
Alice.com, an online retail platform that connects manufacturers and consumers in the consumer packaged goods
market. Prior to Alice.com, Mr. Wiegand co-founded Jellyfish.com, a shopping search engine, in June of 2006. He
served as CEO until October 2007 when the company was sold to Microsoft. Mr. Wiegand continued with Microsoft
as the General Manager of Social Commerce until May 2008. He also co-founded NameProtect, a trademark
research and digital brand protection services company in August 1997 which was sold to Corporation Services
Company in March 2007. In addition, Mr. Wiegand founded BizFilings in 1996, the Internet’s leading incorporation
Services Company. He served as the president and CEO until 2002 when the company was acquired by Wolters
Kluwer. Mr. Wiegand attended the University of Wisconsin – Madison.

On September 22, 2003, the SEC approved a settlement of an investigation into certain financial accounting matters
occurring in the years 2000 and 2001 and involving Homestore, Inc., NameProtect, Inc., and Business Filings, Inc,
along with certain officers and directors of NameProtect, Inc. and Business Filings, Inc., including Mr. Wiegand. As
part of the settlement, the SEC instituted a cease and desist administrative proceeding and entered a cease and desist
order and also filed a civil action in federal district court pursuant to which, without admitting or denying the
allegations in the complaint, Mr. Wiegand consented to pay civil money penalties. Without admitting or denying the
charges in the administrative proceeding, Mr. Wiegand agreed to cease and desist from committing or causing the
violations charged as well as any future violations of these provisions. Additionally, Mr. Wiegand agreed to pay
disgorgement in the amount of $1 and civil penalties in the amount of $35,000.

Nominees for Director for a Five-Year term expiring on the 2018 Annual Meeting

The members of the Board of Directors unanimously recommend a vote FOR the election of Mssrs. Weis and
Wiegand as Class V Directors.

David C. Kleinman

Term Expires in 2014

DIRECTORS CONTINUING IN OFFICE

Mr. Kleinman, age 77, has been a Director of Sonic since December 1997 and has taught at the Chicago Booth
School of Business at the University of Chicago since 1971, where he is now Adjunct Professor of Strategic
Management. Mr. Kleinman was a Director (trustee) of the Columbia Acorn Trust, and its predecessors from
1972 to December 2010 (where he was a member of the Committee on Investment Performance and past chair, a
member and past chair of the Audit Committee and a member of the Compliance Committee); a Director (trustee)
of the Wanger Advisors Trust from 2005 to December 2010; a Director and non-executive chair of the Board
since 1984 of North Lime Holdings and its wholly owned subsidiary, Irex Corporation, a contractor and
distributor of insulation materials; and a Director since 1993 of Plymouth Tube Company, a manufacturer of
metal tubing and metal extrusions (where he serves on the Audit Committee). From 1999 to 2006, he was a
member of the Advisory Board of DSC Logistics, a logistics management and warehousing firm. From May 1997
to February 2004, Mr. Kleinman served as a Director of AT&T Latin America and predecessor companies, a
facilities-based provider of telecom services in Brazil, Argentina, Chile, Peru and Columbia (where he was chair
of the Audit Committee and a member of the Compensation Committee). From 1994 to 2005, he was a director of
Wisconsin Paper and Products Company, a jobber of paper and paper products. From 1964 to 1971,
Mr. Kleinman was a member of the finance staff of the Ford Motor Company. Mr. Kleinman received a MS
degree in Mathematics and a PHD in Business from the University of Chicago.

Paul S. Peercy

Term Expires in 2014

Mr. Peercy, age 72, has been a Director of Sonic since February 2004. Since September 1999, Mr. Peercy has served
as dean of the University of Wisconsin-Madison College of Engineering. Since 2001 Mr. Peercy has been a member
of the National Academy of Engineering. In 2000, then-Wisconsin Governor Tommy Thompson named Mr. Peercy
to the Wisconsin Technology and Entrepreneurship Council. From August 1995 to September 1999, Mr. Peercy
served as president of SEMI/SEMATECH, an Austin, Texas-based non-profit consortium of more than 160 of the
nation’s suppliers to the semiconductor industry. Prior to that position he was director of Microelectronics and
Photonics at Sandia National Laboratories in Albuquerque, New Mexico. He is the author or co-author of more than
175 technical papers and the recipient of two patents. Mr. Peercy is a Director and member of the audit committee of
Bemis Company, Inc, a manufacturer of flexible packaging and pressure sensitive materials. Mr. Peercy received a
BA degree in Physics from Berea College and MS and PhD degrees in Physics from the University of Wisconsin -
Madison.

Mark D. Burish

Term Expires in 2015

Mr. Burish, age 59, is a founder and shareholder of the law firm of Hurley, Burish & Stanton, Madison, WI, which
he helped start in 1983. He is the founder and CEO of Our House Senior Living, LLC, Milestone Senior Living,
LLC and Milestone Management Services, LLC which he started in 1997. Mr. Burish received his BA degree in
communications from Marquette University in 1975 and his JD degree from the University of Wisconsin in 1978.

Frederick H. Kopko, Jr.

Term Expires in 2016

Frederick H. Kopko, age 57, has been Sonic Foundry’s Secretary from April 1997 to February 2001 and has been a
Director since December 1995. Mr. Kopko is a partner of the law firm of McBreen & Kopko, Chicago, Illinois, and
has been a partner of that firm since January 1990. Mr. Kopko practices in the area of corporate law. He is the
Managing Director, Neltjeberg Bay Enterprises LLC, a merchant banking and business consulting firm and has been
a Director of Mercury Air Group, Inc. since 1992. Mr. Kopko received a B.A. degree in Economics from the
University of Connecticut, a J.D. degree from the University of Notre Dame Law School and an M.B.A. degree
from the University of Chicago.

Michael H. Janowiak

Term Expires in 2017

Mr. Janowiak, age 49, has been a director of Sonic since April 2011 and is a Principal at Pinnacle Investments, a
boutique private equity and financial consulting group. He has 26 years of experience in the information industry, with
focus on education, training, research publications and trade conferences for professionals in the communications and
semiconductor sectors. Mr. Janowiak was President of the International Engineering Consortium (IEC)’s online
learning and publishing group, co-founder and Principal of Professional Education International (PEI), where in concert
with academia and companies such as Microsoft he led product development of online training and education. He has
served on the Board of Directors of Mercury Air Group from September 2002 until September 2005, the Advisory
Board of the Midtown Foundation since January 2001, as Industry Advisor to the Illinois Institute of Technology since
January 1999, as the Subsidiary Director of CIB Marine Bancshares since November 2001, as member of Liquio
Corporation since August 2002, and as member of the Advisory Board of Idynta Systems since December 2001.
Janowiak was the co-founder and president of HRDRive, Inc., which is the North American subsidiary of SMR
technologies, a publicly-traded, human resources software company based in Kuala Lampur, Malaysia and Chennai,
India. Mr. Janowiak attended the University of Arizona’s Business School and the Stanford University Executive
Program.

When considering whether the Board of Directors and nominees thereto have the experience, qualifications,
attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities
effectively in light of our business and structure, the Board of Directors focused primarily on the information
discussed in each of the Board members' biographical information set forth above. Each of the Company's directors
possess high ethical standards, act with integrity and exercise careful, mature judgment. Each is committed to
4

employing his skills and abilities to aid the long-term interests of the stakeholders of the Company. In addition,
each of our directors has exhibited judgment and skill, and has either been actively involved with the Company for a
considerable period of time or has experience with other organizations of comparable or greater size. In particular,
Mr. Kopko has had extensive experience with companies comparable in size to Sonic Foundry, including currently
serving as a director of Mercury Air Group, Inc. and fills a valuable need with experience in securities and other
business law. Mr. Weis has had experience in both developing and established companies, having served as a CEO
and Director of Cometa Networks and in several positions at AT&T and IBM, including Senior Vice President of
Global Services. While at AT&T, Weis also was CEO of Concert, a joint venture between AT&T and British
Telecom. Mr. Weis has served as CEO of the Company since March 2011. Mr. Kleinman has significant
experience serving on boards of directors of various companies and has significant experience in finance and
strategic management through his employment with the Chicago Booth School of Business at the University of
Chicago where he also obtained valuable market insight to the Company’s largest customer base. Mr. Peercy shares
that same market expertise through serving the University of Wisconsin in his role as Dean of the engineering
school and also has significant business and technical experience obtained at positions including his role as director
of Microelectronics and Photonics at Sandia National Laboratories and through his role as president of
SEMI/SEMATECH. Mr. Burish brings additional valuable legal experience to the Board as well as experience
obtained through founding multiple companies. Mr. Janowiak brings valuable experience with his deep
connections to the on-line education industry, and with his previous involvement on the boards of public
companies. Mr. Wiegand has significant experience in founding and operating technology companies and building
brand awareness with both businesses and consumers.

CORPORATE GOVERNANCE

Director Independence

Through its listing requirements for companies with securities listed on the NASDAQ Capital Market, the
NASDAQ Stock Market (―NASDAQ‖) requires that a majority of the members of our Board be independent, as
defined under NASDAQ’s rules. The NASDAQ rules have both objective tests and a subjective test for determining
who is an ―independent director.‖ The objective tests state, for example, that a director is not considered
independent if he or she is an employee of the Company or has engaged in various types of business dealings with
the Company. The subjective test states that an independent director must be a person who lacks a relationship that
in the opinion of the Board would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. The Board has made a subjective determination as to each independent director that no
relationship exists that, in the opinion of the Board, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. In making these determinations, the Board reviews information
provided by the directors in an annual questionnaire with regard to each director’s business and personal activities as
they relate to the Company. Based on this review and consistent with NASDAQ’s independence criteria, the Board
has affirmatively determined that Mark D. Burish, Michael H. Janowiak, David C. Kleinman, Paul S. Peercy and
Brian T. Wiegand are independent.

Related Person Transaction

The Board has adopted a Related Person Transaction Policy (the ―Policy‖), which is a written policy governing the
review and approval or ratification of Related Person Transactions, as defined in SEC rules.

Under the Policy, each of our directors and executive officers must notify the Chairman of the Audit Committee in
writing of any new potential Related Person Transaction involving such person or an immediate family member.
The Audit Committee will review the relevant facts and circumstances and will approve or ratify the transaction
only if it determines that the transaction is in, or is not inconsistent with, the best interests of the Company. The
Related Party Transaction must then be approved by the independent directors. In determining whether to approve
or ratify a Related Person Transaction, the Audit Committee and the independent directors may consider, among

other things, the benefits to the Company; the impact on the director’s independence (if the Related Person is a
director or an immediate family member); the availability of other sources for comparable products or services; the
terms of the transaction; and the terms available to unrelated third parties or to employees generally. There were no
new Related Person Transactions in the fiscal year ended September 30, 2012 (―Fiscal 2012‖).

Board Leadership Structure and Role in Risk Oversight

In fiscal 2011 the Company separated the positions of Chairman of the Board and Chief Executive Officer. Mark D.
Burish serves as Non-Executive Chairman of the Board and Gary R. Weis serves as our Chief Executive Officer and
Chief Technical Officer. The Company believes that separating the positions provides an appropriate leadership
structure.

Our business and affairs are managed under the direction of our board, which is the Company’s ultimate decision-
making body, except with respect to those matters reserved to our stockholders. Our Board’s key mission is to
maximize long-term stockholder value. Our Board establishes our overall corporate policies, selects and evaluates
our executive management team (which is charged with the conduct of our business), and acts as an advisor and
counselor to executive management. Our board also oversees our business strategy and planning, as well as the
performance of management in executing its business strategy and assessing and managing risks.

What is the Board’s role in risk oversight?

The board takes an active role in monitoring and assessing the Company’s risks, which include risks associated with
operations, credit, financing and capital investments. Management is responsible for the Company’s day-to-day risk
management activities and our board’s role is to engage in informed risk oversight. Management, through its
disclosure committee, compiles an annual ranking of risks to which the Company could be subjected and reviews
the results of this risk assessment with the audit committee. Any significant risks are then reviewed by the board and
assigned for oversight. In fulfilling this oversight role, our board focuses on understanding the nature of our
enterprise risks, including our operations and strategic direction, as well as the adequacy of our risk management
process and overall risk management system. There are a number of ways our board performs this function,
including the following:

• at its regularly scheduled meetings, the board receives management updates on our business operations,

financial results and strategy and discusses risks related to the business;

•

the audit committee assists the board in its oversight of risk management by discussing with management,
particularly, the Chief Financial Officer, our guidelines and policies regarding financial and enterprise risk
management and risk appetite, including major risk exposures, and the steps management has taken to monitor
and control such exposures; and

through management updates and committee reports, the board monitors our risk management activities,
including the annual risk assessment process, risks relating to our compensation programs, and financial and
operational risks being managed by the Company.

The board of directors also has oversight responsibility for risks and exposures related to employee compensation
programs and management succession planning, and assesses whether the organization’s compensation practices
encourage risk taking that would have a material adverse effect on the Company. The compensation committee
periodically reviews the structure and elements of our compensation programs and its policies and practices that
manage or mitigate such risk, including the balance of short-term and long-term incentives, use of multiple
performance measures, and a multi-year vesting schedule for long-term incentives. Based on these reviews, the
committee believes our compensation programs do not encourage excessive risk taking.

Board Structure and Meetings

The Board met five times during Fiscal 2012. The Board also acted by written consent from time to time. All
directors attended at least 75% of the total number of Board meetings and committee meetings on which they serve
(during the period in which each director served). In addition, NASDAQ marketplace rules contemplate that the
independent members of our Board will meet during the year in separate closed meetings referred to as ―executive
sessions‖ without any employee director or executive officer present. Executive sessions were usually held after
regularly scheduled Board meetings during Fiscal 2012.

The Board of Directors has five standing committees, the Audit Committee, the Executive Compensation Committee,
the New Markets Committee, the Governance Committee and the Nominations Committee.

Sonic has a standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the ―Exchange Act‖). Members of the Audit Committee are Messrs. Kleinman (chair),
Burish, Peercy (until his resignation effective January 23, 2012) and Janowiak (effective January 23, 2012). Sonic’s
Board of Directors has determined that all members of Sonic’s Audit Committee are ―independent‖ as that term is
used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and as defined under Nasdaq listing standards.
The Audit Committee provides assistance to the Board in fulfilling its oversight responsibility including: (i) internal
and external financial reporting, (ii) risks and controls related to financial reporting, and (iii) the internal and external
audit process. The Audit Committee is also responsible for recommending to the Board the selection of our
independent public accountants and for reviewing all related party transactions. The Audit Committee met five times
in Fiscal 2012. A copy of the charter of the Audit Committee is available on Sonic’s website.

Sonic's Board of Directors has determined that, due to his affiliation with the Chicago Booth School of Business at the
University of Chicago, and due to his current and past service as a director on numerous company boards, and
membership on numerous audit committees, including past or present chair, along with his other academic and business
credentials, Mr. Kleinman has the requisite experience and applicable background to meet Nasdaq standards requiring
financial sophistication of at least one member of the audit committee. Sonic's Board of Directors has also determined
that neither Mr. Kleinman nor any other member of the Audit Committee is an audit committee financial expert as
defined by applicable SEC regulations

The Compensation Committee consists of Messrs. Kleinman (chair), Burish, Janowiak (effective January 23, 2012) and
Peercy (until his resignation effective January 23, 2012). The Board of Directors has determined that all of the
members of the Compensation Committee are ―independent‖ as defined under Nasdaq listing standards. The
Compensation Committee makes recommendations to the Board with respect to salaries of employees, the amount and
allocation of any incentive bonuses among the employees, and the amount and terms of stock options to be granted to
executive officers. The Compensation Committee met once in Fiscal 2012. A copy of the charter of the Compensation
Committee is available on Sonic’s website.

The New Markets Committee consists of Messrs. Peercy (chair) and Kleinman. The New Markets Committee was
established on January 24, 2013 to assist management in developing new market entry plans, providing access to
contacts that may facilitate entry, assessing risk and monitoring outcomes. Mr. Peercy will receive an annual retainer
of $10,000 and Mr. Kleinman will receive an annual retainer of $3,000.

The Governance Committee consists of Messrs. Burish (chair), Kopko and Peercy. The Governance Committee was
established on January 24, 2013 to consider board terms and other governance issues related to enhancing shareholder
value.

The Nominations Committee consists of Messrs. Peercy (chair), Burish, Janowiak and Kleinman. The Board of
Directors has determined that all of the members of the Nominations Committee are ―independent‖ as defined under
Nasdaq listing standards.
Mr. Janowiak joined the Nominations Committee following the Committee’s
recommendation to the Board that he be nominated for election at the Annual Meeting. The purpose of the
Nominations Committee is to evaluate and recommend candidates for election as directors, make recommendations

concerning the size and composition of the Board of Directors, develop specific criteria for director independence, and
assess the effectiveness of the Board of Directors. Our Board of Directors has adopted a charter for the Nominations
Committee, which is available on Sonic’s website. The Nominations Committee will review all candidates in the same
manner regardless of the source of the recommendation. In recommending candidates for election to the Board of
Directors, the Nominations Committee reviews each candidate’s qualifications, including whether a candidate
possesses any of the specific qualities and skills desirable in certain members of the Board of Directors. Evaluations of
candidates generally involve a review of background materials, internal discussions and interviews with selected
candidates as appropriate. Generally the Nominations Committee will consider various criteria in considering whether
to make a recommendation. These criteria include expectations that directors have substantial accomplishments in their
professional backgrounds and are able to make independent, analytical inquiries and exhibit practical wisdom and
mature judgment. Director candidates should possess the highest personal and professional ethics, integrity and values,
be committee to promoting the long-term interest of our stockholders and be able and willing to devote the necessary
time to carrying out their duties and responsibilities as members of the Board. While the Board of Directors has not
adopted a policy regarding diversity, we also believe our directors should come from diverse backgrounds and
experience bases in order to promote the representation of diverse views on the Board of Directors. Stockholder
recommendations of candidates for Board membership will be considered when submitted to Corporate Secretary,
Sonic Foundry, Inc., 222 W. Washington Ave., Madison, WI 53703. When submitting candidates for nomination to be
elected at Sonic's annual meeting of stockholders, stockholders must also follow the notice procedures and provide the
information required by Sonic's bylaws.

In particular, for a stockholder to nominate a candidate for election at the 2014 Annual Meeting of Stockholders, the
nomination must be delivered or mailed to and received by Sonic's Secretary between November 8, 2013 and
December 8, 2013 (or, if the 2014 annual meeting is advanced by more than 30 days or delayed by more than 60 days
from March 7, 2014, not earlier than the close of business on the 120th day prior to such annual meeting and not later
than the close of business on the later of the 90th day prior to such annual meeting or the tenth calendar day following
the date on which public announcement of the date of the annual meeting is first made). The nomination must include
the same information as is specified in Sonic's bylaws for stockholder nominees to be considered at an annual meeting,
including the following:

• The stockholder's name and address and the beneficial owner, if any, on whose behalf the nomination is

proposed;

• The stockholder's reason for making the nomination at the annual meeting, and the signed consent of the

nominee to serve if elected;

• The number of shares owned by, and any material interest of, the record owner and the beneficial owner,

if any, on whose behalf the record owner is proposing the nominee;

• A description of any arrangements or understandings between the stockholder, the nominee and any other

•

person regarding the nomination; and
Information regarding the nominee that would be required to be included in Sonic's proxy statement by
the rules of the Securities and Exchange Commission, including the nominee's age, business experience
for the past five years and any other directorships held by the nominee.

The Operations Analysis Committee consisted of Messrs. Weis (chair) and Kleinman. The Operations Analysis
Committee was established in May 2008 to facilitate communication and provide advisory leadership in planning and
strategic growth. The Operations Analysis Committee was disbanded upon the appointment of Mr. Weis as Chief
Executive Officer on March 31, 2011.

DIRECTORS COMPENSATION

Our directors who are not also our full-time employees, receive an annual retainer of $20,000 in addition to a fee of
$1,500 for attendance at each meeting of the Board of Directors and $1,000 per committee meeting attended. In
addition, Mr. Kleinman receives an Audit Committee annual retainer of $8,000 and a Compensation Committee annual
retainer of $3,000 for his services as chairman of each committee and Mr. Burish receives an annual retainer of $35,000
as compensation for his services as Chairman of the Board of Directors. The cash compensation paid to the five non-
8

employee directors combined in Fiscal 2012 was $232,687. When traveling from out-of-town, the members of the
Board of Directors are also eligible for reimbursement for their travel expenses incurred in connection with attendance
at Board meetings and Board Committee meetings. Directors who are also employees do not receive any compensation
for their participation in Board or Board Committee meetings.

Pursuant to the 2008 Sonic Foundry Non-Employee Amended Directors Stock Option Plan (the ―Directors Plan‖) we
grant to each non-employee director who is reelected or who continues as a member of the Board of Directors at each
annual stockholders meeting a stock option to purchase 2,000 shares of Common Stock. Further, the chair of our Audit
Committee receives an additional stock option grant to purchase 500 shares of Common Stock per year pursuant to
Sonic’s Non-Employee Amended Directors Stock Option Plan.

The exercise price of each stock option granted was equal to the market price of Common Stock on the date the stock
option was granted. Stock options issued under the Directors Plan vest fully on the first anniversary of the date of grant
and expire after ten years from date of grant. An aggregate of 100,000 shares are reserved for issuance under the
Directors Plan.

If any change is made in the stock subject to the Directors Plan, or subject to any option granted thereunder, the
Directors Plan and options outstanding thereunder will be appropriately adjusted as to the type(s), number of securities
and price per share of stock subject to such outstanding options.

The options and warrants set forth above have an exercise price equal to the fair market value of the underlying
common stock on the date of grant. The term of all such options is ten years.

The following table summarizes cash and equity compensation provided our non-employee directors during the
fiscal year ended September 30, 2012.

Fees Earned
Or Paid In
Cash
($)(1)
(b)

Stock
Awards
($)
(c)

Option
Awards
($)(2)
(d)

Non-Equity
Incentive
Plan Compen-
sation
($)
(e)

Name
(a)

Mark D. Burish
Michael H. Janowiak
David C. Kleinman
Frederick H. Kopko
Paul S. Peercy
Brian T. Wiegand

83,747
31,500
46,500
27,500
29,500
13,940

—
—
—
—
—
—

3,340
3,340
4,175
3,340
3,340
3,120

—
—
—
—
—
—

Change in
Pension
Value and
Non-qualified
Deferred
Compen-
sation
Earnings
($)
(f)

—
—
—
—
—
—

All Other
Compensation
($)
(g)

—
—
—
—
—
—

Total
($)
(h)

87,087
34,840
50,675
30,840
32,840
17,060

(1)
(2)

The amount reported in column (b) is the total of retainer fees and meeting attendance fees.
The amount reported in column (d) is the aggregate grant date fair value of options granted during the fiscal
year ended September 30, 2012 in accordance with FASB ASC Topic 718. Each director, other than Mr.
Wiegand, received an option award of 2,000 shares on March 7, 2012 at an exercise price of $7.39 with a grant
date fair value of $3,340. In addition, Mr. Kleinman received a grant of 500 shares on March 7, 2012 at an
exercise price of $7.39 with a grant date fair value of $835 in connection with his position as chair of the Audit
Committee. Mr. Wiegand received a grant of 2,000 shares on July 23, 2012 upon his appointment to the board
at an exercise price of $6.99 per share with a grant date fair value of $3,120.

EXECUTIVE OFFICERS OF SONIC

Our executive officers, who are appointed by the Board of Directors, hold office for one-year terms or until their
respective successors have been duly elected and have qualified. There are no family relationships between any of the
executive officers of Sonic.

Gary R. Weis serves as both our Chief Executive and Chief Technology Officer. (See " Directors Continuing in Office
".)

Kenneth A. Minor, age 50, has been our Chief Financial Officer since June 1997, Assistant Secretary from December
1997 to February 2001 and Secretary since February 2001. From September 1993 to April 1997, Mr. Minor was
employed as Vice President and Treasurer for Fruehauf Trailer Corporation, a manufacturer and global distributor of
truck trailers and related aftermarket parts and service where he was responsible for financial, treasury and investor
relations functions. Prior to 1993, Mr. Minor served in various senior accounting and financial positions for public and
private corporations as well as the international accounting firm of Deloitte Haskins and Sells. Mr. Minor is a certified
public accountant and has a B.B.A. degree in accounting from Western Michigan University.

Robert M. Lipps, age 41, has been Executive Vice President of Sales since April 2008, joining Sonic Foundry in April
2006 as Vice President of International Sales and assuming expanded responsibility for U.S. central sales in 2007. Mr.
Lipps leads the company’s global sales organization including oversight of domestic, international and channel sales.
He holds 15 years of sales leadership, business development and emerging market entry expertise in the technology and
manufacturing sectors, including sales and channel management. From January 2004 to March 2006 he served as
General Manager of Natural Log Homes LLC, a New Zealand based manufacturer of log homes. From July 1999 to
Dec 2002 he served as Latin America Regional Manager of Adaytum, a software publisher of planning and
performance management solutions, (acquired by Cognos Software, an IBM Company, in January 2003) and from May
1996 to July 1999 he served as International Sales Manager for Persoft, a software publisher of host access and
mainframe connectivity solutions (acquired by Esker software in 1998). Mr. Lipps has a B.S. degree in Marketing from
the University of Wisconsin at La Crosse.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows information known to us about the beneficial ownership of our Common Stock as of
January 10, 2013, by each stockholder known by us to own beneficially more than 5% of our Common Stock, each of
our executive officers named in the Summary Compensation Table (―Named Executive Officers‖), each of our
directors, and all of our directors and executive officers as a group. Unless otherwise noted, the mailing address for
these stockholders is 222 West Washington Avenue, Madison, Wisconsin 53703.

Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power
with respect to shares. Shares of common stock issuable upon the exercise of stock options or warrants exercisable
within 60 days after January 10, 2013, which we refer to as Presently Exercisable Options, are deemed outstanding for
computing the percentage ownership of the person holding the options but are not deemed outstanding for computing
the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named
in the table have sole voting and investment power with respect to their shares of common stock, except to the extent
authority is shared by spouses under applicable law. The inclusion of any shares in this table does not constitute an
admission of beneficial ownership for the person named below.

Name of Beneficial Owner(1)

Common Stock
Wealth Trust Axiom LLC (3)
4 Radnor Corp Center, suite 520
Radnor PA 19087

Number of Shares of
Class
Beneficially Owned

Percent
of Class(2)

297,677

7.6%

Mark D. Burish(4)
33 East Main St.
Madison, WI 53703

Andrew D. Burish(5)
8020 Excelsior Drive
Madison, WI, 53717

Gary R. Weis(6)

Kenneth A. Minor(7)

Robert M. Lipps(8)

Frederick H. Kopko, Jr.(9)
29 South LaSalle Street
Chicago, IL 60603

David C. Kleinman(10)
1101 East 58th Street
Chicago, IL 60637

Paul S. Peercy(11)
1415 Engineering Dr
Madison, WI 53706

Brian S. Wiegand
8215 Greenway Blvd., Suite 340
Middleton, WI 53562

Michael H. Janowiak(12)
6688 Joliet Road
Countryside, IL 60525

All current Executive Officers and Directors as a Group (9

persons)(13)

247,995

195,000

99,166

68,729

48,905

42,627

34,500

20,040

12,000

4,000

577,962

6.3

5.0

2.5

1.7

1.2

1.1

14.1%

less than 1%

*
(1) Sonic believes that the persons named in the table above, based upon information furnished by such persons,
except as set forth in notes (3) and (5) where such information is based on a Schedule 13G, have sole voting and
dispositive power with respect to the number of shares indicated as beneficially owned by them.

(2) Applicable percentages are based on 3,905,514 shares outstanding, adjusted as required by rules promulgated by

the Securities and Exchange Commission.

(3)

Information is based on Schedule 13G filed on January 20, 2012 by Albert C. Matt, President of Wealth Trust
Axiom LLC. Based on such information, Wealth Trust Axiom LLC has sole dispositive power but not sole voting
power with respect to such shares.
(4)
Includes 6,000 shares subject to Presently Exercisable Options.
(5)
Information is based on Schedule 13G filed on February 6, 2012
(6)
Includes 39,666 shares subject to Presently Exercisable Options.
(7) Consists of 51,580 shares subject to Presently Exercisable Options.
(8)
Includes 47,830 shares subject to Presently Exercisable Options.
(9)
Includes 14,000 shares subject to Presently Exercisable Options.
(10) Includes 24,500 shares subject to Presently Exercisable Options.
(11) Includes 20,000 shares subject to Presently Exercisable Options.
(12) Includes 4,000 shares subject to Presently Exercisable Options.
(13) Includes an aggregate of 207,576 Presently Exercisable Options.

Introduction

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes our compensation strategy, policies, programs and practices
for the executive officers identified in the Summary Compensation Table. Throughout this proxy statement, we refer
to these individuals, who serve as our Chief Executive Officer, Chief Financial Officer and Executive Vice President
of Sales as the ―executive officers.‖

The Executive Compensation Committee (―Committee‖) establishes and oversees our compensation and employee
benefits programs and approves the elements of total compensation for the executive officers. The day-to-day design
and administration of our retirement and employee benefit programs available to our employees are handled by our
Human Resources and Finance Department employees. The Committee is responsible for reviewing these programs
with management and approving fundamental changes to them.

Overview and Objectives of our Executive Compensation Program

The compensation program for our executive officers is designed to attract, motivate, reward and retain highly
qualified individuals who can contribute to Sonic’s growth with the ultimate objective of increasing stockholder
value. Our compensation program consists of several forms of compensation: base salary, annual bonus, long-term
incentives and limited perquisites and benefits.

Base salary and annual bonus are cash-based while long-term incentives consist of stock option awards. The
Committee does not have a specific allocation goal between cash and equity-based compensation or between annual
and long-term incentive compensation. Instead, the Committee relies on the process described in this discussion and
analysis in its determination of compensation levels and allocations for each executive officer.

The Committee established performance metrics for each of its Named Executive Officers in fiscal 2012 designed to
match Company performance to the amount of incentive compensation paid to such officers following completion of
the fiscal year.

The recommendations of the Chief Executive Officer play a significant role in the compensation-setting process.
The Chief Executive Officer provides the Committee with an annual overall assessment of Sonic’s achievements
and performance, his evaluation of individual performance and his recommendations for annual compensation
and long-term incentive awards. The Committee has discretion to accept, reject or modify the Chief Executive
Officer’s recommendations.

The Committee determines the compensation for each executive officer in an executive session.

Market Competitiveness

The Committee’s target is for total cash compensation to average between the 50th and 75th percentile of published
compensation data derived from two sources: (i) a peer group of companies that are in our industry, competitors for
key talent, or with similar financial characteristics; and (ii) published market survey data for companies within our
revenue range. The peer group data was obtained from the most recently filed proxy statement of 14 publicly-traded
technology companies with annual revenues ranging from approximately $10 million to just over $150 million;
market capitalization of $10 million to $400 million and approximately 300 employees or fewer. The following
companies comprised the peer group for the study: MakeMusic, Inc., Majesco Entertainment, XATA Corporation,
Bsquare Corporation, Versant Corporation, Simulations Plus, Adept Technology, Cinedigm Digital Cinema,
SoundBite Communications, Procera Networks, GlobalSCAPE, Broadvision, Evolving Systems and GSE Systems.
Given competitive recruiting pressures, the Committee retains its discretion to deviate from this target under
appropriate circumstances. The Committee periodically receives updates of the published compensation data.

Pay for Performance

The Committee believes that both long and short term compensation of executive officers should correlate to
Sonic’s overall financial performance. Incentive payouts will be larger with strong performance and smaller if
Sonic’s financial results decline. From time to time, extraordinary Board-approved initiatives in a fiscal year, such
as a restructuring, acquisition, or divestiture, are considered by the Committee in its overall evaluation of Sonic’s
performance.

Competitive Benchmarking/Peer Group Analysis

The Committee reviewed market data from Towers Watson Data Services dated April 1, 2010 in various size and
industry stratifications similar to that of Sonic.

The second source of compensation data came from a peer group of fourteen public companies that we consider
similar to our market for sales, or for key talent, or with similar financial or other characteristics such as number of
employees. The companies in the peer group are described above.

Components of Executive Compensation

Base Salary

The Committee seeks to pay the executive officers a competitive base salary in recognition of their job
responsibilities for a publicly held company. As noted above, the target compensation range for an executive’s total
cash compensation (salary and bonus) is between the 50th and 75th percentile of the market data reviewed by the
Committee.

As part of determining annual increases, the Committee also considers the Chief Executive Officer’s
recommendation regarding individual performance as well as internal equitable considerations.

In evaluating individual performance, the Committee considers initiative, leadership, tenure, experience, skill set for
the particular position, knowledge of industry and business, and execution of strategy in placing the individual
within the range outlined.

The Committee considered base wage changes for Mssrs. Weis, Minor and Lipps at a meeting of the Committee
held on October 17, 2012. Accordingly, base compensation for Mr. Weis was increased from $378,400 to
$397,320, base pay for Mr. Minor was increased from $255,646 to $268,428 and base compensation for Mr. Lipps
was increased from $196,267 to $206,080. After its review of all sources of market data as described above, the

Committee believes that the base salaries and the bonuses described below are within its targeted range for total cash
compensation.

Annual Performance-Based Variable Compensation

The performance-based variable compensation reported for each executive officer represents compensation that was
earned based on fiscal 2012 performance. The following describes the methodologies used by the Compensation
Committee to determine the final annual performance-based variable compensation earned by each executive
officer:

Selection of Performance Metrics. For fiscal 2012, the Compensation Committee designed a short-term incentive
program (―STIP‖) driven by four performance measures that it determined were appropriate to drive desired
business behavior for the Company and would correlate positively with total shareholder return. These measures
were the Company’s results with respect to (1) customer billings, (2) pro forma earnings, (3) customer satisfaction,
and (4) the officer’s achievement of certain individual goals. Messrs. Weis, Minor and another Non-Executive
officer were included in the plan. Mr. Lipps’ short term incentive plan was based solely on the level of customer
billings achieved.

Establishment of Incentive Goals and Payout Approach. The Compensation Committee designed the relationship
between pay and performance to ensure that desired performance would be rewarded with material payouts.
Similarly, performance that did not meet the goals would reduce the performance-based variable compensation
payout to as low as zero. In setting the performance levels, the Compensation Committee strived to establish
challenging but achievable goals. The factors considered by the Compensation Committee in assessing the challenge
inherent in the goals included:

• Management’s internal operating plan; and
• Customer satisfaction.

Payout Based on Performance Against Goals. For fiscal 2012 the Company’s performance, as evaluated by the
Compensation Committee, lead to the determination that 40% of the STIP performance metrics were achieved and
therefore 40% of the target bonus payouts were made under the STIP compensation plan. The STIP earned by Mr.
Weis was $75,680 and was $35,784 for Mr. Minor. Mr. Minor earned an additional incentive payout of $15,000
based on achieving certain performance objectives. Total incentive paid to Mr. Lipps during fiscal 2012 was
$109,911.

Stock Options

The Committee has a long-standing practice of providing long-term incentive compensation grants to the executive
officers. The Committee believes that such grants, in the form of stock options, help align our executive officers’
interests with those of Sonic’s stockholders. All stock options have been granted under either our 1995 Stock Option
Plan, the 1999 Non-Qualified Plan or the 2009 Stock Incentive Plan (―Employee Plans‖). All but the 2009 Stock
Incentive Plan are now terminated.

The Committee reviews option grant recommendations by the Chief Executive Officer for each executive officer,
but retains full discretion to accept, reject or revise each recommendation. The Committee’s policy is to grant
options on the date it approves them or such other future date as the Committee may agree at the time of approval.
The exercise price is determined in accordance with the terms of the Employee Plan and cannot be less than the Fair
Market Value, as defined in the Plan, of Sonic’s common stock. The Committee typically grants options once a year,
but may grant options to newly hired executives at other times.

In making its determinations, the Committee considers the number of options or shares owned by the executive
officers.

On October 17, 2012 the Committee awarded Mssrs. Weis, Minor and Lipps option grants to purchase 73,000,
40,000 and 40,000 shares of common stock, respectively, effective October 17, 2012 with the strike price equal to
the closing price of Sonic’s stock on that date, which was $7.80. Each grant will vest one third each on the first,
second and third anniversaries of the grant.

Health and Welfare Benefits

Our officers are covered under the same health and welfare plans, including our 401(k) plan, as salaried employees.

Employment Agreements

We entered into employment agreements with Kenneth A. Minor in October 2007 and Robert M. Lipps in August
2008. The salaries of each of Messrs. Minor and Lipps are subject to increase each year at the discretion of the Board
of Directors. Messrs. Minor and Lipps are also entitled to incidental benefits of employment under the agreements.
Each of the employment agreements provides that a cash severance payment be made upon termination, other than for
cause. In the case of Mr. Minor, such cash severance is equal to the highest cash compensation paid in any of the last
three fiscal years immediately prior to termination and with respect to Mr. Lipps, such cash severance payment is equal
to the cash compensation paid in the previous fiscal year immediately prior to termination. In addition, Mssrs. Minor
and Lipps will receive immediate vesting of all previously unvested common stock and stock options and have the right
to voluntarily terminate their employment, and receive the same severance arrangement detailed above following (i)
any ―person‖ becoming a ― beneficial‖ owner of stock of Sonic Foundry representing 50% or more of the total voting
power of Sonic Foundry’s then outstanding stock; or, (ii) Sonic Foundry is acquired by another entity through the
purchase of substantially all of its assets or securities and following such acquisition, Gary Weis does not remain as
Chief Executive Officer of the Board of Directors of Sonic Foundry or the acquisition is without the written consent of
the Board of Directors of Sonic Foundry; or (iii) Sonic Foundry is merged with another entity, consolidated with
another entity or reorganized in a manner in which any ―person‖ is or becomes a ―beneficial‖ owner of stock of the
surviving entity representing 50% or more of the total voting power of the surviving entity’s then outstanding stock;
and Messrs. Minor or Lipps is demoted without cause or his duties are substantially altered. Pursuant to the
employment agreements, each of Messrs. Minor and Lipps has agreed not to disclose our confidential information and
not to compete against us during the term of his employment agreement and for a period of one year thereafter. Such
non-compete clauses may not be enforceable, or may only be partially enforceable, in state courts of relevant
jurisdictions.

Effective September 30, 2011, the Company entered into an amended and restated employment agreement with Mr.
Weis. Pursuant to the terms of the amended and restated employment agreement, Mr. Weis will receive an annual
minimum base salary of $378,400 per year subject to increase at the discretion of the Board. Mr. Weis may also
receive a performance bonus at the discretion of the Board. Mr. Weis in addition will assume duties as are
customarily performed by a Chief Technology Officer.

The amended and restated employment agreement will continue in effect until terminated as set forth therein. In the
event Mr. Weis’s employment is terminated without cause, as defined in the amended and restated employment
agreement, or in the event his employment is constructively terminated, Mr. Weis shall be entitled to receive, in
equal bi-weekly installments over a one-year period, compensation equal to one and five hundredths
(1.05) multiplied by the highest cash compensation paid to Mr. Weis in any of the last three years immediately prior
to his termination. In the event of a Change of Control, as defined in the amended and restated employment
agreement, Mr. Weis is entitled to terminate the agreement within one year following such Change of Control, in
which event he shall be entitled to receive, in a lump sum payable within thirty days of such termination,
compensation equal to two and one-tenth (2.1) multiplied by the highest cash compensation paid to Mr. Weis in any
of the last three fiscal years immediately prior to his termination. In any of the above events, (i) all of Mr. Weis’s
unvested stock options and stock grants shall vest immediately upon termination, and (ii) Mr. Weis shall receive
health insurance continuation as required by COBRA, salary accrued to the date of termination, and any accrued
vacation pay. Mr. Weis has further agreed not to disclose the Company’s proprietary information, and, until one year

following the termination of his employment agreement, not to compete with the Company or solicit the Company’s
employees. Such non-compete clause may not be enforceable, or may be only partially enforceable, in state courts
of relevant jurisdiction.

For illustrative purposes, if Sonic terminated the employment of Mr. Weis (not for cause) on September 30,
2012, Sonic would be obligated to pay $477,000, representing 1.05 times the cash compensation paid Mr. Weis during
fiscal 2012 and $954,000 if Mr. Weis elected to terminate his employment on September 30, 2012, following a change
of control as defined in the employment agreement. If Sonic terminated Messrs. Minor and Lipps on September 30,
2012, (not for cause), or if Messrs. Minor and Lipps elected to terminate their employment following a demotion or
alteration of duties on September 30, 2012, and a change of control as defined in the employment agreements had
occurred, Sonic would be obligated to pay $306,000 and $299,000, respectively. In addition, any non-vested rights of
Messrs. Weis, Minor and Lipps under the Employee Plans, would vest as of the date of employment termination. The
value of accelerated vesting of the options under these circumstances would be $84,000 for Mr. Weis and $88,000 for
both Mssrs. Minor and Mr. Lipps.

Personal Benefits

Our executives receive a limited number of personal benefits certain of which are considered taxable income to them
and which are described in the footnotes to the section of this Proxy Statement entitled ―Summary Compensation
Table ‖.

Internal Revenue Code Section 162(m)

Internal Revenue Code Section 162(m) limits the ability of a public company to deduct compensation in excess of
$1 million paid annually to each of the Chief Executive Officer and each of the other executive officers named in the
Summary Compensation Table. There are exemptions from this limit, including compensation that is based on the
attainment of performance goals that are established by the Committee and approved by the Company stockholders.
No executive officer was affected by this limitation in fiscal 2012.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of Sonic has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included
in the Proxy Statement.

COMPENSATION COMMITTEE

David C. Kleinman, Chair
Mark D. Burish
Michael H. Janowiak

The following table sets forth the compensation of our principal executive officer, our principal financial officer and
our other two executive officers for the fiscal year ended September 30, 2012.

Summary Compensation

Salary
($)
(c)

Bonus
($)
(d)

Stock
Awards
($)
(e)

Option
Awards
($)(1)
(f)

Non-Equity
Incentive Plan
Compensation
($)(2)
(g)

Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
($)
(h)

378,400
170,000
—

255,123
247,092
241,000

195,811
189,696
185,000

—
—
—

—
191,880
—

75,680
74,923
—

103,400
98,416
18,898

50,784
49,144
—

109,911
101,248
73,834

—
—
—

All Other
Compen-
sation
($)(3)
(i)

Total
($)
(j)

6,986
—
—

461,066
436,803
—

16,809
14,041
7,795

426,116
408,693
270,426

8,787
9,072
1,992

417,909
398,432
279,724

Name and Principal
Position
(a)

Gary R. Weis
Chief Executive and
Chief Technology
Officer

Kenneth A. Minor
Chief Financial Officer
and Secretary

Robert M. Lipps
Executive Vice
President - Sales

Year
(b)

2012
2011
2010

(1) The option awards in column (f) represent the aggregate grant date fair value computed in accordance with FASB
ASC Topic 718 for stock options granted during the fiscal year. The assumptions and methodology used in
calculating the compensation expense of the option awards are provided in Sonic’s Form 10-K. See Note 1,
―Stock Based Compensation‖ in the Notes to the Consolidated Financial Statements in Sonic’s Form 10-K. The
amounts in this column represent value attributed to the awards at the date of grant and not necessarily the actual
value that will be realized by the executive. There can be no assurance that the options will ever be exercised (in
which case no value will be realized by the executive) or that the value on exercise will equal the ASC Topic 718
value.

(2) The amounts in column (g) represent cash bonuses which were awarded for performance during the prior fiscal

year based on a pre-established formula.

(3) The amount shown under column (i) for the fiscal year 2012 includes Sonic’s matching contribution under our
401(k) plan of $6,986, $9,659 and $8,787 for Messrs Weis, Minor and Lipps. Mr. Minor receives $650 per month
as a car allowance of which the taxable personal portions were $7,150. Mr. Lipps receives a car allowance of $700
per month of which there was no taxable personal portion. Mr. Weis received car and housing allowances totaling
$2,500 per month, of which there was no taxable personal portion.

The Following table shows the plan-based awards granted to the Named Executive Officers during fiscal 2012.

Grants of Plan-Based Awards

Name
(a)

Grant
Date
(b)

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Target
($)
(d)

Maximum
($)
(e)

Threshold
($)
(c)

Estimated Future Payouts
Under Equity
Incentive
Plan Awards
Target
($)
(g)

Maximum
($)
(h)

Threshold
($)
(f)

All other
stock
awards:
Number of
Shares of
stock or
units
(#)
(i)

All other
option
awards:
Number of
Securities
Underlying
Options
(#)
(j)

Exercise
or base
price of
option
awards
($/Sh)
(1)
(k)

Grant
Date fair
Value of
Stock and
option
awards
($)
(2)
(l)

Kenneth A. Minor
Robert M. Lipps

10/24/11 —
10/24/11 —

—
—

27,500
27,500

9.46
9.46

103,400
103,400

(1) Sonic grants employee stock options with exercise prices equal to the closing stock price on the date of grant.
(2) The amount reported in column (l) represents the grant date fair value of the award following the required FASB
ASC Topic 718 compensation methodology. Grant date fair value is calculated using the Lattice method. See
Note 1, ―Stock Based Compensation‖ in the Notes to the Consolidated Financial Statements in Sonic’s Form 10-K
for the fiscal year ended September 30, 2012 for an explanation of the methodology and assumptions used in
FASB ASC Topic 718 valuation. With respect to the option grants, there can be no assurance that the options will
ever be exercised (in which case no value will be realized by the executive) or that the value on exercise will equal
the FASB ASC Topic 718 value.

Sonic grants options to its executive officers under our employee stock option plans. As of September 30, 2012, options
to purchase a total of 846,280 shares were outstanding under the plans, and options to purchase 601,926 shares
remained available for grant thereunder.

Outstanding Equity Awards at Fiscal Year-End

The following table shows information concerning outstanding equity awards as of September 30, 2012 held by the
Named Executive Officers.

Option Awards

Stock Awards

Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
(j)

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
(i)

Market
Value of
Shares or
Units of
Stock
That
Have
Not
Vested
($)
(h)

Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
(g)

Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
None

None

Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)(2)
(b)
2,000
2,000
2,000
2,000
2,000
2,000
5,000
2,000
2,000
2,000
0

Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)(2)
(c)
0
0
0
0
0
0
0
0
0
0
50,000

10,000
5,000
12,000
4,000
4,706
0

2,500
750
1,500
2,500
10,000
6,000
4,000
4,706
0

0
0
0
2,000
9,414
27,500

0
0
0
0
0
0
2,000
9,414
27,500

Option
Exercise
Price
($)
(1)(2)
(e)
19.40
13.40
12.30
17.40
37.60
8.00
5.00
5.50
6.90
14.83
8.68

4.20
14.50
15.50
5.26
15.21
9.46

22.60
37.10
15.50
7.50
7.80
5.30
5.26
15.21
9.46

Option
Expiration
Date
(1)
(f)
2/9/2014
5/24/2014
5/15/2015
3/15/2016
3/15/2017
3/6/2018
11/3/2018
3/5/2019
3/4/2020
3/3/2021
9/30/2021

05/09/2013
11/26/2014
12/04/2017
12/2/2019
11/24/2020
10/24/2021

04/10/2016
12/07/2016
12/04/2017
03/10/2018
04/16/2018
11/10/2018
12/2/2019
11/24/2020
10/24/2021

Name
(a)

Gary R. Weis

Kenneth A. Minor

Robert M. Lipps

(1) All options were granted under either our stockholder approved Employee Stock Option Plans or the Non-

Qualified Stock Option Plan. All unexercisable options listed in the table become exercisable over a three-year
period in equal annual installments beginning one year from the date of grant.

(2) All options have been adjusted for the one-for-ten reverse stock split of the Company’s shares completed on

November 16, 2009.

The following table shows information concerning option exercises in fiscal 2012 by the Named Executive Officers.

Option Exercises and Stock Vested

Option Awards

Stock Awards

Number of

Shares
Acquired
on Exercise
(#)

Value
Realized
on
Exercise
($)

Number
of Shares
Acquired
on
Vesting
(#)

Value
Realized
on
Vesting
($)

None

Equity Compensation Plan Information

Plan category

Equity compensation plans approved
by security holders (1)

Equity compensation plans not
approved by security holders (2)

Total

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding
options, warrants
and rights

Number of
securities
remaining
available for
future issuance

(a)

741,555

104,725

846,280

(b)

11.37

10.71

11.28

(c)

646,426

(1) Consists of the 2009 Stock Incentive Plan, Employee Incentive Stock Option Plan and the Amended Directors
Stock Option Plans. For further information regarding these plans, reference is made to Note 5 of the financial
statements.

(2) Consists of the Non-Qualified Stock Option Plan. For further information regarding this plan, reference is

made to Note 5 of the financial statements.

Compensation Committee Interlocks and Insider Participation

The members of the Executive Compensation Committee of Sonic's Board of Directors for fiscal 2012 were those named
in the Executive Compensation Committee Report. No member of the Committee was at any time during Fiscal 2012 or
at any other time an officer or employee of Sonic Foundry, Inc.

No executive officer of Sonic Foundry, Inc. has served on the board of directors or compensation committee of any other
entity that has or has had one or more executive officers serving as a member of the Board of Directors of Sonic
Foundry.

PROPOSAL TWO: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors, upon the recommendation of the Audit Committee, has appointed the firm of Grant Thornton
LLP (―GT‖) as independent auditors to audit our financial statements for the year ending September 30, 2013, and has
further directed that management submit the selection of independent public accountants for certification by the
stockholders at the annual meeting. Representatives of GT are expected to be present at the annual meeting to respond
to stockholders' questions and to have the opportunity to make any statements they consider appropriate.

Stockholder ratification of the selection of GT as our independent auditors is not required by our Bylaws or otherwise.
However, the Board is submitting the selection of GT to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the selection, the Board and the Audit Committee will reconsider whether or
not to retain that firm. Even if the selection is ratified, the Board and the Audit Committee in their discretion may
direct the appointment of a different independent accounting firm at any time during the year if they determine that
such a change would be in the best interests of Sonic and its stockholders.

The ratification of the appointment of GT as independent public accountants requires the approval of a majority of the
votes cast at the Annual Meeting.

Recommendation of Board of Directors

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 2
RATIFYING THE APPOINTMENT OF GT AS INDEPENDENT AUDITORS FOR SONIC FOUNDRY.

Relations with Independent Auditors

GT has served as our independent public accountants since its appointment in July 2004. As stated in Proposal 2, the
Board has selected GT to serve as our independent auditors for the fiscal year ending September 30, 2012.

Audit services performed by GT for Fiscal 2012 and 2011 consisted of the examination of our financial statements,
review of fiscal quarter results, and services related to filings with the Securities and Exchange Commission (SEC).
We also retained GT to perform certain audit related services associated with the audit of our benefit plan, and tax
preparation and consultative services associated with the preparation of Federal and State tax returns. All fees paid to
GT were reviewed, considered for independence and upon determination that such payments were compatible with
maintaining such auditors’ independence, approved by Sonic’s audit committee prior to performance.

