<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 SEPTEMBER 30, 2000

                        COMMISSION FILE NUMBER 000-28317

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

                              DIGIMARC CORPORATION

             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                            <C>
               DELAWARE                                     94-3342784
    (State or Other Jurisdiction of                      (I.R.S. Employer
    Incorporation or Organization)                    Identification Number)
</TABLE>

               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.

    16,167,624 shares of Common Stock, $.001 par value, as of October 31, 2000.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                              DIGIMARC CORPORATION
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        --------
<S>       <C>                                                           <C>
PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements:
          Condensed Balance Sheets as of September 30, 2000 and
          December 31, 1999...........................................      3
          Condensed Statements of Operations for the three months and
          nine months ended September 30, 2000 and 1999...............      4
          Condensed Statements of Cash Flows for the nine months ended
          September 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...................................      8
Item 3.   Quantitative and Qualitative Disclosures about Market
          Risk........................................................     22

PART II.  OTHER INFORMATION
Item 2.   Sales of Unregistered Securities............................     23
Item 6.   Exhibits and Reports on Form 8-K............................     23
Signatures............................................................     24
</TABLE>

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2000          1999(1)
                                                              -------------   ------------
<S>                                                           <C>             <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................    $ 78,804        $ 90,830
  Trade accounts receivable, net............................       2,023           2,225
  Other current assets......................................         731             834
                                                                --------        --------
  Total current assets......................................      81,558          93,889
Property and equipment, net.................................       3,250             961
Other assets, net...........................................          26              53
                                                                --------        --------
Total assets................................................    $ 84,834        $ 94,903
                                                                ========        ========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $  2,402        $  1,638
  Accrued payroll and related costs.........................       1,037             504
  Deferred revenue..........................................       1,104           1,318
  Other current liabilities.................................         116             529
                                                                --------        --------
  Total current liabilities.................................       4,659           3,989
Other long-term liabilities                                           50             119
Stockholders' equity:
  Common stock..............................................          13              13
  Additional paid-in capital................................     111,280         110,675
  Deferred stock compensation...............................      (6,532)         (8,162)
  Warrant...................................................         633             633
  Accumulated deficit.......................................     (25,269)        (12,364)
                                                                --------        --------
  Total stockholders' equity................................      80,125          90,795
  Total liabilities and stockholders' equity................    $ 84,834        $ 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.

                                       3
<PAGE>
                              DIGIMARC CORPORATION
                       CONDENSED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED     NINE MONTHS ENDED
                                                           SEPTEMBER 30,         SEPTEMBER 30,
                                                        -------------------   -------------------
                                                          2000       1999       2000       1999
                                                        --------   --------   --------   --------
<S>                                                     <C>        <C>        <C>        <C>
Revenue:
  License and subscription............................  $   603     $   59    $    698    $  175
  Service.............................................    2,537      2,071       7,716     4,010
                                                        -------     ------    --------    ------
  Total revenue.......................................    3,140      2,130       8,414     4,185
Cost of revenue:
  License and subscription............................       19         19          84        62
  Service.............................................    1,729        922       4,996     1,814
                                                        -------     ------    --------    ------
  Total cost of revenue...............................    1,748        941       5,080     1,876
Gross profit..........................................    1,392      1,189       3,334     2,309
Operating expenses:
  Sales and marketing.................................    2,809        337       8,290       731
  Research, development and engineering...............    1,228        203       3,210       450
  General and administrative..........................    2,885        933       8,534     1,961
                                                        -------     ------    --------    ------
  Total operating expenses............................    6,922      1,473      20,034     3,142
                                                        -------     ------    --------    ------
Operating loss........................................   (5,530)      (284)    (16,700)     (833)
Other income (expense):
  Interest income.....................................    1,332         63       4,009        88
  Interest expense....................................       (7)       (21)       (103)      (75)
  Other...............................................      (51)        (5)       (111)       (4)
                                                        -------     ------    --------    ------
  Total other income (expense), net...................    1,274         37       3,795         9
                                                        -------     ------    --------    ------
Loss before provision for income taxes................   (4,256)      (247)    (12,905)     (824)
Provision for income taxes............................       --         --          --        --
                                                        -------     ------    --------    ------
Net loss..............................................  $(4,256)    $ (247)   $(12,905)   $ (824)
                                                        =======     ======    ========    ======

