DIGIMARC CORP, S-1, 2000-03-17

DIGIMARC CORP
S-1, 2000-03-17
COMPUTER INTEGRATED SYSTEMS DESIGN

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As filed with the Securities and Exchange Commission on March 17, 2000
Registration No.333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIGIMARC CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C> <C>
Delaware 7373 94-3342784
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization Classification Code Number) Identification Number)
</TABLE>

19801 S.W. 72nd Avenue
Tualatin, Oregon 97062
(503) 885-9699
(Address and telephone number of principal executive offices and principal
place of business)
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Bruce Davis
President and Chief Executive Officer
Digimarc Corporation
19801 S.W. 72nd Avenue
Tualatin, Oregon 97062
(503) 885-9699
(Name, Address, and Telephone Number of Agent for Service)
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Copies to:
<TABLE>
<S> <C>
Gavin B. Grover, Esq. Peter T. Healy, Esq.
S. David Goldenberg, Esq. Carmine J. Broccole, Esq.
Charles C. Kim, Esq. Eric D. Jacobs, Esq.
Morrison & Foerster LLP O'Melveny & Myers LLP
425 Market Street 275 Battery Street
San Francisco, California 94105-2482 San Francisco, California 94111
(415) 268-7000 (415) 984-8700
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered(1) Per Share(2) Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 3,450,000 $65.56 $226,182,000 $60,616.78
</TABLE>

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(1) Includes 450,000 shares of common stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act, and based
upon the average high and low sales prices on March 16, 2000, as reported
on the Nasdaq National Market.
---------------

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 17, 2000

[DIGIMARC LOGO]

3,000,000 Shares

Common Stock

Digimarc Corporation is offering 2,000,000 shares of its common stock and the
selling stockholders are selling an additional 1,000,000 shares of our common
stock. Digimarc's common stock is traded on the Nasdaq National Market under
the symbol "DMRC." The last reported sale price of our common stock on the
Nasdaq National Market on March 10, 2000 was $72.88 per share.

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

Investing in our common stock involves risks.
See "Risk Factors" beginning on page 4.

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<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discounts and Commissions.............................. $ $
Proceeds to Digimarc................................................ $ $
Proceeds to the Selling Stockholders................................ $ $
</TABLE>

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

Digimarc has granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of our common stock to cover over-allotments.

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

Robertson Stephens
Chase H&Q
U.S. Bancorp Piper Jaffray
Dain Rauscher Wessels

The date of this Prospectus is , 2000.
<PAGE>

[THE DIGIMARC CORPORATION LOGO WITH THE TEXT "DIGITAL WATERMARKING."]
<PAGE>

[OUR MEDIABRIDGE TRADEMARK WITH A SERIES OF PHOTOGRAPHS DEPICTING THE
PROCEDURE THROUGH WHICH A USER IS CONNECTED TO AN INTERNET DESTINATION USING
OUR MEDIABRIDGE APPLICATION, CONNECTED BY ARROWS AND A PHOTOGRAPH OF AN
INDIVIDUAL USING OUR MEDIABRIDGE APPLICATION THAT INCLUDES THE FOLLOWING TEXT:
"BRIDGING TRADITIONAL AND ONLINE MEDIA," "PRINTED MATERIALS BECOME PORTALS TO
THE INTERNET."]
<PAGE>

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

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TABLE OF CONTENTS

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Page
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Summary.................................................................. 1
Risk Factors............................................................. 4
You Should Not Rely on Forward-Looking Statements Because They Are
Inherently Uncertain.................................................... 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Price Range of Common Stock.............................................. 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 30
Management............................................................... 47
Related Party Transactions............................................... 58
Principal and Selling Stockholders....................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 69
Experts.................................................................. 69
Where You Can Find Additional Information................................ 70
Index to Financial Statements............................................ F-1
</TABLE>

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"Digimarc" and "MarcSpider" are registered trademarks, and "MarcCentre" and
"MediaBridge" are trademarks, of Digimarc. This prospectus also contains other
product names, trade names and trademarks of Digimarc and of other
organizations.

i
<PAGE>

SUMMARY

You should read the following summary, together with the more detailed
information in this prospectus, including risk factors, regarding our company
and the common stock being sold in this offering.

Digimarc Corporation

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.

Recent advances in multimedia, digital imaging and printing technologies have
given computer users at every level of sophistication access to highly advanced
image manipulation and reproduction capabilities. This access has led to new
challenges in the areas of document security, counterfeiting and piracy
deterrence by allowing virtually any user to create expert-quality copies of
traditional and digital content. At the same time, advances in technology have
introduced millions of people to the Internet, which has allowed the Web to
become a global distribution channel for unauthorized reproductions of
proprietary content. Our reader software can render scanners, digital cameras
and PCs ineffective for use in duplicating or distributing proprietary content
into which our digital code has been embedded. One area of critical concern in
the field of digital counterfeiting is the protection of currency, where the
cost of failure is extremely high and the standards for imperceptibility and
reliability are equally important. We have been awarded a multi-year contract
by a global consortium of leading central banks to develop a system to deter
the use of PCs in the counterfeiting of currency.

We believe the same core technologies can be used to enhance e-commerce. The
increasing volume of Internet content and number of Web destinations has made
Internet navigation and information retrieval more challenging. Despite the
availability of numerous search methods, research indicates that users often
experience difficulty when retrieving information on desired products or
services, causing a loss of potential e-commerce revenue. We have used our
technologies to develop the MediaBridge system, which is planned for release in
the second half of 2000. This application is intended to enable imperceptible
digital code to be embedded within print media, such as magazine advertisements
and articles, direct mailers, coupons, catalogs, bank cards, and business
cards. When recognized by PC cameras enabled by our patented reader software,
the code will automatically launch the user to the specific Internet
destination chosen by the producer of the printed content. In this way, we
believe that the MediaBridge system will deliver more efficient Internet
navigation and access to consumers and more effective means for print
publications to link readers directly to supplemental news and entertainment,
and targeted e-commerce points-of-sale. To further our MediaBridge initiative,
we have entered into letters of intent with PC camera vendors such as Logitech
and 3Com and agreements with magazines and magazine publishers such as Wired
magazine and Hearst.

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We believe that our applications offer strong advantages over other media
commerce and secure documents approaches because our digital watermark codes
are imperceptible, persistent and format-independent, allowing them to operate
in both analog and digital environments. Our applications are relevant to a
wide variety of Internet, computing and communications solutions because
virtually any media content can contain our imperceptible digital watermarking
code.

We will continue to address both the security and the access problems
increasingly arising as the world grows more dependent on multimedia computing
and the Internet. Our core goals are to establish our patented technologies as
basic components of industry standards for controlling the use of media content
and to establish the MediaBridge system as a leading means of Internet access
and navigation. We intend to achieve these objectives by encouraging widespread
adoption of our reader software through marketing and strategic relationships
with leading publishers or advertisers and leading manufacturers of PC cameras
or other personal computer peripheral devices. To this end, we are working with
Logitech and 3Com to bundle our reader software into their PC camera software
packages. We also plan to continue to develop new applications that rely upon
our technology for other customers in communications, image processing and
electronic commerce. We believe that successful new applications would further
increase demand for our reader technology.

We intend to maintain our technology leadership in digital watermarking
through continued innovation and rigorous intellectual property development and
protection. By broadly licensing our technologies for deterring copyright
infringement, counterfeiting and piracy, and for linking digital content with
the physical world, we intend to build long-term demand for our technologies
and promote public awareness of our brand.

We derived 51% of our total revenue in 1998 and 89% of our total revenue in
1999 from an agreement with a consortium of leading central banks, and any
change in, or early termination of, our relationship with this customer could
seriously harm our business. We anticipate that this agreement will account for
most of our revenue until we are able to generate revenue from the introduction
of other new products and services that we are currently developing, including
the MediaBridge system. We are not profitable and we expect to continue to
incur losses for the foreseeable future.

We were incorporated in Oregon on January 3, 1995, and reincorporated in
Delaware on December 1, 1999. Our principal executive offices are located at
19801 S.W. 72nd Avenue, Tualatin, Oregon 97062, and our telephone number is
(503) 885-9699. Our Web site is located at www.digimarc.com. Information
contained on our Web site does not constitute part of this prospectus.

Unless otherwise indicated, the information in this prospectus assumes no
exercise by the underwriters of their option to purchase up to an additional
450,000 shares of our common stock and reflects a one-for-two reverse stock
split effected on December 1, 1999.

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The Offering

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<S> <C>
Common stock offered by Digimarc 2,000,000 shares
Corporation.......................
Common stock offered by the selling 1,000,000 shares
stockholders......................
Common stock to be outstanding 14,764,145 shares
after this offering...............
Use of proceeds.................... For general corporate purposes and working
capital, including expansion of our sales
and marketing efforts, product and
technology development, expansion of our
customer support organization, capital
expenditures and possible strategic
acquisitions or investments. See "Use of
Proceeds."
Nasdaq National Market Symbol...... DMRC
</TABLE>

The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of March 10, 2000 and excludes:

. 3,239,311 shares of common stock issuable upon exercise of options
outstanding as of March 10, 2000 at a weighted average exercise price of
$14.11 per share;

. 1,107,854 shares of common stock reserved for future issuance as of March
10, 2000 under our 1999 stock incentive plan, our 1999 non-employee
director option plan, and our 1999 employee stock purchase plan; and

. 150,000 shares of common stock issuable upon exercise of a warrant
outstanding as of March 10, 2000 at an exercise price of $20.00 per
share.

Summary Financial Data

The following summary financial data should be read in conjunction with our
financial statements and related notes, "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The as adjusted column in the balance
sheet data below reflects adjustments to the actual data to show our receipt of
the estimated net proceeds of $137.7 million from our sale of 2,000,000 shares
of our common stock in this offering at an assumed public offering price of
$72.88 per share, after deducting underwriting discounts and commissions and
estimated offering expenses.

<TABLE>
<CAPTION>
Period from
January 3, 1995
(inception) to Year Ended December 31,
December 31, ------------------------------------------
1995 1996 1997 1998 1999
--------------- --------- --------- --------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $ -- $ 236 $ 186 $ 984 $ 6,929
Gross margin............ -- 229 60 (596) 3,303
Total operating
expenses............... 840 1,900 3,999 2,890 6,085
Operating loss.......... (840) (1,671) (3,939) (3,486) (2,782)
Net loss................ $ (874) $ (1,578) $ (3,979) $ (3,442) $ (2,389)
Net loss per share--
basic and diluted...... $ (1.01) $ (0.71) $ (1.88) $ (1.50) $ (0.78)
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 869,478 2,226,519 2,120,477 2,288,442 3,052,671
</TABLE>

<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual As Adjusted
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<S> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents................................... $90,830 $228,543
Working capital............................................. 89,900 227,613
Total assets................................................ 94,903 232,616
Capital lease obligations, less current portion............. 119 119
Total stockholders' equity ................................. 90,795 228,508
</TABLE>

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RISK FACTORS

An investment in our common stock involves risks and uncertainties. You
should carefully consider the factors described below before making an
investment in our securities. In addition, you should keep in mind that the
risks described below are not the only risks that we face. The risks described
below are the risks that we currently believe are material risks of our
business, the industry in which we compete and this offering. However, risks
not presently known to us, or risks that we currently believe are immaterial,
may also harm our business.