Fiscal Years 2012 and 2011 Audit Firm Fee Summary

During fiscal years 2012 and 2011, we retained GT to provide services in the following categories and amounts:

Audit Fees
Audit Related
Tax Fees

Years Ended September 30,
2011
2012

$168,200
12,250
27,378

$143,900
11,350
26,081

All of the services described above were approved by Sonic’s audit committee prior to performance. The Audit
Committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-
audit services to be performed by the independent auditors, provided that any such approvals are presented to the Audit
Committee at its next scheduled meeting. The audit committee has determined that the payments made to its
independent accountants for these services are compatible with maintaining such auditors’ independence.

REPORT OF THE AUDIT COMMITTEE 1

The Audit Committee' s role includes the oversight of our financial, accounting and reporting processes, our system
of internal accounting and financial controls and our compliance with related legal and regulatory requirements, the
appointment, engagement, termination and oversight of our independent auditors, including conducting a review of
their independence, reviewing and approving the planned scope of our annual audit, overseeing the independent
auditors' audit work, reviewing and pre-approving any audit and non-audit services that may be performed by them,
reviewing with management and our independent auditors the adequacy of our internal financial controls, and
reviewing our critical accounting policies and the application of accounting principles. The Audit Committee held
five meetings during fiscal 2012.

Mssrs. Kleinman, Burish and Janowiak meet the rules of the SEC for audit committee membership and are
"independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and under Nasdaq
listing standards. In August 2009, the Board approved revisions to the Audit Committee Charter to reflect new rules
and standards set forth in certain SEC regulations as well as changes to Nasdaq listing standards. A copy of the Audit
Committee Charter is available on Sonic’s website.

As set forth in the Audit Committee Charter, management of Sonic is responsible for the preparation, presentation and
integrity of Sonic’s financial statements and for the effectiveness of internal control over financial reporting.
Management and the accounting department are responsible for maintaining Sonic’s accounting and financial reporting
principles and internal controls and procedures designed to assure compliance with accounting standards and applicable
laws and regulations. The independent auditors are responsible for auditing Sonic’s financial statements and
expressing an opinion as to their conformity with generally accepted accounting principles.

We have reviewed and discussed with our independent auditors, GT, matters required to be discussed pursuant to
Statement on Auditing Standards No. 61 (Communications with Audit Committees). We have received from the
auditors a formal written statement describing the relationships between the auditor and Sonic that might bear on the
auditor's independence consistent with applicable requirements of the Public Company Accounting Oversight Board.
We have discussed with GT matters relating to its independence, including a review of both audit and non-audit fees,
and considered the compatibility of non-audit services with the auditors' independence.

The members of the Audit Committee are not full-time employees of Sonic and are not performing the functions of
auditors or accountants. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct
―field work‖ or other types of auditing or accounting reviews or procedures or to set auditor independence standards.
Members of the Committee necessarily rely on the information provided to them by management and the independent
accountants. Accordingly, the Audit Committee’s considerations and discussions referred to above do not assure that
the audit of Sonic’s financial statements has been carried out in accordance with generally accepted auditing standards,
that the financial statements are presented in accordance with generally accepted accounting principles or that Sonic’s
auditors are in fact ―independent‖.

We have reviewed and discussed with management and GT the audited financial statements. We discussed with GT
the overall scope and plans of their audit. We met with GT, with and without management present, to discuss results
of their examination and the overall quality of Sonic’s financial reporting.

Based on the reviews and discussions referred to above and our review of Sonic’s audited financial statements for fiscal

1 The material in this report is not ―soliciting material‖, is not deemed filed with the SEC, and is not to be
incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general
incorporation language in such filing.

2012, we recommended to the Board that the audited financial statements be included in the Annual Report on
Form 10-K for the fiscal year ended September 30, 2012, for filing with the SEC.
Respectfully submitted,

AUDIT COMMITTEE
David C. Kleinman, Chair
Mark D. Burish
Michael H. Janowiak

CERTAIN TRANSACTIONS

Frederick H. Kopko, Jr., a director and stockholder of Sonic Foundry, is a partner in McBreen & Kopko. Pursuant to
the 1997 Directors' Stock Option Plan, Mr. Kopko has been granted options to purchase 4,000 shares of Common
Stock at exercise prices ranging from $17.40 to $37.60 and was granted options to purchase 10,000 shares of
Common Stock at exercise prices ranging from $5.50 to $14.83 pursuant to the 2008 Non-Employee Directors Plan.
During fiscal 2012, we paid the Chicago law firm of McBreen & Kopko certain compensation for legal services
rendered subject to standard billing rates.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires Sonic's officers and directors, and persons who own
more than ten percent of the Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant
to Rule 16a-3 under the Exchange Act during our most recent fiscal year, to Sonic Foundry's knowledge, all
reporting persons complied with all applicable filing requirements of Section 16(a) of the Securities Exchange Act
of 1934, as amended.

Code of Ethics

Sonic has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K) that applies to its principal executive,
financial and accounting officers. Sonic Foundry will provide a copy of its code of ethics, without charge, to any
investor who requests it. Requests should be addressed in writing to Mr. Kenneth Minor, Corporate Secretary, 222
West Washington Ave, Madison, WI 53703.

COMMUNICATIONS WITH THE BOARD OF DIRECTORS

Any stockholder who desires to contact our Board or specific members of our Board may do so electronically by
sending an email to the following address: directors@sonicfoundry.com. Alternatively, a stockholder can contact
our Board or specific members of our Board by writing to: Secretary, Sonic Foundry Incorporated, 222 West
Washington Avenue, Madison, WI 53703.

Each communication received by the Secretary will be promptly forwarded to the specified party following normal
business procedures. The communication will not be opened but rather will be delivered unopened to the intended
recipient. In the case of communications to the Board or any group or committee of Directors, the Secretary will
open the communication and will make sufficient copies of the contents to send to each Director who is a member of
the group or committee to which the envelope is addressed.

STOCKHOLDER PROPOSALS FOR 2014 ANNUAL MEETING OF STOCKHOLDERS

Requirements for Stockholder Proposals to be Considered for Inclusion in Sonic's Proxy Materials. Stockholders of
Sonic may submit proposals on matters appropriate for stockholder action at meetings of Sonic's stockholders in

accordance with Rule 14a-8 promulgated under the Securities Exchange Act of 1934. For such proposals to be
included in Sonic's proxy materials relating to its 2014 Annual Meeting of Stockholders, all applicable requirements
of Rule 14a-8 must be satisfied and such proposals must be received by Sonic no later than the anniversary date of
120 days prior to the date of this proxy statement (September 30, 2013). Such proposals should be delivered to
Corporate Secretary, Sonic Foundry, Inc., 222 West Washington Avenue, Madison, Wisconsin 53703.

Requirements for Stockholders Proposals to be Brought Before the Annual Meeting.
Sonic's bylaws provide that, except in the case of proposals made in accordance with Rule 14a-8, for stockholder
nominations to the Board of Directors or other proposals to be considered at an annual meeting of stockholders, the
stockholder must have given timely notice thereof in writing to the Secretary not less than ninety nor more than one
hundred twenty calendar days prior to the anniversary of the date on which Sonic held its immediately preceding
annual meeting of stockholders. To be timely for the 2014 Annual Meeting of Stockholders, a stockholder's notice
must be delivered or mailed to and received by Sonic's Secretary at the principal executive offices of Sonic between
November 7, 2013 and December 7, 2013. However, in the event that the annual meeting is advanced by more than
30 days or delayed by more than 60 days from March 7, 2014, to be timely, notice by the stockholders must be so
received not earlier than the close of business on the 120th day prior to such annual meeting and not later than the
close of business on the later of the 90th day prior to such annual meeting or the tenth calendar day following the
date on which public announcement of the date of the annual meeting is first made. In no event will the public
announcement of an adjournment of an annual meeting of stockholders commence a new time period for the giving
of a stockholder's notice as provided above. A stockholder's notice to Sonic's Secretary must set forth the
information required by Sonic's bylaws with respect to each matter the stockholder proposes to bring before the
annual meeting.

In addition, the proxy solicited by the Board of Directors for the 2014 Annual Meeting of Stockholders will confer
discretionary authority to vote on (i) any proposal presented by a stockholder at that meeting for which Sonic has not
been provided with notice on or prior to the anniversary date of 45 days prior to the date of this proxy statement
(December 14, 2013) and (ii) any other proposal, if the 2014 proxy statement briefly describes the matter and how
management's proxy holders intend to vote on it, and if the stockholder does not comply with the requirements of
Rule 14a-4(c)(2) under the Securities Exchange Act of 1934. Notwithstanding the above, all stockholder
proposals must comply with the provisions of Sonic’s bylaws.

OTHER MATTERS

The Board of Directors has at this time no knowledge of any matters to be brought before this year's Annual Meeting
other than those referred to above. However, if any other matters properly come before this year's Annual Meeting, it
is the intention of the persons named in the proxy to vote such proxy in accordance with their judgment on such
matters.

GENERAL

A copy of our Annual Report to Stockholders for the fiscal year ended September 30, 2012 is being mailed, together
with this Proxy Statement, to each stockholder. Additional copies of such Annual Report and of the Notice of Annual
Meeting, this Proxy Statement and the accompanying proxy may be obtained from us. We will, upon request,
reimburse brokers, banks and other nominees, for costs incurred by them in forwarding proxy material and the Annual
Report to beneficial owners of Common Stock. In addition, directors, officers and regular employees of Sonic and its
subsidiaries, at no additional compensation, may solicit proxies by telephone, telegram or in person. All expenses in
connection with soliciting management proxies for this year's Annual Meeting, including the cost of preparing,
assembling and mailing the Notice of Annual Meeting, this Proxy Statement and the accompanying proxy are to be
paid by Sonic.

Sonic will provide without charge (except for exhibits) to any record or beneficial owner of its securities, on
written request, a copy of Sonic's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended September 30, 2012, including the financial statements and schedules
thereto. Exhibits to said report, and exhibits to this proxy statement, will be provided upon payment of fees
limited to Sonic's reasonable expenses in furnishing such exhibits. Written requests should be directed to
Investor Relations, 222 West Washington Avenue, Madison, Wisconsin 53703. We also make available, free of
charge, at the “Investor Information” section of our website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K, our proxy statement, amendments and exhibits to
such reports as soon as practicable after the filing of such reports, exhibits and proxy statements with the
Securities and Exchange Commission.

In order to assure the presence of the necessary quorum at this year's Annual Meeting, and to save Sonic the expense of
further mailings, please date, sign and mail the enclosed proxy promptly in the envelope provided. No postage is
required if mailed within the United States. The signing of a proxy will not prevent a stockholder of record from voting
in person at the meeting.

By Order of the Board of Directors,

January 25, 2013

Kenneth A. Minor, Secretary

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

(Mark One)

FORM 10-K





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

For the fiscal period ended September 30, 2012

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

Commission File Number

000-30407

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

MARYLAND
(State or other jurisdiction of incorporation or
organization)

39-1783372
(I.R.S. Employer Identification No.)

222 W. Washington Ave, Madison, WI 53703
(Address of principal executive offices)

(608) 443-1600
(Issuer's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).

Yes



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes



The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the
last business day of the Registrant’s most recently completed second fiscal quarter was approximately $29,987,000.

The number of shares outstanding of the registrant's common equity was 3,900,024 as of December 6, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference into
Part III. A definitive Proxy Statement pursuant to Regulation 14A will be filed with the Commission no later than
January 28, 2013.

TABLE OF CONTENTS

PAGE NO.

PART I

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Business .................................................................................................................................
Risk Factors ...........................................................................................................................
Unresolved Staff Comments ..................................................................................................
Properties ...............................................................................................................................
Legal Proceedings ..................................................................................................................
Mine Safety Disclosures ........................................................................................................

PART II

Item 5.

Item 6.
Item 7.

Item 7A.
Item 8.

Item 9.

Item 9A.
Item 9B.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ...............................................................................................
Selected Consolidated Financial Data ....................................................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations ..............................................................................................................................
Quantitative and Qualitative Disclosures About Market Risk ...............................................
Consolidated Financial Statements and Supplementary Data:
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm ...............
Consolidated Balance Sheets .................................................................................................
Consolidated Statements of Operations .................................................................................
Consolidated Statements of Stockholders' Equity ..................................................................
Consolidated Statements of Cash Flows ................................................................................
Notes to Consolidated Financial Statements ..........................................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ..............................................................................................................................
Controls and Procedures ........................................................................................................
Other Information ..................................................................................................................

PART III

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

Directors, Executive Officers and Corporate Governance .....................................................
Executive Compensation .......................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ...............................................................................................................
Certain Relationships and Related Transactions, and Director Independence .......................
Principal Accounting Fees and Services ................................................................................

4
16
28
28
28
28

29
32

33
41
42
42
43
44
45
46
47

62
62
63

63
64

64
64
64

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

When used in this Report, the words “anticipate”, “expect”, “plan”, “believe”, “seek”, “estimate” and similar
expressions are intended to identify forward-looking statements. These are statements that relate to future
periods and include, but are not limited to, statements about the features, benefits and performance of our Rich
Media products, our ability to introduce new product offerings and increase revenue from existing products,
expected expenses including those related to selling and marketing, product development and general and
administrative, our beliefs regarding the health and growth of the market for our products, anticipated increase
in our customer base, expansion of our products functionalities, expected revenue levels and sources of revenue,
expected impact, if any, of legal proceedings, the adequacy of liquidity and capital resources, and expected
growth in business. Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and uncertainties include, but are not limited to,
market acceptance for our products, our ability to attract and retain customers and distribution partners for
existing and new products, our ability to control our expenses, our ability to recruit and retain employees, the
ability of distribution partners to successfully sell our products, legislation and government regulation, shifts in
technology, global and local business conditions, our ability to effectively maintain and update our products and
service portfolio, the strength of competitive offerings, the prices being charged by those competitors, and the
risks discussed elsewhere herein. These forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in our expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based.

ITEM 1.

BUSINESS

Who We Are

PART I

Sonic Foundry, Inc. (NASDAQ: SOFO) is the trusted market leader for enterprise webcasting solutions, providing
video content management and distribution for education, business and government. Powered by the patented
Mediasite webcasting platform, Sonic Foundry empowers people to share knowledge online, use webcasts to bridge
time and distance, enhance learning outcomes and improve performance.

Sonic Foundry solutions include:
• Mediasite Recorders for capturing video and rich media presentations
• Mediasite EX for video content management and distribution
• Mediasite Events for turnkey meeting, conference and event webcasting services based on the Mediasite

platform

• Mediasite Services for hosting, installation, training and integration
• Mediasite Customer Assurance for annual hardware and software maintenance and technical support

Today, over 2,500 customers using more than 6,500 Mediasite Recorders in presentation environments around the
world are capturing hundreds of thousands of multimedia presentations with millions of viewers.

Sonic Foundry, Inc. was founded in 1991, incorporated in Wisconsin in March 1994 and merged into a Maryland
corporation of the same name in October 1996. Our executive offices are located at 222 West Washington Ave.,
Madison, Wisconsin 53703 and our
is
www.sonicfoundry.com. In the “Investors” section of our website we make available, free of charge, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports
required to be filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as soon as
reasonably practicable after the filing of such reports with the Securities and Exchange Commission.

is (608) 443-1600. Our corporate website

telephone number

Challenges We Address

Every organization faces a fundamental need to communicate information efficiently to individuals who need it.
Universities and colleges need to connect instructors with students for advanced learning. Corporations strive for

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

successful communication and collaboration among colleagues to provide value to customers. Government agencies
must keep partners, stakeholders and constituents informed to operate effectively. And yet, communication and e-
learning challenges remain, including:

Ensuring learners’ academic and professional success
• Enabling learners to review course material to improve retention and positively impact learning outcomes and

grades

• Providing distance learners with the same quality education as on-campus students
• Helping students balance education, career and family commitments
•
• Capturing complex graphics where visual clarity is essential for learning

Increasing enrollment without the expense of new classrooms and facilities

Connecting with a geographically-dispersed audience
• Simultaneously addressing people in multiple locations
• Holding meetings, conferences and events when it is not feasible for everyone to attend in person
• Transmitting timely information that is crucial for all to receive
• Requiring employees, regardless of time zone or schedule, to attend training

Increasing retention by avoiding distractions, interruptions or absence

Improving productivity and overall organizational knowledge
• Avoiding the need for participants to leave their desks to attend a conference, meeting or training
• Reducing time to train new hires
•
• Keeping everyone on the same page to prevent false starts and forgotten directives
• Documenting meeting content for later review
• Extending the life and value of conferences, meetings and events
• Maintaining an online library of organizational knowledge
• Documenting and preserving expertise from a retiring workforce

Reducing logistical and financial impacts
• Cutting travel expenses and carbon footprints
• Eliminating repetition of the same information to different audiences
• Reducing repeated costs for printing, mailing and meeting expenses
• Enabling individuals to attend professional development in light of budget cuts

Avoiding cumbersome and restrictive technologies
• Maintaining the way presenters present without requiring technical expertise in presentation systems
• Capturing and sharing knowledge in real-time without pre-authoring or pre-uploading of content or needing

substantial post-production time

• Removing significant time and specialized expertise to manage presentation systems

Sonic Foundry Solutions

Sonic Foundry is changing the way organizations share and use information. Our solutions include:

Mediasite Recorders
Designed with instructors and speakers in mind, Mediasite Recorders automatically capture their video and any
presentation materials in high resolution and webcasts them live or on-demand – without changing how they present.
The result is a high quality, interactive streaming experience to a broad range of devices from laptops and computers
to all of the most popular mobile devices. Mediasite Recorders eliminate time-consuming authoring, slide uploads
and post-production work. Plus, seamless integration with existing audio/video and educational technology means
organizations can confidently scale webcasting throughout their academic or corporate enterprise.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

We offer Mediasite Recorders for the following environments:
• A room-based Mediasite Recorder (RL Series) for presentation facilities like conference and training rooms,

lecture halls, auditoriums and classrooms

• A mobile Mediasite Recorder (ML Series) for portability to off-site events, conferences, trade shows or multiple

venues throughout an organization

Mediasite EX
Mediasite EX, a powerful video content management platform for distributing and archiving live and on-demand
content, provides a single system to catalog, customize, search, secure, analyze and edit video-based content.

Mobile-ready and unconstrained by traditional webcast layouts, watching live or on-demand Mediasite presentations
is like being in the room with the presenter, but with flexible playback options and interactive tools to enhance
learning and improve retention.

We understand the value in quickly publishing, retrieving and measuring the impact of video content. Mediasite
automatically publishes content to searchable online catalogs or embeds content directly in learning or course
management systems – no web development or integration skills are required. Powerful analytics show who is
watching what and when, providing valuable data for viewing patterns that we believe correlate to improved
learning outcomes, increased performance and program effectiveness.

Built to leverage existing IT and AV infrastructures, Mediasite EX reduces the resources and effort to manage
multimedia content. Its built-in scheduler saves time by recording and publishing recurring presentations in a fully
automated operation. Integration with leading enterprise directories guarantees that content and intellectual property
remain secure. Best of all, Mediasite EX scales to meet any webcasting needs, whether departmentally with a couple
of rooms or implemented campus- or company-wide. Customers also have the flexibility to deploy Mediasite on-
premises, hosted within Sonic Foundry’s SaaS datacenter or through a combination of both models.

Mediasite Events

Mediasite Events equips customers with a team of trained technicians who work on-site to webcast conferences and
events.

• Enhances attendee experience with online presentation catalogs
• Reaches a wider audience, making webcasts available to those not able to attend
• Brands webcasts using organization logos, colors and messages
• Provides a real-time record of what took place
• Links handout materials with the full presentation, including audio, video and graphics
• Offers sample content to entice new attendees to participate

Mediasite Services
Organizations can quickly and easily take advantage of the Mediasite platform, without wading through IT or
network complexities associated with their infrastructure, with these Mediasite Services:

• Cloud Services / Software as a Service (SaaS): Our cloud services offering provides content hosting, delivery
and management of Mediasite content using Sonic Foundry’s data center and infrastructure. These managed
services allow organizations of all sizes to jump start their webcasting and video content management initiatives
quickly and simply. They provide a low-risk way to implement Mediasite before adopting an on-premises
implementation and for some organizations, provide a hassle-free long-term solution.
Installation: Sonic Foundry provides onsite consulting and installation services to help customers optimize on-
premises deployments and efficiently integrate Mediasite within existing AV and IT infrastructures, processes
and workflows.

•

• Training: To maximize customers’ return on investments, skilled trainers provide the necessary knowledge
transfer so organizations feel confident in using, managing and leveraging Mediasite’s capabilities. On-site
training is customized to specific requirements and skill levels, while online training provides convenient
anytime access to a web-based catalog of training modules.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

• Advanced Integration Services: Sonic Foundry streamlines how Mediasite interfaces with a customer’s specific
technologies, internal policies, workflow or content delivery systems through project-based development.

Mediasite Customer Assurance
Sonic Foundry’s annually renewable maintenance and support plans provide customers access to technical expertise
and Mediasite software updates. With a Mediasite Customer Assurance contract, customers are entitled to:

• Software upgrades and updates for Mediasite Recorders and Mediasite EX
• Unlimited technical support assistance
• Extension of their recorder hardware warranty
• Advanced recorder hardware replacement
• Authorized access to the Mediasite Customer Assurance Portal where they can access software downloads,

documentation, knowledge base articles, tutorials, online training and technical resources at any time.

Nearly all our customers purchase a Customer Assurance plan when they purchase Mediasite Recorders or
Mediasite EX.

What Sets Mediasite Apart?

• Comprehensive video content management and delivery – Sonic Foundry believes a complete solution
focuses on all phases of the academic and business video lifecycle – from content creation to delivery to
retention and management. Mediasite automatically creates searchable online catalogs of Mediasite-recorded as
well as uploaded content from other sources – whether live or on-demand. With integration support for leading
enterprise directories, all content can be secured to manage access to specific groups or individuals based on
roles and permissions. Powerful analytics allow organizations to track and report on exactly who is watching
what, when and how long.

•

• Powerful video search – We understand the need to bring order to growing video libraries so content can be
found, used and re-purposed to derive maximum value. Mediasite’s powerful search capabilities leverage
indexed slide text, audio transcripts, presentation metadata and tags to find where keywords are spoken or
shown during a webcast and display a playlist of these instances for the user.
Interactive playback on any device – Mediasite provides an interactive experience that engages the viewer via
different modalities – auditory, visual and kinesthetic – to increase content comprehension and retention.
Unconstrained by viewing device or traditional webcast layouts, watching a live or archived Mediasite
presentation is like being in the room with the presenter, but with greater playback control and time-saving
conveniences. Mediasite’s interactivity incorporates polls, ask-a-question capabilities and links to other related
reference materials. Support for video closed captioning enhances the playback experience for learners of all
abilities. The interactive Mediasite experience is available on Windows PC, Mac, iPad, iPhone, iPod, Android
and BlackBerry.

• Flexible deployment options – Sonic Foundry offers customers the option to implement Mediasite video
content management on-premises, in the cloud or as any combination of the two. Customers find the
convenience of being able to mix and match deployment models, depending on the unique requirements of their
business, to be an attractive option that provides Mediasite a competitive advantage over SaaS- or on-premises-
only offerings.

• Customer support – Sonic Foundry and the growing Mediasite community provide a reliable, collaborative
support network for all Mediasite customers. Our breadth of field-based system engineers and responsive
customer care ensure that customers have readily available resources committed to their success. With over
1000 active customer members, the Mediasite User Group (MUG) is one of the most vibrant and expanding
user communities for lecture capture, online training and e-learning. MUG members share ideas and get
feedback year-round from community experts through online forum discussions, live quarterly meetings and
unrivaled networking and learning opportunities at UNLEASH, the annual Mediasite User Conference.

• Market Leadership – Industry analyst firm, Frost & Sullivan, has consistently recognized Mediasite as the
worldwide market leader for lecture capture, naming Sonic Foundry the Global Market Share Leader in Lecture
Capture Solutions for six consecutive years, from 2007 – 2012. The Frost & Sullivan Award for Market Share

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Leadership is presented to the company that demonstrates excellence in capturing the highest market share
within its industry. According to Mukul Krishna, Frost & Sullivan Global Director, “Sonic Foundry’s world-
class reputation, legacy of innovation and rich features, including live HD streaming, ubiquitous mobile
playback and a robust video content management system, set the company apart and establish it as the
uncontested leader for lecture capture. Sonic Foundry’s outstanding performance inspires participants in the
lecture capture solutions market to strive for new levels of success. The company’s unique competitive
perspective provides its worldwide customer base with technologies that dramatically enhance on-campus,
blended and distance learning initiatives.” Mediasite has also been voted best in class in five consecutive
Streaming Media Readers’ Choice Awards and named 2011 Best Video Capture, Production and Publishing
Solution by eLearning! Magazine.

Sonic Foundry solutions in higher education:
Among post-secondary institutions, Mediasite is used for:
• Online lectures (blended/hybrid learning): students review content outside of in-class instruction
• Flipped classroom instruction: students view lectures from home and use classroom time for discussion
• Distance learning: off-campus students learn remotely online
• Continuing education: professionals learn online or supplement classroom experiences
• Special events: commencement, guest speakers, sporting events
• Faculty training and development
• Recruitment and orientation: campus tours, financial aid instructions
• University business: leadership meetings, alumni relations, outreach

Through interviews, many higher education institutions report that Mediasite:
•
• Enables their institution to remain competitive by supporting higher enrollment and/or tuition without new

Improves student learning outcomes

classrooms

• Empowers faculty with technology supporting new teaching pedagogies both in the classroom and online
• Boosts campus outreach, recruitment efforts and awareness of campus events

Given the technology pedigree of today’s college students, this move to online learning makes perfect sense as these
students have never known a world without computers, mobile devices and the web. The delivery options for a
modern education are akin to the electronic delivery of music that emerged several years ago. Students demand
immediate access to their coursework regardless of time or place.