Net loss per share--basic and diluted.................  $ (0.33)    $(0.10)   $  (1.00)   $(0.35)
Weighted average shares used in computing net loss per
  share--basic and diluted............................   13,056      2,394      12,950     2,343
</TABLE>

                  See Notes to Condensed Financial Statements.

                                       4
<PAGE>
                              DIGIMARC CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 NINE MONTHS ENDED
                                                                   SEPTEMBER 30,
                                                              -----------------------
                                                                 2000         1999
                                                              ----------   ----------
<S>                                                           <C>          <C>
Cash flows from operating activities:
  Net loss..................................................   $(12,905)    $  (824)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.............................        987         203
  Amortization of discount on note payable..................         --          10
  Stock-based compensation expense..........................      1,630         121
Changes in assets and liabilities:
  Trade accounts receivable.................................        202      (1,355)
  Other assets..............................................        140        (906)
  Accounts payable..........................................        764         495
  Accrued payroll and related costs and other current
    liabilities.............................................        550         225
  Deferred revenue..........................................       (214)      1,387
                                                               --------     -------
  Net cash used in operating activities.....................     (8,846)       (644)
Cash flows from investing activities:
  Purchase of property and equipment........................     (3,276)       (209)
  Purchase of patents.......................................        (10)        (10)
  Sale of tradename.........................................         --          10
                                                               --------     -------
  Net cash used in investing activities.....................     (3,286)       (209)
Cash flows from financing activities:
  Repayment of short-term borrowing.........................         --        (250)
  Net proceeds from issuance of preferred stock.............         --       7,081
  Net proceeds from issuance of common stock................        606          45
  Principal payments on notes payable.......................       (390)         --
  Principal payments under capital lease obligations........       (110)       (121)
                                                               --------     -------
  Net cash provided by financing activities.................        106       6,755
Net (decrease) increase in cash and cash equivalents........    (12,026)      5,902
Cash and cash equivalents at beginning of period............     90,830       2,137
                                                               --------     -------
Cash and cash equivalents at end of period..................   $ 78,804     $ 8,039
                                                               ========     =======

Supplemental disclosure of cash flow information:
  Cash paid for interest....................................   $    182     $    76
Summary of non-cash investing and financing activities:
  Equipment acquired or exchanged under capital lease
    obligations.............................................   $     --     $   167
</TABLE>

                  See Notes to Condensed Financial Statements.

                                       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

    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 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 76% and 93% of
total revenue for the three months ended September 30, 2000 and 1999,
respectively, and 84% and 92% of total revenue for the nine months ended
September 30, 2000 and 1999, respectively. Revenue from another customer
represented 16% and less than 10% of of total revenue for the three and nine
months ended September 30, 2000, respectively. Accounts receivable from one
customer represented 83% and 91% of trade receivables at September 30, 2000 and
December 31, 1999, respectively.

4. STOCK-BASED COMPENSATION ALLOCATION

    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 $1.6 million was
recorded for the three and nine months ended September 30, 2000, respectively,
and is included in the respective statement of operations expense categories for
the employees to which it applies. At current estimates, additional stock-based
compensation expense related to stock option grants will be approximately
$0.5 million for the remainder of 2000 and $2.2 million for each of 2001 and
2002.

5. COMMITMENTS AND CONTINGENCIES

    From time to time, Digimarc may be a party to various lawsuits and claims
incidental to its business. The Company is not currently subject to any lawsuit
or claim which it believes will have a material adverse effect on its financial
position, results of operations or liquidity.

                                       6
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

6. SUBSEQUENT EVENTS

    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.

    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.

                                       7
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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.

