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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K

(MARK ONE)

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   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES
           EXCHANGE ACT OF 1934
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                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000,
                                       OR

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<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
           SECURITIES
           EXCHANGE ACT OF 1934
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              FOR THE TRANSITION PERIOD FROM          TO

                         COMMISSION FILE NUMBER 0-28317
                            ------------------------
                              DIGIMARC CORPORATION
             (Exact name of registrant as specified in its charter)

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                    DELAWARE                                        94-3342784
        (State or other jurisdiction of                          (I.R.S. Employer
         incorporation or organization)                        Identification No.)
</TABLE>

               19801 SW 72ND AVE, STE 100, TUALATIN, OREGON 97062
               (Address of principal executive offices, Zip Code)

                                 (503) 885-9699
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.001 par value
                            ------------------------

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

    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. / /

    The aggregate market value of Common Stock held by non-affiliates of the
Registrant (based on the closing price for the Common Stock on the Nasdaq
National Market on February 28, 2001) was approximately $64.8 million. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

    As of February 28, 2001, there were 16,429,267 shares of the Registrant's
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

    The information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and certain information included
therein is incorporated into Part III of this report by reference.

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                               TABLE OF CONTENTS

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PART I

Item 1.       Business....................................................    2

Item 2.       Properties..................................................   14

Item 3.       Legal Proceedings...........................................   14

Item 4.       Submission of Matters to a Vote of Security Holders.........   14

PART II

Item 5.       Market for Registrant's Common Equity and Related
                Stockholder Matters.......................................   15

Item 6.       Selected Financial Data.....................................   15

Item 7.       Management's Discussion and Analysis of Financial Condition
                and Results of Operations.................................   16

Item 7A.      Quantitative and Qualitative Disclosures About Market
                Risk......................................................   23

Item 8.       Financial Statements and Supplementary Data.................   23

Item 9.       Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure..................................   23

PART III

Item 10.      Directors and Executive Officers of the Registrant..........   24

Item 11.      Executive Compensation......................................   24

Item 12.      Security Ownership of Certain Beneficial Owners and
                Management................................................   24

Item 13.      Certain Relationships and Related Transactions..............   24

PART IV

Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form
                8-K.......................................................   25
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                                     PART I

    THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET
FORTH UNDER "RISKS RELATED TO OUR BUSINESS" AND "RISKS RELATED TO OUR INDUSTRY"
AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS ANNUAL REPORT ON
FORM 10-K. WE ASSUME NO OBLIGATION TO UPDATE THIS INFORMATION.

ITEM 1:  BUSINESS

OVERVIEW

    Digimarc is a leading provider of patented digital watermarking technologies
that allow imperceptible digital code to be embedded in the printed or digital
versions of media content, such as commercial and consumer photographs, movies,
music, magazine advertisements, catalogs, product packages and valuable
documents like financial instruments, passports and event tickets. In addition
to a code that can be embedded within various types of media content, our
technologies include reader software that, as a resident application on PCs and
other devices, enables the recognition of these embedded codes. We believe our
technologies have many potential applications. We are developing products and
services to address what we believe are our two largest near-term market
opportunities--the deterrence of digital counterfeiting and piracy, and the
enhancement of Internet access and navigation. In addition, we continue to
pursue commercial applications in audio and video digital watermarking.

    Since the introduction of our first product in 1996, we have built a broad
technology platform that we believe has a range of applications. Our initial
products allowed copyright owners to deter the unintentional use of professional
digital imaging tools in producing unauthorized high-quality copies of their
images. We later developed image commerce applications that allowed customers to
persistently identify their protected properties and locate these properties
across the Internet, which further discourages their unauthorized distribution
and use.

    Today, our business focuses on providing media commerce solutions, including
copyright protection, and counterfeiting and piracy deterrence. We are currently
developing additional applications to address other forms of visual media such
as DVD video, and other distribution channels such as the Internet. The Digimarc
MediaBridge system is intended to enable imperceptible digital code to be
embedded within print media, such as magazine advertisements and articles,
direct mail, coupons, product packaging, stationery and envelopes, trading
cards, catalogs, credit cards, bank cards and business cards. When recognized by
PC cameras enabled by our patented reader technology, that code will
automatically launch the user directly to the specific Internet destination
chosen by the producer of the print media. In this way, we believe the Digimarc
MediaBridge system will deliver more efficient Internet navigation and access to
consumers and more effective means for print publications to link readers
directly to supplemental news and entertainment, and targeted e-commerce
points-of-sale.

PRODUCTS

    Our current and planned products are grouped along three lines of business:
Secure Documents, Media Commerce, and Digimarc MediaBridge. Each product line
offers systems generally including embedder software to place our digital
watermarks into content, and reader technology that is incorporated into digital
devices to detect, read and respond to the embedded code.

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SECURE DOCUMENTS

    We have relationships with a number of financial institutions that are
involved in the creation or protection of high-value documents. These
relationships include a development and license agreement with a consortium of
leading central banks related to deterring the use of personal computers in the
counterfeiting of currencies. This agreement accounted for the majority of our
revenues in 2000 and substantially all of our revenues in 1999, and is expected
to account for a majority of our revenues until we develop new sources of
revenue from products like the Digimarc MediaBridge system and new products and
services in our Media Commerce and Secure Documents product lines.

    We intend to pursue further development of our relationship with the
consortium of central banks to develop other sources of revenue by proposing
that we develop additional products and services for this customer over time and
by offering the benefits of the anti-counterfeiting system to, and developing
new product applications for, the issuers of other high-value documents. Our
planned document security products will use digital watermarking to authenticate
original documents, detect fraudulent documents and deter unauthorized
duplication or alteration of high-value documents such as passports, tax stamps,
tickets and financial instruments like securities, traveler's checks and
currencies.

MEDIA COMMERCE

    Our Media Commerce products provide a range of solutions, including
copyright communication, enabling online licensing, and other digital asset
control and management solutions. Media Commerce products and services include
those listed below:

    - Digital Images. Customers can protect their copyrights and enhance
      licensing opportunities for their images, using a number of applications.
      Image creators can use Digimarc plug-ins that are bundled with image
      editing applications from leading companies such as Adobe Systems, Corel,
      Micrografx and JASC Software. The Digimarc digital watermarking software
      development kit (SDK) provides a programmatic interface to digital
      watermark embedding, detection and reading, designed for integration into
      client and server products. Our SDK application enables real-time
      server-based watermarking, where digital watermarks carrying transactional
      data are added to images as they are delivered to customers. Our
      MARCCENTRE service is a central repository of registered ownership
      information that is accessible by Web users who view Digimarc-enhanced
      proprietary content with our patented reader technology. This service
      allows any user to view the information that the content owner wishes to
      register in MARCCENTRE. Our MARCSPIDER service searches the public Web for
      images containing our digital watermarks and produces reports on where and
      when such images are found. This service allows Web content developers,
      photographers, stock photography agencies and publishers of entertainment,
      sports and news images to track their works on the Web. In February of
      2001, Digimarc announced two new products that provide various new
      features and benefits to our customers:

       Digimarc ImageBridge-TM- Pro watermarking enables image specific
       licensing and commerce opportunities by enabling each image to direct
       customers to image specific information on their Web site. This extends
       the capabilities of our previous Digimarc ImageBridge watermarking beyond
       copyright communication to provide robust image commerce capabilities
       that aid in licensing images, finding similar images and support asset
       and rights management activities.

       Digimarc ReadMarc-TM- for Windows provides easier identification and
       reading of Digimarc ImageBridge and ImageBridge Pro watermarks integrated
       with Windows Explorer by allowing watermarks to be read from the Windows
       Explorer desktop without opening the image file or requiring an
       ImageBridge enabled image editing application. ReadMarc for Windows is a
       downloadable plug-in that allows image viewers to link to copyright
       information and owner contact information, review usage restrictions and
       learn about commerce opportunities.

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    - Video. Engineers from Digimarc, Macrovision Corporation and Koninklijke
      Philips Electronics N.V. have jointly developed prototypes of technology
      that can protect video programming on videocassettes, DVDs, cable or
      satellite transmissions from unauthorized copying to recordable DVDs, DVHS
      and multimedia personal computers. Digimarc and Philips have announced an
      intention to form a joint venture to develop and market new applications
      in video and audio markets.

    - Audio. The company believes that its technologies may be useful to the
      music industry to protect copyrights and provide enhanced entertainment
      and commercial opportunities to music consumers. We have not actively
      developed a business in this market to date, but have filed litigation
      against a proposed provider of digital watermarking applications to the
      music industry alleging infringement of certain of our patents.

DIGIMARC MEDIABRIDGE

    Digimarc MediaBridge provides the means to link directly from printed
documents to specific Web destinations by showing the enabled document to a Web
camera or by scanning the document using a Twain-compliant scanner, in each
case, enabled with our reader software. We believe that these enhanced documents
and associated reader technology will enable a variety of potential
applications.

    The Digimarc MediaBridge system is based on our patented core technology. We
believe that the system creates new communications capabilities for media
content that can promote and enhance e-commerce. The Digimarc MediaBridge system
is a fundamentally new way to access and use the Internet by embedding
imperceptible digital code in printed materials, including, among other things,
magazine advertisements, articles, covers and subscription cards, direct
mailers, product packaging, stationery and envelopes, trading cards, debit and
credit cards, greeting cards, coupons, catalogs, tickets and business cards that
can be read by digital devices enabled by our patented reader technology. We
believe that the same technology can be used to permit audio, video, images and
other creative properties in digital form to interact with the digital world.

TECHNOLOGY AND INTELLECTUAL PROPERTY

    Digimarc's watermarking technologies allow users to embed in images and
video a digital code that is imperceptible during normal use but readable by
computers and software. The science of creating these imperceptible codes is
known as digital watermarking. We are a leading owner of intellectual property
relating to digital watermarks and a pioneer in the commercial application of
this technology. Our technologies are supported by a broad patent portfolio
covering a wide range of methods and applications.

    Our core technology incorporates a method for embedding code within visual
images in digital formats, such as computer files; in physical representations,
such as print or film; and in audio content. Our most widely deployed systems
embed messages in images by making subtle changes to the brightness of the
pixels, creating messages that can be detected and decoded by hardware that has
been enabled with our patented reader technology. Whether in images, video or
audio, our embedding process generally adjusts to the unique characteristics of
the content, placing a stronger watermark signal in areas with rich detail and a
weaker watermark signal in areas with little detail. Because the message is
carried by the image's pixels, it is file-format independent. The message can
survive most normal compression, edits, rotation, scaling, file-format
transformations, copying, scanning and printing.

    The structure of the information in our digital watermark is modeled along
the lines of a network protocol. The watermark protocol consists of protocol
structure information, such as the type of message and protocol version, the
actual message data and error correction data. The protocol is designed to be
upgraded to accommodate new message types in the future, and is designed so that
later versions of our reader software will be able to read previously created
watermarks. The message

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in our watermarked content can carry identifying information, attributes and
instructions. This message is typically short in length so that it can be
replicated throughout the content many times. The information in the message can
uniquely identify the content, link to Web destinations or databases,
communicate information about the content, enable tracking of the content or
convey instructions for software or devices.

    To protect our significant efforts in creating these technologies, we have
implemented an extensive intellectual property protection program that relies
upon a combination of patent, copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual provisions. We have adopted an
aggressive patent strategy. We believe that we have established one of the
world's most extensive patent portfolios in the field of digital watermarking,
holding 22 U.S. issued patents with 176 U.S. patent applications on file as of
December 31, 2000. We also believe, based on published patents, that we hold
some of the earliest invention dates on issued patents in the field of digital
watermarking and that some of these early patents may be of significant value to
our competitive position. We also own registered trademarks in both the U.S. and
other countries and have applied for other trademarks and have licensed rights
to other technologies. We seek to protect new product applications through both
existing patents and filings for new patents.

    Although we devote significant resources to developing and protecting our
technologies, and periodically evaluate potential competitors of our
technologies for infringement of our intellectual property rights, these
infringements may nonetheless go undetected or may arise in the future. We
expect that infringement claims may increase as companies become more concerned
with protecting their content from electronic copying. We cannot assure you that
the protection of our proprietary rights will be adequate or that our
competitors will not independently develop similar technologies, duplicate our
services or design around any patents or other intellectual property rights we
hold.

COMPETITION

    The markets in which we compete are emerging, highly competitive, fragmented
and characterized by rapidly changing technology and evolving standards. We face
competition in the overall digital watermarking market as well as in each of the
market segments where our products and services compete. We believe that the
principal competitive factors in the markets for our products are functionality,
interoperability with major hardware and software platforms, and the costs, time
to implementation and support services associated with the installation of new
products and services. We have experienced and expect to continue to experience
competition from enterprises in high-technology industries that are developing
watermarking capabilities of their own, many of whom have significantly greater
financial, technical and marketing resources than we have.

    Digimarc's major competition comes from the internal development efforts at
high-technology companies. Internal technology departments have staffed projects
to build their own watermarking systems utilizing a variety of tools. The
competitive factors in this area require that we generate a product that
conforms to the customer's technology standards, scales to meet the needs of
large enterprises, operates globally and costs less than the results of an
internal development effort.

    Our video copy prevention and play control solution for DVD faces intense
competition. Our consortium, comprised of Digimarc, Macrovision and Philips, is
competing with a larger consortium comprised of IBM, NEC, Sony, Hitachi and
Pioneer.

    Most competition in the secure documents market comes from traditional
security features, such as holograms, security threads, special inks, and
laminates which compete for the portion of the production budget reserved for
security features, and machine-readable features, such as Scrambled Indicia, two
dimensional barcodes, Glyphs from Xerox, and data-carrying magnetic stripes.

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    Our Internet-based technology faces competition from companies that provide
Internet portals, and search and directory services. For example, we compete
with search engines, including Google, Excite@Home, Inktomi and AltaVista, for
the traffic generated by Internet users seeking links to third-party content to
address their online information needs. We also compete with directory services,
such as Yahoo! and LookSmart, because they provide alternative ways for users to
obtain the desired information.