Recent trends impacting the economy and lingering high fuel prices continue to drive more students, particularly
adult learners, to online education – through enrollment in blended or hybrid courses with a traditional on-campus
component or through fully online distance learning programs. Historically, graduate programs and STEM (science,
technology, engineering and math)-oriented degree programs in schools of medicine, nursing, engineering or
business have comprised the majority of our academic customer base. We are now experiencing heightened market
demand for lecture capture within undergraduate and community college programs as well.

According to the Sloan Consortium report, Going the Distance: Online Education in the United States, 2011, online
enrollments the past several years have been growing considerably. The 10 percent growth rate for online
enrollments far exceeds the less than one percent growth of the overall higher education student population. The
survey of more than 2,500 colleges and universities nationwide finds more than 6.1 million students were enrolled
in at least one online course in the fall 2010 term, 560,000 more than in the fall 2009 term. Sixty-seven percent of
academic leaders report that online learning is as good as or better than face-to-face instruction. Three-quarters of
institutions also report that the economic downturn has increased demand for existing online courses and programs.
Sixty-five percent of all reporting institutions now say that online learning is a critical part of their long term
strategy, with 31 percent of all higher education students now taking at least one course online.

Community colleges, specifically, have significantly increased their number of blended or hybrid and web-enhanced
courses. The Instructional Technology Council’s “2011 Distance Education Survey Results: Trends in eLearning:
Tracking the Impact of eLearning at Community Colleges (April 2012)” reported an 8.2 percent increase in distance

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

education enrollments, higher than the less than one percent increase in overall higher education campus enrollment.
Twenty-seven percent of community colleges offer blended/hybrid courses, and fifty-five percent continue to
increase the number of blended/hybrid courses each term. Factors cited for contributing to the increase in elearning
enrollments include downturn in the economy (22 percent), typical growth for distance education classes (28
percent) and new enrollment initiatives (14 percent). The study also showed that overall, 68 percent of community
colleges offer audio/video streaming, and another 12 percent plan to offer audio/video streaming in the next year.

According to The Campus Computing Project’s Campus Computing2011: The National Survey of Computing and
Information Technology in American Higher Education, 66 percent of all universities indicated that they already
have or are currently preparing a strategic plan for lecture capture

In their 2011 21st Century Campus Report (July 2011), CDW-G reports that 72 percent of faculty and 66 percent of
students believe digital content is considered essential to a 21st century classroom. Of IT professionals surveyed, 68
percent of institutions currently offer virtual learning opportunities.

Analysts predict the lecture capture market will more than triple over the next six years. Frost & Sullivan analysts
estimate lecture capture revenues will reach over $192 million by 2016, exhibiting a nearly 22 percent compound
annual growth rate (CAGR) for the six-year period (World Lecture Capture Solutions Markets report, 2010).
Wainhouse Research predicts in “Market Sizing & Forecast 2011-2016: Lecture Capture & Streaming for
Education & Training” (December 2011), “Lecture capture and streaming tools are now reaching a stage of
maturity and usability that presages mainstream adoption. In fact, lecture capture – by the end of the forecast period
in this report, 2016 – is likely to be as pervasive as email on college campuses.”

Several universities have conducted their own independent studies to assess the impact of Mediasite on student
performance. Last year, the University of Maryland-Baltimore Dental School announced new independent survey
results demonstrating the positive impact of Mediasite on student outcomes. A Mediasite campus since 2006, the
school compiled several years of student surveys after amassing five-thousand captures with half a million views.
The latest results come from feedback by 118 graduating seniors and are available in the webinar, “Evaluating
Lecture Capture's Impact on Student Outcomes” which can be viewed at http://sofo.com/ada52.

A survey of dental students results reveal:

•
•
•
•
•
•
•

97% felt Mediasite made it easier to learn
73% used a combination of in-class lectures and Mediasite to enhance their studies
98% indicated they watched most or all of the lectures online
40% said Mediasite helped them prepare for the boards
50% agreed or strongly agreed that lecture capture attracted them to the dental school
74% would recommend the dental school to potential students because of Mediasite
95% expressed satisfaction with Mediasite

This finding and additional findings from independent research projects at other universities and colleges are
published in the ebook, “Evaluating the Impact of Mediasite Lecture Capture on Retention, Recruitment and Student
Satisfaction” which can be downloaded at http://bit.ly/PlZjyJ.

To remain relevant, colleges and universities are striving to differentiate themselves through technical leadership as
a means to attract these tech-savvy students, while balancing their campus technology improvements with systems
that faculty will embrace and adopt. As a result, the education market is beginning to restructure and increase
investments around online learning. We believe the visible integration of multimedia learning content into core
university applications and the success of bundled online learning technology solutions are two healthy indicators
for the widespread adoption of online campus lectures.

To date, Sonic Foundry has installed Mediasite in large lecture halls, auditoriums and classrooms of campuses
nationwide. We now see more and broader expansions and integrations of Mediasite at the campus-wide level.
Course and learning management systems like Blackboard®, Moodle, Instructure, Desire2Learn®, Angel, or Sakai

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

are ubiquitous in the education enterprise. As the foundation for e-learning, these systems are rapidly moving
beyond simply aggregating related course documents (handouts, assignments, course syllabi) to becoming students’
single-source portal for all course-related materials including recorded multimedia content like online lectures.
Mediasite’s packaged integrations for Blackboard and Moodle and its support for the Basic Learning Tools
Interoperability (LTI) standard, address the need to make learning content accessible to students when and where
they need it. Similarly, video content management platforms are starting to emerge as repositories for campus’
media-centric content. These platforms provide additional opportunities through which to make Mediasite content
accessible to faculty, staff and students.

Sonic Foundry Solutions in the Enterprise:
Within medium to large corporate, healthcare and government enterprises, Mediasite has numerous applications.

In corporate enterprises it is used for:
• Executive communications: state of the enterprise speeches, all-hands meetings
• Workforce development: training, HR briefings, policy documentation
• Sales and marketing: demonstrations, product announcements, webinars, channel relations
•
• Customer support: product tutorials, self-guided troubleshooting
•
Investor relations: earnings calls, analyst briefings, annual reports
• Conferences and events: user group, sales and annual meetings

Internal knowledge repositories: technical training, research collaboration, user-generated content

In health-related enterprises it is used for:
• Education: continuing medical education, grand rounds, seminars, student/patient simulations, surgical training
• On-demand medical information
• Caregiver training
• Emergency response coordination
• Public health announcements
• Research and collaboration
• Conferences and events

In government agencies it is used for:
• Program management: relief work, military coordination, emergency preparedness
• Community outreach: committee meetings, public safety announcements
• Training, workshops and events
• Executive and legislative communications: constituent relations, public speeches, debates

Through interviews across these verticals, enterprise customers report that Mediasite:
• Expands training and communications opportunities

o Enables them to offer training to more and larger audiences
o Captures knowledge from a retiring workforce
o Supports the creation and sharing of user-generated content
o Aides in building a knowledge library
o Extends the life of conferences and events

• Cuts travel and meeting expenses
• Boosts efficiency by allowing participants to watch when it’s convenient to avoid interruptions and increase

retention

• Helps build stronger teams through direct management/employee communications

Less than a decade ago, the only people in the enterprise talking openly about online multimedia were audiovisual
specialists in information technology or media services units, and even these people were skeptical about what
benefits streaming would hold for the enterprise. Now, executives, event planners and people in training, sales,
human resources and research and development are pushing for online multimedia and webcasting as part of their e-
learning initiatives. They need to be seen and heard by their colleagues, and the return on investment (ROI) for
multimedia online learning is real and measurable.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Matt Brown, senior analyst for Forrester Research wrote in the April 11, 2011 report, Market Overview: Video
Platforms For The Enterprise, “[Content and collaboration] pros planning video initiatives should look beyond just
videoconferencing when they consider the benefits of video. Streaming video, for example, is less taxing on the
network — particularly for ad hoc, on-demand use — and is more scalable to a large audience of employees,
customers, and partners.” He further reported that “video platforms are designed for a broad set of enterprise uses.
Among others, common capabilities include:

• Capture live or ingest pre-recorded video
• Manage workflow and content rules deliver live or on-demand video to three screens
• Engage with video content during and after viewing
• Report on video performance and viewership”

In its 2011 report, World Enterprise Video Webcasting Solutions Market, industry analyst Frost & Sullivan cites
several drivers contributing to the growth of the worldwide enterprise video webcasting market:
• Video webcasting allows enterprises to reduce costs and enhance communication
• Video webcasting is increasingly cheaper to deploy
• Video webcasting integrated into the enterprise portal helps enhance shelf life of video content
• Maturing capabilities of enterprise IT departments help drive buy-in for video webcasting deployments
•

Interactive functionality including tools for reporting and analytics enhance the value proposition of enterprise
video webcasting

The technology market for enterprise webcasting solutions that support many e-learning and business
communications initiatives is growing as well. In Wainhouse Research’s, 2012 Enterprise Streaming Solutions
Market Sizing & 5-Year Forecast (August 2012), senior analyst and partner Ira Weinstein and Steve Vonder Haar,
senior analyst, estimate the enterprise streaming solutions market (which includes content capture and management
solutions and related services for installation, training and support) totaled $470 million in 2011. According to the
report, this market will expand to more than $1 billion by 2016 with Weinstein projecting a CAGR for the period
around 19 percent; a growth rate that will see the absolute size of the market nearly double.

In the 2012 Enterprise Webcasting Services Market Size & 5-Year Forecast, also by Wainhouse Research,
Weinstein and Vonder Haar reported the actual spending on the webcasting services market for hosted streaming
application platforms supporting live virtual events (specifically excluding web conferencing offerings and
consumer-focused video streaming services) exceeded $350 million in 2011. By 2016, Weinstein and Vonder Haar
predict the market will expand to $920 million.

Future Directions

Because webcasting, lecture capture and video are becoming an everyday part of the way people work and learn, we
are driven to shorten the time it takes people to not only capture and share their information but to also quickly find
and effectively manage it. As a company, we are helping create and manage the video libraries of tomorrow.
Supporting this vision, our ongoing innovations center on:
• Advancing enterprise video content management to accommodate organizations’ existing digital video assets,
content generated from third-party solutions and the corresponding metadata associated with those video assets.
• Offering expanded content capture solutions that test the limits of capturing multiple high definition video

sources.

• Continuing to introduce the industry’s widest assortment of content capture solutions that scale even more
economically across entire organizations, allowing anyone to record and share their knowledge or expertise
from their desktop.

• Expanding and automating Mediasite’s powerful multi-modal search capabilities.
• Supporting ubiquitous and interactive content playback on all popular mobile devices.
• Deepening integration with core enterprise platforms including learning and course management systems
(LMS/CMS), content management repositories, online learning portals and student information systems (SIS).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

• Continuing to introduce innovations to our cloud-based or Software as a Service (SaaS) offering for Mediasite –
an increasingly attractive alternative to on-premises deployments that seek to minimize IT challenges and risk
while affordably extending high performance, fault tolerant webcasting services.

Segment Information

We have determined that in accordance with FASB ASC 280-10, we operate in only one segment as we do not
disaggregate profit and loss information on a segment basis for internal management reporting purposes to our chief
operating decision maker. Therefore, such information is not presented.

We have included the cash effect of billings not recorded as revenue, which are deferred for GAAP purposes, in
arriving at non-GAAP net income or loss. Our services are typically billed and collected in advance of providing
the service which requires minimal cost to perform in the future. Billings are a better indicator of customer activity
and cash flow than revenue is, in management’s opinion, and is therefore used by management as a key operational
indicator. Billings is computed by combining revenue with the change in unearned revenue. Total billings for
Mediasite product and support outside the United States totaled 27 percent and 25 percent in fiscal 2012 and 2011,
respectively.

Our largest individual customers are typically value added resellers (“VARs”) and distributors since the majority of
our end users require additional complementary products and services which we do not provide. Accordingly, in
fiscal 2012 and 2011 one master distributor, Synnex Corporation (“Synnex”), contributed 18 percent and 24 percent,
respectively, of total world-wide billings. A second master distributor, Starin Marketing, Inc. (“Starin”), contributed
25 percent and 26 percent of total world-wide billings in fiscal 2012 and 2011, respectively. As master distributors,
Synnex and Starin fulfill transactions to VARs, end users and other distributors. No other customer represented over
10 percent of billings in 2012 or 2011.

Sales

We sell and market our offerings through a sales force that manages a channel of value-added resellers, system
integrators, consultants and distributors. These third party representatives specialize in understanding both
audio/video systems and IT networking. In fiscal 2012, we utilized two master distributors in the U.S. and
approximately 130 resellers, and sold our products to over 1,100 total end users. Our focus has been primarily in the
United States and primarily to customers we have identified as having the greatest potential for high use; that is,
organizations with presenters, trainers, lecturers, marketers, event planners and leaders who have a routine need to
communicate to many people in higher education, government, health and certain corporate markets. Despite our
primary attention on the United States market, reseller and customer interest outside the United States has grown
and accordingly, we allocate five sales professionals to address international demand. To date, we have sold our
products to customers in over 50 countries outside the United States. Total billings for Mediasite product and
support outside the United States totaled 27 percent and 25 percent in fiscal 2012 and 2011, respectively.

Vertical market expansion: Over half our revenue is realized from the education market. Recent trends such as the
slowing economy are driving more students, particularly adult learners, to seek online education options. Similarly,
demand for lecture capture within undergraduate, community college and blended learning programs is
demonstrating growth. This development represents an emerging trend beyond the traditional academic customer
base for the company, which has primarily consisted of graduate, distance learning and technical degree programs.

For our higher education as well as corporate, government and association clients, we anticipate weak economic
conditions will expand market demand for more outsourced services versus licensed sales. Over the last two years,
the company has made extensive capital and technology investments to advance its services model with turnkey
event webcasting, comprehensive hosting/Software as a Service (SaaS), and e-commerce capabilities that position us
well to deliver more diversified business services.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

With our Mediasite Events group, we continue to see growing demand for conference webcasting and hybrid events
(conferences which combine both face-to-face meeting and viewing over the web). These event-based
communication, education and training applications, combined with outsourced webcasting services, are expected to
drive the company’s corporate sales activities going forward.

Repeat orders: Many customers initially purchase a small number of Mediasite Recorders to test or pilot in a
department, school or business unit. A successful pilot project and the associated increase in webcasting demand
from other departments or schools leads to follow up, multiple Recorder orders as well as increased Mediasite
Server capacity. In fiscal 2012, 81 percent of billings were to preexisting customers compared to 67 percent in fiscal
2011.

Renewals: As is typical in the industry, we offer annual support and maintenance service contract extensions for a
fee to our customer base. Nearly all customers purchase a Customer Assurance plan with their initial Mediasite
Recorders and Servers, and the majority renew their contracts annually.

Marketing

Marketing efforts span the spectrum of thought leadership and best practices webinars, tradeshows, product
demonstrations, websites, public relations, social media, direct mail, e-mail campaigns, newsletters, print and online
advertising, sponsorships, Mediasite User Group community building, annual user conference, brochures, white
papers and analyst relations. We often request and receive press release quotes and written or multimedia
testimonials from satisfied, high-profile reference customers, particularly those that demonstrate innovative and
valuable uses of the Mediasite platform and Mediasite Events. We solicit respected industry magazines and trade
organizations to review our product and use advisors as introductions to new channels or customers. We have a
large, growing database of potential customers in the education, government and corporate marketplaces and have
established a process of targeting specific verticals that have a direct and demonstrated need for our offerings.

Operations

We contract with a third party to build the hardware for our Mediasite Recorders and purchase quantities sufficient
to fill specific customer orders, including purchases of inventory by resellers. Quantities are maintained in inventory
by the third party provider and shipped directly to the end customer or reseller. The hardware manufacturer provides
a limited one-year warranty on the hardware, which we pass on to our customers who purchase a Mediasite
Customer Assurance support and maintenance plan. We believe there are alternative sources of manufacturing for
our recorders and believe there are numerous additional sources and alternatives to the existing production process.
We have experienced delays in production of our products and component parts used in our products in the past and
expect to maintain greater quantities of inventory in the future to mitigate the risk of such delays. To date, we have
not experienced any material returns due to product defects.

OTHER INFORMATION

Competition

Various vendors provide lecture capture, enterprise webcasting or video content management capabilities, but few offer
an end-to-end solution that addresses all phases of the video content lifecycle (capture, delivery and management) in a
single platform like Mediasite.

Lecture capture solutions designed specifically for higher education differ in their technology approach.

• Appliance- or room-based lecture capture provides a fully integrated system with complete recording
automation for live or on-demand content. The automated, pre-scheduled workflow results in the greatest
faculty and staff adoption and largest volumes of recorded content in the shortest amount of time.

• Software-based lecture capture that resides on a podium or computer in the classroom also captures and

publishes rich media content, but relies on campus- or user-supplied hardware.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

• Desktop capture tools reside on individual users’ laptops or computers allowing them to record user-generated

content.

Few lecture capture vendors, like Sonic Foundry and Echo360, offer a mix of lecture capture approaches to best suit
customers’ needs. Most vendors, including Crestron, Panopto, TechSmith and Tegrity, support only one approach to
lecture capture. Likewise, a very small number of vendors provide an integrated platform to archive and manage video
and rich media recorded with their solution. Most rely on a third-party platform, typically the institution’s learning or
course management system, to publish and secure content.

Enterprise video management solutions (e.g. Brightcove, Kaltura) serve as centralized media repositories that facilitate
the delivery, publishing and management of on-demand video. Unlike Mediasite, most platforms do not include a video
capture, webcasting or live streaming component, but instead ingest or import video-based content captured by other
third-party devices or solutions.

Some current and potential customers develop their own home-grown lecture capture, webcasting or video content
solutions which may also compete with Mediasite. However, we often find many of these organizations are now looking
for a commercial solution offering comprehensive management capabilities, less internal maintenance and resources, and
a less cumbersome workflow.

Solutions that are designed primarily to address other online communication needs sometimes compete with Mediasite.
Often these solutions are complementary to Mediasite and are integrated with the Mediasite solution as follows:

• Web conferencing (e.g. Adobe, Cisco WebEx and Citrix). These solutions are designed primarily for one-to-few or
group collaboration online versus one-to-many communications like Mediasite. Many organizations acknowledge
that they need both technologies to appropriately address their different communication requirements. In a growing
number of instances, customers are ingesting their recorded web conferencing content into the Mediasite EX
platform.

• Video conferencing (e.g. Polycom and Cisco TANDBERG). Similar to web conferencing, these solutions are
designed primarily for one-to-few or group communications with high levels of interactivity and collaboration.
Similarly, many organizations integrate their video conferencing endpoints with Mediasite to record and manage
interactive meetings, discussions and distance learning courses alongside their Mediasite content.

• Authoring tools (e.g. TechSmith). Unlike webcasting, web conferencing or video conferencing, which capture and
stream content as it occurs in real-time, these tools are used to produce and edit on-demand multimedia content.
Content authors integrate audio, video, images, branding and other visual elements into a presentation which can
then be published for distribution. The authoring process can require a significant amount of production effort and
user expertise. Mediasite is capable of ingesting content produced by popular authoring tools like TechSmith’s
Camtasia Relay – allowing the content to be delivered, managed and secured alongside all other Mediasite content.

• Virtual meeting platforms (e.g. INXPO, ON24, InterCall Unisfair). These companies offer cloud-based virtual
event solutions for online conferences, tradeshows and meetings. The platforms often include the ability to embed or
link to streaming video or webcasts within the interactive environment, however they do not provide the streaming
video directly.

Intellectual Property

The status of United States patent protection in the Internet industry is not well defined and will evolve as the U.S.
Patent and Trademark Office grants additional patents. Currently four U.S patents have been issued to us and we
may seek additional patents in the future. We do not know if any future patent application will result in any patents
being issued with the scope of the claims we seek, if such patents are issued at all. We do not know whether our
patents which have been issued or any patents we may receive in the future will be challenged, invalidated or be of
any value. It is difficult to monitor unauthorized use of technology, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States, and our competitors may independently
develop technology similar to ours. We will continue to seek patent and other intellectual property protections,

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

when appropriate, for those aspects of our technology that we believe constitute innovations providing significant
competitive advantages. Any future, patent applications may not result in the issuance of valid patents.

Our success depends in part upon our rights to proprietary technology. We rely on a combination of copyright, trade
secret, trademark and contractual protection to establish and protect our proprietary rights. We have registered four
U.S. and four foreign country trademarks. We require our employees to enter into confidentiality and nondisclosure
agreements upon commencement of employment. Before we will disclose any confidential aspects of our services,
technology or business plans to customers, potential business distribution partners and other non-employees, we
routinely require such persons to enter into confidentiality and nondisclosure agreements. In addition, we require all
employees, and those consultants involved in the deployment of our services, to agree to assign to us any proprietary
information, inventions or other intellectual property they generate, or come to possess, while employed by us.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use our services or technology. These precautions may not prevent misappropriation or infringement of our
intellectual property.

Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition,
we may be subject to claims of alleged infringement of patents and other intellectual property rights of third parties
or may be required to defend against alleged infringement claims filed against our customers due to indemnification
agreements. We may be unaware of filed patent applications which have not yet been made public and which relate
to our services.

Intellectual property claims may be asserted against us in the future. Intellectual property litigation is expensive and
time-consuming and could divert management’s attention away from running our business. Intellectual property
litigation could also require us to develop non-infringing technology or enter into royalty or license agreements.
These royalty or license agreements, if required, may not be available on acceptable terms, if at all. Our failure or
inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm our
business.

Research and Development

We believe that our future success will depend in part on our ability to continue to develop new business, and to
enhance our existing business. Accordingly, we invest a significant amount of our resources in research and
development activities. During each of the fiscal years ended September 30, 2012 and 2011, we spent $4.1 million
and $3.5 million, respectively, on internal research and development activities in our business. These amounts
represent 16% and 14%, respectively, of total revenue in each of those years. The increase reflects our decision to
accelerate development on identified new products as well as enhancements to existing products.

Employees

At September 30, 2012 and 2011, we had 109 and 94 full-time employees, respectively. Our employees are not
represented by a labor union, nor are they subject to a collective bargaining agreement. We have never experienced
a work stoppage and believe that our employee relations are satisfactory.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

ITEM 1A. RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS THAT WE ARE NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY
ANY OR ALL OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE
SIGNIFICANTLY DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.

Economic conditions could materially adversely affect the Company.

The global economic crisis experienced since 2008 and any continuing unfavorable economic conditions have
negatively affected, and could continue to negatively affect, our business, operating results or financial condition,
which could in turn affect our stock price. Weak economic conditions and the resulting impact on the availability of
public funds along with the possibility of state and local budget cuts and reduced university enrollment could lead to
a reduction in demand for our products and services. In addition, a prolonged economic downturn could cause
insolvency of key suppliers resulting in product delays, inability of customers to obtain credit to finance purchases
of the Company’s products and inability or delay of our channel partners and other customers to pay accounts
receivable owed to us.

Economic conditions may have a disproportionate effect on the sale of our products.

Many of our customers will look at the total A/V equipment and labor cost to outfit a typical conference room or
lecture hall as one amount for budgetary purposes. Consequently, although our products represent only a portion of
the total cost, the cost of the entire project of outfitting a room or conference hall may be considered excessive and
may not survive budgetary constraints. Alternatively, our resellers may modify their quotes to end customers by
eliminating our products or substituting less expensive competitive products in order to win opportunities within
budget constraints. Event service partners may similarly suggest that customers eliminate recording and webcasting
as a means of reducing event cost. Consequently, declines in spending by government, educational or corporate
institutions due to budgetary constraints may have a disproportionate impact on the Company and result in a
material adverse impact on our financial condition.

Multiple unit deals are needed for continued success.

We need to sell multiple units to educational, corporate and government institutions in order to sell most efficiently and
remain profitable. In fiscal 2012, 81% of revenue was to existing customers compared to 67% in fiscal 2011. In
particular, sales of multiple units to corporate customers have lagged behind results achieved in the higher education
market; consequently, we have allocated more resources to the higher education market. While we have addressed a
strategy to leverage existing customers and close multiple unit transactions, a customer may choose not to make expected
purchases of our products. The failure of our customers to make expected purchases will harm our business.

Manufacturing disruption or capacity constraints would harm our business.

We subcontract the manufacture of our recorders to one third-party contract manufacturer. Although we believe
there are multiple sources of supply from other contract manufacturers as well as multiple suppliers of component
parts required by our contract manufacturer, a disruption of supply of component parts or completed products, even
if short term, would have a material negative impact on our revenues. Many component parts currently have long
delivery lead times and some suppliers cease production of certain components with limited notice in which to
evaluate or obtain alternate supply, both require careful estimation of production requirements. Lengthening lead
times, product design changes and other third party manufacturing disruptions have caused delays in delivery. In
order to compensate for supply delays, we have sourced components from off-shore sources, used cross component

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

parts, paid for expediting and currently hold substantially larger quantities of inventory than in the past. Many of
these strategies have increased our costs and may not be sufficient to ensure against production delays. We depend
on our subcontract manufacturers to produce our products efficiently while maintaining high levels of quality. Any
manufacturing defects, delay in production or changes in product features will likely cause customer dissatisfaction
and may harm our reputation. Moreover, any incapacitation of the manufacturing site due to destruction, natural
disaster or similar events could result in a loss of product inventory. As a result of any of the foregoing, we may not
be able to meet demand for our products, which could negatively affect revenues in the quarter of the disruption or
longer depending upon the magnitude of the event, and could harm our reputation.