                                       8
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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 ENDED       NINE MONTHS ENDED
                                                       SEPTEMBER 30,           SEPTEMBER 30,
                                                   ---------------------   ---------------------
                                                     2000        1999        2000        1999
                                                   ---------   ---------   ---------   ---------
<S>                                                <C>         <C>         <C>         <C>
Revenue:
  License and subscription.......................      19%          3%          8%          4%
  Service........................................      81          97          92          96
                                                     ----        ----        ----        ----
  Total revenue..................................     100         100         100         100
Cost of revenue:
  License and subscription.......................       1          --           1           2
  Service........................................      55          44          59          43
                                                     ----        ----        ----        ----
  Total cost of revenue..........................      56          44          60          45
                                                     ----        ----        ----        ----
  Gross margin...................................      44          56          40          55
Operating expenses:
  Sales and marketing............................      89          16          99          17
  Research, development and engineering..........      39           9          38          11
  General and administrative.....................      92          44         101          47
                                                     ----        ----        ----        ----
  Total operating expenses.......................     220          69         238          75
                                                     ----        ----        ----        ----
  Operating loss.................................    (176)        (13)       (198)        (20)
Other income (expense)...........................      40           1          45          --
                                                     ----        ----        ----        ----
  Net loss.......................................    (136)%       (12)%      (153)%       (20)%
                                                     ====        ====        ====        ====
</TABLE>

REVENUE

    Total revenue was $3.1 million and $8.4 million for the three and nine
months ended September 30, 2000, respectively, compared to total revenue of $2.1
and $4.2 million for the three and nine months ended September 30, 1999,
respectively. The $1.0 million or 47% and $4.2 million or 101% increase for the
three and nine months ended September 30, 2000, respectively, was primarily the
result of increased service revenue which we earned through our relationship
with a consortium of leading central banks and through royalty payments made to
the Company by another customer. One customer (the consortium of banks)
accounted for approximately 76% and 84% of our total revenue for the three and
nine months ended September 30, 2000, respectively. Another customer accounted
for 16% of total revenue for the three months ended September 30, 2000. The
consortium of banks has a discretionary right of early termination with respect
to our consulting and development agreement with the consortium. 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 the consortium 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, implementation, and market acceptance 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.

                                       9
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

    LICENSE AND SUBSCRIPTION.  License and subscription revenue was $603,000 and
$698,000 for the three and nine months ended September 30, 2000, respectively,
compared to $59,000 and $175,000 in the respective periods of 1999. The $544,000
or 922% and $523,000 or 299% increase is primarily due to a $500,000 increase in
royalty revenues. We expect such revenues to continue at their current rate for
the next several quarters. We continue to market and implement Digimarc
MediaBridge in a broad range of areas. If we are successful with the
implementation and market acceptance of Digimarc MediaBridge, we would expect
our overall revenue mix to change significantly.

    SERVICE.  Service revenue was $2.5 million and $7.7 million for the three
and nine months ended September 30, 2000, respectively, compared to
$2.1 million and $4.0 million for the three and nine months ended September 30,
1999, respectively. The $0.5 million or 23% and $3.7 million or 92% increase for
the three and nine months ended September 30, 2000, respectively, was primarily
the 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 $19,000 and
$84,000 for the three and nine months ended September 30, 2000, respectively,
compared to $5,000 and $62,000 for the three and nine months ended
September 30, 1999, respectively.

    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 $1.7 million and $5.0 million for the three and nine months ended
September 30, 2000, respectively, compared to cost of service revenue of
$0.9 million and $1.8 million for the three and nine months ended September 30,
1999, respectively. The $0.8 million or 85% and $3.2 million or 175% increase
for the three and nine months ended September 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
$2.8 million and $8.3 million for the three and nine months ended September 30,
2000, respectively, compared to $337,000 and $731,000 for the three and nine
months ended September 30, 1999, respectively. The $2.5 million or 734% and
$7.6 million or 1034% increase for the three and nine months ended
September 30, 2000, respectively, resulted from increased costs of $1.6 million
and $4.5 million, respectively, related to salaries and other employee related
costs, including travel expenses; $0.8 million and $3.1 million, respectively,
of increased costs related to marketing administration and promotional
activities; $0.2 million and $0.5 million respectively, of increased costs
related to stock-based compensation; offset in part by an increased allocation
of $0.4 million and $1.4 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 65 and 15 as of September 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
Media Commerce, Secure Documents, and Digimarc MediaBridge applications.
Accordingly,