    Our current and potential competitors, irrespective of the technology they
use or intend to use, may have well-established relationships with current and
potential customers of ours, extensive knowledge of the markets targeted by us,
better name recognition, and more extensive financial, development, sales and
marketing resources than we have. Therefore, our competitors' products may
achieve greater market acceptance than those offered by us. The development and
marketing of competing software may reduce the marketability of our products and
therefore may harm our business, operating results and financial condition.

    Our business is characterized by extensive research efforts and rapid
technological change. To remain competitive, we will be required to expand and
enhance the functionality of our watermarking software and reader technologies.
Company sponsored research and development expenditures for 2000, 1999, and 1998
were $4.3 million, $1.1 million, and $0.7 million, respectively. New
developments are expected to continue, and there can be no assurance that
discoveries by others, including current and potential competitors and internal
development efforts, will not render our services and products noncompetitive.
Because of rapid technological change, we may be required to expend greater
amounts in the development of each new product than currently anticipated, which
in turn will require greater revenue to recoup such expenditures.

EMPLOYEES

    As of December 31, 2000, we had 172 full-time employees, including 69 in
sales, marketing and technical support, 77 in research, development and
engineering, and 26 in finance, administration, legal and corporate
communications. Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. Our employees are not
covered by any collective bargaining agreement, and we have never experienced a
work stoppage. We believe that our relations with our employees are good.

RISKS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY AND ARE SUBJECT TO THE RISKS ENCOUNTERED BY
  EARLY-STAGE COMPANIES

    We incorporated in January 1995. Accordingly, we have a limited operating
history, and our business and prospects must be considered in light of the risks
and uncertainties to which early-stage companies in new and rapidly evolving
markets, such as digital watermarking, are exposed. These risks include the
following:

    - our developing revenue models and our current and anticipated products and
      services may be unable to attract or retain customers;

    - the intense competition and rapid technological change in our industry
      could adversely affect the market's acceptance of our products and
      services;

    - we may be unable to build and maintain our brand;

    - we may be unable to develop and maintain the strategic relationships upon
      which we currently rely for our revenue; and

    - our quarterly operating results may fluctuate significantly.

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    We cannot assure you that our business strategy will be successful or that
we will successfully address these risks and the risks described below.

WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES; WE CANNOT ASSURE YOU THAT
  WE WILL ACHIEVE PROFITABILITY

    We have incurred significant net losses since inception and we expect to
incur a loss for the 2001 fiscal year in light of our planned operating
expenditures. We incurred net losses of $15.8 million in 2000. We have not been
profitable and cannot assure you that we will realize sufficient revenue to
achieve profitability. Our accumulated deficit as of December 31, 2000 was
approximately $28.2 million. In order to achieve profitability, we will need to
generate significantly higher revenue than we have in prior years. Even if we
ultimately achieve profitability, we may not be able to sustain or increase our
profitability. We anticipate that we will increase our research and development,
sales and marketing, product development and general and administrative expenses
for the foreseeable future. If our revenue grows more slowly than we anticipate,
or if our operating expenses exceed our expectations, our operating results will
be harmed and we may not be profitable.

MOST OF OUR SIGNIFICANT REVENUE MODELS ARE UNDER DEVELOPMENT, AND THE
  CORRESPONDING ANTICIPATED PRODUCTS AND SERVICES MAY FAIL TO ATTRACT OR RETAIN
  CUSTOMERS

    Our business involves embedding digital watermarks in traditional and
digital media, including secure documents, images on the Internet and video
merchandise. Our current applications include media commerce and counterfeiting
and piracy deterrence. To date, our revenue stream has been based primarily on a
combination of development, consulting, subscription and license fees from
copyright communication, from Secure Document applications, and in recent
periods, increasingly from Media Commerce applications. In the future, we
anticipate that an increasing share of our revenue will be from sales of our
Digimarc MediaBridge system, which was released in the second half of 2000, and
sales of other applications of our digital watermarking technologies. We have
not fully developed a revenue model for the Digimarc MediaBridge system, or for
our other future applications. In addition, because these products are not yet
fully established in the marketplace and because these products will be sold in
new and undeveloped markets, we cannot be certain that the pricing structure and
product marketing that are developed and are currently developing for these
products will be accepted. If we do not successfully develop, market and support
the Digimarc MediaBridge system, it is likely that our future revenue will fall
below our targeted objectives. Any shortfall in revenue from the Digimarc
MediaBridge system or our other future applications could reduce the trading
price of our common stock. We believe that it is too early to determine whether
revenue from these applications will meet our objectives, and whether the
revenue models that we are currently developing and may develop in the future
will be successful or require changes after adoption. We cannot assure you that
our anticipated products and services will be able to compete effectively
against other alternative technologies in our target markets or that we will be
able to compete effectively against current or future digital watermark
companies in terms of price, performance, applications or other features of
their technologies. In addition, as we develop models for generating revenue,
they may not be sustainable over time, and as a result, our business, operating
results and financial condition may seriously be harmed.

BECAUSE WE CURRENTLY RECEIVE 76% OF OUR REVENUE FROM A SINGLE CUSTOMER, THE LOSS
  OF THIS CUSTOMER WOULD SERIOUSLY HARM OUR BUSINESS, OPERATING RESULTS AND
  FINANCIAL CONDITION

    We have derived a substantial portion of our revenue from a consortium of
leading central banks with which we have a development and license agreement
related to banknote counterfeit deterrence. Revenue from products and services
provided to this significant customer accounted for 76% of our total revenue in
2000 and 89% of our total revenue in 1999. We anticipate that this relationship
will account for a majority of our revenue until we are able to generate
additional revenue from the introduction of other new products and services that
we are developing. The customer has a

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discretionary right of early termination with respect to the agreement. Unless
the customer exercises this right, we expect revenue under the agreement to
continue at or above current levels for the next year, which concludes our
initial agreement with the consortium of banks. While we are optimistic that the
agreement will be renewed for future periods, we cannot guarantee that this will
happen.

    Under the terms of our agreement with this customer, we are obliged to keep
the identity of the participating banks, design of the system and timetable for
deployment confidential. Any change in our relationship with this customer,
including any actual or alleged breach of the contract by either party or the
early termination of, or any other material change in, the agreement would
seriously harm our business, operating results and financial condition.

OUR FUTURE GROWTH WILL DEPEND ON THE SUCCESSFUL IMPLEMENTATION OF OUR PRODUCT
  SOLUTIONS BY THIRD-PARTY PARTNERS

    The Digimarc MediaBridge system and other applications and services that we
intend to provide in the future will rely on the successful implementation of
our product solutions, including our reader technology, by third-party software
developers and original equipment manufacturers. We anticipate maintaining and
entering into agreements with third-party vendors to create and promote products
that incorporate, embed, integrate or bundle our technologies. If we fail to
obtain partners that will incorporate, embed, integrate or bundle our
technologies, or these partners are unsuccessful in their efforts, our business,
operating results and financial condition could be seriously harmed. In
addition, if our technologies do not perform according to market expectations,
our business will be seriously harmed.

OUR FUTURE QUARTERLY OPERATING RESULTS MAY NOT MEET ANALYSTS' EXPECTATIONS AND
  MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR
  STOCK PRICE

    Our quarterly operating results have fluctuated significantly in the past,
and we expect that our quarterly operating results will fluctuate significantly
in the future. Our operating results are difficult to forecast because of our
limited operating history. Accordingly, you should not rely on
quarter-to-quarter comparisons of our historical results as an indication of
future performance or any trend in our performance. If our quarterly operating
results do not meet the expectations of analysts or investors, the market price
of our common stock will likely decline.

    Our quarterly results may fluctuate in the future as a result of many
factors, some of which are outside our control, including:

    - the timing, introduction and successful commercialization of our new
      products and services;

    - the timing and success of our brand-building and marketing campaigns;

    - the loss of or reduction in revenue from the customer that currently
      accounts for 76% of our total revenue or any other significant customer;

    - the market's acceptance of our products and services, including the
      Digimarc MediaBridge system;

    - our ability to establish and maintain strategic relationships;

    - the potential costs of litigation and intellectual property protection;

    - the operating costs and capital expenditures related to the expansion of
      our business operations and infrastructure, domestically and
      internationally, including the hiring of key personnel and new employees;

    - the introduction of similar or substitute technologies by our competitors;

    - the timing of future licensing revenue; and

    - the marketing arrangements that we enter into during early market
      development.

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    In addition, because the markets for our products and services are new and
rapidly evolving, it is difficult for us to predict our future financial
results. Our research and development, sales and marketing efforts and business
expenditures are based in part on our expectations regarding developments in
counterfeiting and piracy, and our estimates as to the use of digital
watermarking as a solution to those problems. To the extent that these
predictions prove inaccurate, our revenue and operating results will fluctuate
from our anticipated results.

THE MARKETS FOR DIGITAL WATERMARK APPLICATIONS ARE NEW AND DEVELOPING

    Digital watermarking is a new and developing technology. Our success depends
on the acceptance of this technology and the adoption of applications in areas
such as digital media commerce, counterfeiting and piracy deterrence and
self-authentication of documents. The markets for products and services using
digital watermarks are rapidly evolving and are characterized by an increasing
number of market entrants who have introduced or developed products and services
using digital watermarking or alternative technologies. As is typical in a new
and rapidly evolving industry, demand and market acceptance of recently
introduced products and services are subject to a high level of uncertainty. Our
products and services are currently used by only a limited number of customers.
It is difficult to predict the future growth rate, if any, and ultimate size of
these markets or our anticipated future markets. We cannot assure you that
markets for our products and services will develop.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY
  BE SUBJECT TO INFRINGEMENT CLAIMS

    Our success depends on our proprietary technologies. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. Recently, we have offered to license some of our
technologies to parties involved with the Secure Digital Music Initiative under
its directives. We face risks associated with our patent position, including the
potential need to engage in significant legal proceedings to enforce our
patents, the possibility that the validity or enforceability of our patents may
be denied, the possibility that third parties will be able to compete against us
without infringing our patents and the possibility that our products may
infringe patent rights of third parties. If we fail to protect our intellectual
property rights and proprietary technologies adequately, if there are changes in
applicable laws that are adverse to our interests, or if we become involved in
litigation relating to our intellectual property rights and proprietary
technologies or relating to the intellectual property rights of others, our
business could be seriously harmed.

    As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, consultants and corporate
partners, and attempt to control access to and distribution of our technologies,
documentation and other proprietary information. Despite these procedures, third
parties could copy or otherwise obtain and make unauthorized use of our
technologies or independently develop similar technologies. The steps that we
have taken to prevent misappropriation of our solutions or technologies may not
prevent their misappropriation, particularly in foreign countries where laws or
law enforcement practices may not protect our proprietary rights as fully as in
the United States.

    Effective protection of intellectual property rights may be unavailable or
limited, both in the United States and in foreign countries. Patent protection
throughout the world is generally established on a country-by-country basis. We
have applied for patent protection both inside the United States and in various
countries outside the United States. However, we cannot assure you that pending
patents will issue or that issued patents will be valid or enforceable. We
cannot assure you that the protection of our proprietary rights will be adequate
or that our competitors will not independently develop similar technologies,
duplicate our services or design around any patents or other intellectual
property rights we hold.

                                       9
<PAGE>
    We license some rights management technology from a third party, and may
need the assistance of this third party to enforce our rights to this
technology. Although we do not currently rely on this technology for our core
products, we may in the future. The cooperation of any third party in
enforcement of patent rights we may license cannot be assured.

    We have registered "DIGIMARC" "MARCSPIDER" "MARCCENTRE" "PICTUREMARC" and
the "D" logo as trademarks in the United States and other countries, and are
pursuing registration of the "DIGIMARC" trademark in additional countries. We
also have trademark rights with respect to "MediaBridge" and are pursuing
registration of this mark in the United States and other countries. However, our
tradenames or trademarks may be registered by third parties in other countries,
impairing our ability to enter and compete in these markets. In the United
States, the trademarks "Digimark" and "Mediabridge" and the domain names
"Digimark.com" and "Mediabridge.com" have been registered by unrelated
companies. While we have successfully co-existed with these other companies, we
cannot assure you that this state of affairs will continue. If we were forced to
change our name or were prevented from using our other brand names, including
MediaBridge, we would lose a significant amount of our brand equity, and our
business would suffer.

    As more companies enter the digital watermark marketplace and develop
intellectual property rights, it is increasingly likely that claims may arise
which assert that some of our products or services infringe upon other parties'
intellectual property rights. These claims could subject us to costly
litigation, divert management resources and result in the invalidation of our
intellectual property rights. These claims may require us to pay significant
damages, cease production of infringing products, terminate our use of
infringing technologies or develop non-infringing technologies. In these
circumstances, continued use of our technologies may require that we acquire
licenses to the intellectual property that is the subject of the alleged
infringement, and we might not be able to obtain these licenses on commercially
reasonable terms or at all. Our use of protected technologies may result in
liability that threatens our continuing operation.

THE SECURITY SYSTEMS THAT WE USE IN OUR PROPRIETARY TECHNOLOGIES MAY BE
  CIRCUMVENTED BY THIRD PARTIES, WHICH COULD DAMAGE OUR REPUTATION AND DISRUPT
  OUR BUSINESS

    Our products and services involve the embedding of digital code in media
content that is imperceptible in normal use but that can be read by
digitally-enabled devices. The success of our products and services depends on
the security of our media commerce, anti-counterfeiting and piracy systems and
self-authentication solutions. Security breaches of these systems and solutions
could damage our reputation and expose us to a risk of loss or litigation and
possible liability. The security measures that we use in our products and
services may not prevent security breaches, and failure to prevent these
security breaches may disrupt our business. A party who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions or otherwise damage our products and services and the properties
of our customers. If unintended parties obtain sensitive data and information,
or create bugs or viruses in an attempt to sabotage the functionality of our
products and services, we may receive negative publicity, incur liability to our
customers or lose the confidence of our customers, any of which may cause the
termination or modification of our contracts.

    We may be required to expend significant capital and other resources to
protect ourselves against the threat of security breaches or to alleviate
problems caused by these breaches. However, protection may not be available at a
reasonable price or at all.

