Sonic Foundry Announces Third Quarter Results

Sonic Foundry[R] Inc. (NASDAQ: SOFO), a leading developer and marketer of digital media software products and services, today announced its financial results for the fiscal third quarter ended June 30, 2001.

Total revenues for the third quarter 2001 were $7.1 million compared to $6.7 million for the third quarter 2000. Software sales contributed $4.2 million of the total revenues for the quarter while Media services generated $2.9 million.

The Company achieved its goal of cash neutral operations by further reducing operating expenses, improving margins and focusing on strict working capital management. Operations contributed a modest $0.1 million of cash to partially offset non-operating uses of cash of $0.8 million including the settlement of a contract dispute and debt payments. Operating cash was positively impacted by decreasing days sales in receivables by 50% and inventories by 41% from prior year levels.

Losses before charges for goodwill were reduced to $1.8 million or $0.08 per diluted common share for the quarter, down from $7.5 million or $0.35 per share for the prior year quarter. Losses including amortization of goodwill and other intangibles were $8.5 million or $0.39 per diluted share for the current quarter and $14.3 million or $0.66 per share for the same period last year.

"We've met our objective in reaching a cash neutral operating model and the plan we implemented more than 7 months ago has proven successful," stated Rimas P. Buinevicius, Chairman and CEO. "This has all been accomplished through the most difficult economic times in recent memory. Our operating principles of quality, value and availability allow us to continue increasing competitive pressure as we steadfastly pursue deep market penetration throughout the digital media landscape."

The Company's strong showing of the newly released ACID[TM] Pro 3.0 drove significant growth of direct software sales over last year, partially offsetting industry wide weak retail business. This quarter's media services revenues increased over last year due to the full quarter impact of acquisitions made during the third quarter last year. Software gross margins improved as the Company continued to expand it's diversified distribution strategy by utilizing growing internal customer lists to promote electronic distribution of direct Internet sales.

During the quarter, the Company accomplished numerous product and service milestones that included:

• Final product engineering for Sony's Fall Screenblast[TM] rollout
• Introduction of the latest upgrade to ACID[TM], version 3.0
• Finalized engineering on new product Super Duper Music Looper[TM]
• Finalized engineering on VideoFactory[TM] 2.0
• Introduction of the first components of our Enterprise Content Management solution, which include the following applications;
  
  • Digital Media Restoration; a customized project management application being developed and hosted for entertainment customers
  • Media Vault Management; a web-enabled tool developed to allow our current conversion and duplication customers to access and manage the physical content they store in our vaults

"The economic downturn has not slowed the pace at which we continue to develop and innovate," stated Buinevicius. "We're very confident that our new product introductions and service offerings combined with our streamlined operations will allow us to weather the market cycle and continue establishing our offerings as the best in the industry."