<PAGE>

================================================================================

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

                                   -----------

                                    Form 10-Q

                                   -----------

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

                        COMMISSION FILE NUMBER 000-28317

                                   -----------

                              DIGIMARC CORPORATION
             (Exact name of registrant as specified in its charter)

              DELAWARE                                   94-3342784
   State or other jurisdiction of                     (I.R.S. Employer
   incorporation or organization)                  Identification Number)


               19801 SW 72ND AVE, STE 250, TUALATIN, OREGON 97062
                    (Address of principal executive offices)

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

                                   -----------

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes /x/   No / /

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

     13,040,430 shares of Common Stock, $.001 par value, as of July 31, 2000

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Page 1
<PAGE>

                              DIGIMARC CORPORATION
                                TABLE OF CONTENTS


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

Item 1.        Financial Statements:

               Condensed Balance Sheets as of June 30, 2000 and December 31, 1999.....................................         3

               Condensed Statements of Operations for the three months and six months ended June 30, 2000 and 1999....         4

               Condensed Statements of Cash Flows for the six months ended June 30, 2000 and 1999.....................         5

               Notes to Condensed Financial Statements................................................................         6

Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations..................         7

Item 3.        Quantitative and Qualitative Disclosures about Market Risk.............................................        20

PART II.       OTHER INFORMATION

Item 4.        Submission of Matters to a Vote of Security Holders....................................................        21

Item 6.        Exhibits and Reports on Form 8-K.......................................................................        21

Signatures                                                                                                                    22
</TABLE>


Page 2
<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                              DIGIMARC CORPORATION
                            CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                   JUNE 30,        DECEMBER 31,
                                                                                                     2000            1999(1)
                                                                                                ----------         ----------
<S>                                                                                                <C>                <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents...................................................................    $82,637            $90,830
   Trade accounts receivable, net..............................................................      2,533              2,225
   Other current assets........................................................................        976                834
                                                                                                ----------         ----------

      Total current assets.....................................................................     86,146             93,889

Property and equipment, net....................................................................      2,931                961
Other assets, net..............................................................................         38                 53
                                                                                                ----------         ----------

      Total assets.............................................................................    $89,115            $94,903
                                                                                                ==========         ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable............................................................................     $3,063             $1,638
   Accrued payroll and related costs...........................................................      1,000                504
   Deferred revenue............................................................................      1,082              1,318
   Other current liabilities...................................................................        160                529
                                                                                                ----------         ----------

      Total current liabilities................................................................      5,305              3,989
Other long-term liabilities....................................................................         65                119
Stockholders' equity:
   Common stock................................................................................         13                 13
   Additional paid-in capital..................................................................    111,187            110,675
   Deferred stock compensation.................................................................     (7,075)            (8,162)
   Warrant.....................................................................................        633                633
   Accumulated deficit.........................................................................    (21,013)           (12,364)
                                                                                                ----------         ----------

      Total stockholders' equity...............................................................     83,745             90,795
      Total liabilities and stockholders' equity...............................................    $89,115            $94,903
                                                                                                ==========         ==========
</TABLE>

-----------

(1)      The information in this column was derived from the Company's audited
         financial statements as of December 31, 1999.

                  See Notes to Condensed Financial Statements.


Page 3
<PAGE>

                              DIGIMARC CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                         ------------------       ----------------
                                                                          JUNE 30,   JUNE 30,    JUNE 30,   JUNE 30,
                                                                            2000       1999        2000       1999
                                                                            ----       ----        ----       ----
<S>                                                                       <C>        <C>         <C>        <C>
Revenue:
   License and subscription........................................           $66        $42         $95       $116
   Service.........................................................         2,638        954       5,179      1,939
                                                                           ------     ------      ------     ------

      Total revenue................................................         2,704        996       5,274      2,055
Cost of revenue:
   License and subscription........................................            34         22          65         43
   Service.........................................................         1,787        433       3,267        892
                                                                           ------     ------      ------     ------

      Total cost of revenue........................................         1,821        455       3,332        935
Gross profit.......................................................           883        541       1,942      1,120
Operating expenses:
   Sales and marketing.............................................         3,990        263       5,481        394
   Research, development and engineering...........................         1,019        140       1,982        247
   General and administrative......................................         3,369        569       5,649      1,028
                                                                           ------     ------      ------     ------

      Total operating expenses.....................................         8,378        972      13,112      1,669
                                                                           ------     ------      ------     ------