OUR PRODUCTS COULD HAVE UNKNOWN DEFECTS

    Products as complex as those we offer or develop frequently contain
undetected defects or errors. Despite testing, defects or errors may occur in
existing or new products, which could result in loss of revenue or market share,
failure to achieve market acceptance, diversion of development resources,

                                       10
<PAGE>
injury to our reputation, increased insurance costs and increased service and
warranty costs, any of which could materially harm our business. Furthermore, we
often provide implementation, customization, consulting and other technical
services in connection with the implementation and ongoing maintenance of our
products. The performance of these products typically involves working with
sophisticated software, computing and communications systems. Our inability to
meet customer expectations or project milestones in a timely manner could also
result in a loss of, or delay in, revenue, loss of market share, failure to
achieve market acceptance, injury to our reputation and increased costs.

    Because customers rely on our products for critical security applications,
defects or errors in our products might discourage customers from purchasing our
products. These defects or errors could also result in product liability or
warranty claims. Although we attempt to reduce the risk of losses resulting from
these claims through warranty disclaimers and liability limitation clauses in
our sales agreements, these contractual provisions may not be enforceable in
every instance. Furthermore, although we maintain errors and omissions
insurance, this insurance coverage may not adequately cover these claims. If a
court refused to enforce the liability-limiting provisions of our contracts for
any reason, or if liabilities arose that were not contractually limited or
adequately covered by insurance, our business could be materially harmed.

WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH AND EXPANSION THAT MAY
  HARM OUR BUSINESS

    As of December 31, 2000 we had 172 employees. In addition, we expect that we
need to hire a total of approximately 40 additional employees in all areas in
2001. To manage this expected growth, our management must continue to improve
our operational and financial systems and expand, train, retain and manage our
growing employee base. Additional growth of our product lines or business
couldsignificantly strain our managerial and financial resources. If we cannot
manage our growth effectively, we may not be able to coordinate the activities
of our technical, accounting and marketing staffs, and our business could be
harmed.

WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES; IF WE DO, WE MAY BE UNABLE TO
  INTEGRATE THEM WITH OUR OWN BUSINESS, OR WE MAY IMPAIR OUR FINANCIAL
  PERFORMANCE

    While from time to time we have discussions with third parties about
potential acquisitions, we do not currently have any understandings, commitments
or agreements with respect to any acquisition. If appropriate opportunities
present themselves, we may attempt to acquire other businesses or technologies.
We may not be able to identify, negotiate or finance any future acquisition
successfully. Even if we do succeed in acquiring a business, technology, service
or product, we have limited experience in integrating an acquisition into our
business. The process of integration may produce operating difficulties and
expenditures and may require significant attention of our management that
otherwise would be available for the ongoing development of our business.
Moreover, if we make acquisitions, we may issue shares of stock that dilute our
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might negatively affect our financial results and cause our stock price to
decline. Any financing that we might need for future acquisitions may also place
restrictions on our business. We may never achieve any of the benefits that we
might anticipate from a future acquisition.

WE DEPEND ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS

    Our success depends to a significant extent on the performance and continued
service of our senior management. None of our senior management has an
employment agreement. Although our employees have executed agreements containing
non-competition clauses, there is no assurance that a court would enforce all of
the terms of these clauses or the clauses generally. If these clauses were not
fully enforced, our employees would be freely able to join our competitors. In
addition, we currently

                                       11
<PAGE>
have key person life insurance only on Bruce Davis, our president and chief
executive officer, and Geoffrey Rhoads, our chief technology officer. The loss
of the services of any of our senior management or any of our other key
employees could harm our business.

IF WE ARE NOT ABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL, OUR
  BUSINESS MAY BE HARMED

    The recent growth in our business has resulted in an increase in the
responsibilities for both existing and new management personnel. Many of our
personnel are presently serving in more than one capacity. In addition, we
expect that we will need to hire a total of approximately 40 additional
employees in all areas in 2001. Competition for experienced personnel in our
market segments is intense. We may not be able to retain our current key
employees or attract, integrate or retain other qualified personnel in the
future. If we do not succeed in attracting new personnel or in integrating,
retaining and motivating our current personnel, our business could be harmed. In
addition, because our business is based on our patented technology, which is
unique and not generally known, new employees will require substantial training,
which will require substantial resources and management attention.

OUR PROMOTION OF THE DIGIMARC BRAND MUST BE SUCCESSFUL IN ORDER FOR US TO
  ATTRACT USERS AS WELL AS ADVERTISERS AND OTHER STRATEGIC PARTNERS

    We believe that establishing and maintaining our brand is critical to our
success and that the importance of brand recognition will increase due to the
growing number of technologies that compete with our watermarking technologies
and the increasing number of competitors offering technologies similar to ours.
We intend to increase our marketing and branding expenditures in our effort to
increase awareness of our brand. If our brand-building strategy is unsuccessful,
these expenses may never be recovered, we may be unable to increase our future
revenue and our business could be seriously harmed.

FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE

    We currently have 100,000,000 shares of common stock authorized for
issuance. We may sell additional shares of common stock to third parties in the
future. Sales of a substantial number of shares of our common stock could
adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of additional equity securities.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY
  TRANSACTIONS THAT COULD BE PROFITABLE FOR OUR STOCKHOLDERS FROM OCCURRING

    The anti-takeover provisions of Delaware law and our certificate of
incorporation and bylaws may make a change of control of us more difficult, even
if a change of control would be beneficial to our stockholders. These provisions
may allow our board of directors to prevent changes in management and control of
us. Under Delaware law, our board may adopt additional anti-takeover measures in
the future.

    We have the following anti-takeover provisions in our charter documents:

    - our board of directors is divided into three classes of directors, with a
      separate class of directors being elected at each successive annual
      meeting for a term of three years;

    - special meetings of the stockholders may be called only by our president,
      our secretary or at the discretion of our board of directors;

    - vacancies on our board of directors may be filled by a majority of
      directors in office, and not by the stockholders; and

                                       12
<PAGE>
    - our board of directors may issue preferred stock and determine the price,
      rights, preferences and privileges of those shares without any vote or
      further action by the stockholders.

    These provisions could have the effect of discouraging a third party from
making a tender offer or otherwise attempting to gain control of us. In
addition, these provisions could limit the price that investors might be willing
to pay in the future for shares of our common stock.

RISKS RELATED TO OUR INDUSTRY

IF WE ARE UNABLE TO RESPOND TO REGULATORY OR INDUSTRY STANDARDS EFFECTIVELY, OUR
  BUSINESS COULD BE HARMED

    Our future success will depend in part on our ability to enhance and improve
the responsiveness, functionality and features of our products and services in
accordance with newly-imposed regulatory or industry standards. Our ability to
remain competitive will depend in part on our ability to influence and respond
to emerging industry standards, including any standards that may be adopted for
the protection of audio, video, and image content, and for other uses of
metadata with such content, in a timely and cost-effective manner. For instance,
our video copy prevention solution is competing with another solution to become
the industry standard for DVD copy protection. If we are unable to influence or
respond to these standards effectively, our business could be harmed.

IF WE ARE UNABLE TO INTEGRATE NEW TECHNOLOGIES EFFECTIVELY, OUR BUSINESS COULD
  BE HARMED

    Our target markets are characterized by new and evolving technologies. The
success of our business will depend on our ability to address the increasingly
sophisticated technological needs of our customers in a timely and
cost-effective manner. Our ability to remain competitive will depend in part on
our ability to:

    - enhance and improve the responsiveness, functionality and other features
      of the products and services we offer or plan to offer;

    - continue to develop our technical expertise; and

    - develop and introduce new services, applications and technologies to meet
      changing customer needs and preferences and to integrate new technologies.

    We cannot assure you that we will be successful in responding to these
technological and industry challenges in a timely and cost-effective manner. If
we are unable to integrate new technologies effectively or respond to these
changing needs, our business could be harmed.

OUR MARKETS ARE HIGHLY COMPETITIVE

    The markets for digital watermarking applications are new, intensely
competitive and rapidly evolving. We expect competition to continue from both
existing competitors and new market entrants. We face competition from other
companies using digital watermarking technologies and from alternative
technologies. As we expand the applications for our digital watermarking
technologies, we will experience more competition from products and services
that are substitutes for our digital watermarking applications. Because our
business model is new and emerging, we may face competition from unexpected
sources. Alternative technologies that may directly or indirectly compete with
certain applications of our watermarking technologies include:

    - encryption--securing data during distribution using a secret code so it
      cannot be accessed except by authorized users;

    - containers--inserting a media object in a wrapper, which prevents the
      media object from being duplicated;

    - dataglyphs--a visible modification of the characteristics of an image that
      is machine-readable;

                                       13
<PAGE>
    - scrambled indicia--optical refraction-based data-hiding technique that is
      inserted into an image and can be read with a glass;

    - traditional anti-counterfeiting technologies--a number of solutions used
      currently by many governments that compete for budgetary outlays designed
      to deter counterfeiting, including optically sensitive ink, magnetic
      threads and other materials used in the printing of currencies;

    - radio frequency tags--embedding a chip that emits a signal when in close
      proximity with a receiver, which is being used in photo identification,
      labels and tags;

    - Internet technologies--numerous existing and potential Internet access and
      search methods will be potentially competitive with the Digimarc
      MediaBridge system;

    - digital fingerprints--a metric, or metrics, computed solely from a source
      image or audio or video track, that can be used to uniquely identify an
      image or track; and

    - bar codes--visible data-carrying code.

    In addition, as we more broadly apply our technologies to the Internet
through the Digimarc MediaBridge system and other new image commerce
applications, we may begin to compete with a wide range of other companies. Many
of the companies that currently compete with us, as well as other companies with
whom we may compete in the future, are national or international in scope and
may have greater resources than we do. These resources could enable these
companies to initiate severe price cuts or take other measures in an effort to
gain market share in our target markets. We cannot assure you that digital
watermarking technologies, and our products and services using these
technologies, will gain widespread market acceptance.

    We cannot assure you that we will be able to compete successfully against
current or future participants in our markets or against alternative
technologies, nor can we assure you that the competitive pressures we face will
not harm our business, operating results and financial condition.

ITEM 2:  PROPERTIES

    Our principal administrative, sales, marketing, support, research,
development and engineering facility is currently located in Tualatin, Oregon,
under a lease that expires in December 2004 and a separate sublease that expires
in February 2005. This facility occupies a total of approximately 38,000 square
feet. We also lease space for sales, marketing and technical support operations
in Tulsa, Oklahoma under a lease that expires in January 2005. This facility
occupies a total of approximately 11,750 square feet. We also lease sales and
support offices in New York City and San Francisco. We will likely require
additional space before the end of 2001, but believe that securing additional
suitable space to accommodate our growth will not be difficult.

ITEM 3:  LEGAL PROCEEDINGS

    We may from time to time become a party to various legal proceedings arising
in the ordinary course of our business. However, we are not currently subject to
any material legal proceedings.

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

                                       14
<PAGE>
                                    PART II

ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    Our common stock is traded on the Nasdaq National Market under the symbol
"DMRC." Our initial public offering of stock was December 2, 1999 at $20.00 per
share. The following table lists the high and low sales prices of our Common
Stock for the periods indicated, as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                HIGH           LOW
                                                              --------       --------
<S>                                                           <C>            <C>
FISCAL YEAR ENDING DECEMBER 31, 2000
First quarter...............................................   $75.75         $40.50
Second quarter..............................................   $48.63         $21.00
Third quarter...............................................   $38.50         $11.00
Fourth quarter..............................................   $19.44         $11.75
</TABLE>

    At December 31, 2000, there were approximately 178 stockholders of record of
our common stock, as shown in the records of our transfer agent.

    We have never declared or paid cash dividends on our capital stock and we do
not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance the future growth of our
business.

ITEM 6:  SELECTED FINANCIAL DATA

    The following selected financial data should be read in conjunction with the
financial statements and the notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included elsewhere in this report. The statement of operations data for each
of the five years in the period ended December 31, 2000, and the balance sheet
data as of the years then ended are derived from our audited financial
statements.

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                         ----------------------------------------------------------
                                            2000        1999        1998        1997        1996
                                         ----------   ---------   ---------   ---------   ---------
                                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                      <C>          <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA
  Revenue:
    License and subscription...........  $    1,322   $     202   $     484   $     161   $     186
    Service............................      10,528       6,727         500          25          50
                                         ----------   ---------   ---------   ---------   ---------
      Total revenue....................      11,850       6,929         984         186         236
  Cost of revenue
    License and subscription...........          94          97         114         126           7
    Service............................       6,543       3,529       1,466          --          --
                                         ----------   ---------   ---------   ---------   ---------
      Total cost of revenue............       6,637       3,626       1,580         126           7
    Gross margin.......................       5,213       3,303        (596)         60         229
  Operating expenses:
    Sales and marketing................      10,878       2,049         825       1,330         376
    Research, development and
      engineering......................       4,280       1,058         658         934         690
    General and administrative.........      11,766       2,978       1,407       1,282         834
    Impairment charge..................          --          --          --         453          --
                                         ----------   ---------   ---------   ---------   ---------
      Total operating expenses.........      26,924       6,085       2,890       3,999       1,900
                                         ----------   ---------   ---------   ---------   ---------
      Operating loss...................     (21,711)     (2,782)     (3,486)     (3,939)     (1,671)
  Other income (expense)...............       5,866         393          44         (40)         93
                                         ----------   ---------   ---------   ---------   ---------
      Net loss.........................  ($  15,845)  ($  2,389)  ($  3,442)  ($  3,979)  ($  1,578)
                                         ==========   =========   =========   =========   =========
  Net loss per share--basic and
    diluted............................  ($    1.17)  ($   0.78)  ($   1.50)  ($   1.88)  ($   0.71)
                                         ==========   =========   =========   =========   =========
  Weighted average shares--basic and
    diluted............................  13,566,571   3,052,671   2,288,442   2,120,477   2,226,519
</TABLE>

                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                   ----------------------------------------------------
                                                     2000       1999       1998       1997       1996
                                                   --------   --------   --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
  Cash, cash equivalents, and short-term
    investments..................................  $135,872   $90,830     $2,137     $5,638     $3,113
  Working capital................................   135,203    89,900      1,196      4,631      2,782
  Total assets...................................   142,479    94,903      2,978      6,168      3,376
  Long-term obligations, net of current
    portion......................................        30       119        469        395        396
  Convertible redeemable preferred stock.........        --        --     10,185     10,185      4,441
  Total stockholders' equity (deficit)...........   138,727    90,795     (9,095)    (5,680)    (1,885)
</TABLE>

ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE
EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF DIGIMARC, WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISKS RELATED TO OUR BUSINESS" AND "RISKS RELATED TO OUR
INDUSTRY" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. WE ASSUME NO
OBLIGATION TO UPDATE THIS INFORMATION. THIS DISCUSSION AND ANALYSIS SHOULD BE
READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
HEREIN.