Our business, operating results and financial condition could be adversely
affected by any of the following risks. If we are adversely affected by these
risks, then the trading price of our common stock could decline, and you could
lose all or part of your investment. You should also refer to the other
information set forth in this prospectus, including our financial statements
and related notes.

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 upon which you may evaluate us, 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 $874,000 in 1995, $1.6
million in 1996, $4.0 million in 1997, $3.4 million in 1998 and $2.4 million in
1999. We have never been profitable and cannot assure you that we will realize
sufficient revenue to achieve profitability. Our accumulated deficit as of
December 31, 1999 was approximately $12.4 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

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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 MediaBridge system, which is planned for
release in the second half of 2000, and sales of other applications of our
digital watermarking technologies. We have not fully developed a revenue model
for the MediaBridge system, or for our other future applications. In addition,
because we have not yet sold 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. We must complete the
development of the MediaBridge system and obtain revenue from its commercial
launch in order to meet our revenue objectives. If we do not successfully
develop, market and support the MediaBridge system, it is likely that our
future revenue will fall below our targeted objectives. Any shortfall in
revenue from the 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 total revenue from a single customer,
the loss of this customer would seriously harm our business, operating results
and financial condition

We have derived a substantial portion of our revenue from a consortium of
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 51% of our total revenue in 1998 and
89% of our total revenue in 1999. 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 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 two years.

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

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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 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 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 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
MediaBridge system;

. our ability to establish and maintain strategic relationships;

. the potential costs of litigation and intellectual property protection;

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

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

. the timing of future licensing revenue; and

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

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

The markets for digital watermark applications are new and developing

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

We may not be able to adequately protect our intellectual property, and we may
be subject to infringement claims

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

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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 trademark
"Digimark" and "Mediabridge" and the domain names "Digimark.com" and
"Mediabridge.com" have been registered by unrelated companies. While we have
successfully co-existed with these other companies, we cannot assure you that
this state of affairs will continue. If we were forced to change our name or
were prevented from using our other brand names, including MediaBridge, we
would lose a significant amount of our brand equity, and our business would
suffer.

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

The security systems that we use in our proprietary technologies may be
circumvented by third parties, which could damage our reputation and disrupt
our business

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

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

8
<PAGE>

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 March 10, 2000, we had 118 employees. In addition, we expect that we
will need to hire a total of approximately 70 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 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 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.

9
<PAGE>

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 70 additional
employees in all areas during the remainder of 2000, including general
managers for new operations in key market segments. Competition for
experienced personnel in our market segments is intense. We may not be able to
retain our current key employees or attract, integrate or retain other
qualified personnel in the future. If we do not succeed in attracting new
personnel or in integrating, retaining and motivating our current personnel,
our business could be harmed. In addition, because our business is based on
our patented technology, which is unique and not generally known, new
employees will require substantial training, which will require substantial
resources and management attention.

Our promotion of the Digimarc brand must be successful in order for us to
attract users as well as advertisers and other strategic partners

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

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 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.

10
<PAGE>

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;

. 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 MediaBridge
system; and

. bar codes--visible data-carrying code.

In addition, as we apply our technologies to the Internet through the
anticipated introduction of the MediaBridge system, we may begin to compete
with a wide range of other companies. Many of

11
<PAGE>

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.

Risks Related to This Offering

Our stock price may be volatile

The market price of our common stock is likely to be highly volatile and
fluctuate significantly in response to a number of factors, most of which are
beyond our control, including:

. fluctuations in quarterly operating results;

. changes in our relationship with the consortium of central banks, which
is our primary customer;

. announcements of significant contracts, strategic relationships,
acquisitions or capital commitments;

. technological developments in digital watermarking and other forms of
document security, and technological shifts in accessing the Internet;

. the rapidly evolving nature of our business and the digital watermarking
industry;

. the timing and manner of announcement of new products and services by us
or our competitors;

. changes in the marketing methods used by advertisers;

. the launch of significant new products and lines of business, which as of
yet are unreleased and untested in the marketplace;

. changes in financial estimates by securities analysts;

. changes in our intellectual property position or the adoption of industry
standards applicable to our technologies;

. our inability to obtain patents or defend them successfully;

. our inability to complete significant license transactions;

. additions or departures of key personnel;

. trading characteristics that develop in the market for our common stock,
which may include low trading volume and other factors that affect the
liquidity of trading; and

. stock market price and volume fluctuations, which are particularly common
among highly volatile securities of high-technology and software
companies.

In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation could result in substantial costs and could divert our
management's attention and resources.

12
<PAGE>

Future sales of our common stock could cause our stock price to decline

Sales of a substantial number of shares of our common stock after this
offering 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. After the closing of this offering, we will have outstanding
14,764,145 shares of common stock, assuming no exercise of outstanding options
or the warrant after March 10, 2000 and no exercise of the underwriters' over-
allotment option. The 3,000,000 shares of common stock sold in this offering,
which would be 3,450,000 shares if the underwriters' over-allotment option to
purchase additional shares is exercised in full, will be freely tradeable
without restriction or further registration under the federal securities laws
unless purchased by persons who are considered our affiliates under the federal
securities laws. 9,046,127 shares of common stock outstanding upon the closing
of this offering will be considered restricted securities under the federal
securities laws.

Many of our stockholders and option holders signed lock-up agreements in
connection with our initial public offering that limit their ability to sell
their shares of our common stock. Subject to limited exceptions, these
securityholders cannot sell or otherwise dispose of any shares of our common
stock until May 29, 2000 without the prior written approval of FleetBoston
Robertson Stephens Inc. FleetBoston Robertson Stephens Inc. has allowed the
selling stockholders who signed lock-up agreements in connection with our
initial public offering to sell their stock in this offering. Many of our
stockholders and all of the selling stockholders are subject to additional
agreements as part of this offering that limits their ability to sell any other
shares of our common stock they still own after this offering. Subject to
limited exceptions, these securityholders cannot sell or otherwise dispose of
any shares of our common stock for a period of at least 90 days after the
effective date of this offering without the prior written approval of
FleetBoston Robertson Stephens Inc. When these agreements expire, these shares
and the shares underlying the options will become eligible for sale, in some
cases only in accordance with the volume, manner of sale and notice
requirements of the federal securities laws. The sale of these shares 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. See
"Shares Eligible for Future Sale" and "Underwriting."

Our management will retain broad discretion in the use of the net proceeds from
this offering and may use the net proceeds in ways with which you do not agree

We intend to use the net proceeds from this offering for working capital and
general corporate purposes, including expansion of our sales and marketing
efforts, product and technology development, expansion of our customer support
organization, capital expenditures and possible strategic acquisitions or
investments. Accordingly, our management will have significant flexibility in
applying the net proceeds from this offering and may use the net proceeds in
ways with which you do not agree. Until the net proceeds are needed, we plan to
invest them in investment-grade, interest-bearing securities. We cannot assure
you that investment of the net proceeds will yield a favorable or any return.
The inability of our management to apply these funds effectively could harm our
business. You will be relying on the judgment of our management with respect to
the use of the net proceeds. See "Use of Proceeds."

You will incur immediate and substantial dilution in the net tangible book
value of the common stock you purchase

The estimated public offering price is substantially higher than the net
tangible book value as of December 31, 1999 of $15.63 per share that our
outstanding common stock will have immediately after this offering.
Accordingly, if you purchase shares of our common stock at the assumed public

13
<PAGE>

offering price of $72.88 per share, you will incur immediate and substantial
dilution of $57.25 per share. If the holders of outstanding options or the
warrant exercise those options or the warrant, you will suffer further
dilution.

Anti-takeover provisions in our charter documents could prevent or delay
transactions that could be profitable for our stockholders from occurring

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

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

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

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

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

. 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.

YOU SHOULD NOT RELY ON FORWARD-LOOKING
STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN

This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the
prevalence and growth of the number of incidences of copyright infringement,
counterfeiting and piracy. Readers are cautioned not to place undue reliance on
any of these forward-looking statements, which reflect our management's views
as of the date of this prospectus. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks faced by us and described in "Risk Factors" and elsewhere
in this prospectus.

14
<PAGE>

USE OF PROCEEDS

We will receive net proceeds of approximately $137.7 million from the sale of
the 2,000,000 shares of common stock in this offering, assuming a public
offering price of $72.88 per share and after deducting the estimated
underwriting discounts and commissions, and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, our net proceeds will
be approximately $168.9 million.

Our management will have significant flexibility in applying the net proceeds
of this offering. We expect to use the net proceeds of this offering for:

. additional working capital and capital expenditures;

. expanding our sales and marketing operations;

. product and technology development;

. expansion of our customer support organization; and

. facilitating future access by Digimarc to public equity markets.

From time to time, we have discussions with third parties about potential
acquisitions. We may use a portion of the net proceeds to acquire businesses,
products or technologies that we believe will complement our current or future
business. However, we do not currently have any understandings, commitments or
agreements with respect to any acquisition. Pending our use of these funds, the
net proceeds from this offering will be invested in short-term, interest-
bearing, investment grade instruments.

DIVIDEND POLICY

We have never declared or paid any cash dividends on shares of our common
stock. We currently intend to retain future earnings, if any, to support the
development of our business and do not anticipate paying any cash dividends in
the foreseeable future. Our board of directors will have discretion as to
whether future dividends will be paid, after taking into account factors such
as our financial condition, operating results and current and anticipated cash
needs.

PRICE RANGE OF COMMON STOCK

Our common stock has been quoted on the Nasdaq National Market under the
symbol "DMRC" since December 2, 1999. Prior to that time, there was no public
market for our common stock. The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock as
reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
2000
First Quarter (January 1 through March 10, 2000)......... $75.75 $40.50
1999
Fourth Quarter (December 2 through December 31, 1999).... $88.00 $42.00
</TABLE>

On March 10, 2000, the last reported sale price on the Nasdaq National Market
for our common stock was $72.88. As of March 10, 2000, there were approximately
130 holders of record of our common stock.

15
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1999 on
an actual basis and on a pro forma as adjusted basis to give effect to the
receipt of the estimated net proceeds from the sale of 2,000,000 shares of
common stock offered in this offering by us at an assumed public offering price
of $72.88 per share and after deducting underwriting discounts and commissions,
and estimated offering expenses. This table should be read in conjunction with
our financial statements and related notes appearing at the end of this
prospectus.