                                       10
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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
$1.2 million and $3.2 million for the three and nine months ended September 30,
2000, respectively, compared to $203,000 and $450,000 for the three and nine
months ended September 30, 1999, respectively, representing an increase of
$1.0 million or 505% and $2.8 million or 613%, respectively. Salaries and other
employee related costs, including travel expenses, increased $1.4 million and
$3.8 million, respectively; costs relating to stock-based compensation increased
$0.1 million and $0.4 million, respectively; offset in part by an increased
allocation of $0.5 million and $1.6 million for the three and nine months ended
September 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 75 and 28 as of September 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.

    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 $2.9 million
and $8.5 million for the three and nine months ended September 30, 2000,
respectively, compared to $0.9 million and $2.0 million for the three and nine
months ended September 30, 1999, respectively, representing an increase of
$2.0 million or 209% and $6.6 million or 335%, respectively. Salaries and other
employee related costs, including travel expenses, increased $0.1 million and
$1.1 million for the three and nine months ended September 30, 2000,
respectively; costs related to stock-based compensation increased $0.2 million
and $0.7 million, respectively; costs related to facilities, depreciation, and
office expense increased $0.8 million and $2.0 million, respectively; and costs
related to professional fees and litigation against other parties increased
$0.7 million and $1.8 million, respectively. General and administrative
employees totaled 25 and nine as of September 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 and associated with supporting
our growth as a company.

    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 $1.6 million was recorded for
the three and nine months ended September 30, 2000, respectively, and is
included in the respective income statement expense categories for the employees
to which it applies. At current estimates, additional stock-based compensation
expense related to stock option grants will be approximately $0.5 million for
the remainder of 2000 and $2.2 million for each of 2001 and 2002.

    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 $3.8 for the three and

                                       11
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

nine month periods ended September 30, 2000, respectively, compared to $37,000
and $9,000 for the three and nine month periods ended September 30, 1999,
respectively. The $1.2 million and $3.8 million increase for the three and nine
months ended September 30, 2000, respectively, came as a result of increased
interest income earned due to significantly higher cash and cash equivalent
balances.

    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.

LIQUIDITY AND CAPITAL RESOURCES

    As of September 30, 2000, we had cash and cash equivalents of
$78.8 million, which decreased $12.0 million from $90.8 million at December 31,
1999. Working capital at September 30, 2000 was $76.9 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 $8.8 million and
$0.6 million for the nine months ended September 30, 2000 and 1999,
respectively. This increase in operating cash outflows was due primarily to
increased losses from operations in the nine months ended September 30, 2000 of
$12.9 million, offset in part by the following: non-cash charges for
depreciation and amortization of $1.0 million; non-cash charges for stock-based
compensation expense of $1.6 million; an increase in trade accounts payable of
$0.8 million; and an increase in accrued liabilities of $0.6 million.

    Investing activities used cash of $3.3 million and $0.2 million for the nine
months ended September 30, 2000 and 1999, respectively. Cash used in investing
activities related primarily to the purchase of property and equipment. We
anticipate that we will continue to experience an increase in our capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel.

    Financing activities provided net cash of $0.1 million and $6.8 million for
the nine months ended September 30, 2000 and 1999, respectively. Net cash
provided by financing activities in the nine months ended September 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 nine months ended September 30, 1999 was related primarily to
proceeds from the issuance of preferred stock which was converted to common
stock with our initial public offering in December 1999.