OVERVIEW

    Digimarc is a leading provider of patented digital watermarking technologies
that allow imperceptible digital code to be embedded in the printed or digital
versions of media content, such as commercial and consumer photographs, movies,
music, magazine advertisements, catalogs, product packages and valuable
documents like financial instruments, passports and event tickets. In addition
to a code that can be embedded within various types of media content, our
technologies include reader software that, as a resident application on PCs and
other devices, enables the recognition of embedded codes. We believe our
technologies have many potential applications. We are developing products and
services to address what we currently believe are our two largest near-term
market opportunities--the deterrence of digital counterfeiting and piracy, and
the enhancement of Internet access and navigation. In addition, we continue to
pursue commercial applications in audio and video digital watermarking.

    From our inception in January 1995 through late 1996, we devoted
substantially all of our efforts to product development, raising capital and
recruiting personnel. We first generated licensing revenue in the third quarter
of 1996 through the licensing of our software plug-ins to Adobe Systems. In the
fourth quarter of 1996, we introduced a subscription-based service for
communicating copyrights of digital images across the Internet. This product
offering was followed by the introduction in mid-1997 of MarcSpider, our service
that searches the Internet for images containing Digimarc watermarks and
produces reports on the locations of these images. In late 1997, we began
expanding the use of our digital watermarking technologies to counterfeiting and
piracy deterrence.

    In 1998, we began working with a consortium of leading central banks to
develop a system to deter the use of personal computer systems in the
counterfeiting of currency. Providing services relating to the development of
this anti-counterfeiting system accounted for 76% of our total revenue in 2000
and 89% of our total revenue in 1999. We anticipate that this development
project will account for most of our revenue until we are able to generate
substantial revenue from the introduction of new products that we are developing
relating to document security and our Digimarc MediaBridge system.

    In mid 1999, we began to place increasing emphasis on developing the
Digimarc MediaBridge system. Our efforts to develop and introduce the Digimarc
MediaBridge system will require significant

                                       16
<PAGE>
continuing investment. To date, we have derived minimal revenue from the
Digimarc MediaBridge system. We began marketing the Digimarc MediaBridge system
in the second half of 2000. We currently expect to develop other new products
and services, which we anticipate selling to customers through a variety of
pricing plans, including annual license fees and volume-based license fees from
commercial printers, packaging companies, magazine advertisers, and magazine
publishers. Successful marketing and acceptance of the Digimarc MediaBridge
system, if achieved, would significantly change the mix and the concentration of
our future revenue.

    To date, we have derived our revenue from licensing software products,
delivering subscription-based services and providing development and consulting
services to the consortium of central banks. We license our software products to
owners of digital images. Revenue is recognized on delivery of software,
assuming no significant obligations or customer acceptance rights exist. We
provide subscription services to users for tracking of their watermarked images
across the Internet. Subscriptions are paid in advance, and revenue is
recognized ratably over the term of the subscription. We also provide
development and consulting services related to the customization, integration
and installation of our technologies. This revenue is recognized as services are
performed, unless completion is subject to customer acceptance. Revenue from our
international sales has primarily been denominated in U.S. dollars. Therefore,
fluctuations in foreign currency exchange rates have not had a material effect
on our business.

    We intend to increase our revenue through increasing adoption of our
products and services, marketing new digital watermarking applications, and
licensing our intellectual property. We expect to target, among other sources of
revenue, commercial printers, packaging companies, publishers, advertisers and
other producers of printed materials. Our aim is to license our technologies to
those content producers so that they may embed our digital watermarks in their
print media, such as magazine advertisements and articles, direct mail coupons,
catalogs, stationery and envelopes, product packaging, labels and tags, trading
cards, credit cards, and business cards. Our current and anticipated products
are intended to enable content producers to control reproduction and alteration
of their content, as well as to enable their print materials to provide a link
to relevant Web destinations. Revenue from our new applications may include
one-time license fees, time-based or volume-based fees, subscription fees,
royalties and revenue-sharing arrangements. We anticipate that the calculation
of fees and royalties will be based at least in part on the size of the
installed base of PCs, cameras, scanners, digital image capture and output
devices, and software carrying our patented reader technology as well as the
nature of the use, and the nature and amount of licensed content carrying our
digital watermarks.

    Since inception, we have invested in attracting top senior management, in
developing our products and technology and in building our sales and marketing
organizations. We have a limited operating history upon which investors may
evaluate our business and prospects. We have incurred significant losses to
date, and as of December 31, 2000, we had an accumulated deficit of
approximately $28.2 million. We intend to continue to expend significant
financial and management resources on developing additional products and
services, increasing sales and marketing activities, improving our technologies
and expanding our operations. As a result, we expect to continue to incur
additional losses and negative cash flow through most of, if not all of 2001 and
possibly beyond. Our revenue may not increase or even continue at its current
levels and we may not achieve or maintain profitability or generate cash from
operations in future periods. Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stages of development, particularly companies deploying new technologies
and applications, such as our efforts to develop our Digimarc MediaBridge system
as a new means of using the Internet.

                                       17
<PAGE>
RESULTS OF OPERATIONS

    The following table presents our statement of operations data for the
periods indicated as a percentage of total revenue.

<TABLE>
<CAPTION>
                                                                     YEARS ENDED
                                                                     DECEMBER 31,
                                                         ------------------------------------
                                                           2000          1999          1998
                                                         --------      --------      --------
<S>                                                      <C>           <C>           <C>
Revenue:
  License and subscription.............................      11 %           3 %          49 %
  Service..............................................      89            97            51
                                                           ----          ----          ----
    Total revenue......................................     100           100           100
Cost of revenue:
  License and subscription.............................       1             1            12
  Service..............................................      55            51           149
                                                           ----          ----          ----
    Total cost of revenue..............................      56            52           161
  Gross margin.........................................      44            48           (61)
Operating expenses:
  Sales and marketing..................................      92            30            84
  Research, development, and engineering...............      36            15            67
  General and administrative...........................      99            43           143
                                                           ----          ----          ----
    Total operating expenses...........................     227            88           294
                                                           ----          ----          ----
    Operating loss.....................................    (183)          (40)         (355)
Other income (expense).................................      49             6             5
                                                           ----          ----          ----
  Net loss.............................................    (134)%         (34)%        (350)%
                                                           ====          ====          ====
</TABLE>

YEARS ENDED DECEMBER 31, 2000 AND 1999

REVENUE

    Total revenue was $11.9 million and $6.9 million for the years ended
December 31, 2000 and 1999, respectively. The $5.0 million or 71% increase was
primarily the result of increased service revenue that we earned through our
relationship with a consortium of leading central banks and increased license
and subscription revenue from our Media Commerce business. One customer (the
consortium of banks) accounted for approximately 76% and 89% of our total
revenue for the years ended December 31, 2000 and 1999, respectively. The
customer has a discretionary right of early termination with respect to the
agreement. Unless the customer exercises this right, we expect revenue under the
agreement to continue at or above current dollar levels for the next year. The
original agreement with the consortium of banks expires at the end of 2001. We
intend to pursue further business with this customer, including securing a
contract for the next phase of development for this customer, as outlined in our
original proposal to them, and may be able to achieve other sources of revenue
in future periods by providing additional products and services to them and
related institutions. We currently expect to develop new products and services,
which we anticipate selling to customers through a variety of pricing plans,
including license fees and license fees per document from issuers of valuable
documents other than banknotes and from magazine advertisers and publishers.
Successful implementation and maintenance of these products and services,
including self-authenticating documents and the Digimarc MediaBridge system, if
achieved, would significantly change the mix and concentration of our future
revenue.

                                       18
<PAGE>
    LICENSE AND SUBSCRIPTION.  License and subscription revenue was
$1.3 million and $0.2 million for the years ended December 31, 2000 and 1999,
respectively. The $1.1 million or 554% increase was the direct result of
increased licensing and royalty fees from our Media Commerce business.

    SERVICE.  Service revenue was $10.5 million and $6.7 million for the years
ended December 31, 2000 and 1999, respectively. The increase of $3.8 million or
57% was primarily the result of an increase in the level of service provided to
our anti-counterfeiting system customer (the consortium of banks) along with
increased consulting revenues from our Media Commerce business.

COST OF REVENUE

    LICENSE AND SUBSCRIPTION.  Cost of license and subscription revenue
primarily includes compensation for operations personnel, cost of outsourced
customer support, Internet service provider connectivity charges and image
search data fees to support our services. Cost of license and subscription
revenue was $0.1 million and $0.1 million for the years ended December 31, 2000
and 1999, respectively.

    SERVICE.  Cost of service revenue includes compensation for software
developers, quality assurance personnel, product managers and business
development personnel, outside contractors and travel costs directly
attributable to certain service and development contracts. Cost of service
revenue was $6.5 million and $3.5 million for the years ended December 31, 2000
and 1999, respectively. The $3.0 million or 85% increase was the result of
increased services provided to our anti-counterfeiting customer under the
development contract.

OPERATING EXPENSES

    SALES AND MARKETING.  Sales and marketing expenses consist primarily of
compensation, benefits and related costs of sales and marketing personnel,
product managers and sales engineers, as well as recruiting, travel, market
research and costs associated with marketing programs, such as trade shows,
public relations and new product launches. Sales and marketing expenses were
$10.9 million and $2.0 million for the years ended December 31, 2000 and 1999,
respectively, representing an increase of $8.9 million or 431%. This increase
resulted from increased costs of $5.6 million related to salaries and other
employee costs, including travel expenses; increased costs of $3.6 million
related to promotional activities, including advertising; and increased costs of
$0.5 million related to stock-based compensation. These increases were offset in
part by an increased allocation of $1.2 million to cost of service revenue
associated with sales and marketing personnel, who provided education, outreach
and product definition services to our anti-counterfeiting system customer.
Sales and marketing employees totaled 69 and 27 as of December 31, 2000 and
1999, respectively. We believe that an increase in our sales and marketing
effort is essential to maintain our market position and to expand our products'
acceptance in the marketplace. Accordingly, we anticipate that we will continue
to invest significantly in sales and marketing for the foreseeable future, and
that sales and marketing expenses are likely to increase in the future.

    RESEARCH, DEVELOPMENT AND ENGINEERING.  Research, development and
engineering expenses consist primarily of compensation, benefits and related
costs of software developers and quality assurance personnel and payments to
outside contractors. Research, development and engineering expenses were
$4.3 million and $1.1 million for the years ended December 31, 2000 and 1999,
respectively, representing an increase of $3.2 million or 305%. This increase
resulted from increased costs of $4.7 million related to salaries and other
employee related costs, including travel expenses, and increased costs of
$0.4 million related to stock-based compensation. These increases were offset by
increased use of research, development and engineering personnel to provide
services to our anti-counterfeiting system customer, which resulted in an
additional $1.7 million of these expenses being allocated to cost of service
revenue. Research, development and engineering personnel totaled 77

                                       19
<PAGE>
and 34 as of December 31, 2000 and 1999, respectively. We believe that a
significant investment in research, development and engineering is essential for
us to maintain our market position, to continue to expand our product lines and
to enhance our technologies and intellectual property rights. Accordingly, we
anticipate that we will continue to invest significantly in product research,
development and engineering for the foreseeable future.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses consist
primarily of compensation, benefits and related costs of executive, finance and
administrative personnel, facilities costs, legal and other professional fees
and depreciation expense. General and administrative expenses were
$11.8 million and $3.0 million for the years ended December 31, 2000 and 1999,
respectively, representing an increase of $8.8 million or 295%. This increase
resulted from increased costs of $1.7 million related to salaries and other
employee related costs, including travel expenses; increased costs of
$2.6 million related to administrative costs, including facilities, office
expenses, and depreciation; increased costs of $3.3 million related to
professional fees, including litigation costs; and increased costs of
$0.7 million related to stock-based compensation. General and administrative
employees totaled 26 and 15 as of December 31, 2000 and 1999, respectively. We
believe that our general and administrative expenses will continue to increase
as a result of the continued expansion of our administrative staff and expenses
associated with being a public company, including annual and other
public-reporting costs, directors' and officers' liability insurance,
investor-relations programs and professional-services fees.

    STOCK-BASED COMPENSATION.  Stock-based compensation expense includes costs
relating to stock-based employee compensation arrangements. Stock-based
compensation expense is based on the difference between the fair market value of
our common stock and the exercise price of options to purchase that stock on the
date of the grant, and is being recognized over the vesting periods of the
related options, usually four years. Stock-based compensation expense of
$2.2 million and $0.5 million was recorded for the years ended December 31, 2000
and 1999, respectively, and is included in the respective statements of
operations expense categories for the employees to which it applies. At
December 31, 2000, $6.0 million of stock-based compensation remains deferred and
we expect approximately $2.2 million, $2.2 million, and $1.6 million to be
recognized as expense in 2001, 2002, and 2003, respectively.

    OTHER INCOME (EXPENSE).  Other income (expense) consists primarily of
interest income, interest expense, and other non-operating expenses. Other
income (expense) increased to income of $5.9 million in 2000 from income of
$0.4 million in 1999, an increase of $5.5 million or 1,393%. The Company had
increased interest income of $5.6 million from significantly higher cash, cash
equivalents, and short-term investments balances, partially offset by a
$0.1 million increase in other non-operating expenses incurred by the Company.