<TABLE>
<CAPTION>
December 31, 1999
---------------------
Pro Forma
As Adjusted
Actual (unaudited)
-------- -----------
(in thousands,
except share and per
share data)
<S> <C> <C>
Cash and cash equivalents................................ $ 90,830 $228,543
======== ========
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, no shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma as adjusted.................... $ -- $ --
Common stock, $0.001 par value; 30,000,000 shares
authorized; 12,615,145 shares issued and outstanding,
actual; 14,615,145 shares issued and outstanding, pro
forma as adjusted..................................... 13 15
Additional paid in capital............................. 110,675 248,386
Deferred stock compensation............................ (8,162) (8,162)
Warrant................................................ 633 633
Accumulated deficit.................................... (12,364) (12,364)
-------- --------
Total stockholders' equity .......................... 90,795 228,508
-------- --------
Total capitalization................................. $ 90,795 $228,508
======== ========
</TABLE>

The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of December 31, 1999 and excludes:

. 149,000 shares of common stock issued between December 31, 1999 and March
10, 2000 upon exercise of options;

. 3,239,311 shares of common stock issuable upon exercise of options
outstanding as of March 10, 2000 at a weighted average exercise price of
$14.11 per share;

. 150,000 shares of common stock issuable upon exercise of a warrant
outstanding as of March 10, 2000 at an exercise price of $20.00 per
share.

16
<PAGE>

DILUTION

As of December 31, 1999, our net tangible book value was approximately $90.7
million or $7.19 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. After giving
effect to the sale of the 2,000,000 shares of common stock we are offering at
an assumed public offering price of $72.88 per share, our net tangible book
value as of December 31, 1999 would have been $228.5 million or $15.63 per
share of common stock. This represents an immediate increase in net tangible
book value of $8.44 per share to existing stockholders and an immediate
dilution of $57.25 per share to new investors. The following table illustrates
this per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $72.88
Net tangible book value per share as of December 31, 1999.......... $7.19
Increase per share attributable to new investors................... 8.44
-----
Net tangible book value per share after this offering............... 15.63
Dilution per share to new investors................................. $57.25
======
</TABLE>

The following table summarizes, as of December 31, 1999, the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid by existing stockholders and new investors
purchasing shares of common stock in this offering. The information presented
is based upon an assumed public offering price of $72.88 per share, before
deducting underwriting discounts and commissions, and estimated offering
expenses of this offering:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... 12,615,145 86.3% $110,379,000 43.1% $ 8.75
New investors........... 2,000,000 13.7 145,750,000 56.9 72.88
---------- ----- ------------ -----
Total................. 14,615,145 100.0% $256,129,000 100.0%
========== ===== ============ =====
</TABLE>

The above information is as of December 31, 1999 and excludes:

. 149,000 shares of common stock issued between December 31, 1999 and March
10, 2000 upon exercise of options;

. 3,239,311 shares of common stock issuable upon exercise of options
outstanding as of March 10, 2000 at a weighted average exercise price of
$14.11 per share;

. 1,107,854 shares of common stock reserved for future issuance as of March
10, 2000 under our 1999 stock incentive plan, our 1999 non-employee
director option plan and our 1999 employee stock purchase plan; and

. 150,000 shares of common stock issuable upon exercise of a warrant
outstanding as of March 10, 2000 at an exercise price of $20.00 per
share.

Giving effect to the full vesting of all options and the warrant outstanding
as of March 10, 2000 and the stock issued between December 31, 1999 and March
10, 2000, the net tangible book value per share after this offering as of
December 31, 1999 would be $15.27, the dilution per share to the new investors
would be $57.60, and the consideration paid by the existing stockholders and
the new investors would represent 52.2% and 47.8%, respectively. If we grant
additional options or warrants with low exercise prices in the future, there
will be further dilution to new investors.

17
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
prospectus. The statement of operations data for the years ended December 31,
1997, 1998 and 1999, and the balance sheet data at December 31, 1998 and 1999,
are derived from our financial statements that KPMG LLP, independent certified
public accountants, have audited and are included in this prospectus. The
statement of operations data for the period from January 3, 1995 (inception)
through December 31, 1995 and the year ended December 31, 1996, and the balance
sheet data at December 31, 1995, 1996 and 1997 are derived from our audited
financial statements not included in this prospectus. Historical results are
not necessarily indicative of the results to be expected in the future.

<TABLE>
<CAPTION>
Period from
January 3, 1995
(inception)
through Year Ended December 31,
December 31, ------------------------------------------
1995 1996 1997 1998 1999
--------------- --------- --------- --------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Secure documents...... $ -- $ 50 $ 25 $ 500 $ 6,727
Media commerce........ -- 186 161 484 202
------- --------- --------- --------- ---------
Total revenue....... -- 236 186 984 6,929
Cost of revenue:
Secure documents...... -- -- -- 1,466 3,529
Media commerce........ -- 7 126 114 97
------- --------- --------- --------- ---------
Total cost of
revenue............ -- 7 126 1,580 3,626
------- --------- --------- --------- ---------
Gross margin.......... -- 229 60 (596) 3,303
Operating expenses:
Sales and marketing... 36 376 1,330 825 1,883
Research, development
and engineering...... 327 690 934 658 936
General and
administrative....... 477 834 1,282 1,407 2,739
Impairment charge..... -- -- 453 -- --
Stock-based
compensation......... -- -- -- -- 527
------- --------- --------- --------- ---------
Total operating
expenses........... 840 1,900 3,999 2,890 6,085
------- --------- --------- --------- ---------
Operating loss...... (840) (1,671) (3,939) (3,486) (2,782)
Other income (expense).. (34) 93 (40) 44 393
------- --------- --------- --------- ---------
Net loss............ $ (874) $ (1,578) $ (3,979) $ (3,442) $ (2,389)
======= ========= ========= ========= =========
Net loss per share--
basic and diluted...... $ (1.01) $ (0.71) $ (1.88) $ (1.50) $ (0.78)
======= ========= ========= ========= =========
Weighted average shares
outstanding used in
computing net loss per
share--basic and
diluted ............... 869,478 2,226,519 2,120,477 2,288,442 3,052,671
<CAPTION>
December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
--------------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 46 $ 3,113 $ 5,638 $ 2,137 $ 90,830
Working capital......... (244) 2,782 4,631 1,196 89,900
Total assets............ 63 3,376 6,168 2,978 94,903
Long-term obligations,
net of current
portion................ 438 396 395 469 119
Convertible redeemable
preferred stock........ -- 4,441 10,185 10,185 --
Total stockholders'
equity (deficit)....... (690) (1,885) (5,680) (9,095) 90,795
</TABLE>

18
<PAGE>

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and related notes included in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-
looking statements as a result of factors described within this prospectus. We
refer you also to the section "You Should Not Rely on Forward-Looking
Statements Because They Are Inherently Uncertain."

Overview

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

In 1998, we began working with a consortium of leading central banks to
develop a system to deter the use of personal computer systems in the
counterfeiting of currency. Providing services relating to the development of
this anti-counterfeiting system accounted for 51% of our total revenue in 1998
and 89% of our total revenue in 1999. This increase in the share of total
revenue resulted from our securing a contractual relationship with the
consortium. We anticipate that this development project will account for most
of our revenue until we are able to generate substantial revenue from the
introduction of new products that we are developing relating to document
security and our MediaBridge system.

In early 1999, we began to place increasing emphasis on developing the
MediaBridge system. Our efforts to develop and introduce the MediaBridge system
will require significant continuing investment. To date, we have not derived
any revenue from the MediaBridge system. We expect to begin marketing the
MediaBridge system in the second half of 2000. We currently expect to develop
new products and services, which we anticipate selling to customers through a
variety of pricing plans, including annual license fees and license fees per
document from issuers of valuable documents other than banknotes and from
magazine advertisers and publishers. Successful

19
<PAGE>

introduction and marketing of the MediaBridge system, if achieved, would
significantly change the mix and the concentration of our future revenue.

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

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

We believe that developing our business will require increasing levels of
expenditures in future periods, including a significant increase in our sales
and marketing efforts for the launch of new products, including the MediaBridge
system. Accordingly, we anticipate that we will continue to invest
significantly in sales and marketing for the foreseeable future and that the
dollar amount of sales and marketing expenses is likely to increase in the
future. We believe that a significant increase in our research and development
investment will be necessary for the development of additional applications of
our technologies. We anticipate that we will continue to invest significantly
in product research and development for the foreseeable future and that
research and development expenses are likely to increase in the future. Due to
the short development period between achievement of technological feasibility
and the general availability of our software to customers, software development
costs qualifying for capitalization have been insignificant, and as a result,
are expensed as they are incurred. We also believe that our general and
administrative expenses will continue to increase as a result of the continued
expansion of our administrative staff and the expenses associated with becoming
a public company, including annual and other public-reporting costs, directors'
and officers' liability insurance, investor-relations programs and
professional-service fees.

Since inception, we have invested in attracting top senior management, in
developing our products and technology and in building our sales and marketing
organizations. We have a limited operating history upon which investors may
evaluate our business and prospects. We have incurred significant losses to
date, and as of December 31, 1999, we had an accumulated deficit of

20
<PAGE>

approximately $12.4 million. We intend to continue to expend significant
financial and management resources on developing additional products and
services, increasing sales and marketing activities, improving our technologies
and expanding our operations. As a result, we expect to continue to incur
additional losses and negative cash flow through 2001 and possibly beyond. Our
revenue may not increase or even continue at its current levels and we may not
achieve or maintain profitability or generate cash from operations in future
periods. Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stages of
development, particularly companies deploying new technologies and
applications, such as our efforts to develop our MediaBridge system as a new
means of using the Internet.

Results of Operations

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

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Secure documents.................................. 13% 51% 97%
Media commerce.................................... 87 49 3
-------- ------- ------
Total revenue................................... 100 100 100
Cost of revenue:
Secure documents.................................. -- 149 51
Media commerce.................................... 68 12 1
-------- ------- ------
Total cost of revenue........................... 68 161 52
-------- ------- ------
Gross margin........................................ 32 (61) 48
Operating expenses:
Sales and marketing............................... 715 84 27
Research, development and engineering............. 502 67 13
General and administrative........................ 689 143 40
Impairment charge................................. 244 -- --
Stock-based compensation.......................... -- -- 8
-------- ------- ------
Total operating expenses........................ 2,150 294 88
-------- ------- ------
Operating loss...................................... (2,118) (355) (40)
Other income (expense).............................. (21) 5 6
-------- ------- ------
Loss before income taxes............................ (2,139) (350) (34)
Provision for income taxes.......................... -- -- --
-------- ------- ------
Net loss.......................................... (2,139)% (350)% (34)%
======== ======= ======
</TABLE>

Years Ended December 31, 1998 and 1999

Revenue

Total revenue was $984,000 and $6.9 million for the years ended December 31,
1998 and 1999, respectively. The $5.9 million or 604% increase was primarily
the result of increased service revenue which we earned through securing a
relationship with a consortium of leading central banks. One customer (the
consortium of banks) accounted for approximately 51% and 89% of our total
revenue for the years ended December 31, 1998 and 1999, respectively. The
customer has a discretionary

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<PAGE>

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 two years. 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 MediaBridge system, if
achieved, would significantly change the mix and concentration of our future
revenue.

Secure documents. Secure documents revenue was $500,000 and $6.7 million for
the years ended December 31, 1998 and 1999, respectively. The $6.2 million or
1,245% increase was the direct result of our securing a relationship with a
consortium of leading central banks under which we are developing a system to
deter the use of personal computer systems in the counterfeiting of currency.