We may need to raise additional capital.

At September 30, 2012 we had cash of $4.5 million and availability under our line of credit facility with Silicon Valley
Bank of $2.8 million. The Company has historically financed its operations primarily through cash from sales of equity
securities, and to a limited extent, cash from operations and, through bank credit facilities. The Company has a history of
operating losses and historically used cash in operations prior to fiscal 2010. The Company improved both metrics with
a combination of increased revenue and expense reductions over the last several fiscal years and while we expect to
continue to increase revenue in fiscal 2013 and manage our expense growth to a level less than anticipated growth in
revenues, we cannot ensure that revenue will grow as anticipated and if revenue is determined to be growing at a rate less
than anticipated, it may be too late to reduce expenses for fiscal 2013. The Company believes its cash position and
available credit is adequate to accomplish its business plan through at least the next twelve months.

We may evaluate further operating or capital lease opportunities or incur additional term debt to finance equipment
purchases in the future and may utilize the Company’s revolving line of credit to support working capital needs.
While the Company anticipates that it will be in compliance with all provisions of our debt facilities, there can be no
assurance that the existing debt facilities will be available to the Company or that additional financing will be
available or on terms acceptable to the Company.

The business environment is not currently conducive to raising additional debt or equity financing and may not improve
in the near term. If we borrow money, we may incur significant interest charges, which could harm our profitability.
Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common
stock. If we raise additional equity, the terms of such financing may dilute the ownership interests of current investors
and cause our stock price to fall significantly. We may not be able to secure financing upon acceptable terms, if at all. If
we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our
business, operating results, and financial condition

We have only recently achieved profitability.

While we reached profitability in fiscal 2012 and generated cash from operations of $350 thousand, we may not realize
sufficient revenues to sustain profitability on a quarterly or annual basis. For the year ended September 30, 2012, we had
a gross margin of $18.8 million on revenue of $26.1 million with which to cover selling, marketing, product
development and general and administrative costs. Our selling, marketing, product development and general and
administrative costs have historically been a significant percentage of our revenue, due partly to the expense of
developing leads and the relatively long period required to convert leads into sales associated with selling products that
are not yet considered "mainstream" technology investments. Fluctuations in profitability or failure to maintain
profitability will likely impact the price of our stock.

We could lose revenues if there are changes in the spending policies or budget priorities for government funding
of colleges, universities, schools and other education providers.

Most of our customers and potential customers are public colleges, universities, schools and other education providers
who depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or
local funding for colleges, universities, schools and other education providers could cause our current and potential
customers to reduce their purchases of our products and services, or to decide not to renew service contracts, either of

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

which could cause us to lose revenues. In addition, a specific reduction in governmental funding support for products
such as ours would also cause us to lose revenues. The severe economic downturn experienced in the U.S. and
globally has caused many of our clients to experience severe budgetary pressures, which has and will likely continue
to have a negative impact on sales of our products. Continuing unfavorable economic conditions may result in
further budget cuts and lead to lower overall spending, including information technology spending, by our current
and potential clients, which may cause our revenues to decrease.

If a sufficient number of customers do not accept our products, our business may not succeed.

We cannot predict how the market for our products will develop, and part of our strategic challenge will be to convince
enterprise customers of the productivity, improved communications, cost savings, suitability and other benefits of our
products. Our future revenue and revenue growth rates will depend in large part on our success in delivering these
products effectively, creating market acceptance for these products and meeting customer’s needs for new or enhanced
products. If we fail to do so, our products will not achieve widespread market acceptance, and we may not generate
sufficient revenue to offset our product development and selling and marketing costs, which will hurt our business.

We may not be able to innovate to meet the needs of our target market.

Our future success will continue to depend upon our ability to develop new products, product enhancements or service
offerings that address future needs of our target markets and to respond to these changing standards and practices. The
success of new products, product enhancements or service offerings depend on several factors, including the timely
completion, quality and market acceptance of the product, enhancement or service. Our revenue could be reduced if we
do not capitalize on our current market leadership by timely developing innovative new products, product enhancements
or service offerings that will increase the likelihood that our products and services will be accepted in preference to the
products and services of our current and future competitors.

If our marketing and lead generation efforts are not successful, our business will be harmed.

We believe that continued marketing efforts will be critical to achieve widespread acceptance of our products. Our
marketing campaigns may not be successful given the expense required. For example, failure to adequately generate
and develop sales leads could cause our future revenue growth to decrease. In addition, our inability to generate and
cultivate sales leads into large organizations, where there is the potential for significant use of our products, could
have a material effect on our business. We may not be able to identify and secure the number of strategic sales leads
necessary to help generate marketplace acceptance of our products. If our marketing or lead-generation efforts are
not successful, our business and operating results will be harmed.

The length of our sales and deployment cycles are uncertain, which may cause our revenue and operating results to
vary significantly from quarter to quarter and year to year.

During our sales cycle, we spend considerable time and expense providing information to prospective customers about
the use and benefits of our products without generating corresponding revenue. Our expense levels are relatively fixed in
the short-term and based in part on our expectations of future revenue. Therefore, any delay in our sales cycle could
cause significant variations in our operating results, particularly because a relatively small number of customer orders
represent a large portion of our revenue.

Our largest potential sources of revenue are educational institutions, large corporations and government entities that often
require long testing and approval processes before making a decision to purchase our products, particularly when
evaluating our products for inclusion in new buildings under construction or high dollar transactions. In general, the
process of selling our products to a potential customer may involve lengthy negotiations, collaborations with consultants,
designers and architects, time consuming installation processes and changes in network infrastructure in excess of what
we or our VARs are able to provide. In addition, educational institutions that started with small pilots are committing to
more complex installations. Further, our educational market is expanding to include undergraduate classrooms, which,
due to the increased size of these types of transactions, typically require a longer sales cycle. Also, our enterprise

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

accounts are less motivated by seasonal sales and promotions, and therefore are frequently difficult to finalize. As a
result of these factors, our sales and deployment cycles are unpredictable. Our sales and deployment cycles is also
subject to delays as a result of customer-specific factors over which we have little or no control, including budgetary
constraints and internal approval procedures, particularly with customers or potential customers that rely on government
funding.

Our products are aimed toward a broadened user base within our key markets and these products are relatively early in
their product life cycles. We cannot predict how the market for our products will develop and part of our strategic
challenge will be to convince targeted users of the productivity, improved communications, cost savings and other
benefits. Accordingly, it is likely that delays in our sales cycles with these products will occur and this could cause
significant variations in our operating results.

Sales of some of our products have experienced seasonal fluctuations which have affected sequential growth rates
for these products, particularly in our first fiscal quarter. For example, there is generally a slowdown for sales of our
products in the higher education and corporate markets in the first fiscal quarter of each year. Seasonal fluctuations
could negatively affect our business, which could cause our operating results to fall short of anticipated results for
such quarters. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results and cash
flows may not be meaningful and should not be relied upon as an indication of future performance.

Our operating results are hard to predict as a significant amount of our sales typically occur at the end of a quarter
and the mix of product and service orders may vary significantly.

Revenue for any particular quarter is extremely difficult to predict with any degree of certainty. We typically ship
products within a short time after we receive an order and therefore, we do not have an order backlog with which to
estimate future revenue. In addition, orders from our channel partners are based on the level of demand from end-
user customers. Any decline or uncertainty in end-user demand could negatively impact end-user orders, which
could in turn significantly negatively affect orders from our channel partners in any given quarter. Accordingly, our
expectations for both short and long-term future revenue is based almost exclusively on our own estimate of future
demand based on the pipeline of sales opportunities we manage, rather than on firm channel partner orders. Our
expense levels are based largely on these estimates. In addition, our event business is particularly unpredictable and
subject to variation due to the short time-frame between when we learn of an opportunity and when the event occurs.
Further, the majority of our product orders are received in the last month of a quarter; thus, the unpredictability of
the receipt of these orders could negatively impact our future results. We historically have received all or nearly all
our channel partner orders in the last month of a quarter and often in the last few days of the quarter. Accordingly,
any significant shortfall in demand for our products or services in relation to our expectations, even if the result was
a short term delay in orders, would have an adverse impact on our operating results.

We have experienced growing demand for our hosting and event services as well as a growing preference from our
corporate customers in purchasing our software as a service (SaaS). As a result, we expect that service billings as a
percentage of total billings will continue to grow which we believe will ultimately lead to more recurring revenue.
We subcontract for some services required by our events customers, such as close captioning, and charge for such
services at a lower margin than other services. The percentage of billings represented by services, provided either
directly or indirectly, is also likely to fluctuate from quarter to quarter due to seasonality of event services and other
factors. Since hosting and support services are typically billed in advance of providing the service, revenue is
initially deferred, leading to reduced current period revenue with a corresponding negative impact to profits or losses
in periods of significant increase in the percentage of our billings for deferred services.

We are subject to risks associated with our channel partners’ product inventories and product sell-through.

We sell a significant amount of our products to distributors such as Synnex Corporation and Starin Marketing, Inc.,
as well as other channel partners who maintain their own inventory of our products for sale to dealers and end-users.
If these channel partners are unable to sell an adequate amount of their inventory of our products in a given quarter
to dealers and end-users or if channel partners decide to decrease their inventories for any reason, such as a long-
term continuation or increase, in global economic uncertainty and downturn in technology spending, the volume of

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

our sales to these channel partners and our revenue would be negatively affected. In addition, if channel partners
decide to purchase more inventory, due to product availability or other reasons, than is required to satisfy end-user
demand or if end-user demand does not keep pace with the additional inventory purchases, channel inventory could
grow in any particular quarter, which could adversely affect product revenue in the subsequent quarter. In addition,
we also face the risk that some of our channel partners have inventory levels in excess of future anticipated sales. If
such sales do not occur in the time frame anticipated by these channel partners for any reason, these channel partners
may substantially decrease the amount of product they order from us in subsequent periods, which would harm our
business.

If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely
affected.

We provide two of our distributors with stock balancing return rights, which generally permit our distributors to
return products, subject to ordering an equal dollar amount of alternate products. We also provide price protection
rights to these two distributors. Price protection rights require that we grant retroactive price adjustments for
inventories of our products held by distributors if we lower our prices for those products within a specified time
period. To cover our exposure to these product returns and price adjustments, we establish reserves based on our
evaluation of historical product trends and current marketing plans. However, we cannot be assured that our
reserves will be sufficient to cover our future product returns and price adjustments. If we inadequately forecast
reserves, we would not be able to recognize revenue until these two distributors sell the inventory to the final end
user which would have a material adverse effect on revenues in the period covered by that change.

We depend in part on the success of our relationships with third-party resellers and integrators.

Our success depends on various third-party relationships, particularly in our non-higher education business and with
our international and events services operations. The relationships include third party resellers as well as system
integrators that assist with implementations of our products and sourcing of our products and services. Identifying
partners, negotiating and documenting relationships with them and maintaining their relationships require significant
time and resources from us. In addition, our agreements with our resellers and integrators are typically non-
exclusive and do not prohibit them from working with our competitors or from offering competing products or
services. We have limited control, if any, as to whether these strategic partners devote adequate resources to
promoting, selling and implementing our products as compared to our competitor’s products. Our competitors may
be effective in providing incentives to third parties to favor their products or services. If we are unsuccessful in
establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to
maintain or grow our revenue could be impaired and our operating results would suffer.

Our cash flow could fluctuate due to the potential difficulty of collecting our receivables.

A significant portion of our sales are fulfilled by VARs, regional distributors or master distributors. As an example,
43% of our billings in 2012 were to Synnex Corporation and Starin Marketing Inc., two master distributors who
fulfill demand from other distributors, VARs or end-users. While our distributors and VARs typically maintain
payment terms consistent with other end-users, a delay in payment may occur as a result of a number of factors
including changes in demand, general economic factors, financial performance, inventory levels or disputes over
payments. Any delay from Synnex, Starin, or other large distributors or VARs, could have a material impact on the
collections of our receivables during a particular quarter.

We offer credit terms to some of our international customers; however, payments tend to go beyond terms in certain
countries and advances allowable on accounts receivable from international customers under our revolving line of
credit are calculated using a lower advance rate than domestic receivables and are limited to $500 thousand.
Therefore, as Europe, Asia and other international regions grow, accounts receivable balances will likely increase as
compared to previous years and our ability to finance the increase will be limited.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Accounting regulations and related interpretations and policies, particularly those related to revenue recognition,
cause us to defer revenue recognition into future periods for portions of our products and services.

Revenue recognition for our products and services is complex and subject to multiple sources of authoritative
guidance, some of which are new, as well as varied interpretations and implementation practices for such rules.
These rules require us to apply judgment in determining revenue recognition in certain situations. Factors that are
considered in revenue recognition include those such as vendor specific objective evidence (VSOE), best estimate of
selling price and the inclusion of other services and contingencies to payment terms. We expect that we will
continue to defer portions of our service billings because of these factors, and to the extent that management’s
judgment is incorrect it could result in an increase in the amount of revenue deferred in any one period. The amounts
deferred may also be significant and may vary from quarter to quarter depending on the mix of products sold or
contractual terms.

Additional changes in authoritative guidance or changes in practice in applying such rules could also cause us to
defer the recognition of revenue to future periods or recognize lower revenue.

Because most of our service contracts are renewable on an annual basis, a reduction in our service renewal rate
could significantly reduce our revenues.

Our clients have no obligation to renew their content hosting agreements, customer support contracts or other annual
service contracts after the expiration of the initial period, which is typically one year, and some clients have elected
not to do so. A decline in renewal rates could cause our revenues to decline. We have limited historical data with
respect to rates of renewals, so we cannot accurately predict future renewal rates. Our renewal rates may decline or
fluctuate as a result of a number of factors, including client dissatisfaction with our products and services, our failure
to update our products to maintain their attractiveness in the market, deteriorating economic conditions or budgetary
constraints or changes in budget priorities faced by our clients.

Because we generally recognize revenues ratably over the term of our service contracts, downturns or upturns in
service transactions will not be fully reflected in our operating results until future periods.

We recognize most of our revenues from service contracts monthly over the terms of their agreements, which are
typically 12 months, although terms have ranged from less than one month to 48 months. As a result, much of the
service revenue we report in each quarter is attributable to agreements entered into during previous quarters.
Consequently, a decline in sales, client renewals or market acceptance of our products in any one quarter will not
necessarily be fully reflected in the revenues in that quarter and will negatively affect our revenues and profitability
in future quarters. This ratable revenue recognition also makes it difficult for us to rapidly increase our revenues
through additional sales in any period, as revenues from new clients must be recognized over the applicable
agreement term.

There is a great deal of competition in the market for our products, which could lower the demand for our products
and have a negative impact on our operations.

The market for our products and services is intensely competitive, dynamic and subject to rapid technological change.
The intensity of the competition and the pace of change are expected to increase in the future. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market share, any one of which could seriously
harm our business. Competitors vary in size and in the scope and breadth of the products and services offered, many of
which have greater financial resources, longer operating histories, greater name recognition, more employees and greater
financial, technical, marketing, public relations and distribution resources than we have. In addition, new competitors
with greater financial resources may arise through partnerships, distribution agreements, mergers, acquisitions or other
types of transactions at any time. In particular, large companies have begun to make investments in and/or partner with
smaller companies to enter the lecture capture market. We encounter competition with respect to different aspects of our
solution from a variety of sources including:

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

• Web conferencing solutions (e.g. Adobe, Cisco/WebEx, Microsoft and Citrix). Although part of the overall online
multimedia communications landscape, these solutions are designed primarily for collaborative communications
versus one-to-many communications like Mediasite. Many organizations acknowledge that they need both
technologies – one-to-many webcasting and collaborative web conferencing – to appropriately address their
different communication requirements.

• Video conferencing solutions (e.g. Polycom, TANDBERG (now Cisco) and Sony). These solutions are designed
primarily for one-to-one or group-to-group communications with high levels of interactivity and collaboration. Like
web conferencing, many organizations use both video conferencing and webcasting. Mediasite integrates with
videoconferencing endpoints from Polycom and TANDBERG to record and manage interactive meetings,
discussions and distance learning courses alongside other Mediasite content.

• Authoring tools solutions (e.g. Polycom Accordent PresenterPLUS and TechSmith Camtasia ). Unlike webcasting,
web conferencing or video conferencing, which are forms of online multimedia communication that capture and
distribute/stream content, these solutions are production-oriented tools designed to create and edit multimedia
content only. Some organizations will use these desktop tools to create training content by manually integrating
existing audio, video, images, branding and other visual elements into a multimedia presentation which can then be
published to a web or streaming server for distribution. This process can require a significant amount of production
effort and user expertise in presentation authoring. Mediasite is capable of ingesting content produced by popular
desktop tools like TechSmith’s Camtasia Relay or in video formats like Windows Media or H.264, allowing the
content to be delivered, managed and secured alongside all other Mediasite content.

• Online video services and virtual meeting platforms (e.g.INXPO, Livestream, ON24, Onstream Media, InterCall,
Thomson Reuters, Unisfair and Wall Street Webcasting). These companies offer services or SaaS-based platforms
that either allow audio and video to be captured from a presenter’s computer (often with supporting materials
uploaded in advance), produced streaming video services or 2D/3D virtual environments that may or may not
include rich media webcasts.

Other vendors such as Echo360, Tegrity, Panopto, TechSmith, Crestron and Accordent Technologies (now Polycom),
provide lecture capture or webcasting capabilities, but differ in their technology approach, particularly in the lecture
capture arena. Mediasite is an appliance- or room-based platform for lecture capture. It provides a fully integrated system
designed around an automated purpose-built recording appliance to capture, publish and manage rich media content.
This transparent recording automation means no presenter intervention which leads to the broadest end-user adoption
across campuses. Room-based appliances are capable of streaming live or on-demand and can leverage the full breadth
of in-room audio/visual technology. A room-based platform like Mediasite also includes complete content management
for captured multimedia presentations.

Other lecture capture solutions are implemented as software applications designed to capture and publish rich media
content, but dependent upon a third-party content management platform, typically the institution’s course management
system. Software applications for lecture capture support on-demand streaming only and require in-room PC integration
with varying levels of presenter intervention and recording knowledge which may lead to lower adoption rates
throughout a given campus.

Lastly, laptop-resident desktop tools capture and publish non-rich media (limited video and presentation graphics) and
like software applications support only on-demand streaming and require a third-party content management platform.
Desktop tools require the greatest degree of presenter intervention, technical confidence and support. While desktop tools
are prevalent on many campuses, these three factors limit its practicality for campus-wide adoption.

The competitive environment may require us to make changes in our products, pricing, licensing, services, or marketing
to maintain and extend our current technology. Price concessions or the emergence of other pricing, licensing, and
distribution strategies or technology solutions of competitors may reduce our revenue, margins or market share. Other
changes we have to make in response to competition could cause us to expend significant financial and other resources,
disrupt our operations, strain relationships with partners, release products and enhancements before they are thoroughly
tested or result in customer dissatisfaction, any of which could harm our operating results and stock price.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

If potential customers or competitors use open source software to develop products that are competitive with our
products and services, we may face decreased demand and pressure to reduce the prices for our products.

The growing acceptance and prevalence of open source software may make it easier for competitors or potential
competitors to develop software applications that compete with our products, or for customers and potential
customers to internally develop software applications that they would otherwise have licensed from us. One of the
aspects of open source software is that it can be modified or used to develop new software that competes with
proprietary software applications, such as ours. Such competition can develop without the degree of overhead and
lead time required by traditional proprietary software companies. As open source offerings become more prevalent,
customers may defer or forego purchases of our products, which could reduce our sales and lengthen the sales cycle
for our products or result in the loss of current customers to open source solutions. If we are unable to differentiate
our products from competitive products based on open source software, demand for our products and services may
decline, and we may face pressure to reduce the prices of our products, which would hurt our profitability. If our use
of open-source is challenged and construes unfavorably, our operating results could be adversely impacted.

We use open source software in our application suite. Although we monitor our use of open source software closely,
the terms of many open source licenses have not been interpreted by United States courts, and there is risk that such
licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to
commercialize our products. In such event, we could be required to re-engineer our technology or to discontinue
offering all or a portion of our products in the event re-engineering cannot be accomplished on a timely basis, any of
which could adversely affect our business, operating results and financial condition.

Our customers may use our products to share confidential and sensitive information, and if our system security is
breached, our reputation could be harmed and we may lose customers.

Our customers may use our products and services to share confidential and sensitive information, the security of
which is critical to their business. Third parties may attempt to breach our security for customer hosted content or
the networks of our customers. Customers may take inadequate security precautions with their sensitive information
and may inadvertently make that information public. We may be liable to our customers for any breach in security,
and any breach could harm our reputation and cause us to lose customers. In addition, customers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays
or loss of data. We may be required to expend significant capital and other resources to further protect against
security breaches or to resolve problems caused by any breach, including litigation-related expenses if we are sued.

Operational failures in our network infrastructure could disrupt our remote hosting services, cause us to lose
clients and sales to potential clients and result in increased expenses and reduced revenues.

Unanticipated problems affecting our network systems could cause interruptions or delays in the delivery of the
hosting services we provide to some of our clients. We are not equipped to provide full disaster recovery to all of
our hosted clients. If there are operational failures in our network infrastructure that cause interruptions, slower
response times, loss of data or extended loss of service for our remotely hosted clients, we may be required to issue
credits or pay penalties, current clients may terminate their contracts or elect not to renew them and we may lose
sales to potential clients. We have recently acquired additional hardware and systems and outsourced most aspects
of our network infrastructure to two providers. As a result, we are reliant on third parties for network availability so
outages may be outside our control and we may need to acquire additional hardware in order to provide an
appropriate level of redundancy required by our customers.

We license technology from third parties. If we are unable to maintain these licenses, our operations and
financial condition may be negatively impacted.

We license technology from third parties. The loss of, our inability to maintain, or changes in material terms of these
licenses could result in increased cost or delayed sales of our software and services, or may cause us to remove
features from our products or services. We anticipate that we will continue to license technology from third parties
in the future. This technology may not continue to be available on commercially reasonable terms, if at all. Although

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

we do not believe that we are substantially dependent on any individual licensed technology, some of the component
technologies that we license from third parties could be difficult for us to replace. The impairment of these third-
party relationships, especially if this impairment were to occur in unison, could result in delays in the delivery of our
software and services until equivalent technology, if available, is identified, licensed and integrated. This delay
could adversely affect our operating results and financial condition.

The technology underlying our products and services is complex and may contain unknown defects that could
harm our reputation, result in product liability or decrease market acceptance of our products.

The technology underlying our products is complex and includes software that is internally developed, software
licensed from third parties and hardware purchased from third parties. These products have, and will in the future,
contain errors or defects, particularly when first introduced or when new versions or enhancements are released. We
may not discover defects that affect our current or new applications or enhancements until after they are sold and our
insurance coverage may not be sufficient to cover our complete liability exposure. Any defects in our products and
services could:

 Damage our reputation
 Cause our customers to initiate product liability suits against us

 Cause customers to cancel orders or potential customers to purchase competitive products or services
 Delay release or market acceptance of our products, or otherwise adversely impact our relationships with

Increase our product development resources

our customers

 Cause us to allocate valuable engineering resources to fix our existing products, which may cause us to
allocate fewer resources toward developing new products, or toward adding features to our existing
products

If we are viewed only as a commodity supplier, our margins and valuations will shrink.

We need to provide value-added services in order to avoid being viewed as a commodity supplier. This entails building
long-term customer relationships and developing features that will distinguish our products. Our technology is complex
and is often confused with other products and technologies in the market place, including video conferencing, streaming
and collaboration.

We have developed a lower cost desktop software product to better address that market segment. Our desktop software
product has more limited features compared to our existing products. While we believe we can preserve the market for
our full-featured products, release of our desktop software product could reduce demand for products sold at higher
prices.

If we fail to build long-term customer relationships and develop features that distinguish our products in the market
place, our margins will shrink and our stock may become less valuable to investors.

Our success depends upon the proprietary aspects of our technology.

Our success and ability to compete depend to a significant degree upon the protection of our proprietary technology.
We currently have four U.S. patents that have been issued to us. We may seek additional patents in the future.
However, it is possible that:

 Any patents acquired by or issued to us may not be broad enough to protect us
 Any issued patent could be successfully challenged by one or more third parties, which could result in our

loss of the right to prevent others from exploiting the inventions claimed in those patents

 Current and future competitors may independently develop similar technology, duplicate our services or

design around any of our patents

 Effective patent protection, including effective legal-enforcement mechanisms against those who violate
our patent-related assets, may not be available in every country in which we do or plan to do business

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

 We may not have the resources to enforce our patents or may determine the potential benefits are not worth

the cost and risk of ultimately being unsuccessful

We also rely upon trademark, copyright and trade secret laws, which may not be sufficient to protect our
intellectual property.

We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual
restrictions, such as confidentiality agreements and licenses, to establish and protect our technology. We have
registered four U.S. and four foreign country trademarks. These forms of intellectual property protection are
critically important to our ability to establish and maintain our competitive position. However, it is possible that:

 Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights
 Laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or to

deter others from developing similar technologies

 Effective trademark, copyright and trade secret protection, including effective legal-enforcement
mechanisms against those who violate our trademark, copyright or trade secret assets, may be unavailable
or limited in foreign countries

 Contractual agreements may not provide meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information

 Other companies may claim common law trademark rights based upon state or foreign laws that precede

the federal registration of our marks

 Policing unauthorized use of our services and trademarks is difficult, expensive and time-consuming, and

we may be unable to determine the extent of any unauthorized use

Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third
parties to benefit from our technology without paying us for it, which would significantly harm our business.

If other parties bring infringement or other claims against us, we may incur significant costs or lose customers.