    PROVISION FOR INCOME TAXES.  We have recognized operating losses since
inception and as such have not incurred income tax expense. As of December 31,
2000, we had operating loss carryovers for federal and state income tax
reporting purposes of approximately $32.4 million and research and development
tax credit carryforwards of approximately $130,000, the last of which will
expire in 2020 if not utilized. Under the Tax Reform Act of 1986, the amounts of
and benefits from net operating loss carryforwards may be impaired or limited in
certain circumstances, including a change of more than 50% in ownership. Such a
change in ownership occurred with the sale of preferred stock in June 1996,
July 1996, and July 1999 and in connection with the initial public offering of
our common stock in December 1999. Accordingly, we estimate that approximately
$9.0 million of net operating loss carryforwards are subject to the utilization
limitation.

                                       20
<PAGE>
YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUE

    Total revenue was $6.9 million and $1.0 million for the years ended
December 31, 1999 and 1998, respectively. The $5.9 million or 604% increase was
primarily the result of increased service revenue that we earned through
securing a relationship with a consortium of leading central banks. One customer
(the consortium of banks) accounted for approximately 89% and 51% of our total
revenue for the years ended December 31, 1999 and 1998, respectively. The
customer has a discretionary right of early termination with respect to the
agreement.

    LICENSE AND SUBSCRIPTION.  License and subscription revenue was
$0.2 million and $0.5 million for the years ended December 31, 1999 and 1998,
respectively. The decrease of $0.3 million or 58% was primarily the result of an
increased use of our sales, marketing and research and development personnel to
provide education, outreach and product definition services to our
anti-counterfeiting system customer (the consortium of banks).

    SERVICE.  Service revenue was $6.7 million and $0.5 million for the years
ended December 31, 1999 and 1998, respectively. The $6.2 million or 1,245%
increase was the direct result of our securing a relationship with a consortium
of leading central banks under which we are developing a system to deter the use
of personal computer systems in the counterfeiting of currency.

COST OF REVENUE

    LICENSE AND SUBSCRIPTION.  Cost of license and subscription revenue was
$0.1 million and $0.1 million for the years ended December 31, 1999 and 1998,
respectively.

    SERVICE.  Cost of service revenue was $3.5 million and $1.5 million for the
years ended December 31, 1999 and 1998, respectively. The $2.0 million or 141%
increase was the result of increased services provided to our
anti-counterfeiting customer under the development contract.

OPERATING EXPENSES

    SALES AND MARKETING.  Sales and marketing expenses were $2.0 million and
$0.8 million for the years ended December 31, 1999 and 1998, respectively,
representing an increase of $1.2 million or 148%. This increase resulted from
increased costs of $1.2 million related to salaries, stock-based compensation,
other employee costs, travel, and a $0.6 million charge to record the vested
portion of a warrant granted to Hearst in connection with a marketing agreement
to jointly promote Digimarc-enabled advertising, offset in part by an increased
allocation of $0.5 million to cost of service revenue associated with sales and
marketing personnel who provided education, outreach and product definition
services to our anti-counterfeiting system customer. Sales and marketing
employees totaled 27 and eight as of December 31, 1999 and 1998, respectively.

    RESEARCH, DEVELOPMENT AND ENGINEERING.  Research, development and
engineering expenses were $1.1 million and $0.7 million for the years ended
December 31, 1999 and 1998, respectively, representing an increase of
$0.4 million or 61%. Increased use of research, development and engineering
personnel to provide services to our anti-counterfeiting system customer
resulted in an additional $1.0 million of these expenses being allocated to cost
of service revenue, while salaries and other employee related costs, including
travel expenses and stock-based compensation, increased $1.3 million. Research,
development and engineering personnel totaled 34 and 14 as of December 31, 1999
and 1998, respectively.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses were
$3.0 million and $1.4 million for the years ended December 31, 1999 and 1998,
respectively, representing an increase of

                                       21
<PAGE>
$1.6 million or 112%. $1.5 million of this increase was the result of increased
executive compensation (including stock-based compensation), travel expenses,
executive recruiting fees, depreciation, office expense and professional fees
related to our recent growth. General and administrative employees totaled 15
and four as of December 31, 1999 and 1998, respectively.

    OTHER INCOME (EXPENSE).  Other income (expense) increased to income of
$0.4 million in 1999 from income of $44,000 in 1998. The increase of
$3.5 million or 793% is primarily related to increased interest income from the
Company's cash and cash equivalents balances.

LIQUIDITY AND CAPITAL RESOURCES

    As of December 31, 2000, we had cash, cash equivalents and short-term
investments of $135.9 million, representing an increase of $45.1 million from
$90.8 million at December 31, 2000. Working capital at December 31, 1999 was
$135.2 million, compared to working capital of $89.9 million at December 31,
1999. The increase in working capital is attributable primarily to
$61.6 million in proceeds from the sale of our common stock during the year
offset by cash used to finance operations.

    Our operating activities resulted in net cash outflows of $12.1 million and
$1.1 million for the years ended December 31, 2000 and 1999, respectively. This
$11.0 million increase in operating cash outflows from the year ended
December 31, 1999 to the year ended December 31, 2000 was due primarily to the
Company's operating loss for the year ended December 31, 2000. Operating
activities resulted in net cash outflows of $3.2 million in 1998. The $2.1
decrease in operating cash outflows from 1998 to 1999 resulted from improved
operating results during the year ended December 31, 1999.

    Investing activities used cash of $67.4 million and $0.8 million for the
years ended December 31, 2000 and 1999, respectively. This $66.6 million
increase in cash used in investing activities related primarily to the purchase
of short-term investments of $63.4 million and the purchase of property and
equipment of $4.0 million for the year ended December 31, 2000. Investing
activities in 1999 used cash of $0.8 million related primarily to the purchase
of property and equipment. Investing activities in 1998 used cash of
$0.1 million related primarily to the purchase of patents. We anticipate that we
will experience an increase in our capital expenditures consistent with our
anticipated growth in operations, infrastructure and personnel.

    Financing activities provided net cash of $61.2 million and $90.5 million
for the years ended December 31, 2000 and 1999, respectively. In addition,
financing activities used net cash of $0.2 million in 1998. Net cash provided by
financing activities in 2000 and 1999 was related primarily to the sale of
shares of our common stock related to our private placement investment in
October 2000, the sale of shares of our common stock related to our initial
public offering in December 1999, and the sale of shares of our preferred stock
in 1999. Net cash used in financing activities in 1998 related primarily to
principal payments on our bank line of credit and equipment lease obligations.

    We have computers and office equipment financed under long-term capital
leases that expire over the next 21 months. As of December 31, 2000, we had an
outstanding balance of $0.1 million of capital lease obligations. Other
significant commitments consist of obligations under non-cancelable operating
leases, which totaled $4.1 million as of December 31, 2000, and are payable in
monthly installments through February 2005.

    On October 20, 2000, the Company completed the sale of 1,089,983 shares of
its common stock to Macrovision Corporation for proceeds of approximately
$21.8 million. Additionally on October 20, 2000, the Company completed the sale
of 1,933,879 shares of its common stock to Koninklijke Philips Electronics N.V.
for proceeds of approximately $38.7 million.

    We expect to experience significant growth in our operating expenses for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may

                                       22
<PAGE>
utilize cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines.

    We believe that our current cash, cash equivalent, and short-term investment
balances will satisfy our projected working capital and capital expenditure
requirements for at least the next twelve months. Thereafter, we may find it
necessary to obtain additional equity financing, debt financing, or credit
facilities. We may not be able to obtain additional financings or credit
facilities, or if these funds are available, they may not be available on
satisfactory terms.

NEW ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, as amended by SFAS
Nos. 137 and 138, establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. Statement No. 133, as amended, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company believes
SFAS No. 133, as amended, will not have a material impact on its financial
position, results of operations or cash flows.

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of any
interest expense we must pay with respect to outstanding debt instruments. The
risk associated with fluctuating interest expense is limited, however, to the
exposure related to those debt instruments and credit facilities that are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to ensure the safety and preservation of its
invested principal funds by limiting default risk, market risk and investment
risk. We plan to mitigate default risk by investing in low-risk securities. At
December 31, 2000, we had an investment portfolio of money market funds,
commercial securities and U.S. Government securities, including those classified
as cash and cash equivalents and short-term investments, of $135.5 million. The
original maturities of our investment portfolio range from three to 121 days
with an average interest rate of 6.73%. We had capital lease obligations
totaling $0.1 million at December 31, 2000. If market interest rates were to
increase immediately and uniformly by 10% from levels as of December 31, 2000,
the decline of the fair market value of the fixed income portfolio and loans
outstanding would not be material.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Financial Statements and Related Notes of Digimarc Corporation as of
December 31, 2000 and 1999 and for the three year period ended December 31, 2000
and the independent accountants report thereon are set forth on pages F-1 to
F-18 of this Annual Report on Form 10-K.

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    None.

                                       23
<PAGE>
                                    PART III

    The information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and certain information included
therein is incorporated into Part III of this report by reference.

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION OF THE REGISTRANT

    The information concerning the Company's directors required by this Item is
incorporated herein by reference to the information under the caption "Director
Compensation" to be contained in the Proxy Statement.

    The information concerning the Company's executive officers required by this
Item is incorporated herein by reference to the information under the caption
"Executive Compensation" to be contained in the Proxy Statement.

ITEM 11:  EXECUTIVE COMPENSATION

    The information required by this item is incorporated herein by reference to
the information under the caption "Executive Compensation" to be contained in
the Proxy Statement.

ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this item is incorporated herein by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" to be contained in the Proxy Statement.

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item is incorporated herein by reference to
the information under the caption "Certain Relationships and Related
Transactions" to be contained in the Proxy Statement.

                                       24
<PAGE>
                                    PART IV

ITEM 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a)(1) FINANCIAL STATEMENTS

    The Financial Statements, together with the report thereon of KPMG LLP are
set forth on pages F-1 - F-18 attached hereto and are incorporated herein by
reference.

    Digimarc Corporation:

       Independent Auditors' Report

       Balance Sheets as of December 31, 2000 and 1999

       Statements of Operations for the years ended December 31, 2000, 1999 and
       1998

       Statements of Stockholders' Equity (Deficit) for the years ended
       December 31, 2000, 1999 and 1998

       Statements of Cash Flows for the years ended December 31, 2000, 1999 and
       1998

       Notes to Financial Statements

  (a)(2) Financial Statement Schedules

    All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.

  (a)(3) INDEX TO EXHIBITS

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER           DOCUMENT
---------------------   --------
<C>                     <S>
     3.1                Second Amended and Restated Certificate of Incorporation of
                        the Registrant (incorporated by reference to Exhibit 3.1 of
                        Exhibits to Registrant's Quarterly Report on Form 10-Q, as
                        filed with the Commission on November 14, 2001)
     3.2                Certificate of Amendment of Second Amended and Restated
                        Certificate of Incorporation of the Registrant (incorporated
                        by reference to Exhibit 3.2 of Exhibits to Registrant's
                        Quarterly Report on Form 10-Q, as filed with the Commission
                        on November 14, 2001)
     3.3                Bylaws of the Registrant, as amended (incorporated by
                        reference to Exhibit 3.3 of Exhibits to Registrant's
                        Quarterly Report on Form 10-Q, as filed with the Commission
                        on November 14, 2001)
     4.1                Reference is made to Exhibits 3.1 and 3.2
     4.2                Second Amended and Restated Investor Rights Agreement, dated
                        as of November 2, 1999, between the Registrant and the
                        holders of the Registrant's preferred stock (incorporated by
                        reference to Exhibit 4.2 to the Registrant's Registration
                        Statement on Form S-1 (Commission File No. 333-87501) which
                        became effective on December 2, 1999)
    10.1                Form of Indemnification Agreement between the Registrant and
                        each of its executive officers and directors (incorporated
                        by reference to Exhibit 10.1 to the Registrant's
                        Registration Statement on Form S-1 (Commission File
                        No. 333-87501) which became effective on December 2, 1999)
    10.2                Registrant's 1995 Stock Incentive Plan, as amended
                        (incorporated by reference to Exhibit 99.1 to the
                        Registrant's Registration Statement on Form S-8 (Commission
                        File No. 333-31114) which became effective on February 25,
                        2000)
    10.3                Registrant's Restated 1999 Stock Incentive Plan
                        (incorporated by reference to Exhibit 99.2 to the
                        Registrant's Registration Statement on Form S-8 (Commission
                        File No. 333-42042) which became effective on July 24, 2000)
</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER           DOCUMENT
---------------------   --------
<C>                     <S>
    10.4                Registrant's 1999 Employee Stock Purchase Plan, as amended,
                        including forms of agreements thereunder (incorporated by
                        reference to Exhibit 99.3 to the Registrant's Registration
                        Statement on Form S-8 (Commission File No. 333-31114) which
                        became effective on February 25, 2000)
    10.5                Office Lease Agreement, dated as of April 16, 1998, between
                        the Registrant and Property Reserve, Inc. (incorporated by
                        reference to Exhibit 10.5 of Exhibits to Registrant's
                        Registration Statement on Form S-1 (Commission File No.
                        333-87501) which became effective on December 2, 1999)
    10.6                Sublease, dated as of April 23, 1998, between the Registrant
                        and Southern Pacific Funding Corporation (incorporated by
                        reference to Exhibit 10.6 of Exhibits to Registrant's
                        Registration Statement on Form S-1 (Commission File No.
                        333-87501) which became effective on December 2, 1999)
    10.7                Sublease, dated as of April 27, 1998, between the Registrant
                        and Southern Pacific Funding Corporation (incorporated by
                        reference to Exhibit 10.7 of Exhibits to Registrant's
                        Registration Statement on Form S-1 (Commission File No.
                        333-87501) which became effective on December 2, 1999)
    10.8                Lease Agreement, dated as of June 25, 1999, between the
                        Registrant and Southplace Associates LLC (incorporated by
                        reference to Exhibit 10.8 of Exhibits to Registrant's
                        Registration Statement on Form S-1 (Commission File No.
                        333-87501) which became effective on December 2, 1999)
    10.9+               Counterfeit Deterrence System Development and License
                        Agreement, dated as of January 1, 1999 (incorporated by
                        reference to Exhibit 10.9 of Exhibits to Registrant's
                        Registration Statement on Form S-1 (Commission File No.
                        333-87501) which became effective on December 2, 1999)
    10.10               First Amendment to Lease Agreement, dated as of
                        February 17, 2000, between the Registrant and Southplace
                        Associates LLC (incorporated by reference to Exhibit 10.10
                        of Exhibits to Registrant's Registration Statement on Form
                        S-1 (Commission File No. 333-32778) which was filed with the
                        Commission on March 17, 2000 and withdrawn on July 31, 2000)
    10.11               CityPlex Towers Lease Agreement, dated as of January 4,
                        2000, between the Registrant and Oral Roberts University
                        (incorporated by reference to Exhibit 10.11 of Exhibits to
                        Registrant's Registration Statement on Form S-1 (Commission
                        File No. 333-32778) which was filed with the Commission on
                        March 17, 2000 and withdrawn on July 31, 2000)
    10.12               Strategic Investment Agreement, dated as of September 17,
                        2000, between the Registrant and Macrovision Corporation
                        (incorporated by reference to Exhibit 10.12 of Exhibits to
                        Registrant's Quarterly Report on Form 10-Q, as filed with
                        the Commission on November 14, 2001)
    10.13               Strategic Investment Agreement, dated as of September 17,
                        2000, between the Registrant and Koninklijke Philips
                        Electronics N.V. (incorporated by reference to
                        Exhibit 10.13 of Exhibits to Registrant's Quarterly Report
                        on Form 10-Q, as filed with the Commission on November 14,
                        2001)
    10.14               Registrant's 2000 Non-Officer Employee Stock Incentive Plan
                        (incorporated by reference to Exhibit 99.1 of Exhibits to
                        the Registrant's Registration Statement on Form S-8
                        (Commission File No. 333-42042) which became effective on
                        July 24, 2000)
    23.2                Consent of KPMG LLP, Independent Certified Public
                        Accountants
    24.1                Powers of Attorney (see signature page to this form)
    27.1                Financial Data Schedule
</TABLE>

------------------------

+   Confidential treatment has been requested with regard to certain portions of
    this document. Such portions have been omitted from this filing and have
    been filed separately with the Securities and Exchange Commission.