Media commerce. Media commerce revenue was $484,000 and $202,000 for the
years ended December 31, 1998 and 1999, respectively. The decrease of $282,000
or 58% was primarily the result of an increased use of our sales, marketing and
research and development personnel to provide education, outreach and product
definition services to our anti-counterfeiting system customer (the consortium
of banks).

Cost of Revenue

Secure documents. Cost of secure documents 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 secure documents revenue was $1.5 million and $3.5 million for the years
ended December 31, 1998 and 1999, respectively. The $2.1 million or 141%
increase 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.

Media commerce. Cost of media commerce 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 media commerce revenue was $114,000 and $97,000 for the years
ended December 31, 1998 and 1999, respectively.

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
$825,000 and $1.9 million for the years ended December 31, 1998 and 1999,
respectively, representing an increase of $1.1 million or 128%. This increase
resulted from increased costs of $1.1 million related to salaries, other
employee costs, travel, and a $633,000 charge to record the vested portion of a
warrant granted to Hearst in connection with a marketing agreement to jointly
promote Digimarc-enabled advertising, offset in part by an increased allocation
of $467,000 to cost of secure documents revenue

22
<PAGE>

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 eight and 27 as of December 31, 1998 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 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 $658,000 and
$936,000 for the years ended December 31, 1998 and 1999, respectively,
representing an increase of $278,000 or 42%. Increased use of research and
development personnel to provide services to our anti-counterfeiting system
customer resulted in an additional $1.0 million of these expenses being
allocated to cost of secure documents revenue, while salaries and other
employee related costs, including travel expenses, increased $1.2 million.
Research, development and engineering personnel totaled 14 and 34 as of
December 31, 1998 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 $1.4 million
and $2.7 million for the years ended December 31, 1998 and 1999, respectively,
representing an increase of $1.3 million or 95%. $1.2 million of this increase
was the result of increased executive compensation, travel expenses, executive
recruiting fees, depreciation, office expense and professional fees related to
our recent growth. General and administrative employees totaled four and 15 as
of December 31, 1998 and 1999, respectively. We believe that our general and
administrative expenses will continue to increase as a result of the continued
expansion of our administrative staff and expenses associated with being a
public company, including annual and other public-reporting costs, directors'
and officers' liability insurance, investor-relations programs and
professional-services fees.

Stock-based compensation. Stock-based compensation expense includes costs
relating to stock-based employee compensation arrangements. Stock-based
compensation expense is based on the difference between the fair market value
of our common stock and the exercise price of options to purchase that stock on
the date of the grant, and is being recognized over the vesting periods of the
related options, usually four years. Stock-based compensation expense of
$527,000 was recorded for the year ended December 31, 1999. The total deferred
stock compensation recorded by us from inception to December 31, 1999 was $8.7
million. The fair value per share used to determine deferred stock compensation
for stock option grants 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 $2.2 million for each of 2000, 2001 and 2002.

23
<PAGE>

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 carryovers 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.

Years Ended December 31, 1997 and 1998

Revenue

Total revenue was $186,000 and $984,000 in 1997 and 1998, respectively,
representing an increase of $798,000 or 429%. This increase was caused by
increased secure documents revenue in 1998. We had two customers (Micrographx
and the consortium of central banks) that accounted for more than 10% of our
revenue, representing in aggregate approximately 30% of our total revenue for
the year ended December 31, 1997; and one customer (the consortium of central
banks) that accounted for more than 10% of our revenue, representing
approximately 51% of our total revenue for the year ended December 31, 1998.

Secure documents. Secure documents revenue was $25,000 and $500,000 in 1997
and 1998, respectively, representing an increase of $475,000 or 1,900%. This
increase was a result of our completion of an anti-counterfeiting feasibility
study in 1998. This has since led to the award of a contract to develop a
system to deter the use of personal computers in the counterfeiting of
currency.

Media commerce. Media commerce revenue was $161,000 and $484,000 in 1997 and
1998, respectively, representing an increase of $323,000 or 201%. $241,000 of
this increase was the result of our introduction and the market's acceptance of
our subscription-based services designed to address the needs of customers that
distribute and promote their image collections on the Internet.

Cost of Revenue

Secure documents. We recorded cost of secure documents revenue of $1.5
million in 1998 as a result of the use of our product managers, sales,
marketing and research and development personnel in our performance of a
feasibility study for a consortium of leading central banks which led to a
contract to develop a system to deter the use of personal computer systems in
the counterfeiting of currency. Cost of secure documents revenue was 293% of
secure documents revenue for the year ended 1998.

Media commerce. Cost of media commerce revenue was $126,000 and $114,000 in
1997 and 1998, respectively, representing a decrease of $12,000 or 10%. $7,000
of this decrease was the result of cost savings associated with providing
customer technical support in-house, which had previously been provided by a
third party.

Operating Expenses

Sales and marketing. Sales and marketing expenses were $1.3 million and
$825,000 in 1997 and 1998, respectively, representing a decrease of $505,000 or
38%. This decrease was the result of

24
<PAGE>

devoting sales and marketing personnel to provide education, outreach and
product definition services to our anti-counterfeiting system customer at a
cost of $498,000. Sales and marketing employees totaled ten and eight at
December 31, 1997 and 1998, respectively. We believe that a significant
increase in our sales and marketing efforts is essential for the introduction
of new products, including self-authenticating documents and the MediaBridge
system.

Research, development and engineering. Research, development and engineering
expenses were $934,000 and $658,000 in 1997 and 1998, respectively,
representing a decrease of $276,000 or 30%. Increased use of our research and
development personnel to provide services to our anti-counterfeiting system
customer resulted in $968,000 of these expenses being allocated to cost of
secure documents revenue, while salaries and other employee related costs
increased $594,000. Research, development and engineering personnel totaled
ten and 14 for 1997 and 1998, respectively.

General and administrative. General and administrative expenses were $1.3
million and $1.4 million in 1997 and 1998, respectively, representing an
increase of $125,000 or 10%. $64,000 of this increase was the result of more
frequent domestic and international travel and $81,000 was the result of
increased depreciation expense as our fixed asset base grows. General and
administrative employees totaled three and four at December 31, 1997 and 1998,
respectively.

Impairment charge. The impairment charge relates to certain assets we
acquired in July 1997 from NetRights, LLC. The assets acquired included
certain office equipment, trademarks and tradenames, and all engineering
drawings, designs and documentation, including patent applications. We
originally intended to use the technology to expand and potentially enhance
the delivery of information to our customers in connection with a reevaluation
of our business strategy.

Prior to consummating the acquisition, we realized that NetRights'
technology did not have the features and functionality previously believed,
and that results could be achieved in a more simple way. Despite proceeding
with the legally binding terms that had been agreed by the parties, a decision
was made prior to consummating the transaction not to use the purchased
technology. As a result, the purchased technology totaling $453,000 was
considered impaired and written off during the year ended December 31, 1997.
The fixed assets, the pending patent and tradenames were retained as acquired
assets.

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<PAGE>

Quarterly Results of Operations

The following table presents unaudited statement of operations data for the
eight quarters ended December 31, 1999. In our management's opinion, this
unaudited information has been prepared on the same basis as the audited annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the unaudited
information for the quarters presented. You should read this information in
conjunction with the financial statements and the related notes included
elsewhere in this prospectus. The results of operations for any quarter are not
necessarily indicative of results that we might achieve for any subsequent
periods.

<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
Dec. Sep. Dec.
Mar. 31, June 30, Sep. 30, 31, Mar. 31, June 30, 30, 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- ------- -------- -------- ------ -------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Secure documents............ $ -- $ 125 $ 187 $ 188 $ 985 $ 954 $2,071 $ 2,717
Media commerce.............. 161 121 97 105 74 42 59 27
----- ----- ----- ------- ----- ----- ------ -------
Total revenue............. 161 246 284 293 1,059 996 2,130 2,744
Cost of revenue:
Secure documents............ 128 339 308 691 459 419 922 1,729
Media commerce.............. 31 31 31 21 21 36 19 21
----- ----- ----- ------- ----- ----- ------ -------
Total cost of revenue..... 159 370 339 712 480 455 941 1,750
----- ----- ----- ------- ----- ----- ------ -------
Gross margin.............. 2 (124) (55) (419) 579 541 1,189 994
Operating expenses:
Sales and marketing......... 294 204 244 83 131 263 337 1,152
Research, development and
engineering................ 236 179 131 112 107 140 203 486
General and administrative.. 275 331 307 494 459 569 812 899
Stock-based compensation.... -- -- -- -- -- -- 121 406
----- ----- ----- ------- ----- ----- ------ -------
Total operating expenses.. 805 714 682 689 697 972 1,473 2,943
----- ----- ----- ------- ----- ----- ------ -------
Operating loss............ (803) (838) (737) (1,108) (118) (431) (284) (1,949)
Other income (expense)........ 16 16 25 (13) (11) (17) 37 384
----- ----- ----- ------- ----- ----- ------ -------
Loss before income taxes.. (787) (822) (712) (1,121) (129) (448) (247) (1,565)
Provision for income taxes.... -- -- -- -- -- -- -- --
----- ----- ----- ------- ----- ----- ------ -------
Net loss.................. $(787) $(822) $(712) $(1,121) $(129) $(448) $ (247) $(1,565)
===== ===== ===== ======= ===== ===== ====== =======
</TABLE>

We expect operating results to fluctuate significantly in the future as a
result of a variety of factors, many of which are outside of our control. For
more information on quarterly fluctuations and how they affect our business,
see "Risk Factors--Our future quarterly operating results may not meet
analysts' expectations and may fluctuate significantly in the future, which
could adversely affect our stock price."

We believe that comparisons of our historical quarterly operating results
will not necessarily be meaningful, and you should not rely on them as an
indication of future performance. It is possible that in some future periods
our operating results may fail to meet the expectations of analysts and
investors. In such event, the trading price of our common stock may decline.

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<PAGE>

Liquidity and Capital Resources

As of December 31, 1999, we had cash and cash equivalents of $90.8 million,
representing an increase of $88.7 million from $2.1 million at December 31,
1998. Working capital at December 31, 1999 was $89.9 million, compared to
working capital of $1.2 million at December 31, 1998. The increase in working
capital is attributable primarily to $7.1 million in proceeds from the sale of
our preferred stock in June 1999 and August 1999, and $83.8 million in proceeds
from our initial public offering in December 1999.

Our operating activities resulted in net cash outflows of $3.2 million and
$1.1 million for the years ended December 31, 1998 and 1999, respectively. This
$2.1 million decrease in operating cash outflows from the year ended December
31, 1998 to the year ended December 31, 1999 was due primarily to improved
operating results in the year ended December 31, 1999. Operating activities
resulted in net cash outflows of $3.1 million in 1997. The $68,000 increase in
operating cash outflows from 1997 to 1998 resulted from further growth of
deferred revenue and accrued payroll and related costs, offset by lower
operating losses.