Other companies may obtain patents or other proprietary rights that would limit our ability to conduct our business and
could assert that our technologies infringe their proprietary rights. We could incur substantial costs to defend any legal
proceedings, even if without merit, and intellectual property litigation could force us to cease using key technology,
obtain a license or redesign our products. In the course of our business, we may sell certain systems to our customers,
and in connection with such sale, we may agree to indemnify these customers from claims made against them by
third parties for patent infringement related to these systems, which could harm our business.

If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our
business could be impaired.

Our future success depends upon the continued service of our key management, technical, sales and other critical
personnel, particularly our Chief Executive Officer. Most of our officers and other key personnel are employees-at-
will, and we cannot assure that we will be able to retain them. Key personnel have left our company in the past,
sometimes to accept employment with companies that sell similar products or services to existing or potential
customers of ours. There will likely be additional departures of key personnel from time to time in the future and
such departures could result in additional competition, loss of customers or confusion in the marketplace. As we
seek to replace such departures, or expand our business, the hiring of qualified sales, technical and support personnel
has been difficult due to the limited number of qualified professionals. The loss of any key employee could result in
significant disruptions to our operations, including adversely affecting the timeliness of product releases, the
successful implementation and completion of company initiatives and the results of our operations. In addition, we
do not have life insurance policies on any of our key employees. If we lose the services of any of our key
employees, the integration of replacement personnel could be time consuming, may cause disruptions to our
operations and may be unsuccessful.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Because our business is susceptible to risks associated with international operations, we may not be able to
maintain or increase international sales of our products.

International product and service billings ranged from 25% to 27% of our total billings in each of the past two years
and are expected to continue to account for a significant portion of our business in the future. However, in the future
we may be unable to maintain or increase international sales of our products and services. International sales are
subject to a variety of risks, including:






difficulties in establishing and managing international distribution channels or operations;
difficulties in selling, servicing and supporting overseas products, translating products into foreign
languages and compliance with local hardware requirements;
the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual
property or requirements for product certification or other restrictions;

 multiple and possibly overlapping tax structures;



currency and exchange rate fluctuations;
difficulties in collecting accounts receivable in foreign countries, including complexities in documenting
letters of credit; and
economic or political changes in international markets.
difficulty in complying with international employment related requirements




Our operating results may fluctuate due to our investment in Mediasite KK.

We currently own approximately 23% of the common stock of Mediasite KK, our Japanese affiliate. Because our
ownership interest exceeds 20%, our investment is accounted for under the equity method of accounting. This
method requires us to record 23% of Mediasite KK's income or loss each quarter. However, due to our less-than-
majority interest, we do not exercise control over Mediasite KK's operations. Therefore, a substantial portion of our
overall profits and losses have been and will continue to be subject to events over which we have little control. If
equity income had not been recorded, we would have incurred a loss of $263 thousand, rather than a profit of $157
thousand.

We face risks associated with government regulation of the internet and related legal uncertainties.

Currently, few existing laws or regulations specifically apply to the Internet, other than laws generally applicable to
businesses. Many Internet-related laws and regulations, however, are pending and may be adopted in the United
States, in individual states and local jurisdictions and in other countries. These laws may relate to many areas that
impact our business, including encryption, network and information security, and the convergence of traditional
communication services, such as telephone services, with Internet communications, taxes and wireless networks.
These types of regulations could differ between countries and other political and geographic divisions both inside
and outside the United States. Non-U.S. countries and political organizations may impose, or favor, more and
different regulation than that which has been proposed in the United States, thus furthering the complexity of
regulation. In addition, state and local governments within the United States may impose regulations in addition to,
inconsistent with, or more strict than federal regulations. The adoption of such laws or regulations, and uncertainties
associated with their validity, interpretation, applicability and enforcement, may affect the available distribution
channels for, and the costs associated with, our products and services. The adoption of such laws and regulations
may harm our business.

Exercise of outstanding options and warrants will result in further dilution.

The issuance of shares of common stock upon the exercise of our outstanding options and warrants will result in dilution
to the interests of our stockholders, and may reduce the trading price of our common stock.

At September 30, 2012, we had less than 1 thousand of outstanding warrants and 846 thousand of outstanding stock
options granted under our stock option plans, 555 thousand of which are immediately exercisable.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

To the extent that these stock options or warrants are exercised, dilution to the interests of our stockholders will likely
occur. Additional options and warrants may be issued in the future at prices not less than 85% of the fair market value of
the underlying security on the date of grant. Exercises of these options or warrants, or even the potential of their exercise
may have an adverse effect on the trading price of our common stock. The holders of our options or our warrants are
likely to exercise them at times when the market price of the common stock exceeds the exercise price of the securities.
Accordingly, the issuance of shares of common stock upon exercise of the options and warrants will likely result in
dilution of the equity represented by the then outstanding shares of common stock held by other stockholders. Holders
of our options and warrants can be expected to exercise or convert them at a time when we would, in all likelihood, be
able to obtain any needed capital on terms, which are more favorable to us than the exercise terms provided, by these
options and warrants.

We may need to make acquisitions or form strategic alliances or partnerships in order to remain competitive in our
market, and potential future acquisitions, strategic alliances or partnerships could be difficult to integrate, disrupt our
business and dilute stockholder value.

We may acquire or form strategic alliances or partnerships with other businesses in the future in order to remain
competitive or to acquire new technologies. As a result of these acquisitions, strategic alliances or partnerships, we may
need to integrate products, technologies, widely dispersed or overseas operations and distinct corporate cultures. The
products, services or technologies of the acquired companies may need to be altered or redesigned in order to be made
compatible with our software products and services, or the software architecture of our customers. These integration
efforts may not succeed or may distract our management from operating our existing business. An acquisition could
expose us to unexpected liabilities, regulations or costs, including tax or other regulatory items impacting repatriation of
profits. Our failure to successfully manage future acquisitions, strategic alliances or partnerships could seriously harm
our operating results. In addition, our stockholders would be diluted if we finance the acquisition, strategic alliances or
partnerships by incurring convertible debt or issuing equity securities.

Our ability to utilize our net operating loss carryforwards may be limited.

The use of our net operating loss carryforwards may have limitations resulting from certain future ownership
changes or other factors under Section 382 of the Internal Revenue Code.

If our net operating loss carryforwards are limited, and we have taxable income which exceeds the available net
operating loss carryforwards for that period, we would incur an income tax liability even though net operating loss
carryforwards may be available in future years prior to their expiration. Any such income tax liability may adversely
affect our future cash flow, financial position and financial results.

Our business is subject to changing regulations regarding corporate governance and public disclosure that will
increase both our costs and the risk of noncompliance.

As a publicly traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002.
While we have developed and instituted a corporate compliance program based on what we believe are the current
best practices and continue to update the program in response to newly implemented regulatory requirements and
guidance, we cannot assure that we are or will be in compliance with all potentially applicable regulations.
Although our non-affiliate market capitalization was less than $75 million at March 31, 2012 and we were therefore
not required to have an auditor attestation on our internal controls over financial reporting for fiscal 2012, SEC rules
may in the future require us to have such an attestation if our non-affiliate market capitalization exceeds a certain
threshold. We cannot assure that in the future our management or our auditors, will not find a material weakness in
connection with our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.
We also cannot assure that we could correct any such weakness to allow our management to assess the effectiveness
of our internal control over financial reporting as of the end of our fiscal year in time to enable our independent
registered public accounting firm to attest that such assessment will have been fairly stated in our Annual Report on
Form 10-K to be filed with the Securities and Exchange Commission or attest that we have maintained effective
internal control over financial reporting as of the end of our fiscal year. If we fail to comply with any of these

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

regulations, we could be subject to a range of regulatory actions, fines, or other sanctions or litigation. In addition, if
we must disclose any material weakness in our internal control over financial reporting, our stock price may decline.

Provisions of our charter documents and Maryland law could also discourage an acquisition of our company that
would benefit our stockholders.

Provisions of our articles of incorporation and by-laws may make it more difficult for a third party to acquire control of
our company, even if a change in control would benefit our stockholders. Our articles of incorporation authorize our
board of directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting
and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Furthermore, our
articles of incorporation provide for a classified board of directors, which means that our stockholders may vote upon the
retention of only one or two of our seven directors each year. Moreover, Maryland corporate law restricts certain
business combination transactions with “interested stockholders” and limits voting rights upon certain acquisitions of
“control shares.”

We face risks associated with government regulation of the internet and related legal uncertainties.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

Our principal office is located in Madison, Wisconsin in a leased facility of approximately 26,000 square feet. The
building serves as our corporate headquarters, accommodating our general and administrative, product development
and selling and marketing departments. We believe this facility is adequate and suitable for our needs. The current
lease term for this office expires on December 31, 2018.

ITEM 3.

LEGAL PROCEEDINGS

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock was initially traded on the American Stock Exchange under the symbol "SFO," beginning with
our initial public offering in April of 1998. On April 24, 2000, our common stock began trading on the NASDAQ
Global Market under the symbol "SOFO." Effective September 16, 2009, we transferred the listing of our common
stock to the NASDAQ Capital Market. The following table sets forth, for the periods indicated, the high and low
sale prices per share of our common stock as reported on the NASDAQ Global or Capital Markets.

Year Ended September 30, 2013:

First Quarter (through December 6, 2012)

Year Ended September 30, 2012:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Year Ended September 30, 2011:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

Low

$ 8.18

$ 6.81

10.46

8.98

9.09

8.50

15.94

15.90

15.39

13.47

7.00

7.05

6.70

6.85

10.10

13.45

12.38

8.68

The Company has not paid any cash dividends and does not intend to pay any cash dividends in the foreseeable
future. The Company is prohibited from paying any cash dividends pursuant to the terms of the loan and security
agreement with Silicon Valley Bank.

At December 6, 2012 there were 383 common stockholders of record and approximately 6,000 total shareholders.
Many shares are held by brokers and other institutions on behalf of shareholders.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Equity Compensation Plan Information

Plan category

Equity compensation plans approved
by security holders (1)

Equity compensation plans not
approved by security holders (2)

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding
options, warrants
and rights

Number of
securities
remaining
available for
future issuance

(a)

(b)

(c)

741,555

$ 11.37

646,426

104,725

10.71

Total

846,280

$ 11.28

646,426

(1) Consists of the 2009 Stock Incentive Plan, Employee Incentive Stock Option Plan and the Directors Stock
Option Plans. For further information regarding these plans, reference is made to Note 5 of the financial
statements.

(2) Consists of the Non-Qualified Stock Option Plan. For further information regarding this plan, reference is

made to Note 5 of the financial statements.

The graph below compares the cumulative total stockholder return on our common stock from September 30, 2007
through and including September 30, 2012 with the cumulative total return on The NASDAQ Stock Market (US only)
and the RDG Technology Composite. The graph assumes that $100 was invested in our common stock on September
30, 2007 for each of the indexes and that all dividends were reinvested. Unless otherwise specified, all dates refer to the
last day of each month presented. The comparisons in the graph below are based on historical data, with our common
stock prices based on the closing price on the dates indicated, and are not intended to forecast the possible future
performance of our common stock.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sonic Foundry, Inc., the NASDAQ Composite Index, and the RDG Technology
Composite Index

$140

$120

$100

$80

$60

$40

$20

9/07

9/08

9/09

9/10

9/11

9/12

Sonic Foundry, Inc.

NASDAQ Composite

RDG Technology Composite

*$100 invested on 9/30/07 in stock or index, including reinvestment of dividends.
Fiscal year ending September 30.

(A) RECENT SALES OF UNREGISTERED SECURITIES

None

(B) USE OF PROCEEDS FROM REGISTERED SECURITIES

None

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial and operating data were derived from our consolidated financial statements. The selected
financial data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes
thereto appearing elsewhere in this annual report on Form 10-K (in thousands except per share data). All share and
per share data have been adjusted for the one-for-ten reverse stock split which was effective on November 16, 2009.

Statement of Operations Data:
Revenue
Cost of revenue
Gross margin
Operating expenses
Income (loss) from operations
Other income (expense), net
Provision for income taxes
Net income (loss)

Basic net income (loss) per

common share

Diluted net income (loss) per

common share

Weighted average common

shares: - Basic

- Diluted

Balance Sheet Data at
September 30:

Cash and cash equivalents
Working capital
Total assets
Long-term liabilities
Stockholders' equity

Years Ended September 30,

2012

2011

2010

2009

2008

$ 26,090
7,246
18,844
18,735
109
288
(240)
$ 157

$ 25,222
7,311
17,911
17,633
278
(310)
(211)
$ (243)

$ 20,476
5,065
15,411
15,138
273
(170)
(225)
$ (122)

$ 18,577
4,331
14,246
16,724
(2,478)
(25)
(142)
$ (2,645)

$ 15,601
4,205
11,396
19,279
(7,883)
10
(256)
$ (8,129)

$ 0.04

$ (0.06)

$ (0.03)

$ (0.74)

$ (2.28)

$ 0.04

$ (0.06)

$ (0.03)

$ (0.74)

$ (2.28)

3,857,161
3,907,888

3,748,840
3,748,840

3,617,423
3,617,423

3,598,040
3,598,040

3,557,966
3,557,966

2012

2011

2010

2009

2008

$ 4,478
3,332
22,821
3,748
10,539

$ 5,515
3,083
21,840
3,072
9,261

$ 3,358
1,442
18,267
3,202
7,137

$ 2,598
(344)
16,173
1,977
6,601

$ 3,560
774
17,474
1,610
8,455

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The financial and business analysis below provides information that Sonic Foundry, Inc. (the Company) believes is
relevant to an assessment and understanding of the Company's consolidated financial position and results of
operations. This financial and business analysis should be read in conjunction with the consolidated financial
statements and related notes.

When used in this Report, the words “anticipate”, “expect”, “plan”, “believe”, “seek”, “estimate” and similar
expressions are intended to identify forward-looking statements. These are statements that relate to future periods
and include, but are not limited to, statements about the features, benefits and performance of our products, our
ability to introduce new product offerings and increase revenue from existing products, expected expenses including
those related to selling and marketing, product development and general and administrative, our beliefs regarding
the health and growth of the market for products, anticipated increase in our customer base, expansion of our
products functionalities, expected revenue levels and sources of revenue, expected impact, if any, of legal
proceedings, the adequacy of liquidity and capital resources, and expected growth in business. Forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, market acceptance for our products, our
ability to attract and retain customers and distribution partners for existing and new products, our ability to control
our expenses, our ability to recruit and retain employees, the ability of distribution partners to successfully sell our
products, legislation and government regulation, shifts in technology, global and local business conditions, our
ability to effectively maintain and update our products and service portfolio, the strength of competitive offerings,
the prices being charged by those competitors, and the risks discussed elsewhere herein. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or circumstances on which any such statement
is based.

Overview

Sonic Foundry, Inc. is a technology leader in the emerging web communications marketplace, providing enterprise
solutions and services that link an information-driven world. The company’s principal product line, Mediasite® is a
web communication and content management system that automatically and cost-effectively webcasts lectures and
presentations. Trusted by Fortune 500 companies, top education institutions and Federal, state and local government
agencies for a variety of critical communication needs, Mediasite is the leading one-to-many multimedia
communication solution for capturing knowledge and sharing it online.

Critical Accounting Policies

We have identified the following as critical accounting policies to our Company and have discussed the development,
selection of estimates and the disclosure regarding them with the audit committee of the board of directors:

Impairment of long-lived assets;

 Revenue recognition, allowance for doubtful accounts, and reserves;

 Valuation allowance for net deferred tax assets; and
 Accounting for stock-based compensation.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Revenue Recognition, Allowance for Doubtful Accounts and Reserves

General

Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered,
the sales price is fixed or determinable and collectability is reasonably assured. Revenue is deferred when
undelivered products or services are essential to the functionality of delivered products, customer acceptance is
uncertain, significant obligations remain, or the fair value of undelivered elements is unknown. The Company does
not offer customers the right to return product, other than for exchange or repair pursuant to a warranty or stock
rotation. The Company’s policy is to reduce revenue if it incurs an obligation for price rebates or other such
programs during the period the obligation is reasonably estimated to occur. The following policies apply to the
Company’s major categories of revenue transactions.

Products

Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the
customer. Under the terms and conditions of the sale, this occurs at the time of shipment to the customer. Product
revenue currently represents sales of our Mediasite recorders and Mediasite related products such as server software
revenue.

Services

The Company sells support and content hosting contracts to our customers, typically one year in length, and records
the related revenue ratably over the contractual period. Our support contracts cover phone and electronic technical
support availability over and above the level provided by our distribution partners, software upgrades on a when and
if available basis, advance hardware replacement and an extension of the standard hardware warranty from 90 days
to one year. The manufacturers we contract with to build the units provide a limited one-year warranty on the
hardware. We also sell installation, training, event webcasting, and customer content hosting services. Revenue for
those services is recognized when performed in the case of installation, training and event webcasting services.
Service amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue until the
revenue recognition criteria are met.

Revenue Arrangements that Include Multiple Elements

The Company has historically applied the software revenue recognition rules as prescribed by Accounting Standards
Codification (ASC) Subtopic 985-605. In October 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) Number 2009-14, “Certain Revenue Arrangements That Include Software
Elements,” which amended ASC Subtopic 985-605. This ASU removes tangible products containing software
components and non-software components that function together to deliver the product’s essential functionality from
the scope of the software revenue recognition rules. In the case of the Company’s hardware products with embedded
software, the Company has determined that the hardware and software components function together to deliver the
product’s essential functionality, and therefore, the revenue from the sale of these products no longer falls within the
scope of the software revenue recognition rules. Revenue from the sale of software-only products remains within the
scope of the software revenue recognition rules. Installation, training, and post customer support no longer fall
within the scope of the software revenue recognition rules, except when they are sold with and relate to a software-
only product. Revenue recognition for products that no longer fall under the scope of the software revenue
recognition rules is similar to that for other tangible products. ASU Number 2009-13, “Multiple-Deliverable
Revenue Arrangements,” which amended ASC Topic 605 and was also issued in October 2009, is applicable for
multiple-deliverable revenue arrangements. ASU 2009-13 allows companies to allocate revenue in a multiple-
deliverable arrangement in a manner that better reflects the transaction’s economics. ASU 2009-13 and 2009-14
were adopted and are effective for revenue arrangements entered into or materially modified beginning in the
Company’s fiscal year 2011.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

charged when the same deliverable is sold separately, with the residual value from the arrangement allocated to the
delivered element. The portion of the fee that is allocated to each deliverable is then recognized as revenue when the
criteria for revenue recognition are met with respect to that deliverable. If VSOE does not exist for all of the
undelivered elements, then all revenue from the arrangement is typically deferred until all elements have been
delivered to the customer. All revenue arrangements, with the exception of hosting contracts, entered into prior to
October 1, 2010 and the sale of all software-only products and associated services have been accounted for under
this guidance.

Under the revenue recognition rules for tangible products as amended by ASU 2009-13, the fee from a multiple-
deliverable arrangement is allocated to each of the deliverables based upon their relative selling prices as determined
by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the
delivered item has value to the customer on a stand-alone basis. A delivered item that does not qualify as a separate
unit of accounting is combined with the other undelivered items in the arrangement and revenue is recognized for
those combined deliverables as a single unit of accounting. The selling price used for each deliverable is based upon
VSOE if available, third-party evidence (TPE) if VSOE is not available, and best estimate of selling price (ESP) if
neither VSOE nor TPE are available. TPE is the price of the Company’s or any competitor’s largely interchangeable
products or services in stand-alone sales to similarly situated customers. ESP is the price at which the Company
would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-
specific factors. All revenue arrangements negotiated after September 30, 2010, excluding the sale of all software-
only products and associated services, have been accounted for under this guidance.

The selling prices used in the relative selling price allocation method are as follows: (1) the Company’s products and
services are based upon VSOE and (2) hardware products with embedded software, for which VSOE does not exist
are based upon ESP. The Company does not believe TPE exists for any of these products and services because they
are differentiated from competing products and services in terms of functionality and performance and there are no
competing products or services that are largely interchangeable. Management establishes ESP for hardware products
with embedded software using a cost plus margin approach with consideration for market conditions, such as the
impact of competition and geographic considerations, and entity-specific factors, such as the cost of the product and
the Company’s profit objectives. Management believes that ESP is reflective of reasonable pricing of that
deliverable as if priced on a stand-alone basis. When a sales transaction includes deliverables that are divided
between ASC Topic 605 and ASC Subtopic 985-605, the Company allocates the selling price using the relative
selling price method whereas value is allocated using an ESP for software developed using a percent of list price
approach. The other deliverables are valued using ESP or VSOE as previously discussed.

While the pricing model, currently in use, captures all critical variables, unforeseen changes due to external market
forces may result in a revision of the inputs. These modifications may result in the consideration allocation differing
from the one presently in use. Absent a significant change in the pricing inputs or the way in which the industry
structures its deals, future changes in the pricing model are not expected to materially affect our allocation of
arrangement consideration.

Management has established VSOE for hosting services. Billings for hosting are spread ratably over the term of the
hosting agreement, with the typical hosting agreement having a term of 12 months, with renewal on an annual basis.
The Company sells most hosting contracts without the inclusion of products. When the hosting arrangement is sold
in conjunction with product, the product revenue is recognized immediately while the remaining hosting revenue is
spread ratably over the term of the hosting agreement. The selling price is allocated between these elements using
the relative selling price method. The Company uses ESP for development of the selling price for hardware products
with embedded software.

Reserves

We record reserves for stock rotations, price adjustments, rebates, and sales incentives to reduce revenue and
accounts receivable for these and other credits we may grant to customers. Such reserves are recorded at the time of
sale and are calculated based on historical information (such as rates of product stock rotations) and the specific
terms of sales programs, taking into account any other known information about likely customer behavior. If actual
customer behavior differs from our expectations, additional reserves may be required. Also, if we determine that we

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

can no longer accurately estimate amounts for stock rotations and sales incentives, we would not be able to
recognize revenue until the customers exercise their rights, or such rights lapse, whichever is later.

Credit Evaluation and Allowance for Doubtful Accounts

We assess the realization of our receivables by performing ongoing credit evaluations of our customers’ financial
condition. Through these evaluations, we may become aware of a situation where a customer may not be able to
meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. Our reserve
requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is
received. Our reserves are also based on amounts determined by using percentages applied to certain aged
receivable categories. These percentages are determined by a variety of factors including, but not limited to, current
economic trends, historical payment and bad debt write-off experience. Allowance for doubtful accounts for
accounts receivable was $85,000 at September 30, 2012 and $90,000 at September 30, 2011.

Impairment of long-lived assets

We assess the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that
the fair value of these assets is less than the carrying value.

If we determine that the fair value of goodwill is less than its carrying value, based upon the annual test or the existence
of one or more indicators of impairment, we would then measure impairment based on a comparison of the implied fair
value of goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than
the implied fair value of goodwill, we would record an impairment charge for the difference.

We evaluate all of our long-lived assets, including intangible assets other than goodwill, for impairment in accordance
with the provisions of FASB ASC 360-10. Long-lived assets and intangible assets other than goodwill are evaluated for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that asset.

Valuation allowance for net deferred tax assets

Deferred income taxes are provided for temporary differences between financial reporting and income tax basis of assets
and liabilities, and are measured using currently enacted tax rates and laws. Deferred income taxes also arise from the
future benefits of net operating loss carryforwards. A valuation allowance equal to 100% of the net deferred tax assets
has been recognized due to uncertainty regarding future realization.

Accounting for stock-based compensation

The Company uses a lattice valuation model to account for all stock options granted. The lattice valuation model
provides a flexible analysis to value options because of its ability to incorporate inputs that change over time, such
as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise and
employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility of the
Company’s stock. The Company considers all employees to have similar exercise behavior and therefore has not
identified separate homogenous groups for valuation. The expected term of options granted is derived from the
output of the option pricing model and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the U.S. Treasury
yields in effect at the time of grant. Forfeitures are based on actual behavior patterns.

Recent Accounting Pronouncements

In December 2010, FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts”. ASU 2010-28 modifies Step 1 of the goodwill
impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2
of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update became

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

effective for fiscal years beginning after December 15, 2010. The Company’s adoption of ASU 2010-28 did not
have a material impact on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in US GAAP and IFRS”, which amends ASC 820. This update clarifies the existing
guidance and amends the wording used to describe many of the requirements in US GAAP for measuring fair value
and for disclosing information about fair value measurements. This update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011, with prospective application required. The adoption
of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The amendments in this
ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than
not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step goodwill test described in ASC 350. The more-likely-than-not threshold is
defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required
to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair
value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted,
including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an
entity’s financial statements for the most recent annual or interim period have not yet been issued. The early
adoption of this guidance during fiscal 2012 did not have a material impact on the Company’s consolidated financial
statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do
not require adoption until a future date are not expected to have a material impact on the Company's financial
statements upon adoption.

RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition in conjunction with our
consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.

Revenue

Revenue from our business includes the sale of Mediasite recorders and server software products and related
services contracts, such as customer support, installation, training, content hosting and event services. We market
our products to educational institutions, corporations and government agencies that need to deploy, manage, index
and distribute video content on Internet-based networks. We reach both our domestic and international markets
through reseller networks, a direct sales effort and partnerships with system integrators.

Revenue in fiscal 2012 totaled $26.1 million, compared to $25.2 million in fiscal 2011, an increase of 3%. Revenue
consisted of the following:

• Product revenue from the sale of Mediasite recorder units and server software decreased from $12.8 million
in fiscal 2011 to $12.4 million in fiscal 2012. The product revenue decrease relates to an increase in
discounted upgrade recorders sold to customers whose product had reached the end of hardware warranty
eligibility (“refresh units”).