Operating loss.....................................................        (7,495)      (431)    (11,170)      (549)
Other income (expense):
   Interest income.................................................         1,351         12       2,677         25
   Interest expense................................................            (8)       (28)        (96)       (54)
   Other...........................................................           (33)        (1)        (60)         1
                                                                           ------     ------      ------     ------

      Total other income (expense), net............................         1,310        (17)      2,521        (28)
                                                                           ------     ------      ------     ------

Loss before provision for income taxes.............................        (6,185)      (448)     (8,649)      (577)
Provision for income taxes.........................................             -          -           -          -
                                                                           ------     ------      ------     ------

Net loss...........................................................       $(6,185)     $(448)    $(8,649)     $(577)
                                                                           ======     ======      ======     ======

Net loss per share-basic and diluted...............................        $(0.48)    $(0.19)     $(0.67)    $(0.25)
Weighted average shares used in computing net loss per share-
basic and diluted..................................................        12,917      2,335      12,825      2,328
</TABLE>

                  See Notes to Condensed Financial Statements.


Page 4
<PAGE>

                              DIGIMARC CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                            SIX MONTHS ENDED
                                                                                                            ----------------
                                                                                                         JUNE 30,       JUNE 30,
                                                                                                           2000           1999
                                                                                                           ----           ----
<S>                                                                                                     <C>              <C>
Cash flows from operating activities:
   Net loss.........................................................................................     $(8,649)         $(577)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization.................................................................         566            121
      Amortization of discount on note payable......................................................           -              7
      Stock-based compensation expense..............................................................       1,086              -
      Changes in assets and liabilities:
        Trade accounts receivable...................................................................        (308)        (1,258)
        Other current assets........................................................................        (142)          (278)
        Accounts payable............................................................................       1,425            124
        Accrued payroll and related costs and other current liabilities.............................         543            (33)
        Deferred revenue............................................................................        (236)            (1)
                                                                                                          ------          -------
           Net cash used in operating activities....................................................      (5,715)        (1,895)
Cash flows from investing activities:
   Purchase of property and equipment...............................................................      (2,510)           (82)
   Purchase of tradename............................................................................         (10)             -
   Sale of tradename................................................................................           -             10
                                                                                                          ------          -------
           Net cash used in investing activities....................................................      (2,520)           (72)
Cash flows from financing activities:
   Repayment of short-term borrowing................................................................           -           (250)
   Net proceeds from issuance of preferred stock....................................................           -          6,329
   Net proceeds from issuance of common stock.......................................................         512              -
   Principal payments on notes payable..............................................................        (390)             -
   Principal payments under capital lease obligations...............................................         (80)           (80)
                                                                                                          ------          -------
           Net cash provided by financing activities................................................          42          5,999
Net (decrease) increase in cash and cash equivalents................................................      (8,193)         4,032
Cash and cash equivalents at beginning of period....................................................      90,830          2,137
                                                                                                          ------          -------
Cash and cash equivalents at end of period..........................................................     $82,637         $6,169
                                                                                                          ======          =======

Supplemental disclosure of cash flow information:
   Cash paid for interest...........................................................................        $174            $54
Summary of non-cash investing and financing activities:
   Equipment acquired or exchanged under capital lease obligations..................................          $-           $127
</TABLE>


                  See Notes to Condensed Financial Statements.


Page 5
<PAGE>

                              DIGIMARC CORPORATION
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

1.  THE COMPANY, BASIS OF PRESENTATION

         The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. The results of operations for such periods are not
necessarily indicative of the results expected for a full year or for any
future period. Certain reclassifications were made to the financial
statements to conform to the 2000 presentation.

         These financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1999 as included in
the Company's Annual Report on Form 10-K dated March 28, 2000.

2.  LOSS PER SHARE COMPUTATION

         Historical basic and diluted net loss per share is computed using the
weighted average number of shares of common stock outstanding for the period.
The effect of outstanding stock options and outstanding warrants are excluded
from the calculation of historical diluted net loss per share for the periods
presented as their inclusion would be antidilutive.

3.  SEGMENT INFORMATION

         The Company derives its revenue from a single operating segment,
digital watermarking applications. Revenue from one customer represented 87% and
89% of total revenue for the three months ended June 30, 2000 and 1999,
respectively, and 89% and 91% of total revenue for the six months ended June 30,
2000 and 1999, respectively. Accounts receivable from one customer represented
87% and 91% of trade receivables at June 30, 2000 and December 31, 1999,
respectively.