    We have computers and office equipment financed under long-term capital
leases that expire over the next 24 months. As of September 30, 2000, we had
outstanding capital lease obligations of $149,000. Other significant commitments
consist of obligations under non-cancelable operating leases, which totaled
$4.2 million as of September 30, 2000, and are payable in monthly installments
through 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,

                                       12
<PAGE>
                              DIGIMARC CORPORATION

              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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 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
believes that its current revenue recognition policies comply with SAB 101.

    In January 2000, the Emerging Issues Task Force ("EITF") of the FASB reached
consensus on Issue 99-17 "Accounting for Advertising Barter Transactions" which
involves 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 adoption of EITF 99-17
has not had a material impact on the Company's 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. The adoption of FIN 44 has
not had a material impact on the Company's 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 adoption of EITF 00-2 has not had a material impact
on the Company's financial condition or results of operations.

                                       13
<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 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 due to rapid
      developments in our business or business model.

    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 $12.9 million for the first
nine months of 2000. To date, we have not been profitable and we cannot assure
you that we will realize sufficient revenue to achieve profitability. Our
accumulated deficit as of September 30, 2000 was approximately $25.3 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 some of these products 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 we are currently
developing for these new products will be accepted. If we do not successfully
market and support the Digimarc MediaBridge

                                       14
<PAGE>
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 the Digimarc
MediaBridge system or our other 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 84% 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 84% of our total revenue during the nine
months ended September 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 remainder of years 2000 and 2001.

    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.

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

                                       15
<PAGE>
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 84% 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 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

                                       16
<PAGE>
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 claims
against us 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" "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 "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 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

                                       17
<PAGE>
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 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 September 30, 2000 we had 165 employees. In addition, we expect that
we need to hire a total of approximately 23 additional employees in all areas
during the remainder of 2000. To manage this expected growth, our management
must continue to improve our operational and financial systems

                                       18
<PAGE>
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 23 additional
employees in all areas during the remainder of 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 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, our current and future new
employees require substantial training, which requires 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

                                       19
<PAGE>
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.

                                       20
<PAGE>
                         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;

    - 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;

                                       21
<PAGE>
    - scrambled anti-counterfeiting technologies--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.

                                       22
<PAGE>
PART II. OTHER INFORMATION

ITEM 2. SALES OF UNREGISTERED SECURITIES

    On October 20, 2000, Digimarc Corporation completed the sale of 1,089,983
shares of its Common Stock to Macrovision Corporation for proceeds of
approximately $21.8 million. The issuance of the shares was made in reliance on
Section 4(2) of the Securities Act of 1933, as amended, ("Securities Act") and
Regulation D promulgated thereunder.

    On October 20, 2000, Digimarc Corporation 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. The issuance of the shares was made in reliance
on Section 4(2) of the Securities Act of 1933, as amended, ("Securities Act")
and Regulation D promulgated thereunder.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           DESCRIPTION
-------  ------------------------------------------------------------
<C>      <S>
  3.1    Second Amended and Restated Certificate of Incorporation of
         the Registrant
  3.2    Certificate of Amendment of Second Amended and Restated
         Certificate of Incorporation of the Registrant
  3.3    Bylaws of the Registrant, as amended
 10.12   Strategic Investment Agreement, dated as of September 17,
         2000, between the Registrant and Macrovision Corporation
 10.13   Strategic Investment Agreement, dated as of September 17,
         2000, between the Registrant and Koninklijke Philips
         Electronics N.V.
  27     Financial Data Schedule
</TABLE>

    (b) Reports on Form 8-K.

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

    Items 1, 3, 4 and 5 have been omitted as they are not applicable.

                                       23
<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.

<TABLE>
<S>                                                    <C>  <C>
Date: November 14, 2000                                DIGIMARC CORPORATION

                                                       By:               /s/ E.K. RANJIT
                                                            -----------------------------------------
                                                                           E.K. Ranjit
                                                                     CHIEF FINANCIAL OFFICER
                                                                   (Duly Authorized Officer and
                                                                   Principal Financial Officer)
</TABLE>

                                       24