                                       26
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 22nd day of
March, 2001.

<TABLE>
<S>                                                    <C>  <C>
                                                       DIGIMARC CORPORATION

                                                       By:               /s/ E.K. RANJIT
                                                            -----------------------------------------
                                                                           E.K. Ranjit
                                                                CHIEF FINANCIAL OFFICER, SECRETARY
</TABLE>

                               POWER OF ATTORNEY

    KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bruce Davis and EK Ranjit and each of
them, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof.

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
                   NAME                                      TITLE                         DATE
                   ----                                      -----                         ----
<C>                                         <S>                                       <C>
             /s/ BRUCE DAVIS
    ---------------------------------       President, Chief Executive Officer and    March 22, 2001
              (Bruce Davis)                   Director (Principal Executive Officer)

             /s/ E.K. RANJIT                Chief Financial Officer (Principal
    ---------------------------------         Financial and Accounting Officer) and   March 22, 2001
              (E.K. Ranjit)                   Secretary

           /s/ GEOFFREY RHOADS
    ---------------------------------       Chief Technology Officer, and Director    March 22, 2001
            (Geoffrey Rhoads)

          /s/ PHILIP MONEGO, SR.
    ---------------------------------       Chairman of the Board of Directors        March 22, 2001
           (Philip Monego, Sr.)

           /s/ BRIAN J. GROSSI
    ---------------------------------       Director                                  March 22, 2001
            (Brian J. Grossi)
</TABLE>

                                       27
<PAGE>

<TABLE>
<CAPTION>
                   NAME                                      TITLE                         DATE
                   ----                                      -----                         ----
<C>                                         <S>                                       <C>
             /s/ JOHN TAYSOM
    ---------------------------------       Director                                  March 22, 2001
              (John Taysom)

             /s/ PETER SMITH
    ---------------------------------       Director                                  March 22, 2001
              (Peter Smith)

          /s/ WILLIAM A. KREPICK
    ---------------------------------       Director                                  March 22, 2001
           (William A. Krepick)

            /s/ ALTY VAN LUJIT
    ---------------------------------       Director                                  March 22, 2001
             (Alty van Luijt)
</TABLE>

                                       28
<PAGE>
               DIGIMARC CORPORATION INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Independent Auditor's Report................................    F-2

Balance Sheets..............................................    F-3

Statements of Operations....................................    F-4

Statements of Stockholders' Equity (Deficit)................    F-5

Statements of Cash Flows....................................    F-6

Notes to Financial Statements...............................    F-7
</TABLE>

                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Stockholders of Digimarc Corporation:

    We have audited the accompanying balance sheets of Digimarc Corporation as
of December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 financial statements referred to above present fairly,
in all material respects, the financial position of Digimarc Corporation as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.

                                          /s/ KPMG LLP

Portland, Oregon
January 19, 2001

                                      F-2
<PAGE>
                              DIGIMARC CORPORATION

                                 BALANCE SHEETS

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 72,454   $ 90,830
  Short-term investments....................................    63,418         --
  Trade accounts receivable, net............................     1,609      2,225
  Prepaid expenses and other current assets.................     1,444        834
                                                              --------   --------
    Total current assets....................................   138,925     93,889
Property and equipment, net.................................     3,522        961
Other assets, net...........................................        32         53
                                                              --------   --------
    Total assets............................................  $142,479   $ 94,903
                                                              ========   ========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  1,936   $  1,638
  Accrued payroll and related costs.........................       805        504
  Other short term liabilities..............................       191        218
  Deferred revenue..........................................       790      1,318
  Current portion of notes payable to stockholders..........        --        311
                                                              --------   --------
    Total current liabilities...............................     3,722      3,989
Capital lease obligations, less current portion.............        30        119
                                                              --------   --------
    Total liabilities.......................................     3,752      4,108
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized at December 31,
  2000 and 1999; no shares issued and outstanding at
  December 31, 2000 and 1999................................        --         --
Common stock, $0.001 par value; 100,000,000 shares
  authorized at December 31, 2000, 30,000,000 shares
  authorized at December 31, 1999; issued and outstanding
  16,295,435 and 12,615,145 shares at December 31, 2000 and
  1999, respectively........................................        16         13
Additional paid-in capital..................................   172,276    110,675
Deferred stock compensation.................................    (5,989)    (8,162)
Warrant.....................................................       633        633
Accumulated deficit.........................................   (28,209)   (12,364)
                                                              --------   --------
    Total stockholders' equity..............................   138,727     90,795
                                                              --------   --------
    Total liabilities and stockholders' equity..............  $142,479   $ 94,903
                                                              ========   ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-3
<PAGE>
                              DIGIMARC CORPORATION

                            STATEMENTS OF OPERATIONS

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                          -------------------------------------
                                                             2000          1999         1998
                                                          -----------   ----------   ----------
<S>                                                       <C>           <C>          <C>
Revenue:
  License and subscription..............................  $     1,322   $      202   $      484
  Service...............................................       10,528        6,727          500
                                                          -----------   ----------   ----------
    Total revenue.......................................       11,850        6,929          984
Cost of revenue:
  License and subscription..............................           94           97          114
  Service...............................................        6,543        3,529        1,466
                                                          -----------   ----------   ----------
    Total cost of revenue...............................        6,637        3,626        1,580
                                                          -----------   ----------   ----------
    Gross margin........................................        5,213        3,303         (596)
Operating expenses:
  Sales and marketing...................................       10,878        2,049          825
  Research, development and engineering.................        4,280        1,058          658
  General and administrative............................       11,766        2,978        1,407
                                                          -----------   ----------   ----------
    Total operating expenses............................       26,924        6,085        2,890
                                                          -----------   ----------   ----------
    Operating loss......................................      (21,711)      (2,782)      (3,486)
Other income (expense):
  Interest income.......................................        6,117          492          189
  Interest expense......................................         (109)         (94)        (119)
  Other.................................................         (142)          (5)         (26)
                                                          -----------   ----------   ----------
    Loss before provision for income taxes..............      (15,845)      (2,389)      (3,442)
Provision for income taxes..............................           --           --           --
                                                          -----------   ----------   ----------
    Net loss............................................  $   (15,845)  $   (2,389)  $   (3,442)
                                                          ===========   ==========   ==========
Net loss per share--basic and diluted...................  $     (1.17)  $    (0.78)  $    (1.50)
                                                          ===========   ==========   ==========
Weighted average shares--basic and diluted..............   13,566,571    3,052,671    2,288,442
</TABLE>

                See accompanying notes to financial statements.

                                      F-4
<PAGE>
                              DIGIMARC CORPORATION
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
             (IN THOUSANDS, EXCEPT SHARE AND PER STOCK SHARE DATA)
<TABLE>
<CAPTION>
                                      CONVERTIBLE
                                    PREFERRED STOCK         PREFERRED STOCK          COMMON STOCK
                                 ---------------------   ---------------------   ---------------------     ADDITIONAL
                                  SHARES      AMOUNT      SHARES      AMOUNT       SHARES      AMOUNT    PAID-IN CAPITAL
                                 --------   ----------   --------   ----------   ----------   --------   ---------------
<S>                              <C>        <C>          <C>        <C>          <C>          <C>        <C>
BALANCE AT DECEMBER 31, 1997...   162,500   $      --         --    $      --     2,252,993     $ 2          $    851
Stock issued...................        --          --         --           --        27,144      --                13
Exercise of stock options......        --          --         --           --        33,486      --                14
Net loss.......................        --          --         --           --            --      --                --
                                 --------   ----------   --------   ----------   ----------     ---          --------
BALANCE AT DECEMBER 31, 1998...   162,500          --         --           --     2,313,623       2               878
Issuance of common stock
  through conversion of
  redeemable preferred stock...        --          --         --           --     5,259,775       6            17,261
Issuance of common stock
  through initial public
  offering, net................        --          --         --           --     4,600,000       5            83,796
Issuance of common stock
  through conversion of
  convertible preferred
  stock........................  (162,500)         --         --           --       325,000      --                --
Warrant issued.................        --          --         --           --            --      --                --
Exercise of stock options......        --          --         --           --       116,747      --                51
Deferred compensation related
  to stock options.............        --          --         --           --            --      --             8,689
Stock-based compensation
  expense......................        --          --         --           --            --      --                --
Net loss.......................        --          --         --           --            --      --                --
                                 --------   ----------   --------   ----------   ----------     ---          --------
BALANCE AT DECEMBER 31, 1999...        --          --         --           --    12,615,145      13           110,675
Issuance of common stock
  through private placement,
  net..........................        --          --         --           --     3,023,862       3            60,233
Exercise of stock options,
  net..........................        --          --         --           --       595,721      --               429
Purchase of employee stock
  purchase plan shares.........        --          --         --           --        60,707      --               939
Stock-based compensation
  expense......................        --          --         --           --            --      --                --
Net loss.......................        --          --         --           --            --      --                --
                                 --------   ----------   --------   ----------   ----------     ---          --------
BALANCE AT DECEMBER 31, 2000...        --   $      --         --    $      --    16,295,435     $16          $172,276
                                 ========   ==========   ========   ==========   ==========     ===          ========

<CAPTION>

                                                                                 TOTAL
                                 DEFERRED STOCK              ACCUMULATED     STOCKHOLDERS'
                                  COMPENSATION    WARRANT      DEFICIT      EQUITY (DEFICIT)
                                 --------------   --------   ------------   ----------------
<S>                              <C>              <C>        <C>            <C>
BALANCE AT DECEMBER 31, 1997...     $    --         $ --       $ (6,533)        $ (5,680)
Stock issued...................          --           --             --               13
Exercise of stock options......          --           --             --               14
Net loss.......................          --           --         (3,442)          (3,442)
                                    -------         ----       --------         --------
BALANCE AT DECEMBER 31, 1998...          --           --         (9,975)          (9,095)
Issuance of common stock
  through conversion of
  redeemable preferred stock...          --           --             --           17,267
Issuance of common stock
  through initial public
  offering, net................          --           --             --           83,801
Issuance of common stock
  through conversion of
  convertible preferred
  stock........................          --           --             --               --
Warrant issued.................          --          633             --              633
Exercise of stock options......          --           --             --               51
Deferred compensation related
  to stock options.............      (8,689)          --             --               --
Stock-based compensation
  expense......................         527           --             --              527
Net loss.......................          --           --         (2,389)          (2,389)
                                    -------         ----       --------         --------
BALANCE AT DECEMBER 31, 1999...      (8,162)         633        (12,364)          90,795
Issuance of common stock
  through private placement,
  net..........................          --           --             --           60,236
Exercise of stock options,
  net..........................          --           --             --              429
Purchase of employee stock
  purchase plan shares.........          --           --             --              939
Stock-based compensation
  expense......................       2,173           --             --            2,173
Net loss.......................          --           --        (15,845)         (15,845)
                                    -------         ----       --------         --------
BALANCE AT DECEMBER 31, 2000...     $(5,989)        $633       $(28,209)        $138,727
                                    =======         ====       ========         ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-5
<PAGE>
                              DIGIMARC CORPORATION

                            STATEMENTS OF CASH FLOWS

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(15,845)  $(2,389)   $(3,442)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................     1,478       303        178
    Amortization of discount on note payable................        --        13         14
    Stock-based compensation expense........................     2,173       527         --
    Other non-cash expenses.................................        --       632         20
    Changes in assets and liabilities:
      Trade accounts receivable.............................       616    (1,927)      (196)
      Prepaid expenses and other current assets.............      (610)     (710)       (33)
      Accounts payable......................................       298     1,410       (107)
      Accrued payroll and related costs.....................       301       114        204
      Other short term liabilities..........................        24        --         --
      Deferred revenue......................................      (528)      973        152
                                                              --------   -------    -------
Net cash used in operating activities.......................   (12,093)   (1,054)    (3,210)
  Cash flows from investing activities:
    Purchase of property and equipment......................    (3,998)     (762)        (8)
    Purchases of patents....................................       (20)      (10)       (50)
    Purchase of tradename...................................        --       (10)        --
    Sale of tradename.......................................        --        10         --
    Purchase of investments.................................   (63,418)       --         --
                                                              --------   -------    -------
Net cash used in investing activities.......................   (67,436)     (772)       (58)
  Cash flows from financing activities:
    Proceeds (repayment) of short-term borrowings...........      (311)     (250)      (150)
    Net proceeds from issuance of preferred stock...........        --     7,081         --
    Net proceeds from issuance of common stock..............    61,604    83,852         14
    Principal payments under capital lease obligations......      (140)     (164)       (97)
                                                              --------   -------    -------
Net cash provided by (used in) financing activities.........    61,153    90,519       (233)
                                                              --------   -------    -------
  Net increase (decrease) in cash and cash equivalents......   (18,376)   88,693     (3,501)
  Cash and cash equivalents at beginning of period..........    90,830     2,137      5,638
                                                              --------   -------    -------
  Cash and cash equivalents at end of period................    72,454   $90,830    $ 2,137
                                                              ========   =======    =======
  Supplemental disclosure of cash flow information:
    Cash paid for interest..................................  $    187   $    95    $   125
  Summary of non-cash investing and financing activities:
    Equipment acquired or exchanged under capital lease
      obligations...........................................  $     --   $   127    $   202
</TABLE>

                See accompanying notes to financial statements.