Investing activities used cash of $58,000 and $772,000 for the years ended
December 31, 1998 and 1999, respectively. This $714,000 increase in cash used
in investing activities related primarily to the purchase of property and
equipment. In addition, investing activities used cash of $440,000 in 1997. Net
cash used in investing activities in 1997 was related primarily to the
acquisition of selected assets, including technology, patent applications and
some fixed assets of NetRights, LLC. Net cash used in investing activities in
1998 was related primarily to the purchase of patents. We anticipate that we
will experience an increase in our capital expenditures consistent with our
anticipated growth in operations, infrastructure and personnel.

Financing activities used net cash of $233,000 and provided net cash of $90.5
million for the years ended December 31, 1998 and 1999, respectively. In
addition, financing activities provided cash of $6.1 million in 1997. Net cash
provided by, or used in, financing activities in each of these periods was
related primarily to the sale of shares of our common stock in our initial
public offering in 1999, sale of shares of our preferred stock in 1997 and 1999
and proceeds from borrowings in 1997, offset by principal payments on our bank
line of credit and equipment lease obligations in 1998.

We have computers and office equipment financed under long-term capital
leases that expire over the next 36 months. As of December 31, 1999, we had an
outstanding balance of $258,000 of capital lease obligations. We had unsecured
notes payable to common stockholders totaling $311,000 at December 31, 1999
which bear interest at 7% per annum. Other significant commitments consist of
obligations under non-cancelable operating leases, which totaled $2.0 million
as of December 31, 1999, and are payable in monthly installments through 2004.

We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future. These operating
expenses will consume a material amount of our cash resources, potentially
including a portion of the net proceeds from this offering. We believe that the
net proceeds from this offering, together with our existing cash and cash
equivalents and available bank borrowings, will be sufficient to meet our
anticipated capital needs for at least the next 12 months, although we may seek
to raise additional capital during that period. If additional funds are raised
through the issuance of equity securities, stockholders may experience
additional dilution, and such equity securities may have rights, preferences or
privileges senior to those of the holders of

27
<PAGE>

our common stock. There can be no assurance that additional financing will be
available on acceptable terms or at all. If adequate funds are not available or
are not available on acceptable terms, we may be unable to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could harm our business,
operating results and financial condition.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of any
interest expense we must pay with respect to outstanding debt instruments. The
risk associated with fluctuating interest expense is limited, however, to the
exposure related to those debt instruments and credit facilities which are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to ensure the safety and preservation of its
invested principal funds by limiting default risks, market risk and investment
risk. We plan to mitigate default risk by investing in low-risk securities. At
December 31, 1999, we had an investment portfolio of money market funds,
commercial securities and U.S. Government securities of $90.8 million. We had
promissory notes and capital lease obligations totaling $569,000 at December
31, 1999. If market interest rates were to increase immediately and uniformly
by 10% from levels as of December 31, 1999, the decline of the fair market
value of the fixed income portfolio and loans outstanding would not be
material.

Year 2000 Readiness

Beginning in 1999, we took steps designed to ensure that our products,
information technology and facilities computer systems were Year 2000
compliant. To date, we have not experienced Year 2000 issues with regard to our
internal systems or with regard to any third party systems. Our expenditures
relating to Year 2000 compliance have not been material. Despite the fact that
the Year 2000 has commenced and we have experienced no problems to date, we
cannot assure that the risks posed by Year 2000 issues will not adversely
affect our business in the future, either as a result of unanticipated
difficulties related to our own systems or those of third parties.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because we do not currently
hold any derivative instruments and do not currently engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a
material impact on our financial position or results of operations. 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, an Amendment of FASB Statement No. 133." Statement No. 137 defers the
effective date of Statement No. 133 for one year. Statement No. 133, as
amended, is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000.

In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4, extending the deferral

28
<PAGE>

of the application of certain provisions of SOP 97-2 amended by SOP 98-4
through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. Before 1998, we recognized software
license revenue in accordance with the AICPA SOP 91-1, "Software Revenue
Recognition." Beginning in 1998, we have recognized software license revenue in
accordance with AICPA SOP 97-2, "Software Revenue Recognition," and related
amendments and interpretations contained in the AICPA's SOP 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2." Although these pronouncements
apply to our subscription and license revenue and service revenue, we do not
expect the adoption of SOP 98-9 to have a material effect on our results of
operations or financial condition or to materially impact our revenue
recognition practices.

29
<PAGE>

BUSINESS

Overview

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

Today, our business focuses on providing media commerce solutions, including
copyright protection, and counterfeiting and piracy deterrence. We are
currently developing additional applications to address other forms of visual
media such as DVD and video, and other distribution channels such as the
Internet. Our first product to address these opportunities is the MediaBridge
system, which is being developed and is planned for release as a resident
application in PC camera software in the second half of 2000. The MediaBridge
system is intended to enable imperceptible digital code to be embedded within
print media, such as magazine advertisements and articles, direct mail,
coupons, catalogs, bank cards and business cards. When recognized by PC cameras
enabled by our patented reader technology, that code will automatically launch
the user directly to the specific Internet destination chosen by the producer
of the print media. In this way, we believe that the MediaBridge system will
deliver more efficient Internet navigation and access to consumers and more
effective means for print publications to link readers directly to supplemental
news and entertainment, and targeted e-commerce points-of-sale.

Industry Background

The Proliferation of Digital Media and the Internet

Computing systems widely available today are more powerful than ever before,
incorporating high-resolution scanning, streaming media and data compression as
well as significant increases in processing power, bandwidth and memory.
Advances in multimedia, digital imaging and printing technologies have given
users of every level of sophistication access to highly advanced image
manipulation and printing capabilities. Higher scanner and printer resolution,
now typically at 600 dots per inch or higher, have enabled users to digitally
capture and subsequently print images with higher quality. Very high-resolution
digital camera technology, with over one million pixels per image, has become
standard in consumer digital camera products, giving users the ability to
capture images that approach photo quality. International Data Corporation
(IDC) estimates that worldwide scanner shipments will increase at 23.3% per
year to 39.5 million units by 2003 and worldwide PC

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camera shipments will grow from approximately 600,000 in 1997 to more than 9.2
million units by 2002.

These advances in computing performance, coupled with computer system price
decreases, are also enabling millions of people to participate in the growth of
activity on the Internet. IDC estimates that the number of Internet users
worldwide will grow from 196 million in 1999 to 502 million by 2003. The
Internet represents a fundamental change in the way people conduct business and
access or distribute information and contributes to an increase in the
conversion of traditional media and other forms of content to digital format.
IDC further estimates that the number of Web pages will increase from 1.7
billion in 1999 to 13.1 billion in 2003 and it estimates that the number of
users who will make purchases on the Web will increase from 48 million in 1999
to over 183 million in 2003. The rapid growth in the Internet, Internet-based
business activities and the growing use of the digital format for media content
are all contributing to the growing obsolescence of analog media content
control systems, creating new technological challenges in media content
protection.

Web Interface, Internet Navigation and e-Commerce

As advances in technology are transforming the Internet into a ubiquitous
platform for commerce, traditional "bricks and mortar" businesses are being
challenged to bridge their existing methods for marketing and selling with new
on-line marketing models. According to Forrester Research, U.S. per capita
advertising spending, including print, TV, radio and the Internet, was over
$700 in 1999, and the U.S. per capita online advertising portion will grow from
$40 in 1999 to $195 in 2004. A MarketFacts survey indicates that in 1998
approximately 62% of current Internet users visited a Web site after seeing it
mentioned in a magazine or newspaper and approximately 53% visited a site
because of a product's packaging. Currently these users must use search
engines, which only provide an uncategorized listing of Internet addresses, or
at best look for an advertiser's Internet address within the fine print at the
bottom of the page, to find their intended Web destination. The current forms
of print advertising such as magazine ads, couponing, packaging and direct mail
do not fully tap the communications capabilities of the Internet, because these
approaches do not provide a direct link driving potential customers to e-
commerce points-of-sale.

The growth of the Internet has created a large amount of unstructured
information that, according to eMarketer, consists of hundreds of millions of
Web sites and hundreds of millions of Web pages, with 1.5 million Web pages
being added per day. Many corporate Web sites now have thousands, and in some
cases millions, of pages, which often makes finding relevant information within
a particular site frustrating and time-consuming. As a result, Internet users
using conventional search and directory services often experience difficulty in
retrieving information relevant to specific products and services, potentially
causing e-commerce vendors to lose sales opportunities. According to a study
conducted by the Georgia Institute of Technology, approximately 70% of online
shoppers abandon a Web site because they have problems locating specific
products or services. Search engines currently available are generally
inefficient. According to data gathered by NEC, the most comprehensive search
engine indexes less than 16% of the Web, a decrease from previous periods. NEC
also estimates that the top 11 search engines combined currently index only 42%
of the Web.

Counterfeiting and Piracy in the Digital Age

The access to advanced technology that allows users to easily create high-
quality digital content has lowered the barriers to entry for professional
counterfeiters, counterfeiters engaged in crimes of opportunity and copyright
infringers. The Internet has exacerbated the difficulties of tracking and

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managing proprietary content such as movies and photographic or artistic
images. The International Intellectual Property Alliance estimates that U.S.
copyright industries lost at least $12.4 billion worldwide due to copyright
piracy in 1998. Traditional commercial merchandise or services, financial
instruments and government-issued documents are also affected. The European
Commission estimates that more than 5% of world trade is lost to
counterfeiting. The expediency and reach of the Internet increases the rate at
which this harm is being done.

The first content providers to utilize our digital watermarking for
protection of their copyrights were professional photographers. Shortly
thereafter, the movie industry formed an anti-piracy initiative focused on
digital watermarking technologies. The lack of an effective DVD security method
led major motion picture studios, including Universal Studios, Warner Brothers,
The Walt Disney Company, Paramount Pictures, Columbia TriStar, 20th Century
Fox, Metro-Goldwyn-Mayer and United Artists, as well as the Motion Picture
Association of America, to engage in their own multi-year digital watermarking
specifications program that is still underway. To our knowledge no contracts
have yet been awarded under this program. Although current Internet speeds are
not fast enough to support the practical transmission of video, future
broadband technology improvements may allow for this transmission. Currently,
the Motion Picture Association of America estimates that American motion
picture companies lose approximately $2.5 billion per year to video piracy, and
the potential loss after Internet distribution of movies becomes widely
available could be much greater.

The music industry also faces the problem of protecting and managing rights
of content owners. The MP3 audio file format standard compresses music with
near-compact disc quality and is rapidly becoming a major threat to audio
content owners and distributors. With readily available MP3-enabled software,
music can be copied from compact discs into computers, compressed to under 10%
of its former size, redistributed, played, and even copied back onto a blank
compact disc for private use or pirated resale. Every compact disc published
and distributed is at risk of being copied. Already, many popular music titles
have been digitized in MP3 and a new channel of direct MP3 distribution is
emerging. To address the protection of digital audio content, recording and
technology companies worldwide have collaboratively established the Secure
Digital Music Initiative (SDMI). SDMI sponsors the development or licensing of
technology specifications for the protected storage, distribution and playback
of digital music.