Units sold
Rack to mobile ratio
Average sales price, excluding support (000’s)
Refresh Units

2012
1,280
2.4 to 1
$9.4
434

2011
1,250
2.3 to 1
$9.6
327

 Services revenue represents the portion of fees charged for Mediasite customer support contracts amortized

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

over the length of the contract, typically 12 months, as well as training, installation, event and content
hosting services. Services revenue increased from $12.2 million in fiscal 2011 to $13.4 million in fiscal
2012 due primarily to an increase in event services as well as an increase in customer support contracts on
Mediasite recorder units. At September 30, 2012 $5.6 million of revenue was deferred, of which we expect
to recognize $5.3 million in the next twelve months, including approximately $2.2 million in the quarter
ending December 31, 2012. At September 30, 2011, $6.0 million of revenue was deferred.

 Other revenue relates to freight charges billed separately to our customers.

Gross Margin

Total gross margin in fiscal 2012 was $18.8 million or 72% compared to $17.9 million or 71% in fiscal 2011. Gross
margin increased due to operational efficiencies in recorder and services costs and a decrease in direct and
outsourced event labor costs with lower markups for services which the Company does not provide, such as closed
captioning. These improvements were partially offset by a greater volume of discounted upgrade units for customers
whose product had reached end of hardware warranty eligibility and by an increase in high definition material cost.
The significant components of cost of revenue include:

 Material and freight costs for the Mediasite recorders. Costs for fiscal 2012 Mediasite recorder hardware
and other costs totaled $4.7 million compared to $4.8 million in fiscal 2011. Freight costs were $369
thousand and labor and allocated costs were $863 thousand in fiscal 2012 compared to $369 thousand and
$813 thousand, respectively, in fiscal 2011.

 Services costs. Staff wages and other costs allocated to cost of service revenues were $1.4 million in both
fiscal 2012 and fiscal 2011, resulting in gross margin on services of 90% in fiscal 2012 and 89% in fiscal
2011.

The Company expects the gross margin percentage to remain consistent or higher in fiscal 2013 as total revenue
increases and as the Company benefits from manufacturing efficiencies anticipated in fiscal 2013.

Operating Expenses

Selling and Marketing Expenses

Selling and marketing expenses include wages and commissions for sales, marketing, business development
personnel, print advertising and various promotional expenses for our products. Timing of these costs may vary
greatly depending on introduction of new products and services or entrance into new markets, or participation in
major tradeshows.

Selling and marketing expense increased $1.1 million, or 10% from $10.76 million in fiscal 2011 to $11.84 million
in fiscal 2012. Increases in the major categories include:

 Salaries, incentive compensation, and benefits increased $246 thousand over the prior year due to slightly

higher staff levels in fiscal 2012 compared to fiscal 2011.

 Costs also increased by $144 thousand as a result of higher stock compensation expense and depreciation

expense.

 Tradeshow, market research and travel expense increased by $772 thousand due to an increase in the

number of tradeshows and market research agreements.

At September 30, 2012 we had 70 employees, excluding interns, in Selling and Marketing, an increase from 64
employees at September 30, 2011. We anticipate modest growth in Selling and Marketing headcount in fiscal 2013
to support future revenue growth.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities,
finance, legal, human resources and information technology departments, as well as other expenses not fully
allocated to functional areas.

G&A expenses increased slightly from $2.81 million in fiscal 2011 to $2.82 million in fiscal 2012. Professional
services increased by $72 thousand, mainly due to an increase in investor relations services. This was partially offset
by a decrease in compensation and benefits of $41 thousand.

At September 30, 2012 and September 30, 2011 we had 6 full-time employees in G&A. We do not anticipate
growth in G&A headcount in fiscal 2013.

Product Development Expenses

Product development (“R&D”) expenses include salaries and wages of the software research and development staff
and an allocation of benefits, facility and administrative expenses. Fluctuations in product development expenses
correlate directly to changes in headcount.

R&D expenses increased $541 thousand, or 15%, from $3.54 million in fiscal 2011 to $4.08 million in fiscal 2012.
Some significant differences include:



Increase in compensation and benefits of $540 thousand related to an increase in headcount and
performance related incentive compensation.

 Professional services decrease of $111 thousand, primarily related to payments made pursuant to a

consulting agreement with our former chief technology officer during the second half of fiscal 2011.

 Costs also increased by $122 thousand as a result of higher stock compensation expense and depreciation

expense.

At September 30, 2012 we had 33 employees, excluding interns, in Product Development compared to 24
employees at September 30, 2011. The increase in fiscal year 2012 headcount will result in an additional increase in
R&D compensation cost in fiscal 2013 as the full year effect of the current level of headcount is realized. We
anticipate a slight increase in R&D headcount in fiscal 2013. No fiscal 2012 or 2011 software development efforts
qualified for capitalization.

Severance Costs

On September 30, 2011, Rimas Buinevicius resigned his position as Chief Strategy Officer, Executive Chairman of
the Board, and Director. The Company agreed to pay Mr. Buinevicius, in equal bi-weekly installments over a one-
year period, an amount equal to one and five hundredths (1.05) multiplied by the highest cash compensation paid to
Mr. Buinevicius in any of the last three fiscal years immediately prior to his termination. Mr. Buinevicius’ unvested
stock options also immediately vested on September 30, 2011 upon termination. The consulting agreement with
Monty Schmidt, former Chief Technology Officer and Director, was also terminated in September 2011. The
remaining six months of Mr. Schmidt’s consulting agreement along with Mr. Buinevicius’ one year severance
agreement and immediately vested stock options total $528 thousand of expense and were fully recognized in fiscal
2011. These severance amounts were paid in full by September 30. 2012.

Other Income (Expense), Net

Under the equity method of accounting, we record our proportional share of earnings in Mediasite KK. We currently
own approximately 23% of their common stock. We recorded $420 thousand of net equity in earnings during fiscal
2012. Other income included primarily interest income from investments in overnight investment vehicles. Lower
interest rates led to a decrease in interest income from $6 thousand in fiscal 2011 to $2 thousand in fiscal 2012.
Other expense primarily consists of interest costs related to outstanding debt and amortization of a debt discount.
The refinancing of our debt obligations in the second half of fiscal 2011 was a driver of decreased interest expense

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

from $316 thousand in fiscal 2011 to $152 thousand in fiscal 2012. The primary driver of the decrease in interest
expense was non-cash interest associated with the amortization of debt discount relating to the issuance of warrants
of $142 thousand in fiscal 2011 and $32 thousand in fiscal 2012. The Company paid the balance of the note payable
to Partners for Growth in October 2011.

Provisions Related to Income Taxes

The Company records a non-cash deferred tax liability related to goodwill acquired in 2001. The related income tax
expense was $240 thousand for both fiscal 2012 and fiscal 2011. The Company netted an income tax credit of $29
thousand against this amount for fiscal 2011.

LIQUIDITY AND CAPITAL RESOURCES

We funded our operations primarily with cash generated from operations in fiscal 2012. On September 30, 2012 and
2011, we had cash and cash equivalents of $4.5 million and $5.5 million, respectively.

Cash provided by operating activities totaled $350 thousand in fiscal 2012 and $1.4 million in fiscal 2011, a
decrease of $1.1 million. Cash provided in fiscal 2012 was impacted by working capital changes including the
negative effects of an increase in inventory of $517 thousand, a decrease in unearned revenue of $385 thousand and
an increase of equity in earnings from investment in Mediasite KK of $420 thousand. These were offset by the
positive effects of increases in accounts payable, accrued liabilities and other long-term liabilities of $601 thousand
and a decrease in accounts receivable of $226 thousand. Cash provided in fiscal 2011 was impacted by working
capital changes including the negative effects of a $746 thousand increase in accounts receivable and an increase in
prepaid expenses and other assets of $307 thousand. These were offset by the positive effects of increases in
accounts payable, accrued liabilities and other long-term liabilities of $999 thousand.

Cash used in investing activities totaled $1.5 million in fiscal 2012 compared to cash used in investing activities of
$739 thousand in fiscal 2011. Investing activities for each of these two years were due to purchases of property and
equipment.

Cash provided by financing activities in fiscal 2012 totaled $69 thousand compared to $1.5 million in fiscal 2011.
Cash provided in fiscal 2012 was due primarily to proceeds from exercise of common stock options and issuance of
common stock of $379 thousand and $1.2 million of proceeds from notes payable. This was mostly offset by $1.5
million of cash used for payments on notes payable and capital leases. Cash provided in fiscal 2011 was due
primarily to proceeds from exercise of common stock options of $1.7 million and $800 thousand of proceeds from
notes payable. This was partially offset by $985 thousand of cash used for payments on notes payable.

The Company believes its cash position is adequate to accomplish its business plan through at least the next twelve
months. We will likely evaluate operating or capital lease opportunities to finance equipment purchases in the future
and anticipate utilizing the Company’s revolving line of credit to support working capital needs. We may also seek
additional equity financing, or issue additional shares previously registered in our available shelf registration,
although we currently have no plans to do so.

On June 27, 2011, Sonic Foundry and its wholly-owned subsidiary (the “Companies”) entered into the Second
Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the “Second Amended
Agreement”). Under the Second Amended Agreement, the revolving line of credit has a maximum principal amount
of $3,000,000. Interest accrues on the revolving line of credit at the per annum rate of one percent (1.0%) above the
Prime Rate (as defined), provided that Sonic Foundry maintains an Adjusted Quick Ratio (as defined) of greater
than 2.0 to 1.0, or one-and-one half percent (1.5%) above the Prime Rate, if Sonic Foundry does not maintain an
Adjusted Quick Ratio of greater than 2.0 to 1.0. The Second Amended Agreement does not provide for a minimum
interest rate on the revolving loan. The Second Amended Agreement also provides for an increase in the advance
rate on domestic receivables from 75% to 80%, and extends the facility maturity date to October 1, 2013. Under the
Second Amended Agreement, the existing term loan continues to accrue interest at a per annum rate equal to the
greater of (i) one percentage point (1.0%) above Silicon Valley Bank’s prime rate; or (ii) eight and three quarters
percent (8.75%). In addition, a new term loan can be issued in multiple draws provided that the total term loan from

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Silicon Valley Bank shall not exceed $2,000,000 and provided further that total term debt shall not exceed
$2,400,000. Under the Second Amended Agreement, any new draws on the term loan will accrue interest at a per
annum rate equal to the Prime Rate plus three and three quarters percent (3.75%). The Second Amended Agreement
does not provide for a minimum interest rate on the new term loan. Each draw on the new term loan will be
amortized over a 36-month period. All draws on the term loan were required to have been made within ten
(10) months of June 27, 2011. The Second Amended Agreement also requires Sonic Foundry to continue to comply
with certain financial covenants, including the maintenance of an Adjusted Quick Ratio (as defined) of at least 1.75
to 1.00 and of a Debt Service Coverage Ratio of at least 1.25 to 1.00, the latter of which will be waived if certain
funds are reserved. The Company maintains the revolving line of credit with Silicon Valley Bank and has $2.8
million available for borrowing at September 30, 2012.

Contractual Obligations

The following summarizes our contractual obligations at September 30, 2012 and the effect those obligations are
expected to have on our liquidity and cash flow in future periods (in thousands):

Total

Less than

Years 2-3

Years 4-5

Contractual Obligations:
Product purchase commitments
Operating lease obligations
Capital lease obligations (a)
Notes payable (a)

$ 1,317

3,981
274
1,541

1 Year
$ 1,317
602
138
743

$ ─
1,239
136
798

$ ─
1,298
─
─

Over 5
years
$ ─
842
─
─

(a) Includes fixed and determinable interest payments

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments

We are not party to any derivative financial instruments or other financial instruments for which the fair value
disclosure would be required under FASB ASC-815-10. Our cash equivalents consist of overnight investments in
money market funds that are carried at fair value. Accordingly, we believe that the market risk of such investments
is minimal.

Interest Rate Risk

Our cash equivalents are subject to interest rate fluctuations, however, we believe this risk is not significant due to
the short-term nature of these investments.

At September 30, 2012, all of our $1.4 million of debt outstanding is variable rate. We do not expect that an increase
in the level of interest rates would have a material impact on our Consolidated Financial Statements. We monitor our
positions with, and the credit quality of, the financial institutions that are party to any of our financial transactions.

Foreign Currency Exchange Rate Risk

All international sales of our products are denominated in US dollars.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Sonic Foundry, Inc.

We have audited the accompanying consolidated balance sheets of Sonic Foundry, Inc. and subsidiary (a
Maryland Corporation) (the “Company”) as of September 30, 2012 and 2011, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the years then ended. Our audits
of the basic consolidated financial statements included the financial statement schedule listed in the index
appearing under Item 15(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Sonic Foundry, Inc. and subsidiary as of September 30, 2012 and 2011, and the
results of their operations and their cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Milwaukee, Wisconsin
December 12, 2012

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

Assets
Current assets:

Cash and cash equivalents

Accounts receivable, net of allowances of $85 and $90

Inventories
Prepaid expenses and other current assets

Total current assets
Property and equipment:

Leasehold improvements
Computer equipment
Furniture and fixtures

Total property and equipment
Less accumulated depreciation and amortization

Net property and equipment

Other assets:
Goodwill
Investment in Mediasite KK
Other intangibles, net of amortization of $180 and $137

Total assets

Liabilities and stockholders' equity
Current liabilities:

Revolving line of credit
Accounts payable
Accrued liabilities
Accrued severance
Unearned revenue
Current portion of capital lease obligations
Current portion of notes payable
Total current liabilities

Long-term portion of unearned revenue
Long-term portion of capital lease obligations
Long-term portion of notes payable
Other liabilities
Deferred tax liability
Total liabilities

Commitments and contingencies

Stockholders' equity:

Preferred stock, $.01 par value, authorized 500,000 shares; none issued
5% Preferred stock, Series B, voting, cumulative, convertible, $.01 par value
(liquidation preference at par), authorized 1,000,000 shares, none issued
Common stock, $.01 par value, authorized 10,000,000 shares; 3,909,040 and
3,845,531 shares issued and 3,896,324 and 3,832,815 shares outstanding

Additional paid-in capital
Accumulated deficit
Receivable for common stock issued
Treasury stock, at cost, 12,716 shares

Total stockholders' equity

Total liabilities and stockholders' equity
See accompanying notes

September 30,

2012

2011

$ 4,478
5,578
1,053
757
11,866

$ 5,515
5,799
536
740
12,590

852
3,851
865
5,568
2,624
2,944

980
3,586
461
5,027
3,391
1,636

7,576
420
15
$ 22,821

7,576
-
38
$ 21,840

$ -
1,604
850
-
5,284
129
667
8,534

349
131
766
532
1,970
12,282

─

$ -
1,373
1,073
528
5,547
89
897
9,507

471
177
694
-
1,730
12,579

─

39
189,459
(178,764)
(26)
(169)
10,539
$ 22,821

38
188,339
(178,921)
(26)
(169)
9,261
$ 21,840

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

Revenue:
Product
Services
Other
Total revenue

Cost of revenue:
Product
Services
Total cost of revenue
Gross margin

Operating expenses:
Selling and marketing
General and administrative
Severance costs
Product development
Total operating expenses
Income from operations

Equity in earnings from investment in Mediasite KK
Interest expense
Other income, net
Total other income (expense), net
Income (loss) before income taxes
Provision for income taxes

Years Ended September 30,

2012

2011

$ 12,385
13,409
296
26,090

$ 12,784
12,187
251
25,222

5,883
1,363
7,246
18,844

11,841
2,815
-
4,079
18,735
109

420
(152)
20
288
397
(240)

5,957
1,354
7,311
17,911

10,755
2,811
528
3,539
17,633
278

-
(316)
6
(310)
(32)
(211)

Net income (loss)

$ 157

$ (243)

Income (loss) per common share:
Basic net income (loss) per common share
Diluted net income (loss) per common share

Weighted average common shares – Basic

– Diluted

See accompanying notes

$ 0.04
$ 0.04

$ (0.06)
$ (0.06)

3,857,161
3,907,888

3,748,840
3,748,840

Sonic Foundry, Inc.
Consolidated Statements of Stockholders' Equity
For the Year Ended September 30, 2012 and 2011
(in thousands)

Common
stock

Additional
paid-in
capital

Accumulated
Deficit

Receivable
for common
stock issued

Treasury
stock

Total

$ 37

$185,973

$ (178,678)

$ (26)

$ (169)

$ 7,137

─

1
─

664

1,670
─

─

─
(243)

─

─
─

─

─
─

664

1,671
(243)

188,339

(178,921)

(26)

(169)

9,261

─

1
─

742

134

244
─

─

157

─

─
─

─

─
─

742

134

245
157

$ 39

$189,459

$ (178,764)

$ (26)

$ (169)

$ 10,539

Balance,
September 30, 2010

Stock compensation and

other

Issuance of common

stock

Exercise of common
stock warrants and
options

Net loss
Balance,
September 30, 2011

Stock compensation and

other

Issuance of common

stock

Exercise of common

stock options

Net income
Balance,
September 30, 2012

See accompanying notes

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

Operating activities

Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

$ 157

$ (243)

Years Ended September 30,

2012

2011

Equity in earnings from investment in Mediasite KK
Amortization of other intangibles
Depreciation and amortization of property and equipment
Provision for doubtful accounts
Deferred taxes
Stock-based compensation expense related to stock options
Changes in operating assets and liabilities:

Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable, accrued liabilities and other long-term liabilities

Unearned revenue
Net cash provided by operating activities

Investing activities

Purchases of property and equipment
Net cash used in investing activities

Financing activities

Net proceeds from (payments on) revolving line of credit
Proceeds from notes payable
Payments on notes payable
Payments of loan fees
Proceeds from issuance of common stock
Proceeds from exercise of common stock warrants and options
Payments on capital leases
Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Supplemental cash flow information:

Interest paid

Non-cash transactions:

Property and equipment financed by accounts payable, accrued liabilities or capital lease

See accompanying notes

(420)
75
855
(5)
240
742

226
(517)
(17)
(601)
(385)
350

(1,456)
(1,456)

—
1,200
(1,390)
(20)
134
245
(100)
69

—
208
704
(15)
240
707

(746)
(78)
(307)
999
(55)
1,414

(739)
(739)

—
800
(985)
(21)
32
1,671
(15)
1,482

(1,037)
5,515
$ 4,478

2,157
3,358
$ 5,515

120

752

174

330

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

1. Basis of Presentation and Significant Accounting Policies

Business

Sonic Foundry, Inc. (the Company) is in the business of providing enterprise solutions and services for the web
communications market.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, Sonic Foundry Media Systems, Inc. All significant intercompany transactions and balances have been
eliminated. In 2012 and 2011, net income (loss) equaled comprehensive income (loss) as there were no items of
comprehensive income.

Under the equity method of accounting, the Company’s investment in unconsolidated affiliates are initially recorded
as an investment in the stock of an investee at cost and are adjusted on a quarterly basis for the carrying amount of
the investment to recognize the investor’s share of the earnings or losses of the investee after the date of the initial
investment.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of
America (US GAAP), management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expense during the period. Actual results could differ from
those estimates.

Revenue Recognition

General

Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered,
the sales price is fixed or determinable and collectability is reasonably assured. Revenue is deferred when
undelivered products or services are essential to the functionality of delivered products, customer acceptance is
uncertain, significant obligations remain, or the fair value of undelivered elements is unknown. The Company does
not offer customers the right to return product, other than for exchange or repair pursuant to a warranty or stock
rotation. The Company’s policy is to reduce revenue if it incurs an obligation for price rebates or other such
programs during the period the obligation and sale occurs. The following policies apply to the Company’s major
categories of revenue transactions.

Products

Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the
customer. Under the terms and conditions of the sale, this occurs at the time of shipment to the customer. Product
revenue currently represents sales of our Mediasite recorder and Mediasite related products such as our server
software.

Services

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

the hardware. The Company also sells installation, training, event webcasting, and customer content hosting
services. Revenue for those services is recognized when performed in the case of installation, training and event
webcasting services. Service amounts invoiced to customers in excess of revenue recognized are recorded as
deferred revenue until the revenue recognition criteria are met.

Revenue Arrangements that Include Multiple Elements

Under the software revenue recognition rules, the fee from a multiple-deliverable arrangement is allocated to each of
the undelivered elements based upon vendor-specific objective evidence (VSOE), which is limited to the price
charged when the same deliverable is sold separately, with the residual value from the arrangement allocated to the
delivered element. The portion of the fee that is allocated to each deliverable is then recognized as revenue when the
criteria for revenue recognition are met with respect to that deliverable. If VSOE does not exist for all of the
undelivered elements, then all revenue from the arrangement is typically deferred until all elements have been
delivered to the customer. All revenue arrangements, with the exception of hosting contracts, entered into prior to
October 1, 2010 and the sale of all software-only products and associated services have been accounted for under
this guidance.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

with embedded software using a cost plus margin approach with consideration for market conditions, such as the
impact of competition and geographic considerations, and entity-specific factors, such as the cost of the product and
the Company’s profit objectives. Management believes that ESP is reflective of reasonable pricing of that
deliverable as if priced on a stand-alone basis. When a sales transaction includes deliverables that are divided
between ASC Topic 605 and ASC Subtopic 985-605, the Company allocates the selling price using the relative
selling price method whereas value is allocated using an ESP for software developed using a percent of list price
approach. The other deliverables are valued using ESP or VSOE as previously discussed.

The Company also offers hosting services bundled with events services. The Company uses VSOE to establish
relative selling prices for its events services. The Company recognizes events revenue when the event takes place
and recognizes the hosting revenue over the term of the hosting agreement. The total amount of the arrangement is
allocated to each element based on the relative selling price method.

Reserves

The Company records reserves for stock balancing return rights, price adjustments, rebates, and sales incentives to
reduce revenue and accounts receivable for these and other credits granted to two of our distributors. Such reserves
are recorded at the time of sale and are calculated based on historical information (such as rates of product stock
rotations) and the specific terms of sales programs, taking into account any other known information about likely
customer behavior. If actual customer behavior differs from our expectations, additional reserves may be required.
Also, if the Company determines that it can no longer accurately estimate amounts for stock rotations and sales
incentives, the Company would not be able to recognize revenue until resellers sell the inventory to the final end
user.

Shipping and Handling

The Company’s shipping and handling costs billed to customers are included in other revenue. Costs related to
shipping and handling are included in cost of revenue and are recorded at the time of shipment to the customer.

Concentration of Credit Risk and Other Risks and Uncertainties

The Company’s cash and cash equivalents are deposited with two major financial institutions. At times, deposits in
these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any
losses on such amounts and believes that it is not exposed to any significant credit risk on these balances.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

receivable categories. These percentages are determined by a variety of factors including, but not limited to, current
economic trends, historical payment and bad debt write-off experience. Allowance for doubtful accounts for
accounts receivable was $85,000 at September 30, 2012 and $90,000 at September 30, 2011.

We had billings for Mediasite product and support services as a percentage of total billings to one distributor of
approximately 18% in 2012 and 24% in 2011 and to a second distributor of approximately 25% in 2012 and 26% in
2011. At September 30, 2012 and 2011, these two distributors represented 56% and 68%, respectively of total
accounts receivable.

Currently all of our product inventory purchases are from one third-party contract manufacturer. Although we
believe there are multiple sources of supply from other contract manufacturers as well as multiple suppliers of
component parts required by the contract manufacturers, a disruption of supply of component parts or completed
products, even if short term, would have a material negative impact on our revenues. At September 30, 2012 and
2011, this supplier represented 60% and 21%, respectively, of total accounts payable.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to
be cash equivalents.

Trade Accounts Receivable

The majority of the Company’s accounts receivable are due from entities in, or distributors or value added resellers
to, the education, corporate and government sectors. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not required. Accounts receivable are typically due within 30 days
and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the contractual payment terms are considered to be past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s
previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful
accounts. Interest is not accrued on past due receivables.

Inventory Valuation

Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units.
Inventory of completed units and spare parts are carried at the lower of cost or market, with cost determined on a
first-in, first-out basis.

Inventory consists of the following (in thousands):

Raw materials and supplies
Finished goods

Software Development Costs

September 30,

2012

2011

$ 216
837
$ 1,053

$ 232
304
$ 536

Internal software development costs are capitalized after technological feasibility is established. The capitalized
cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenue to
total projected product revenue, whichever is greater. To date, the period between achieving technological
feasibility, which the Company has defined as the establishment of a working model, typically occurs when the beta
testing commences, and the general availability of such software has been short and software development costs

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any internal
software development costs.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method for financial
reporting purposes. The estimated useful lives used to calculate depreciation are as follows:

Leasehold improvements
Computer equipment
Furniture and fixtures

Impairment of Long-Lived Assets

Years
5 to 10 years
3 to 5 years
5 to 7 years

We assess the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that
the fair value of these assets is less than the carrying value. Effective for fiscal 2012 with the adoption of ASU 2011-08,
“Testing Goodwill for Impairment”, we first assessed qualitative factors related to goodwill to determine whether it
is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill test. The more-likely-than-not threshold is
defined as having a likelihood of more than 50 percent. Using the qualitative assessment, we determined that the fair
value of goodwill is more likely than not greater than its carrying amount thus step two was not deemed necessary to
perform. The Company has recognized no such losses as of September 30, 2012 and 2011.

If we had determined that the fair value of goodwill is less than its carrying value, based upon the annual test or the
existence of one or more indicators of impairment, we would then measure impairment based on a comparison of the
implied fair value of goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is
greater than the implied fair value of goodwill, we would record an impairment charge for the difference.

Long-lived assets and intangible assets other than goodwill are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash
flows attributable to that asset. For the years ended September 30, 2012 and 2011, no events or changes in circumstances
occurred that required this analysis.