                                      F-6
<PAGE>
                              DIGIMARC CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

    Digimarc is a leading provider of patented digital watermarking technologies
that allow imperceptible digital code to be embedded in the printed or digital
versions of media content, such as commercial and consumer photographs, movies,
music, magazine advertisements, catalogs, product packages and valuable
documents like financial instruments, passports and event tickets. In addition
to a code that can be embedded within various types of media content, our
technologies include reader software that, as a resident application on PCs and
other devices, enables the recognition of embedded codes.

USE OF ESTIMATES

    Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and contingencies at the date of the financial statements and the
reported amounts of revenues and expense during the reporting periods. Actual
results could differ from those estimates.

RECLASSIFICATIONS

    Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to current year presentation. These
reclassifications had no effect on the results of operations or financial
position for any year presented.

CASH AND CASH EQUIVALENTS

    The Company considers all highly liquid investments with original maturities
of 90 days or less at the date of acquisition to be cash equivalents. Cash
equivalents include money market funds, certificates of deposit, commercial
paper, and investments in government bonds totaling $72,084 and $90,830 at
December 31, 2000 and 1999, respectively. Cash equivalents are carried at
amortized cost, which approximates market.

INVESTMENTS

    The Company considers all investments with original maturities over 90 days
but less than one year to be short-term investments. Short-term investments
include commercial paper totaling $63,418 at December 31, 2000. The Company's
marketable securities are classified as held-to-maturity as of the balance sheet
date and are reported at amortized cost, which approximates market.

FAIR VALUE OF FINANCIAL INSTRUMENTS

    The carrying amounts of cash and cash equivalents, short-term investments,
trade accounts receivable, accounts payable and accrued payroll approximate fair
value due to the short-term nature of these instruments. The carrying amounts of
capital leases approximate fair value as the stated interest rates reflect
current market rates. Fair value estimates are made at a specific point in time,
based on relevant market information about the financial instrument when
available. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.

                                      F-7
<PAGE>
                              DIGIMARC CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATIONS OF CREDIT RISK

    Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and investments and trade receivables.
The Company places its cash and cash equivalents with major banks and financial
institutions. The Company's investment policy limits its credit exposure to any
one financial institution or type of financial instrument. As a result, the
credit risk associated with cash and investments is minimal. The Company had
accounts receivable from one customer representing approximately 63% of trade
accounts receivable at December 31, 2000 and accounts receivable from the same
customer representing approximately 91% of trade accounts receivable at
December 31, 1999. Loss of or non-performance by this significant customer could
adversely affect the Company's financial position, liquidity or results of
operations.

ACCOUNTS RECEIVABLE

    Trade accounts receivable are shown net of allowance for doubtful accounts.
The amount of the allowance and the charges were as follows:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                             ------------------------------
                                                               2000       1999       1998
                                                             --------   --------   --------
<S>                                                          <C>        <C>        <C>
Balance--beginning of period...............................    $ 3        $ 2        $17
Provision (recovery).......................................      2          5         (7)
Charge offs................................................     (5)        (4)        (8)
                                                               ---        ---        ---
Balance--end of period.....................................    $--        $ 3        $ 2
                                                               ===        ===        ===
</TABLE>

PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost. Property and equipment under
capital lease obligations are stated at the lower of the present value of
minimum lease payments at the beginning of the lease term or fair value of the
leased assets at the inception of the lease. Repairs and maintenance are charged
to expense when incurred.

    Depreciation on property and equipment is calculated by the straight-line
method over the estimated useful lives of the assets, generally two to five
years. Property and equipment held under capital leases are amortized by the
straight-line method over the lease term. Amortization of property and equipment
under capital lease is included in depreciation expense.

SOFTWARE DEVELOPMENT COSTS

    Under Statement of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING
FOR THE COST OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
software development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is made
available for general release to customers. To date, the establishment of
technological feasibility of the Company's products has occurred shortly before
general release and, therefore, software development costs qualifying for
capitalization have been immaterial. Accordingly, the Company has not
capitalized any software development costs and has charged all such costs to
research and development expense.

                                      F-8
<PAGE>
                              DIGIMARC CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
    Internal use software development costs are accounted for in accordance with
AICPA Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Costs incurred in the
preliminary project stage are expensed as incurred and costs incurred in the
application development stage, which meet the capitalization criteria, are
capitalized and amortized on a straight-line basis over the estimated useful
life of the asset.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

    The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS

    A portion of the Company's revenues each year is generated from licensing of
technology. In the competitive environment in which the Company operates, such
product generation, development and marketing processes are uncertain and
complex, requiring accurate prediction of demand as well as successful
management of various development risks inherent in technology development. In
light of these dependencies, it is possible that failure to successfully manage
future changes in technology with respect to the Company's technology could have
a long-term impact on the Company's growth and results of operations.

REVENUE RECOGNITION

    Revenue is recognized when earned in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, SOFTWARE
REVENUE RECOGNITION, SOP 98-4, Deferral of the Effective Date of a Provision of
97-2, SOFTWARE REVENUE RECOGNITION, and SOP 98-9, MODIFICATION OF SOP 97-2, WITH
RESPECT TO CERTAIN TRANSACTIONS.

    The Company generates revenue from the licensing of digital watermarking
products and services for use in authenticating documents, detecting fraudulent
documents and deterring unauthorized duplication or alteration of high-value
documents (Secure Documents), for use in communicating copyright, asset
management and business-to-business image commerce solutions (Media Commerce),
and for use in connecting analog media to a digital environment (Digimarc
MediaBridge).

    Revenue for licenses of the Company's software products is recognized upon
the Company meeting the following criteria, in accordance with SOP 97-2, as
amended: persuasive evidence of an arrangement exists; delivery has occurred;
the vendor's fee is fixed or determinable; and, collectibility is probable.

                                      F-9
<PAGE>
                              DIGIMARC CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
    SOP 98-9 requires that revenue is recognized under certain circumstances
using the "residual method." Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence (VSOE), is deferred and subsequently
recognized in accordance with the relevant sections of SOP 97-2, and (2) the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements.

    Revenue for subscriptions are paid in advance and are recognized ratably
over the term of the subscription. Revenue for contracted professional services
are recognized as the services are performed. The Company recognizes revenues on
service contracts on a method that approximates the percentage of completion
basis using budgeted amounts established with the customer at the inception of
the contract. Progress towards completion is measured using allowable costs
incurred as compared to the budgeted amounts contained in the basic contract.
Losses on contracts, if any, are provided for in the period in which the loss
becomes determinable. The contract is considered complete upon completion of the
deliverables specified in the contract. Deferred revenue consists of payments
received in advance for consulting services and subscriptions to the Company's
Internet service for service and support not yet performed.

FUNDED RESEARCH AND DEVELOPMENT

    The Company accounts for amounts received under its funded research and
development arrangements in accordance with the provisions of SFAS No. 68,
RESEARCH AND DEVELOPMENT ARRANGEMENTS. Under the terms of the arrangements, the
Company is not obligated to repay any of the amounts provided by the funding
parties. As a result, the Company recognizes revenue as the services are
performed.

    Revenues recognized under vendor and end-user funding arrangements totaled
$50, $6, and $1 for the years ended December 31, 2000, 1999, and 1998,
respectively. Direct costs allocated to the arrangement were $43, $3, and $1 for
the years ended December 31, 2000, 1999 and 1998, respectively.

ADVERTISING COSTS

    Advertising costs are expensed as incurred. Total advertising expenses were
$1,464, $86 and $135 for the years ended December 31, 2000, 1999 and 1998,
respectively.

STOCK-BASED COMPENSATION

    The Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize stock-based compensation expense over the
vesting period based on the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, under which no compensation expense for stock options
is recognized for stock awards granted at or above fair market value and to
provide pro forma net income and pro forma earnings per share disclosures as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.

                                      F-10
<PAGE>
                              DIGIMARC CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
    The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18,
ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR
ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES.

INCOME TAXES

    The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the future
tax consequences of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
tax assets to the amount expected to be realized.

NET LOSS PER SHARE

    Net loss per share is calculated in accordance with SFAS No. 128, EARNINGS
PER SHARE, which provides that basic and diluted net loss per share for all
prior periods presented are to be computed using the weighted average number of
common shares outstanding during each period, with diluted net income per share
including the effect of potentially dilutive common shares.

    Common stock equivalents related to stock options and warrants of 2,604,382,
1,615,944, and 1,327,426 are antidilutive in a net loss year and, therefore, are
not included in 2000, 1999 and 1998 diluted net loss per share, respectively.

(2) PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                             -------------------
                                                               2000       1999
                                                             --------   --------
<S>                                                          <C>        <C>
Furniture and fixtures.....................................  $   725     $  185
Office equipment...........................................    4,128      1,123
Leasehold improvements.....................................      591        140
                                                             -------     ------
                                                               5,444      1,448
Less accumulated depreciation and amortization.............   (1,922)      (487)
                                                             -------     ------
                                                             $ 3,522     $  961
                                                             =======     ======
</TABLE>

                                      F-11
<PAGE>
(3) NOTES PAYABLE

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2000        1999
                                                              ----------   --------
<S>                                                           <C>          <C>
Notes payable to stockholders, net of unamortized discount
  of $0 and $72 at December 31, 2000 and 1999, respectively,
  interest at 7% beginning in 1998, due and payable May 2005
  or earlier under certain conditions, unsecured............  $       --     $311
                                                              ----------     ----
                                                                      --      311
Less current portion........................................          --      311
                                                              ----------     ----
                                                              $       --     $ --
                                                              ==========     ====
</TABLE>

(4) LEASES

    The Company leases certain office equipment under long-term capital leases,
which expire over the next two years. At December 31, 2000 and 1999, the cost of
these assets was $584, and accumulated amortization was $463 and $329,
respectively.

    Future minimum lease payments under non-cancelable operating leases and the
present value of future minimum capital lease payments are as follows:

<TABLE>
<CAPTION>
                                                             CAPITAL    OPERATING
YEAR ENDING DECEMBER 31:                                      LEASES     LEASES
------------------------                                     --------   ---------
<S>                                                          <C>        <C>
2001.......................................................    $105      $1,049
2002.......................................................      32       1,002
2003.......................................................      --       1,058
2004.......................................................      --         936
2005.......................................................      --          31
                                                               ----      ------
  Total minimum lease payments.............................     137      $4,076
                                                                         ======
Less amount representing interest..........................      19
                                                               ----
                                                                118
Less current portion of capital lease......................      88
                                                               ----
                                                               $ 30
                                                               ====
</TABLE>

    On June 22, 1999, the Company entered into a five-year operating lease
agreement for office space. The lease requires a letter of credit in lieu of a
cash security deposit in the amount of $350. The letter of credit dated
August 1999 is secured by a certificate of deposit in the amount of $350. The
letter of credit is to be released over two years in increments upon the
Company's meeting certain milestones.

    Rent expense on the operating leases for the years ended December 31, 2000,
1999 and 1998 totaled $804, $141, and $71, respectively.

(5) DEFINED CONTRIBUTION PENSION PLAN

    The Company sponsors an employee savings plan (the Plan) which qualifies as
a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Employees become eligible to participate in the Plan at the beginning of the
following quarter after the employees' hire date.

                                      F-12
<PAGE>
(5) DEFINED CONTRIBUTION PENSION PLAN (CONTINUED)
Employees may contribute up to 15% of their pay to the Plan, subject to the
limitations of the Internal Revenue Code. Company matching contributions are
discretionary. For the years ending December 31, 2000, 1999 and 1998 the Company
made no discretionary matching contributions.

(6) STOCKHOLDERS' EQUITY

PREFERRED STOCK

    All outstanding preferred stock of the Company was converted to common stock
upon the closing of the Company's initial public offering in December 1999. The
authorized preferred stock of the Company following its re-incorporation and the
initial public offering consists of 5,000,000 shares of undesignated preferred
stock. Prior to the Company's initial public offering of common stock, the
Company had issued Series A-1, Series B-1 Series, C-1, Series D and Series D-X
preferred stock.

COMMON STOCK

    In December 1999, the Company completed its initial public offering of
common stock of 4,600,000 shares of its common stock which included the exercise
of the underwriters over-allotment option resulting in net proceeds of $83,801,
after deducting underwriting discounts, commissions and offering expenses.

DEFERRED STOCK COMPENSATION

    Deferred stock compensation expense is based on the difference between the
deemed fair market value of the Company's common stock and the exercise price of
options to purchase that stock on the date of grant, and is being recognized
over the vesting period of the related options, usually four years. The
estimated fair value per share used to determine deferred stock compensation was
derived by reference to preferred stock sales reduced by a discount factor, the
execution of various contracts and letters of intent, the progress toward
completion of new products, and the estimated price range of the common stock at
the effective date of the initial public offering. Stock-based compensation
expense of $2,173, $527, and $0 was recorded for the years ended December 31,
2000, 1999, and 1998, respectively. At December 31, 2000, $5,989 of stock-based
compensation remains deferred and we expect approximately $2,173, $2,173, and
$1,643 to be recognized as expense in 2001, 2002, and 2003, respectively.