Financial instruments and government-issued documents are frequent targets of
illegal counterfeiting enabled by digital technology. In recent Congressional
testimony, the U.S. Treasury Department attributed the alarming increases in
counterfeiting activity primarily to high-quality graphic devices such as color
scanners and printers. The U.S. Treasury Department reported that the advanced
technology of today's PCs and peripheral devices was responsible for 43% of all
counterfeit banknotes passed and seized in 1998, up from 0.5% in 1995. The U.S.
Treasury Department also reported that the amount of U.S. counterfeit banknotes
produced increased over 30% during the twelve months ended September 1998.

Currency counterfeiting has wide-ranging implications that may involve, among
other issues, undermining the confidence in a currency's stability, causing
losses far greater than the aggregate face amount of the currency
counterfeited. We believe that digital imaging has contributed to a portion of
the $615 million lost by U.S. banks each year due to fraudulent and counterfeit
checks but are unable to quantify the portion of the loss attributable to
digital imaging. We believe that the rise of digital counterfeiting and forgery
of passports, driver's licenses and other photo identification is also
responsible for substantial losses related to increases in identity theft and
falsification of other valuable documents. Easy access to duplication
technology has also put other high-value documents

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such as stocks, bonds, government obligations, traveler's checks, commercial
checks, credit and debit cards and food stamps at risk for counterfeiting and
substantial losses.

Many other forms of printed materials are also at risk. Counterfeiters have
targeted traditional commercial merchandise and services by using high-quality
scanners, color laser printers and inkjet printers to reproduce packaging,
stamps, gift certificates and event tickets. These copies can be distributed
over the Internet or on hard copy, CDs or disks. Event tickets in particular
can be successfully duplicated and sold. Concerned over counterfeit tickets,
organizers of the World Cup and Super Bowl recently adopted currency and check
security techniques that required costly design and printing alterations.
Product counterfeiting of branded clothing, perfumes, luxury items and other
items is widespread, causing label and tag manufacturers to explore and
implement similar security printing methods. For instance, manufacturers of
expensive retail items, such as computer software and branded clothing, have
redesigned their packaging and identification tags to incorporate security
techniques borrowed from banknote design, such as holograms and microtext to
deter counterfeiting and enhance authentication of genuine articles.

Existing solutions to combat counterfeiting and piracy have had limited
success against advanced digital technology. Traditional analog security
solutions for printed documents, such as special printing techniques, embedded
holograms and microthreads, and the use of optically-variable inks, generally
do not provide sufficient protection from digital counterfeiting. Network
security measures, such as encryption, digital signatures, conditional access
and digital containers, control access to digital content during electronic
transmission but are ineffective for situations in which encryption or format
conversion are involved. These measures also fail to effectively communicate
information regarding content copyright and are unable to operate outside of
the digital environment. Digital certificates, which are specially prepared
software files that act as verifiable electronic credentials, provide
authentication and privacy capabilities for consumers and businesses conducting
commerce over the Internet, but also do not convert to a non-digital format and
do not identify copyright ownership. Without effective solutions that combat
counterfeiting and piracy by communicating copyright ownership within the
digital landscape, there can be no foundation for the management and efficient
licensing of proprietary content across the Internet.

Solutions

We first used our patented digital watermarking technologies in a variety of
applications that protect copyrights, promote media commerce and deter
counterfeiting, piracy and other unauthorized uses of all forms of traditional
and digital media content. We believe that our digital watermarking
technologies are the most widely employed in the media commerce and secure
documents markets. We also believe we have core technologies and applications
for watermarking audio and visual digital content. We believe our applications
offer strong advantages over other approaches because our digital watermarks
are imperceptible, format independent and survive format changes such as
scanning, printing and some types of copying, allowing them to operate in both
analog and digital environments.

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MediaBridge: Bridging the Physical and Digital Worlds and Enhancing the Use of
the Internet

We are developing a fundamentally new way to access and use the Internet by
embedding imperceptible digital code in digital content such as video images
and other creative properties in digital form and in traditional and digital
media, including printed materials such as:

magazine advertisements catalogs packaging

articles debit and credit cards greeting cards

covers and subscription cards tickets coupons

direct mailers business cards

This embedded code creates a bridge between those materials and the Internet
that permits users to link directly to relevant Web destinations without any
typing or mouse clicks. Accordingly, our patented technologies will give
digital capabilities to physical media and allow new forms of interaction with
the digital world, enhancing publishing, advertising and e-commerce.

Our technologies allow owners of media content, such as printed materials, to
embed imperceptible digital code into the content itself. We have designed our
reader technology to detect and read this code by cameras, scanners and other
image capture devices connected to personal computers and other digital
devices. When the code is read, our software is designed to initiate the
display of Web destinations or launch Web-based applications specified by the
creators of the visual content. We believe these MediaBridge applications will
benefit users by providing "no click" direct access to Internet-based
information and e-commerce opportunities. For example, a magazine advertisement
that has been embedded with our digital code will enable a user to hold the
magazine page up to a digital camera enabled with our proprietary reader
technology and be taken directly to the Web destination specified by the
advertiser.

As online business models evolve and the amount of business transacted on the
Internet increases, enterprises are seeking new Internet solutions that will
enable them to develop, maintain and leverage relationships with consumers,
users and affiliates. We believe our MediaBridge applications will bridge the
two separate commerce systems in place right now: traditional commerce and e-
commerce. We believe Digimarc-enabled images will facilitate cost-effective
integrated marketing by linking traditional marketing materials to the
Internet, allowing print materials to become direct portals to the Internet and
other digital processing environments. Through our technologies, advertisers
will be able to address both online and offline audiences through one marketing
effort, and easily link readers of traditional print material to an
advertiser's Internet or e-commerce presence.

We believe our ability to embed imperceptible digital code in traditional and
digital media content will benefit consumers, businesses and institutions in
the following areas:

. Benefits to Businesses. We believe our solutions will enable marketers to
improve the return on their investment in conventional and Internet
advertising. Because our embedded codes will direct users to a specified
Web destination, we believe advertisers can expect a higher percentage of
their intended audience to respond to an advertisement, and ultimately,
to become purchasers. In addition, our solutions are intended to improve
customer satisfaction and retention as customers will be less frustrated
with searches and complicated Web sites. We intend to provide advertisers
the flexibility to alter the Web destination linked by the embedded code
in a particular advertisement, allowing them to remotely redirect a
marketing campaign without having to update their print advertisements.
We believe businesses can lessen the need for, and therefore lower the
internal costs of, call and e-mail centers by

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establishing self-service Web pages on proper use and maintenance that are
linked to embedded content. Moreover, digital code can be embedded without
any inherent changes to the media content or additional material costs,
whether in print, audio or video.

. Benefits to Consumers. We believe consumers will benefit from our
solutions through improved convenience and assured success in reaching
the relevant Web destination. We intend to offer a direct path from a
consumer's interest in an advertisement, editorial, package or label to
an online research and buying opportunity, thus avoiding misdirected or
overly broad searches on traditional search engines or portals.

Protecting Media Content and Valuable Documents

We also provide solutions to deter the counterfeiting, piracy and
unauthorized alteration of media content. Major industries have endorsed
digital watermarking generally as an important technology in controlling media
content and valuable documents, including commercial photography, movies,
video, music, traditional merchandise and services, financial instruments and
other high-value documents. Our digital watermarking solutions are compatible
with a variety of Internet, computing and communications solutions because
virtually any piece of media content can contain our imperceptible digital
watermarking code. We are able to digitally mark a diverse set of sensitive,
high-value materials, including identity documents such as passports and
drivers' licenses, commercial and traveler's checks, credit and debit cards,
video or print images, currencies, stock certificates, stamps, personal checks,
event tickets and clothing brand labels. Our solutions also provide the means
to link an embedded code to human- and machine-readable information about a
document to establish its authenticity, control its use and link it to the
rightful owner. Our digital watermarking technologies can be applied to various
types of applications for protecting content, including:

. Counterfeiting Deterrence. One customer (the consortium of banks) has
accounted for nearly all of our revenue to date in the area of
counterfeiting deterrence. We intend to pursue further development of our
relationship with this customer and develop other sources of revenue by
proposing additional products and services over time. We also intend to
use our digital watermarking technologies to provide other issuers of
high-value documents with the ability both to deter illegal or prohibited
reproduction, subject to approval by the consortium, and to verify
authenticity of photo identification documents. We are forming
partnerships with computer, software and peripheral vendors with the aim
of having these entities embed or bundle our reader technology into their
products. Once incorporated into their products, our reader technology
will detect each of our digital watermarks embedded in images or
documents the user attempts to process. Detection of the watermark can
deter attempts to counterfeit high-value documents by preventing the
computer processing of those documents.

. Piracy Prevention. Our digital watermarking technologies provide the
ability to prevent unauthorized reproduction of copyrighted or otherwise
proprietary content. Our digital watermarks can be embedded in almost any
form of media content and can survive file and format changes to provide
persistent identification of the content. By enabling applications with
our embedding and reader technologies, the imperceptible identity created
by a digital watermark facilitates the communication of copyright and
ownership information. Ultimately, these anti-piracy applications help
owners of media content to retain attribution and compensation for their
proprietary media content, such as print, audio and video.

. Document Integrity. We are developing applications using our digital
watermarking technologies to deter unauthorized alteration of
confidential or proprietary content and to ensure document integrity. Our
self-authenticating technology will allow an access control

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device enabled with our reader technology to check for digital
watermarking consistency in documents like passports to determine if
photos have been swapped or data on a document has been altered. For
instance, this capability could allow a plane ticket or travel document to
be checked for authenticity. By checking to see if the code in the digital
watermark matches information such as a ticket number, an access control
device can determine if a document is authentic.

. Media Commerce. Any form of audio or visual intellectual property that
can be put into a digital format can be marked with our digital
watermarking technologies. This includes audio in any format, and video
in any format, including traditional and internet streaming media
technologies. Our digital watermarks represent a new feature in media
content because they can enhance any type of content, both as a form of
protection that allows an owner of intellectual property to discourage
its unauthorized distribution and as a method for owners to locate their
property on the Internet. In this manner, we provide a fundamental
component of media commerce systems and facilitate e-commerce.