4.STOCK-BASED COMPENSATION ALLOCATION TO SALES & MARKETING, RESEARCH,
DEVELOPMENT AND ENGINEERING, AND GENERAL AND ADMINISTRATIVE EXPENSE
CATEGORIES. 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
$543,000 and $1.1 million was recorded for the three and six months ended
June 30, 2000, respectively, and is included in the respective income
statement expense categories for the employees to which it applies. The total
deferred stock compensation recorded by us from inception to June 30, 2000
was $8.7 million. The fair value per share used to determine deferred stock
compensation for stock option grants made prior to our initial public
offering was derived by reference to sales of our preferred and common stock
reduced by a discount factor in each case. At current estimates, additional
stock-based compensation expense related to stock option grants will be
approximately $1.1 million for the remainder of 2000 and $2.2 million for
each of 2001 and 2002.


Page 6
<PAGE>

ITEM 2. 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," "RISKS RELATED
TO OUR INDUSTRY," AND ELSEWHERE IN THIS DOCUMENT AND THOSE RISKS DESCRIBED IN
OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MARCH 28, 2000, AND IN OUR REGISTRATION STATEMENT NO. 333-87501, AS AMENDED,
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS DISCUSSION AND ANALYSIS
SHOULD BE READ IN CONJUNCTION WITH OUR INTERIM UNAUDITED CONDENSED 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 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.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                  THREE MONTHS          SIX MONTHS
                                                                                  ENDED JUNE 30,       ENDED JUNE 30,
                                                                                  --------------       --------------
                                                                                  2000      1999       2000      1999
                                                                                  ----      ----       ----      ----
<S>                                                                               <C>       <C>        <C>      <C>
Revenue:
   License and subscription................................................          2%        4%         2%       6%
   Service.................................................................         98        96         98       94
                                                                                  ----      ----       ----     ----

      Total revenue........................................................        100       100        100      100
Cost of revenue:
   License and subscription................................................          1         2          1        2
   Service.................................................................         66        44         62       44
                                                                                  ----      ----       ----     ----

      Total cost of revenue................................................         67        46         63       46
                                                                                  ----      ----       ----     ----

   Gross margin............................................................         33        54         37       54
Operating expenses:
   Sales and marketing.....................................................        148        27        104       19
   Research, development and engineering...................................         38        14         38       12
   General and administrative..............................................        124        57        107       50
                                                                                  ----      ----       ----     ----

      Total operating expenses.............................................        310        98        249       81
                                                                                  ----      ----       ----     ----

      Operating loss.......................................................       (277)      (43)      (212)     (27)
Other income (expense).....................................................         48        (2)        48       (1)
                                                                                  ----      ----       ----     ----

      Net loss.............................................................       (229)%     (45)%     (164)%    (28)%
                                                                                  ====      ====       ====     ====
</TABLE>

Page 7
<PAGE>

REVENUE

         Total revenue was $2.7 million and $5.3 million for the three and
six months ended June 30, 2000, respectively, compared to total revenue of
$996,000 and $2.1 million for the three and six months ended June 30, 1999,
respectively. The $1.7 million or 171% and $3.2 million or 157% increase for
the three and six months ended June 30, 2000, respectively, was primarily the
result of increased service revenue which we earned through our 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. One customer (the consortium of banks) accounted for approximately
87% and 89% of our total revenue for the three and six months ended June 30,
2000, 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 for the remainder of
years 2000 and 2001. We intend to pursue further business with this customer
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
introduction and implementation of these new 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.

LICENSE AND SUBSCRIPTION. License and subscription revenue was $66,000 and
$95,000 for the three and six months ended June 30, 2000, respectively,
compared to $42,000 and $116,000 in the respective periods of 1999. During
the quarter we introduced Digimarc MediaBridge commercially and launched the
first internet-enabled magazine, the July issue of WIRED. We continue to
market and implement Digimarc MediaBridge in other areas. If we are
successful in our implementation of Digimarc MediaBridge, we would expect our
overall revenue mix to change significantly.

SERVICE. Service revenue was $2.6 million and $5.2 million for the three and
six months ended June 30, 2000, respectively, compared to revenue of $954,000
and $1.9 million for the three and six months ended June 30, 1999,
respectively. The $1.7 million or 176% and $3.2 million or 167% for the
three and six months ended June 30, 2000, respectively, increase was the
direct result of increased services provided to the consortium of leading
central banks.