Advertising Expense

Advertising costs included in selling and marketing, are expensed when the advertising first takes place.
Advertising expense was $261 and $169 thousand for years ended September 30, 2012 and 2011, respectively.

Research and Development Costs

Research and development costs are expensed in the period incurred.

Income Taxes

Deferred income taxes are provided for temporary differences between financial reporting and income tax basis of
assets and liabilities, and are measured using currently enacted tax rates and laws. Deferred income taxes also arise
from the future benefits of net operating loss carryforwards. A valuation allowance equal to 100% of the net
deferred tax assets has been recognized due to uncertainty regarding the future realization.

The Company also accounts for the uncertainty in income taxes related to the recognition and measurement of a tax
position and measurement of a tax position taken or expected to be taken in an income tax return. The Company
follows the applicable accounting guidance on derecognition, classification, interest and penalties, accounting in
interim periods and disclosure related to the uncertainty in income tax positions.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts
payable and debt instruments. The book values of cash and cash equivalents, accounts receivable, debt and accounts
payable are considered to be representative of their respective fair values. The carrying value of capital lease
obligations, including the current portion, approximates fair market value as the fixed rate approximates the current
market rate of interest available to the Company.

Stock-Based Compensation

The Company uses a lattice valuation model to account for all employee stock options granted. The lattice valuation
model provides a flexible analysis to value options because of its ability to incorporate inputs that change over time,
such as actual exercise behavior of option holders. The Company uses historical data to estimate the option exercise
and employee departure behavior in the lattice valuation model. Expected volatility is based on historical volatility
of the Company’s stock. The Company considers all employees to have similar exercise behavior and therefore has
not identified separate homogenous groups for valuation. The expected term of options granted is derived from the
output of the option pricing model and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods the options are expected to be outstanding is based on the U.S. Treasury
yields in effect at the time of grant. Forfeitures are based on actual behavior patterns.

The fair value of each option grant is estimated using the assumptions in the following table:

Expected life
Risk-free interest rate
Expected volatility
Expected forfeiture rate
Expected exercise factor
Expected dividend yield

Years Ending September 30,
2011
2012

4.7 – 4.8 years
0.4%
51.4% - 64.0%
12.0%-13.1%
1.34 – 1.36
0%

4.4 – 4.8 years
0.4% - 1.4%
68.2% - 83.0%
12.8%-17.7%
1.15 – 1.32
0%

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Per Share Computation

Basic and diluted net income (loss) per share information for all periods is presented under the requirements of
FASB ASC-260-10. Basic earnings per share has been computed using the weighted-average number of shares of
common stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects
of options and warrants. In periods where the Company reports net income, diluted net income per share is
computed using common equivalent shares related to outstanding options and warrants to purchase common stock.
The numerator for the calculation of basic and diluted earnings per share is net income (loss). The following table
sets forth the computation of basic and diluted weighted average shares used in the earnings per share calculations:

Denominator for basic earnings per share
- weighted average common shares

Years Ending September 30,

2012

2011

3,857,161

3,748,840

Effect of dilutive options and warrants (treasury method)

50,727

─

Denominator for diluted earnings per share

- adjusted weighted average common shares

3,907,888

3,748,840

Options and warrants outstanding during each year, but not included in the
computation of diluted earnings per share because they are antidilutive

─

787,347

Recent Accounting Pronouncements

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

2. Commitments

The Company leases certain equipment under capital lease agreements expiring through March 2015. Such leases
are included in fixed assets with a cost of $375 thousand and accumulated depreciation of $76 thousand at
September 30, 2012. Minimum lease payments, including principal and interest, are summarized in the table below.

Fiscal Year (in thousands)

2013
2014
2015
Total payments
Less interest
Total

Capital

$ 138
119
17
274
(14)
$ 260

The Company leases certain facilities and equipment under operating lease agreements expiring at various times
through December 31, 2018. Total rent expense on all operating leases was approximately $526 thousand and $522
thousand for the years ended September 30, 2012 and 2011, respectively.

In November 2011, the Company occupied office space related to a lease agreement entered into on June 28, 2011.
The lease term is from November 2011 through December 2018. The lease includes a tenant improvement
allowance of $613 thousand that was recorded as a leasehold improvement liability and is being amortized as a
credit to rent expense on a straight-line basis over the lease term. At September 30, 2012, the unamortized balance is
$532 thousand.

The following is a schedule by year of future minimum lease payments under operating leases:

Fiscal Year (in thousands)

2013
2014
2015
2016
2017
Thereafter
Total

Operating

$ 602

614
625
641
657
842
$ 3,981

The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite
product. The Company has an obligation to purchase $1.3 million at September 30, 2012, which is not recorded on
the Company's Consolidated Balance Sheet.

The Company enters into license agreements that generally provide indemnification against intellectual property
claims for its customers as well as indemnification agreements with certain service providers, landlords and other
parties in the normal course of business. The Company has not incurred any material costs as a result of such
indemnifications and has not accrued any liabilities related to such obligations in the consolidated financial
statements.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

3. Credit Arrangements

On June 27, 2011, the Companies executed the Second Amended and Restated Loan and Security Agreement with
Silicon Valley Bank (the “Second Amended Agreement”). Under the Second Amended Agreement, the revolving
line of credit will continue to have a maximum principal amount of $3,000,000. Interest will accrue on the revolving
line of credit at the per annum rate of one percent (1.0%) above the Prime Rate (as defined), provided that Sonic
Foundry maintains an Adjusted Quick Ratio (as defined) of greater than 2.0 to 1.0, or one-and-one half percent
(1.5%) above the Prime Rate, if Sonic Foundry does not maintain an Adjusted Quick Ratio of greater than 2.0 to 1.0.
The Second Amended Agreement does not provide for a minimum interest rate on the revolving loan. The Second
Amended Agreement also provides for an increase in the advance rate on domestic receivables from 75% to 80%,
and extends the facility maturity date to October 1, 2013. Under the Second Amended Agreement, the existing term
loan will continue to accrue interest at a per annum rate equal to the greater of (i) one percentage point (1.0%) above
Silicon Valley Bank’s prime rate; or (ii) eight and three quarters percent (8.75%). In addition, a new term loan can
be issued in multiple draws provided that the total term loan from Silicon Valley Bank shall not exceed $2,000,000
and provided further that total term debt shall not exceed $2,400,000. Under the Second Amended Agreement, any
new draws on the term loan will accrue interest at a per annum rate equal to the Prime Rate plus three and three
quarters percent (3.75%). The Second Amended Agreement does not provide for a minimum interest rate on the new
term loan. Each draw on the new term loan will be amortized over a 36-month period. All draws on the term loan
must be made within ten (10) months of June 27, 2011. The Second Amended Agreement also requires Sonic
Foundry to continue to comply with certain financial covenants, including covenants to maintain an Adjusted Quick
Ratio (as defined) of at least 1.75 to 1.00 and Debt Service Coverage Ratio of at least 1.25 to 1.00, the latter of
which will be waived if certain funds are reserved.

At September 30, 2012, a balance of $1.4 million was outstanding on the term loans with Silicon Valley Bank and
no balance was outstanding on the revolving line of credit. At September 30, 2012, there was $2.8 million available
under this credit facility for advances. At September 30, 2012, the Company was in compliance with all covenants in
the Second Amended Agreement.

The Second Amended Agreement contains events of default that include, among others, non-payment of principal or
interest, inaccuracy of any representation or warranty, violation of covenants, bankruptcy and insolvency events,
material judgments, cross defaults to certain other indebtedness, and material adverse changes. The occurrence of an
event of default could result in the acceleration of the Companies’ obligations under the Second Amended
Agreement.

Pursuant to the Second Amended Agreement, the Companies pledged as collateral to Silicon Valley Bank
substantially all non-intellectual property business assets. The Companies also entered into an Intellectual Property
Security Agreement with respect to intellectual property assets.

Partners for Growth

On March 5, 2010, the Companies executed a $1,250,000 Loan and Security Agreement (the “Term Loan”) and a
$750,000 Revolving Loan and Security Agreement (the “Revolving Loan”) with Partners for Growth II, L.P.
(“PFG”), (collectively the “Agreements”).

On June 28, 2011, the Companies entered into a Consent and Modification No. 1 to Loan and Security Agreement
(“Consent and Modification Agreement”) with PFG. Under the Consent and Modification Agreement, PFG
consented to the Companies incurring additional indebtedness to Silicon Valley Bank, provided that total
outstanding term indebtedness owed to PFG and Silicon Valley Bank does not exceed $1,900,000.

The Term Loan accrued interest at 11.75% per annum with principal due in 36 equal monthly payments of $34,722
beginning April 1, 2011 and continuing through March 1, 2014. At September 30, 2011, a balance of $642 thousand
was outstanding on the Term Loan. In October 2011, the Company paid the remaining balance of the Term Loan.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

The annual principal payments on the term loans were as follows:

Fiscal Year (in thousands)

2013
2014
2015
Total

Common Stock Warrants

$ 667
633
133
$ 1,433

The Company has issued restricted common stock purchase warrants to various consultants and other third parties.
Each warrant represents the right to purchase one share of common stock. All warrants are currently exercisable.
The Company did not grant any warrants in fiscal 2012 or fiscal 2011. All such warrants are either valued and
expensed in full at the date of grant or valued at the date of grant and deferred over the term of the relevant contract
for services.

Exercise Prices

September 30, 2012

Expiration Date

Warrants Outstanding at

$ 23.50

750

Fiscal 2013

5. Stock Options and Employee Stock Purchase Plan

On March 5, 2009, Stockholders approved adoption of the 2009 Stock Incentive Plan (the “2009 Plan”). The 2009
Plan, beginning October 1, 2009, replaced two former employee stock option plans that terminated coincident with
the effectiveness of the 2009 Plan. On March 7, 2012, Stockholders approved an amendment to increase the number
of shares of common stock subject to this plan by 600,000 and to increase the number of shares for the directors’
stock option plan by 50,000 shares. The Company maintains a directors' stock option plan under which options may
be issued to purchase up to an aggregate of 100,000 shares of common stock. Each non-employee director, who is
re-elected or who continues as a member of the board of directors on each annual meeting date and on each
subsequent meeting of Stockholders, will be granted options to purchase 2,000 shares of common stock under the
directors’ plan, or at other times or amounts at the discretion of the Board of Directors.

Each option entitles the holder to purchase one share of common stock at the specified option price. The exercise
price of each option granted under the plans was set at the fair market value of the Company's common stock at the
respective grant date. Options vest at various intervals and expire at the earlier of termination of employment,
discontinuance of service on the board of directors, ten years from the grant date or at such times as are set by the
Company at the date of grant.

Compensation cost for options will be recognized in earnings, net of estimated forfeitures, on a straight-line basis
over the requisite service period.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

The number of shares available for grant under these plans at September 30 is as follows:

Shares available for grant at September 30, 2010
Options granted
Options forfeited
Shares available for grant at September 30, 2011
Stockholder approval to increase shares
Options granted
Options forfeited
Shares available for grant at September 30, 2012

Qualified
Employee
Stock Option
Plans

Director
Stock Option
Plans

327,300
(189,051)
13,634
151,883
600,000
(180,350)
30,393
601,926

19,500
(12,500)
–
7,000
50,000
(12,500)
–
44,500

The following table summarizes information with respect to outstanding stock options.

Years Ended September 30,

2012

2011

Weighted
Average
Exercise
Price

$ 11.52
9.03
5.75
11.12
$ 11.28

Weighted
Average
Exercise
Price

$ 10.98
12.64
10.08
11.69
$ 11.52

Options

764,718
201,551
(138,496)
(42,226)
785,547
535,668

Options

785,547
192,850
(42,499)
(89,618)
846,280
555,135

Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Weighted average fair value of options granted

during the year

$ 3.45

$ 5.39

The options outstanding at September 30, 2012 have been segregated into four ranges for additional disclosure as
follows:

Options Outstanding

Options Exercisable

Options
Outstanding at
September 30,
2012
478,370
200,801
121,801
45,308
846,280

Weighted
Average
Remaining
Contractual
Life
7.5
5.5
5.6
4.2

Weighted
Average
Exercise
Price
$ 7.53
13.04
15.89
33.63

Options
Exercisable at
September 30,
2012
263,179
146,533
100,115
45,308
555,135

Weighted
Average
Exercise
Price
$ 6.41
12.92
16.04
33.63

Exercise Prices
$ 4.20 to $9.90
10.10 to 14.83
15.00 to 19.40
21.40 to 46.90

At September 30, 2012, there was $687 thousand of total unrecognized compensation cost related to non-vested
stock-based compensation, including $91 thousand of estimated forfeitures. The cost is expected to be recognized
over a weighted-average life of 1.8 years.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

A summary of the status of the Company’s non-vested shares at September 30, 2012 and for the year then ended is
presented below:

Non-vested shares at October 1, 2011
Granted
Vested
Forfeited
Non-vested shares at September 30, 2012

Weighted Average

Grant Date
Fair Value
$ 5.05
3.45
4.31
4.27
$ 4.40

249,879
192,850
(123,531)
(28,053)
291,145

Stock-based compensation recorded in the year ended September 30, 2012 of $742 thousand was allocated $485
thousand to selling and marketing expenses, $43 thousand to general and administrative expenses and $214
thousand to product development expenses. Stock-based compensation recorded in the year ended September 30,
2011 of $707 thousand was allocated $482 thousand to selling and marketing expenses, $49 thousand to general and
administrative expenses and $176 thousand to product development expenses. Cash received from exercises under
all stock option plans and warrants for the years ended September 30, 2012 and 2011 was $245 thousand and $1.7
million, respectively. There were no tax benefits realized for tax deductions from option exercises for the years
ended September 30, 2012 and 2011. The Company currently expects to satisfy stock-based awards with registered
shares available to be issued.

The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which an aggregate of 100,000
common shares may be issued. The Shareholders approved an amendment to increase the number of shares of
common stock subject to the plan from 50,000 to 100,000 at the Company’s annual meeting in March 2011. All
employees who have completed 90 days of employment with the Company on the first day of each offering period
and customarily work twenty hours per week or more are eligible to participate in the Purchase Plan. An employee
who, after the grant of an option to purchase, would hold common stock and/or hold outstanding options to purchase
stock possessing 5% or more of the total combined voting power or value of the Company will not be eligible to
participate. Eligible employees may make contributions through payroll deductions of up to 10% of their
compensation. No participant in the Purchase Plan is permitted to purchase common stock under the Purchase Plan
if such option would permit his or her rights to purchase stock under the Purchase Plan to accrue at a rate that
exceeds $25,000 of the fair market value of such shares, or that exceeds 1,000 shares, for each calendar year. The
Company makes a bi-annual offering to eligible employees of options to purchase shares of common stock under the
Purchase Plan on the first trading day of January and July. Each offering period is for a period of six months from
the date of the offering, and each eligible employee as of the date of offering is entitled to purchase shares of
common stock at a purchase price equal to the lower of 85% of the fair market value of common stock on the first or
last trading day of the offering period. A total of 29,408 shares are available to be issued under the plan. There were
21,010 and 5,405 shares purchased by employees during fiscal 2012 and 2011, respectively. The Company recorded
stock compensation expense under this plan of $26 and $16 thousand during fiscal 2012 and 2011, respectively.
Cash received from issuance of stock under this plan was $134 and $32 thousand during fiscal 2012 and 2011,
respectively.

Income Taxes

The provision for income taxes consists of the following (in thousands):

Current tax benefit
Deferred income tax expense
Provision for income taxes

Years Ended September 30,

2012

2011

$ -
240
$ 240

$ (29)
240
$ 211

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

The reconciliation of income tax expense (benefit) computed at the U.S. federal statutory rate to income tax expense
(benefit) is as follows (in thousands):

Income tax expense (benefit) at U.S. statutory rate of 34%
Federal income tax refundable research credit
State income tax expense (benefit)
Permanent differences, net
Adjustment of temporary differences to income tax returns
Change in valuation allowance
Income tax expense

Years Ended September 30,

2012

2011

$ 135
-
105
93
264
(357)
$ 240

$ (11)
(29)
(2)
158
212
(117)
$ 211

The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows
(in thousands):

Deferred tax assets:
Net operating loss and other carryforwards
Common stock warrants
Allowance for doubtful accounts
Other
Total deferred tax assets

Valuation allowance
Goodwill amortization
Deferred tax liability for goodwill amortization

September 30,

2012

2011

$ 34,352
519
33
175
35,079

(35,079)
(1,970)
$ (1,970)

$ 34,444
460
35
249
35,188

(35,188)
(1,730)
$ (1,730)

At September 30, 2012, the Company had net operating loss carryforwards of approximately $88 million for U.S.
Federal and $51 million for state tax purposes. For Federal tax purposes, the carryforwards expire in varying
amounts between 2019 and 2032. For state tax purposes, the carryforwards expire in varying amounts between
2013 and 2031. Utilization of the Company’s net operating loss may be subject to substantial annual limitation due
to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss carryforwards before utilization. In addition,
the Company has research and development tax credit carryforwards of approximately $500 thousand, which expire
in varying amounts between 2017 and 2020.

Beginning with an acquisition in fiscal year 2002, the Company has amortized Goodwill for tax purposes over a 15
year life. Goodwill is not amortized for book purposes. Annual impairment tests are performed for book purposes
and the balance of goodwill is to be written down if impairment occurs. The impairment tests have not indicated
any goodwill impairment.

The difference between the book and tax balance of Goodwill creates a Deferred Tax Liability and an annual tax
expense. Because of the long term nature of the goodwill timing difference, tax planning strategies cannot be
applied related to the Deferred Tax Liability. The balance of the Deferred Tax Liability at September 30, 2012 was
$1.97 million and $1.73 million at September 30, 2011.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

In accordance with accounting guidance for uncertainty in income taxes, the Company has concluded that a reserve
for income tax contingencies is not necessary. The Company's practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. The Company had no accruals for interest and penalties on the
Company's consolidated balance sheets at September 30, 2012 and 2011, and has not recognized any interest or
penalties in the consolidated statement of operations for the years ended September 30, 2012 or 2011. The
Company’s tax rate differs from the expected tax rate each reporting period as a result of the aforementioned items.

The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company's tax years are
subject to examination by the U.S. and state tax authorities due to the carryforward of unutilized net operating
losses.

7. Savings Plan

The Company's defined contribution 401(k) savings plan covers substantially all employees meeting certain
minimum eligibility requirements. Participating employees can elect to defer a portion of their compensation and
contribute it to the plan on a pretax basis. The Company may also match certain amounts and/or provide additional
discretionary contributions, as defined. The Company made matching contributions of $316 and $229 thousand
during the years ended September 30, 2012 and 2011, respectively. The Company made no additional discretionary
contributions during 2012 and 2011.

8. Related-Party Transactions

The Company incurred fees of $186 and $220 thousand during the years ended September 30, 2012 and 2011,
respectively, to a law firm whose partner is a director and stockholder of the Company. The Company had accrued
liabilities for unbilled services to the same law firm of $30 and $50 thousand at September 30, 2012 and 2011,
respectively.

The Company recorded Mediasite product and customer support billings of $1.1 million and $861 thousand during
the years ended September 30, 2012 and 2011, respectively, to Mediasite KK, a Japanese reseller in which the
Company has an equity interest. Mediasite KK owed the Company $240 and $241 thousand on such billings at
September 30, 2012 and 2011, respectively. The Company accounts for its investment in Mediasite KK under the
equity method. The recorded value is $420 thousand and $0 at September 30, 2012 and 2011, respectively.

During the years ended September 30, 2012 and 2011, the Company had a loan outstanding to an executive totaling
$26 thousand. The loan is collateralized by Company stock.

9. Goodwill and Other Intangible Assets

Goodwill and intangible assets that have indefinite useful lives are not amortized but, instead, tested at least annually
for impairment. The Company assesses the impairment of goodwill on an annual basis or whenever events or changes
in circumstances indicate that the fair value of these assets is less than the carrying value.

If the Company determines that the fair value of goodwill is less than its carrying value, based upon the annual test or the
existence of impairment, the Company would then measure impairment based on a comparison of the implied fair value
of goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than the
implied fair value of goodwill, an impairment charge for the difference would be recorded. The Company performed its
annual goodwill impairment test as of July 1, 2012 and tested goodwill recognized in connection with the
acquisition of Mediasite and determined it was not impaired.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

The following tables present details of the Company’s total intangible assets at September 30, 2012 and 2011:

Life
(years)

Gross

Accumulated

Amortization at
September 30,
2012

Balance at
September 30,
2012

(in thousands)

Amortizable:
Loan origination fees

Non-amortizable goodwill
Total

7,576
$ 7,771

-
$ 180

$ 195
195

$ 180
180

$ 15
15

7,576
$ 7,591

Life
(years)

Gross

Accumulated

Amortization at
September 30,
2011

Balance at
September 30,
2011

$ 175
175

$ 137
137

7,576
$ 7,751

$ 137

$ 38
38

7,576
$ 7,614

(in thousands)

Amortizable:
Loan origination fees

Non-amortizable goodwill

Total

10.

Segment Information

The Company has determined that it operates in only one segment as it does not disaggregate profit and loss
information on a segment basis for internal management reporting purposes to its chief operating decision maker.

The Company’s long-lived assets maintained outside the United States are insignificant.

The following summarizes revenue by geographic region (in thousands):

United States
Europe and Middle East
Asia
Other

Total

11. Customer Concentration

Years Ended September 30,

2012

2011

$ 20,014
3,189
1,740
1,147
$ 26,090

$ 19,231
3,311
1,161
1,519
$ 25,222

In the fiscal year ended September 30, 2012 and 2011, two distributors represented 43% and 50% of total revenue.
At September 30, 2012 and 2011, these two distributors represented 56% and 68%, respectively, of total accounts
receivable.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

12. Quarterly Financial Data (unaudited)

The following table sets forth selected quarterly financial information for the years ended September 30, 2012 and
2011. The operating results are not necessarily indicative of results for any future period.

(in thousands except
per share data)

Revenue
Gross margin
Income (loss) from

operations

Net income (loss)
Basic and diluted net
income (loss) per
share

Quarterly Financial Data

Q4-’12 Q3-’12

Q2-’12

Q1-’12

Q4-’11* Q3-’11

Q2-’11

Q1-’11

$ 6,219
4,497

$ 7,757 $ 5,928 $ 6,185
4,507
4,284

5,555

$ 6,677
4,852

$ 7,090
4,928

$ 5,525
3,870

$ 5,930
4,261

(186)
(103)

399
559

(32)
(115)

(72)
(184)

(277)
(406)

361
212

(152)
(272)

346
223

$ (0.03)

$ 0.14

$ (0.03)

$ (0.05)

$ (0.11)

$ 0.06

$ (0.07)

$ 0.06

* During Q4-‘11, the Company recognized $528 thousand of expense due to executive severance compensation
triggered by the resignations of Rimas Buinevicius, former Executive Chairman of the Board, and Monty Schmidt,
former Chief Technology Officer.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Based on evaluations as of the end of the period covered by this report, our principal executive officer and principal
financial officer, with the participation of our management team, have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e), and 15d-15(e) under the Securities Exchange Act) were effective.

Limitations on the effectiveness of Controls and Permitted Omission from Management’s Assessment

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention or overriding of controls. Accordingly,
even effective internal controls can only provide reasonable assurance with respect to financial statement
preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f).

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, our management believes that, as of September 30, 2012, our internal control over
financial reporting was effective based on those criteria.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, we have not made any change to our internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by Item 10 of Form 10-K with respect to directors and executive officers is incorporated
herein by reference to the information contained in the section entitled “Proposal One: Election of Directors” and
“Executive Officers of Sonic”, respectively, in the Company’s definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2012 Annual
Meeting of Stockholders, which will be filed no later than January 28, 2013 (the “Proxy Statement”).

Item 405 of Regulation S-K calls for disclosure of any known late filings or failure by an insider to file a report
required by Section 16(a) of the Securities Act. This information is contained in the Section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.

Item 401 of Regulation S-K calls for disclosure of whether or not the Company has a financial expert serving on the
audit committee of its Board of Directors, and if so who that individual is. This information is contained in the
Section entitled “Meetings and Committees of Directors” in the Proxy Statement and is incorporated herein by
reference.

Item 407 of Regulation S-K calls for disclosure of whether or not the Company has an audit committee and a
financial expert serving on the audit committee of the Board of Directors, and if so, who that individual is. Item 407
also requires disclosure regarding the Company’s nominating committee and the director nomination process. This
information is contained in the section entitled “Meetings and Committees of Directors” in the Proxy Statement and
is incorporated herein by reference.

Sonic Foundry has adopted a code of ethics that applies to all officers and employees, including Sonic Foundry’s
principal executive officer, its principal financial officer, and persons performing similar functions. This code of
ethics is available, without charge, to any investor who requests it. Request should be addressed in writing to Mr.
Kenneth A. Minor, Corporate Secretary, 222 West Washington Avenue, Madison, Wisconsin 53703.

Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2012

ITEM 11.

EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated herein by reference to the information contained
in the sections entitled “Directors Compensation”, “Executive Compensation and Related Information” and
“Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of Form 10-K is incorporated herein by reference to the information contained
in the sections entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement. Information related to equity compensation plans is set forth in Item 5 herein.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS , AND DIRECTOR
INDEPENDENCE

The information required by Item 13 of Form 10-K is incorporated herein by reference to the information contained
in the section entitled “Certain Transactions” and “Meetings and Committees of Directors” in the Proxy Statement.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated herein by reference to the information contained
in the section entitled “Ratification of Appointment of Independent Auditors – Fiscal 2011 and 2012 Audit Fee
Summary” in the Proxy Statement.

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sonic foundry annual report 2012