Strategy

Our strategy focuses on establishing our technologies as the industry
standard for all forms of media content, contributing to systems designed to
control its consumption and use, and enabling numerous new communications
functions to enhance its value for producers and consumers. The key elements of
our strategy are as follows:

Become the De Facto Standard for Digital Watermarking

We believe that our proprietary technologies will emerge as standard digital
watermarking technologies for deterring counterfeiting, piracy and copyright
infringement, managing digital assets, and for linking digital media content
with the physical world because of the advantages they offer over existing
security and communications-enabling technologies. We intend to leverage our
expertise, our customer and OEM relationships and our strong intellectual
property position derived from our first-to-market position and robust
portfolio of digital watermarking patents to extend our leadership position
into other areas of opportunity for digital watermarking, including movies and
video, traditional merchandise and services and high-value documents. We plan
to leverage our relationship with a consortium of leading central banks to
encourage manufacturers and developers to install our reader software in
multiple personal computer system components including in computers, digital
cameras, scanners and software. Digimarc has the right to use these readers to
protect documents other than banknotes, subject to prior approval by the
consortium of central banks. We also actively participate in a number of
initiatives for establishing industry standards and plan to participate in
others, including the Copy Protection Technical Working Group for video copy
protection, the Secure Digital Music Initiative for the protection of audio
content, and the Digital Imaging Group for promotion of digital imaging
solutions in general. Through our participation and planned participation in
these groups, we hope to promote the role that digital watermarking
technologies play in each of these industries. We believe the following
characteristics provide a competitive advantage for establishing our
technologies as standards:

. Imperceptibility. The generally imperceptible nature of our digital
watermark technology during normal use distinguishes it from most other
security technologies because it does not require a visible or audible
change in content, preserving the aesthetic value of the object.

. Persistence and Format Independence. Our digital watermarks survive file
and format changes, including printing and scanning, to provide
persistent identity. In addition, the embedded image is not restricted to
specific channels or media types and formats.

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Achieve Market Penetration Through an Integrated Focus on Infrastructure and
Applications

We are attempting to build long-term demand for our technologies by fostering
broad proliferation of our reader software as a resident application on
personal computers and in software applications and image processing
peripherals, like digital cameras, printers and scanners. We plan to leverage
our relationship with a consortium of leading central banks to encourage
manufacturers and developers to install our reader software in multiple
personal computer system components, adding to our infrastructure development.
Simultaneously, we are aggressively pursuing the development of applications
that utilize our digital watermarking technologies in all forms of media,
including print, audio, video and streaming media. Our success in driving the
proliferation of infrastructure enabled by our digital watermarking reader
technology will reinforce our technology's applicability to, and is expected to
generate demand for, related applications. In a complementary fashion, the
successful implementation of our applications should drive the availability and
demand for our reader technology. We plan to focus our efforts in each of these
key areas as follows:

. Drive Proliferation of Our Reader Technology. We are working with major
infrastructure companies, including Adobe, Be Incorporated, 3Com,
Logitech and Hewlett-Packard, to broaden and extend the penetration of
our reader technology into scanners, digital cameras, graphics editing
and photo-processing software, printers, Web browsers and other areas of
the digital infrastructure. Our reader technology is currently bundled
with image-editing applications from leading vendors. To drive adoption,
we will continue working with these and other leading infrastructure
companies through joint research and development efforts and assistance
in product development to influence the establishment of technical
standards.

. Develop New Media Applications. We intend to continue developing
applications for our digital watermarking technologies through strategic
relationships and consulting efforts. We are working with major media
companies, such as Macrovision and Philips, to develop applications and
standards which incorporate our digital watermarking technologies.
Through our efforts with consumer brand leaders, we hope to incorporate
these technologies into applications that span all forms of content. We
believe our core digital watermarking technologies have applications in
all forms of media, including print, audio, video and streaming media.

Establish MediaBridge as a Leading Internet Access and Navigation Technology

We believe our MediaBridge solution will serve as a fundamental new interface
to digital devices and the Internet, while also enhancing e-commerce. Our
MediaBridge technology is intended to link the analog and digital formats by
embedding imperceptible digital code in printed materials, making those
materials Web-enabled. To promote our MediaBridge system, we intend to
establish strategic relationships with leading consumer brands and publishers
of printed media as well as infrastructure partners. We believe that our
applications offer distinct advantages over existing Internet-based
alternatives for facilitating e-commerce, including ease of use,
disintermediation of directories and search engines and enhanced market
research. We also intend to facilitate e-commerce through our MediaBridge
system by:

. enabling licensing and distribution of content;

. promoting e-commerce through digital and printed imagery;

. protecting the financial instruments used to pay for Internet goods and
services; and

. establishing greater confidence in personal identity systems.

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Continue Intellectual Property Leadership

We were an early developer of the core technologies that we believe will
become the standard in both digital media commerce and other e-commerce
enabling applications. Since our patent filings commenced in 1993, we believe
that we have established one of the world's most extensive patent portfolios in
the field of digital watermarking. We hold 16 U.S. issued patents, and have an
additional 103 U.S. patent applications pending of which two have received a
notice of allowance, indicating that the allowed applications are entitled to
issue as patents subject to completion of all formalities, and at least 19
foreign patent applications pending, including Patent Cooperation Treaty
applications. We intend to maintain our technology leadership by creating new
products and services, concentrating heavily on research and development, and
emphasizing intellectual property protection in all of our activities. We
believe our dedication to innovation will also enable us to respond to the
challenges presented by the ever-increasing access to sophisticated technology
in the areas of piracy and counterfeiting, as well as address the opportunities
emerging from the growth of e-commerce.

Promote Our Brand

To enhance industry and public awareness of our solutions, we are pursuing an
aggressive brand development strategy through mass market and targeted
advertising, promotions and public relations. Our industry branding strategy
promotes the broad utility of our technologies across numerous content types,
distribution channels and applications. A primary objective of our branding
strategy will be to generate widespread recognition of our corporate logo,
which will appear on all print advertisements and other media that are
Digimarc-enabled. We believe that building our brand will foster continued
adoption of our solutions by leading companies in relevant markets and, as
appropriate, educate consumers about the new features in media content that we
enable. We also believe that a strong brand will increase licensing
opportunities with corporate customers, contributing to revenue growth and
diversification.

Products

We offer patented digital watermarking solutions, including technology,
software, tools and services that allow users to embed, and subsequently read,
imperceptible digital code in media content. This embedded data is generally
imperceptible during normal use but detectable by software and hardware
equipped with our reader technology. We believe that this embedded code can be
used to identify, authenticate, track, manage and enhance content, as well as
facilitate traditional and e-commerce transactions. We also believe our core
technologies have applications in audio, video, and streaming media
technologies. We plan to develop applications in these markets which utilize
our strong position in the digital watermarking field.

Our initial products addressed the growing concerns of photographers,
illustrators and graphic designers who began to use the Web and CD-ROM as
central marketing and distribution tools for their portfolios, but who had
become increasingly concerned by the use of digital imaging tools to produce
high fidelity copies of their images. Our initial products addressed the
copyright concerns of these image owners, and ultimately fostered commercial
relations between them, by communicating ownership information and helping an
image owner to retain attribution and compensation for a copyrighted work. The
Advertising Photographers of America expressed concern to Adobe and other major
vendors that tools like Photoshop were providing greater availability of new
forms of copyright infringement. In response, vendors began to bundle our
digital watermarking applications in Photoshop and other leading imaging
applications. In addition, by working with the Picture Agency Council of
America, and leading agencies such as MasterFile, we developed products to

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address the needs of stock photo agencies, which use CD-ROM technology for
image distribution and the Web for marketing their image collections, but which
often do not directly hold image copyrights.

We have worked closely with our customers to develop applications for our
digital watermarking technologies with other media forms, distribution channels
and applications like DVD and the Internet. For instance, our initial customers
sought to track uses of copyrighted images. This market demand led us to
develop MarcSpider, our service to track images on the Internet. Other
industries, including media companies such as Time Inc. and National Geographic
Television, began to use digital means to distribute and promote large image
collections, and as a result, they also sought to develop a system of image
asset management. For instance, Time used our watermarking technologies to mark
images that were published in the online version of Teen People. Our image
asset management applications allow customers to use our digital watermarks as
a de facto digital asset tag, discouraging an image's unauthorized distribution
and ultimately generating revenue and extending brand recognition by increasing
the likelihood of the licensing of marked images. In addition, we have recently
established the Digimarc Embedding Institute, a full-service facility where we
assist our customers in optimizing the implementation of our technologies in
their images.

The dual goals of copyright protection and revenue and brand enhancement
inspired two system improvements: the addition of transactional watermarking
and the construction of a media commerce platform. Working with large stock
photo collections, notably Corbis and Getty Images, we developed and licensed
systems to dynamically embed digital watermarks in images as they are
downloaded to customers. Corbis marked more than a million images, many of
which became available through AltaVista's search engine. Getty added our
digital watermarks to the Tony Stone Web site, the online source for their
premium images. National Geographic Television began using our digital
watermarks for advertising images used with partners. In addition, we are
continuing to develop the media commerce system in cooperation with our
customers and business partners, reaching further into the image publishing
work flow. By using our digital watermarks to link an image to a server,
distributors can offer licensing and image search functions within products
like Photoshop. Virtual content bundling being contemplated will further extend
the reach for distributors while adding substantial value to an image user.

Our products continue to adapt to the technological needs of our customers.
Applications like the MediaBridge system are intended to allow our customers to
link virtually any physical content with the online world of computing,
multimedia and the Internet. We believe that this new method for Web-enabling
printed materials will have many potential product applications in direct
marketing, merchandising and promotion, packaging, service and support,
community building, brand enhancement, news, entertainment and education.

Together with the evolution of our product offerings, we believe that our
fundamental embedding and reader technologies will continue to find increased
applicability. For example, counterfeiting constitutes a growing threat to the
security of the world's currencies. The proliferation of high-resolution color
copiers, scanners and printers, and increasingly powerful computers and image-
processing software has made it possible for relatively unsophisticated users
to produce counterfeit banknotes that pass as authentic in many environments.
These developments have made casual counterfeiting a more attractive crime of
opportunity, leading to a substantially increased burden on law agencies. In
response to these threats, a number of leading central banks have decided to
add new anti-counterfeiting features to their currencies using our digital
watermarking technologies.

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Our current and planned products are grouped along three lines of business:

. secure documents,

. copyright protection and media commerce, and

. MediaBridge.

Each product line consists of embedders to place our digital watermarks into
content, and reader technology to detect, read and respond to the embedded
code.

Secure Documents

Our planned document security products will use digital watermarking to
authenticate original documents, detect fraudulent documents and deter
unauthorized duplication or alteration of high-value documents such as
passports, tax stamps, tickets and financial instruments like securities,
traveler's checks and currencies. We have relationships with a number of
financial institutions that are involved in the creation or protection of high-
value documents. These relationships include a development and license
agreement with a consortium of leading central banks related to anti-
counterfeiting of currencies that has accounted for more than half of our total
revenue in 1998 and substantially all of our total revenue in 1999, and is
expected to account for substantially all of our total revenue until we develop
new sources of revenue from new products like the MediaBridge system. We also
intend to pursue further development of our relationship with the consortium of
central banks to develop other sources of revenue by proposing additional
products and services to this customer over time and by offering the benefits
of the anti-counterfeiting system to, and developing new product applications
for, the issuers of other high value documents.