COST OF REVENUE

LICENSE AND SUBSCRIPTION. Cost of license and subscription revenue 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 $34,000 and
$65,000 for the three and six months ended June 30, 2000, respectively, compared
to $22,000 and $43,000 for the three and six months ended June 30, 1999,
respectively.


Page 8
<PAGE>

SERVICE. Cost of service revenue primarily 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 $1.8 million and $3.3 million for the three and six months ended
June 30, 2000, respectively, compared to cost of service revenue of $433,000 and
$892,000 for the three and six months ended June 30, 1999, respectively. The
$1.4 million or 313% and $2.4 million or 266% for the three and six months ended
June 30, 2000, respectively, was the result of an increased use of our
research and development and sales and marketing personnel to provide services
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
$4.0 million and $5.5 million for the three and six months ended June 30, 2000,
respectively, compared to $263,000 and $394,000 for the three and six months
ended June 30, 1999, respectively. The $3.7 million or 1417% and $5.1 million or
1291% increase for the three and six months ended June 30, 2000, respectively,
resulted from increased costs of $1.8 million and $2.8 million, respectively,
related to salaries and other employee related costs, including travel expenses;
$1.9 million and $2.3 million, respectively, of increased costs related to
marketing administration and promotional activities; $171,000 and $342,000,
respectively, of increased costs related to stock-based compensation; offset in
part by an increased allocation of $560,000 and $1.0 million, respectively, to
cost of 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 62 and 11 as of June 30,
2000 and 1999, respectively. We believe that a significant increase in our sales
and marketing effort is essential for the introduction of new products,
including additional secure documents applications, and the Digimarc MediaBridge
system. 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 $1.0 million
and $2.0 million for the three and six months ended June 30, 2000, respectively,
compared to $140,000 and $247,000 for the three and six months ended June 30,
1999, respectively, representing an increase of $879,000 or 628% and $1.7
million or 702%, respectively. Salaries and other employee related costs,
including travel expenses, increased $1.3 million and $2.4 million,
respectively; costs relating to stock-based compensation increased $126,000 and
$251,000, respectively; offset in part by an increased allocation of $611,000
and $1.1 million for the three and six months ended June 30, 2000, respectively,
to cost of revenue associated with research, development and engineering
personnel who provided services to our anti-counterfeiting system customer.
Research, development and engineering personnel totaled 64 and 15 as of June 30,
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.


Page 9
<PAGE>
 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 $3.4
million and $5.6 million for the three and six months ended June 30, 2000,
respectively, compared to $569,000 and $1.0 million for the three and six
months ended June 30, 1999, respectively, representing an increase of $2.8
million or 492% and $4.6 million or 450%, respectively. $570,000 and $1.1
million for the three and six months ended June 30, 2000, respectively, of
this increase was the result of increased executive compensation, travel
expenses, and recruiting fees; $246,000 and $493,000, respectively, of
increased cost related to stock-based compensation; $696,000 and $1.2
million, respectively, was the result of increased general administrative
expenses of facilities, depreciation and office expense related to our recent
growth; and $767,000 and $1.1 million, respectively, was the result of
professional fees primarily related to litigation costs associated with our
claims against other parties. General and administrative employees totaled 24
and five as of June 30, 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 ALLOCATION TO SALES & MARKETING, RESEARCH,
DEVELOPMENT AND ENGINEERING, AND GENERAL AND ADMINISTRATIVE EXPENSE
CATEGORIES. 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
$543,000 and $1.1 million was recorded for the three and six months ended
June 30, 2000, respectively, and is included in the respective income
statement expense categories for the employees to which it applies. The total
deferred stock compensation recorded by us from inception to June 30, 2000
was $8.7 million. The fair value per share used to determine deferred stock
compensation for stock option grants made prior to our initial public
offering was derived by reference to sales of our preferred and common stock
reduced by a discount factor in each case. At current estimates, additional
stock-based compensation expense related to stock option grants will be
approximately $1.1 million for the remainder of 2000 and $2.2 million for
each of 2001 and 2002.


PROVISION FOR INCOME TAXES. We have recognized operating losses since inception
and as such have not incurred income tax expense. As of December 31, 1999, we
had operating loss carryforwards for federal and state income tax reporting
purposes of approximately $9.1 million and research and development tax credit
carryforwards of $113,000, the last of which will expire through 2019 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.