STOCK INCENTIVE PLAN

    In October 1995, the 1995 Stock Incentive Plan (the 1995 Plan) was approved
by our Board of Directors. Under the terms of the 1995 Plan, the Board of
Directors is authorized to grant incentive stock options, non-qualified stock
options and restricted stock to officers, directors, employees or consultants.
Prices for all options or stock granted under the 1995 Plan are determined by
the Board of Directors. Option prices for incentive stock options are set at not
less than the fair market value of the common stock at the date of grant.
Options vest over periods determined by the Board of Directors, generally four
years. Options are contingent upon continued employment with the Company and,
unless otherwise specified, expire ten years from the date of grant. The Company
has reserved 2,800,000 shares of its common stock for issuance under the 1995
Plan.

    In October 1999, the 1999 Stock Incentive Plan (the 1999 Plan) was approved
by our Board of Directors. The Company initially reserved 1,500,000 shares of
its common stock for issuance under the 1999 Plan. Upon completion of the
Company's Offering, shares available for grant from the 1995 Plan were
transferred to the 1999 Plan. During 2000, the Company reserved an additional
1,500,000 shares

                                      F-13
<PAGE>
(6) STOCKHOLDERS' EQUITY (CONTINUED)
of its common stock for issuance under the 1999 Plan bringing the total to
5,800,000 shares. The exercise price and term of options granted under the 1999
Plan are determined by our Board of Directors or by a committee they designate.

    As part of the 1999 Plan, the Company adopted the Non-Employee Director
Option Plan (the Director Plan). Under the Director Plan, an automatic option
grant to acquire 10,000 shares will be given to each non-employee director
then-existing or first elected to the Company's Board of Directors. These
options vest in four annual increments on the anniversary date of the grant
date. In addition, an annual option grant of 2,500 shares will be given to each
non-employee director on the date of the Company's annual stockholders' meeting
if certain conditions are met. These options will vest on the first anniversary
of the grant date. The exercise price of the options under this plan is fair
market value on the date of grant.

    In June 2000, the 2000 Non-Officer Employee Stock Incentive Plan (the 2000
Plan) was approved by our Board of Directors. The Company initially reserved
275,000 shares of its common stock for issuance under the 2000 Plan. Options
from the 2000 Plan cannot be granted to Officers or Directors of the Company.
The exercise price and term of options granted under the 2000 Plan are
determined by our Board of Directors or by a committee they designate. The
exercise price is generally set at the fair market value of the stock on the
date of grant. Options under the 2000 Plan generally vest over four years.

    SFAS No. 123 defines a fair value based method of accounting for an employee
stock option and similar equity instrument. As is permitted under SFAS No. 123,
the Company has elected to continue to account for its stock-based compensation
plans under APB Opinion No. 25. The Company has computed, for pro forma
disclosure purposes, the value of all options granted during 2000, 1999 and 1998
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 with
the following weighted average assumption for grants:

<TABLE>
<CAPTION>
                                                            2000          1999          1998
                                                          --------      --------      --------
<S>                                                       <C>           <C>           <C>
Risk-free interest rate.................................    6.00%         6.25%         6.00%
Expected dividend yield.................................      --            --            --
Expected life (in years)................................       4             4             4
Expected volatility.....................................     100%          100%          100%
</TABLE>

    Using the Black-Scholes methodology, the total value of options granted
during 2000, 1999, and 1998 was $49,201, $9,015, and $175, respectively, which
would be amortized on a pro forma basis over the vesting period of the options.
The weighted average fair value of options granted during 2000, 1999, and 1998
was $22.28, $7.91, and $0.09 per share, respectively. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS
No. 123, the Company's loss per share would approximate the pro forma
disclosures below:

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2000       1999       1998
                                                   --------   --------   --------
<S>                                                <C>        <C>        <C>
Pro forma net loss...............................  $(38,398)  $(5,700)   $(3,552)
Pro forma net loss per share.....................  $  (2.83)  $ (1.87)   $ (1.55)
</TABLE>

    To comply with the pro forma reporting requirements of SFAS No. 123
compensation cost is also estimated for the fair value of future employee stock
purchase plan issuances which is included in the pro forma totals above.
Therefore, the Company has estimated the compensation cost for its employee

                                      F-14
<PAGE>
(6) STOCKHOLDERS' EQUITY (CONTINUED)
stock purchase plan issuance, which will be in May 2001. The fair value of
purchase rights granted under the Purchase Plan is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for the year ended December 31, 2000: no expected dividends;
expected volatility of 100%; risk-free interest rate of 6.00%; and expected life
of approximately six months. The weighted-average fair value of the purchase
rights granted under the Purchase Plan during fiscal 2000 was $6.70.

    The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.

    Transactions involving the stock incentive plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                   WEIGHTED AVERAGE
                                                NUMBER OF SHARES    EXERCISE PRICE
                                                ----------------   ----------------
<S>                                             <C>                <C>
Options outstanding, December 31, 1997........       912,200            $ 0.40
Granted.......................................       646,800              0.50
Exercised.....................................       (33,486)             0.50
Canceled......................................      (220,714)             0.50
                                                   ---------            ------
Options outstanding, December 31, 1998........     1,304,800              0.42
Granted.......................................     1,516,750              3.67
Exercised.....................................      (116,747)             0.44
Canceled......................................       (47,992)             0.50
                                                   ---------            ------
Options outstanding, December 31, 1999........     2,656,811              2.28
Granted.......................................     2,954,750             30.96
Exercised.....................................      (595,721)             0.72
Canceled......................................      (217,941)            43.34
                                                   ---------            ------
Options outstanding, December 31, 2000........     4,797,899            $18.37
                                                   =========
</TABLE>

<TABLE>
<CAPTION>
                                             OUTSTANDING                   EXERCISABLE
                                 -----------------------------------   --------------------
                                              REMAINING     WEIGHTED               WEIGHTED
                                 NUMBER OF   CONTRACTUAL    AVERAGE    NUMBER OF   AVERAGE
                                  SHARES     LIFE (YEARS)    PRICE      SHARES      PRICE
                                 ---------   ------------   --------   ---------   --------
<S>                    <C>       <C>         <C>            <C>        <C>         <C>
          $0.15--$0.50 ........    675,109        6.64       $ 0.41      447,078    $ 0.37
           1.50-- 2.50 ........  1,274,231        8.40         2.12      341,150      2.07
          13.38--15.88 ........  1,018,400        9.94        14.21       10,018     14.58
          16.25--23.00 ........    355,904        9.11        20.28       36,978     20.73
          25.13--34.00 ........    421,100        9.45        28.15       72,146     26.21
          35.13--44.25 ........    367,055        9.40        36.69       71,887     35.13
          46.50--53.94 ........    535,500        9.10        53.23       89,426     53.94
          57.00--74.13 ........    150,600        9.10        64.05        5,979     62.20
                                 ---------        ----       ------    ---------    ------
         $0.15--$74.13 ........  4,797,899        8.80       $18.37    1,074,662    $10.60
                                 =========                             =========
</TABLE>

    At December 31, 2000, 252,545 shares were available for grant.

                                      F-15
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN

    Under the 1999 Employee Stock Purchase Plan (the Purchase Plan), the Company
has authorized the issuance of 625,000 common shares, 564,293 of which all are
available at December 31, 2000. The Purchase Plan allows eligible employees to
purchase the Company's common stock through payroll deductions, which may not
exceed 15% of an employee's base compensation, not to exceed $21 per year,
including commissions, bonuses and overtime, at a price equal to 85% of the
lower of the fair value at the beginning or end of each enrollment period.

WARRANT

    In October 1999, the Company entered into a two year agreement with Hearst
Communications, Inc. (Hearst) in which the Company and Hearst would jointly
promote Internet-enabled advertising. In connection with the Hearst agreement,
the Company issued a warrant to purchase 150,000 shares of common stock to
Hearst at $20 per share. Of the 150,000 shares, 62,500 vested upon the Company's
Offering, another 62,500 shares vest based on the achievement of certain
milestones within the first year of the agreement, and the final 25,000 vest
upon the one-year anniversary of the agreement. The warrant is exercisable for
three years after each vesting date.

    The value of the warrant at December 31, 2000 was $1,518. The Company
recorded $633 of sales and marketing expense during 1999 that related to the
vested portion of the warrant. The value and expense of the warrant was
calculated using the Black-Scholes method, assuming a 6.25% risk-free interest
rate, three year term, and 100% volatility. The Company will continue to record
non-cash charges in its statement of operations based on the fair value of the
newly-vested portions of the warrant. During 2000, no additional warrant expense
was recorded as no additional vesting occurred. As of December 31, 2000, no
portion of the warrant had been exercised.

(7) INCOME TAXES

    Due to the Company's losses before the provision for income taxes for the
years ended December 31, 2000, 1999 and 1998, there has been no provision for
federal and state taxes. The reconciliation of the statutory federal income tax
rate to the Company's effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED
                                                                      DECEMBER 31,
                                                          ------------------------------------
                                                            2000          1999          1998
                                                          --------      --------      --------
<S>                                                       <C>           <C>           <C>
Federal statutory rate..................................    (34)%         (34)%         (34)%
Increase (decrease) resulting from:
  State income taxes, net of federal tax benefit........     (7)%          (5)%          (4)%
  Change in valuation allowance.........................     41 %          43 %          40 %
  Other, net............................................     --            (4)%          (2)%
                                                            ---           ---           ---
    Effective tax rate..................................     --%           --%           --%
                                                            ===           ===           ===
</TABLE>

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

                                      F-16
<PAGE>
(7) INCOME TAXES (CONTINUED)
purposes. The tax effects of significant items comprising the Company's deferred
tax assets and deferred tax liabilities as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                           --------   --------
<S>                                                        <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards.......................  $ 12,428   $ 3,482
  Tax depreciation and amortization......................       328       233
  Research and experimentation credits...................       113       113
  Accrued expenses.......................................     1,213       432
  Deferred revenue.......................................       248       491
                                                           --------   -------
    Total gross deferred tax assets......................    14,330     4,751
  Less valuation allowance...............................   (14,309)   (4,723)
                                                           --------   -------
    Net deferred tax assets..............................        21        28
  Deferred tax liabilities:
    Unamortized discount on notes payable................        21        28
                                                           --------   -------
      Total deferred tax liabilities.....................        21        28
                                                           --------   -------
      Net deferred tax liability (asset).................  $     --   $    --
                                                           ========   =======
</TABLE>

    The valuation allowance for deferred tax assets as of December 31, 2000 and
1999, respectively, was $14,309 and $4,723. The net change in the total
valuation allowance for the year ended December 31, 2000, 1999 and 1998 was an
increase of $9,586, $1,024, and $1,385, respectively. Included in the valuation
allowance at December 31, 2000 is $3,852 for deferred tax assets for which
subsequently recognized tax benefits, if any, will be allocated to contributed
capital.

    At December 31, 2000, the Company had net operating loss carryforwards of
approximately $32,403 to offset against future income for federal and state tax
purposes, and research and experimentation credits of $130. These carryforwards
expire through 2020.

    A provision of the Internal Revenue Code requires that the utilization of
net operating losses and research and experimentation credits be limited when
there is a change of more than 50% in ownership of the Company. Such a change
occurred with the sale of Series A preferred stock in June 1996 and the sale of
Series B preferred stock in July 1996. Accordingly, the utilization of the net
operating loss carryforwards generated from periods prior to July of 1996 is
limited; the amount subject to limitation is approximately $915.

    A change of more than 50% in ownership occurred twice during 1999. The
change occurred with the sale of Series D preferred stock in June 1999 and again
with the Offering in December 1999. As such, the utilization of the net
operating loss carryforwards generated from periods prior to June and December
of 1999 is limited. The amount of the net operating loss carryforward subject to
the utilization limitation is approximately $9,037.

(8) SEGMENT INFORMATION

GEOGRAPHIC INFORMATION

    The Company derives its revenue from a single operating segment, digital
watermarking applications. Revenue is generated in this segment through
licensing and subscription of its Media Commerce, Secure Documents, and Digimarc
MediaBridge products and the delivery of contracted and consulting services
related to these products.

                                      F-17
<PAGE>
(8) SEGMENT INFORMATION (CONTINUED)
    The Company operates solely within the United States, and all assets are
located within the United States. Sales to identifiable foreign customers were
approximately $1,322, $351 and $89 for the years ended December 31, 2000, 1999
and 1998, respectively.

MAJOR CUSTOMERS

    Revenue from the Company's major customers was as follows:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED
                                                                   DECEMBER 31,
                                                          ------------------------------
                                                            2000       1999       1998
                                                          --------   --------   --------
<S>                                                       <C>        <C>        <C>
Customer A..............................................   9,053      6,136       503
</TABLE>

    Accounts receivable from one customer represented 63% of trade receivables
at December 31, 2000. Accounts receivable from one customer represented
approximately 91% of trade accounts receivable at December 31, 1999.

(9) COMMITMENTS AND CONTINGENCIES

    At December 31, 2000, the Company had an unused line of credit of $5,000.
This line is secured by $5,000 in investments at the bank providing the line.

(10) QUARTERLY FINANCIAL INFORMATION -- UNAUDITED

    A summary of quarterly financial information follows:

<TABLE>
<CAPTION>
QUARTER ENDED                       MARCH 31   JUNE 30    SEPTEMBER 30   DECEMBER 31
-------------                       --------   --------   ------------   -----------
<S>                                 <C>        <C>        <C>            <C>
2000
Total revenue.....................  $ 2,570    $ 2,704       $ 3,140       $ 3,436
Cost of revenue...................    1,511      1,821         1,748         1,557
Operating loss....................   (3,675)    (7,495)       (5,530)       (5,011)
Net loss..........................   (2,464)    (6,185)       (4,256)       (2,940)
Net loss per share, diluted and
  basic...........................  $ (0.19)   $ (0.48)      $ (0.33)      $ (0.19)

1999
Total revenue.....................  $ 1,059    $   996       $ 2,130       $ 2,744
Cost of revenue...................      480        455           941         1,750
Operating loss....................     (118)      (431)         (284)       (1,949)
Net loss..........................     (129)      (448)         (247)       (1,565)
Net loss per share, diluted and
  basic...........................  $ (0.06)   $ (0.19)      $ (0.10)      $ (0.30)
</TABLE>

    The four quarters for net loss per share may not add for the year because of
the different number of shares outstanding during the year.

                                      F-18