OTHER INCOME (EXPENSE)

         Other income (expense) consists primarily of interest received and
paid, as well as corporate tax expense. Other income (expense) was $1.3
million and $2.5 for the three and six month periods ended June 30, 2000,
respectively, compared to $(17,000) and $(28,000) for the three and six month
periods ended June 30, 1999, respectively. The $1.3 million and $2.5 million
increase for the three and six months ended June 30, 2000, respectively, came
as a result of increased interest income due to significantly higher cash and
cash equivalent balances.

Page 10
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 2000, we had cash and cash equivalents of $82.6
million, which decreased $8.2 million from $90.8 million at December 31,
1999. Working capital at June 30, 2000 was $80.8 million, compared to working
capital of $89.9 million at December 31, 1999. The decrease in working
capital is primarily attributable to the cash used in our current operations
and investments made in fixed assets.

         Our operating activities resulted in net cash outflows of $5.7
million and $1.9 million for the six months ended June 30, 2000 and 1999,
respectively. Operating cash outflows was due primarily to increased losses
from operations in the six months ended June 30, 2000 of $8.1 million, offset
in part by an increase in trade accounts payable, and accrued liabilities of
$1.3 million and $576,000, respectively.

         Investing activities used cash of $2.5 million and $72,000 for the
six months ended June 30, 2000 and 1999, respectively. Cash used in investing
activities related primarily to the purchase of property and equipment. 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 $42,000 and $6.0 million for
the six months ended June 30, 2000 and 1999, respectively. Net cash provided by
financing activities in the six months ended June 30, 2000 related primarily to
proceeds from issuance of common stock offset by principal payments on our
equipment lease obligations and the payoff of principal and interest on notes
payable to common stockholders. Net cash provided by financing activities in the
six months ended June 30, 1999 was related primarily to proceeds from the
issuance of preferred stock.

         We have computers and office equipment financed under long-term capital
leases that expire over the next 27 months. As of June 30, 2000, we had an
outstanding balance of $178,000 of capital lease obligations. Other significant
commitments consist of obligations under non-cancelable operating leases, which
totaled $4.4 million as of June 30, 2000, and are payable in monthly
installments through 2005.

         We believe that our current cash and cash equivalent balances,
together with cash anticipated to be generated from operations and
anticipated financing arrangements, will satisfy our projected working
capital and capital expenditure requirements, at a minimum, through at least
the end of 2001. However, we may be required to finance any additional
requirements through additional equity, debt financings, 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.

RECENT ACCOUNTING PROUNCEMENT

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 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
In June 1999, the FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133. Statement No. 137 defers the effective date of Statement
No. 133 for one year. Statement No. 133 is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company is
currently evaluating the adoption of SFAS Nos. 133 and 137 and its potential
impact on its financial condition or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements.  In June 2000, SAB 101B was
issued which defers the implementation date of SAB 101 until October 1, 2000.
 The Company is currently evaluating the adoption of SAB 101 and its
potential impact on its financial condition or results of operations.

In January 2000, the Emerging Issues Task Force ("EITF") of the FASB reached
consensus on Issue 99-17 "Accounting for Advertising Barter Transactions"
barter transactions which involve nonmonetary exchanges of advertising. It
requires that an entity recognize revenue and expenses from advertising
barter transactions at the fair value of the advertising surrendered only
when an entity has a historical practice of receiving cash for similar
transactions. The Company does not believe that the adoption of EITF 99-17
will have a material impact on its financial condition or results of
operations.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion
No. 25, (FIN 44).  FIN 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards, and
changes in grantee status that occur on or after July 1, 2000, except for the
provisions related to repricings and the definition of an employee, which
apply to awards issued after December 15, 1998.  The provisions related to
modifications to fixed stock options awards to add a reload feature are
effective for awards modified after January 12, 2000.  We do not expect that
this statement will have a significant impact on our financial condition or
results of operations.

In March 2000, the EITF of the FASB reached consensus on Issue 00-2
"Accounting for Website Development Costs" ("EITF 00-2"). EITF 00-2
establishes how an entity should account for costs incurred to develop a
website. It requires that an entity capitalize costs during the web
application and infrastructure and graphics development stages of
development. The consensus is effective for all costs incurred beginning
after June 30, 2000, although earlier adoption is encouraged. The Company is
currently evaluating the adoption of EITF 00-2 and its potential impact on
its financial condition or results of operations.



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<PAGE>

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 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.

         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 continue to incur losses for the foreseeable future in light of our planned
operating expenditures. We incurred net losses of $8.6 million for the first six
months of 2000, $2.4 million in 1999, $3.4 million in 1998, $4.0 million in
1997, $1.6 million in 1996 and $874,000 in 1995. We have not been profitable and
cannot assure you that we will realize sufficient revenue to achieve
profitability. Our accumulated deficit as of June 30, 2000 was approximately
$21.0 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, and in recent periods, from secure document
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 June 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 we have not yet sold these products in the


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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 we are currently developing for these new products will be
accepted. If we do not successfully 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 89% OF OUR REVENUE FROM A SINGLE CUSTOMER, THE LOSS
OF THIS CUSTOMER WOULD SERIOUSLY HARM OUR BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION

         We derive a substantial portion of our revenue from a consortium of
leading central banks with whom we have a development and license agreement
related to banknote counterfeit deterrence. Revenue from products and services
provided to this significant customer accounted for 89% of our total revenue
during the six months ended June 30, 2000, 89% of our total revenue in 1999 and
51% of our total revenue in 1998. We anticipate that this relationship will
account for most of our revenue until we are able to generate additional revenue
from the introduction of other new products and services that we are developing,
including the Digimarc MediaBridge system. 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 levels for the next 18 months.

         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
which we plan on providing 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 major 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.


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<PAGE>

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, including the Digimarc MediaBridge
               system;

          -    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 89% 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.

         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 an
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


Page 14
<PAGE>

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 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.

         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" and "MARCSPIDER" 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 "MarcCentre" and are pursuing registration of these
marks 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


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<PAGE>

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, 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


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<PAGE>

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 June 30, 2000 we had 150 employees. In addition, we expect that
we need to hire a total of approximately 38 additional employees in all areas in
2000. 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. In addition, any additional growth of our product lines
or business will place an even more significant strain on 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 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 38 additional
employees in all areas in 2000. 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

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<PAGE>

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 materially harmed.

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

         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-takover 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

          -    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.


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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 content, digital photography or video on
DVD, 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. In addition, the Digimarc MediaBridge system
competes against companies that provide Internet portals, and other Internet
companies that provide search and directory services. 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 to increase
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;


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<PAGE>

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

          -    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; and

          -    bar codes--visible data-carrying code.

         In addition, as we apply our technologies to the Internet through the
introduction of the Digimarc MediaBridge system, 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 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's market risk disclosures set forth in Item 7A of its
Annual Report on Form 10-K for the year ended December 31, 1999 have not changed
significantly.


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<PAGE>

PART II.  OTHER INFORMATION

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

         The Company held its Annual Meeting of Stockholders on May 11, 2000.
The following proposals were voted on by the Company stockholders and results
obtained thereon:

         PROPOSAL 1: Election of Directors.

         The election of John Taysom as a director was approved with 9,274,560
         votes in favor, 23,325 against, 0 abstentions, and 3,466,260 non-votes.
         The following directors' term of office as a director continued after
         the meeting: Phillip J. Monego, Sr.; Geoffrey Rhoads; Bruce Davis;
         Brian J. Grossi; and Peter Smith.

         PROPOSAL 2: Amendment of the Amended and Restated Certificate of
         Incorporation to authorize 70 million additional shares of common
         stock.

         The amendment of the amended and restated certificate of incorporation
         to authorize 70 million additional shares of common stock was ratified
         and approved with 7,995,360 votes in favor, 1,164,855 against, 137,670
         abstentions and 3,466,260 non-votes.

         PROPOSAL 3: Ratification of Appointment of Independent Auditors.

         KPMG LLP was ratified as the Company's independent auditors for fiscal
         2000 with 9,294,249 votes in favor, 2,005 votes against, 1,631
         abstentions and 3,466,260 non-votes.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits.

<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER         DESCRIPTION

<S>                 <C>
      27            Financial Data Schedule
</TABLE>

(b)      Reports on Form 8-K.

         No reports on Form 8-K were filed during the six months ended June 30,
2000.

ITEMS 1, 2, 3 AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.


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<PAGE>

                                   SIGNATURES

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


Date: August 14, 2000           DIGIMARC CORPORATION
                                  By:

                                                 E.K. Ranjit
                                           CHIEF FINANCIAL OFFICER
                                        (Duly Authorized Officer and
                                         Principal Financial Officer)


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