Our copyright protection and media commerce products provide a range of
solutions, including copyright communication, asset management and business-to-
business media commerce solutions. Our solutions are enabled by digital
watermarking tools provided to content owners, and software modules provided to
manufacturers and software vendors for reading the embedded code and
facilitating the appropriate responses to them. Our products and services
include those listed below:

. Still Images. Copyright protection solution customers can benefit from
our solutions by using a number of applications. Image creators can use
Digimarc plug-ins that are bundled with a number of leading image editing
applications from companies such as Adobe Systems, Corel, Micrografx and
JASC Software. The Digimarc batch embedder is a stand-alone tool that
processes the embedding of digital watermarks in large collections of
digital images. The Digimarc digital watermarking software development
kit (SDK) provides a programmatic interface to digital watermark
embedding, detection and reading, designed for integration into client
and server products. Our SDK application includes real-time server-based
watermarking, where digital watermarks carrying transactional data are
added to images as they are delivered to customers. Our MarcCentre
service is a central repository of registered ownership information that
is accessible by a Web user who views Digimarc-enhanced proprietary
content with our patented reader technology. This service allows any user
to view the information that the content owner wishes to register in
MarcCentre. Our MarcSpider service searches the public Web for images
containing our digital watermarks and produces reports on where and when
such images are found. This service allows Web content developers,
photographers, stock photography agencies and publishers of
entertainment, sports and news images to track their works on the Web.

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. Video. Using a unique approach to digital watermarking, Digimarc,
Macrovision and Philips engineers have developed prototypes of technology
that can protect program material on videocassettes, DVDs, cable or
satellite transmissions from unauthorized copying to recordable DVDs,
DVHS and multimedia personal computers. The resulting system would
complement Macrovision's widely-adopted existing video copy protection
technology. Detectors can be cost effectively deployed in hardware or
software to meet real-time play and record control requirements in a wide
range of DVD platforms.

MediaBridge

We anticipate that our MediaBridge system will provide the ability for
printed documents to be identified by personal computers and similar devices
through digital images in the documents enhanced with our watermarks that are
generally imperceptible to users that will link the computer to a targeted Web
destination. We believe that these enhanced images and associated reader
technology will enable a variety of potential applications.

The MediaBridge system is an application we are developing based on our
patented core technology. The MediaBridge system will create new communications
capabilities for media content that promote and enhance e-commerce. The
MediaBridge system will be a fundamentally new way to access and use the
Internet by embedding imperceptible digital code in printed materials,
including, among other things, magazine advertisements, articles, covers and
subscription cards, direct mailers, packaging, debit and credit cards, greeting
cards, coupons, catalogs, tickets and business cards that can be read by
digital devices enabled by our patented reader technology. We expect to begin
marketing the MediaBridge system in the second half of 2000. The same
technology can be used to permit audio, video, images and other creative
properties in digital form to interact with the digital world.

Technology and Intellectual Property

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

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

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

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<PAGE>

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

Our technologies allow messages in our watermarked images to survive through
a variety of changes to the underlying image, including scaling and rotation of
the image. The ability to be rotation independent is particularly important for
images that are acquired through digital scanners or cameras because the input
image is rarely at the exact same orientation as the original image. We achieve
rotation independence through a patented process that incorporates orientation
information into our digital watermarks, which allows our watermarks to be read
regardless of their orientation relative to the scanner or camera. Using this
orientation information, our patented reader technology can recover an image's
embedded message after scale changes of as much as .6x to 2x the original image
size. We believe these features will be important for communicating the
embedded messages through changes from digital to physical form and back again.
We believe these features will be especially critical for applications that
include printing and scanning, or recording a digital video to VHS and back to
DVD.

To protect our significant efforts in creating these technologies, we have
implemented an extensive intellectual property protection program that relies
upon a combination of patent, copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual provisions. We have adopted an
aggressive patent strategy. We believe that we have established one of the
world's most extensive patent portfolios in the field of digital watermarking,
holding 16 U.S. issued patents, with at least 103 U.S. patent applications
currently on file, of which two have received a notice of allowance, and at
least 19 foreign patent applications pending, including Patent Cooperation
Treaty applications. We also believe, based on published patents, that we hold
some of the earliest invention dates on issued patents in the field of digital
watermarking and that some of these early patents may be of significant value
to our competitive position. We also own registered trademarks in both the U.S.
and other countries and have applied for other trademarks and have licensed
rights to other technologies. We seek to protect new product applications
through both existing patents and filings for new patents.

We are not currently involved in any proceedings and are not currently aware
of any claims regarding our intellectual property rights. However, pursuant to
SDMI's directives, we have offered to license certain of our technologies to
parties involved with SDMI, and may be required to enforce our rights against
them in the future. Although we devote significant resources to developing and
protecting our technologies, and periodically evaluate potential competitors of
our technologies for infringement of our intellectual property rights, these
infringements may nonetheless go undetected or may arise in the future. We
expect that infringement claims may increase as companies become more concerned
with protecting their content from electronic copying.

Customers and Strategic Relationships

Since the introduction of our first product in 1996, we have built a broad
technology platform that we believe has a range of applications. Our initial
customers were copyright owners concerned with the use of digital imaging tools
in producing unauthorized high-quality copies of their images. We have helped
corporate users to generate revenue and extend their brands through media
commerce initiatives. We later developed media commerce applications allowing
customers to persistently identify their protected properties or locate those
properties on the Internet and,

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ultimately, discourage the unauthorized distribution or use of those
properties. Our strategic partners use our media commerce applications to offer
licensing and image search functions within image-editing products. While our
applications continue to develop to address changing technological trends, our
fundamental embedding and reader technologies continue to find increased
applicability.

Customers

Digimarc has been awarded a multi-year contract to develop a system to deter
the use of personal computer systems in the counterfeiting of currency. The
contract is funded by a consortium of leading central banks. The identities of
the participating banks, design of the system and timetable for deployment are
confidential. The central banks have acquired an exclusive license to
Digimarc's technologies for deterring the counterfeiting of currency. Digimarc
has retained the exclusive right to use the technologies developed for the
system in other applications, subject to approval by the banks.

Digimarc's current customers also include leaders in the sports,
entertainment, news and publishing fields, as well as leading image creators,
such as National Geographic Television, Corbis, Getty Communications, Time,
Inc. and Fox Broadcasting. Our target markets include photographers, Web
designers and OEMs, such as Adobe, Corel and Micrografx. Our stock photo agency
customers account for 75% of all stock photo collections, which include more
than 60 million high-quality photographs.

The following case studies provide illustrations of how selected customers
have used our products and services to address their copyright concerns:

. NASA's Lunar and Planetary Institute (LPI). LPI was looking for a way to
announce its copyrights on the unique images in its 3-D Tour of the Solar
System CD-ROM. LPI also wanted to remind viewers that these images could
not be copied without permission. After much study, LPI took a dual
approach by adding a "do not copy" warning to the packaging and Digimarc-
enabling all of the images. LPI used the Digimarc watermarking technology
bundled with Adobe Photoshop to mark the images on the CD-ROM, as well as
the images on the LPI Web site. To date, LPI has discovered no misuse of
the images, and it has indicated to us that it plans to use Digimarc-
enabled images on future projects to communicate image copyrights.

. National Geographic Television. National Geographic Television uses
Digimarc software to add "digital asset tags" to assist with tracking and
management of the computer-generated original content it uses in its
television programming. National Geographic Television's graphic
designers Digimarc-enable digital art used in their productions prior to
sharing the work with outside production facilities or other groups
within the National Geographic Society.

Strategic Relationships

. Macrovision and Philips. In 1997, we entered a joint marketing and
development agreement with Macrovision, our largest shareholder, aimed at
addressing the absence of an effective DVD security method. Under this
arrangement, we have agreed to develop with Macrovision a system to
control the copying and unauthorized playing of video content in all
forms of distribution, with an initial focus on DVD video. In 1998,
Philips NV joined the partnership. Macrovision and Philips have been
developing the video copy prevention and play control solution, with
Digimarc contributing intellectual property and technical assistance. In
addition, Macrovision has exclusive marketing rights for the video copy
prevention and playback control solution for a number of years, subject
to payment of minimum royalties. Between December 1997 and June 1999,
Macrovision purchased shares of our preferred stock that

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were converted into 924,475 shares of our common stock upon the
consummation of our initial public offering in December 1999.

. Hearst. In October 1999, we entered into a binding letter agreement with
Hearst Communications, Inc. Under this agreement, Hearst and Digimarc
will jointly promote and market the MediaBridge system by enhancing the
editorial content of participating Hearst magazines and by enabling
advertisements in Hearst magazines to be compatible with the MediaBridge
system. In connection with these marketing efforts, we have agreed to
provide a non-exclusive license to Hearst to enable its editorial content
to be compatible with the MediaBridge system and to sublicense the
MediaBridge system to its advertisers. We will also provide Hearst with
all reasonable and necessary development tools and related training to
enable it to create and publish Digimarc-enabled content for its
magazines. Under the letter agreement, we have granted Hearst a warrant
to purchase up to 150,000 shares of our common stock at an exercise price
of $20.00 per share, 87,500 of which are subject to vesting based upon
events as set forth in the letter agreement. In addition to marketing the
MediaBridge system to publishers of its magazines and their advertisers,
Hearst has agreed to promote the MediaBridge system to readers of its
publications and to remit to Digimarc a portion of revenues it receives
from MediaBridge-enabled advertising.

. Wired. In October 1999, we entered into a binding letter agreement with
Wired magazine, part of the Conde Nast Publishing Group. Under this
agreement, Digimarc and Wired have each agreed to encourage advertisers
to use the MediaBridge system for their advertisements in issues of Wired
magazine beginning in the summer of 2000. In addition, Wired has agreed
to jointly promote and market in Wired magazine and to remit to us a
portion of the revenue it receives for MediaBridge-enabled advertising.
Under this agreement, we have agreed to provide a non-exclusive license
to Wired to enable its editorial content to be compatible with the
MediaBridge system, as well as to provide Wired with all reasonable and
necessary development tools, training, software and cameras for it to
comply with its obligations under the agreement. We have also agreed to
refrain from granting a license to distribute a MediaBridge-enabled
publication to any other publisher until at least 30 days after the first
issue of Wired is published under this agreement.

. Logitech. In September 1999, we entered into a non-binding letter of
intent to establish a strategic partnership with Logitech, Inc. In this
letter of intent, Logitech expressed its intention to enter into an
agreement with Digimarc to include the MediaBridge system with Logitech's
tethered PC camera software on a royalty-free basis and it would
prominently mark each package with the Digimarc logo beginning no later
than six months after the first commercial availability of the
MediaBridge system.

. 3Com. In September 1999, we entered a non-binding letter of intent to
establish a strategic partnership with 3Com Corporation. In this letter
of intent, 3Com expressed its intention to enter a bundling agreement
with Digimarc that will provide for the bundling of the MediaBridge
system with 3Com's tethered PC cameras on a royalty-free basis and it
would prominently mark each package with the Digimarc logo beginning no
later than six months after Digimarc's first commercial shipment of the
MediaBridge system.

. Be Incorporated. In August 1999, we entered a non-binding letter of
intent to establish a strategic partner relationship with Be Incorporated
for use of our MediaBridge software as a standard feature of their
operating system. In exchange, Digimarc will grant a royalty free, non-
exclusive license to Be Incorporated to offer the MediaBridge system to
licensees of its operating system.

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. Adobe. In 1996, Digimarc granted a ten-year license to Adobe to use
Digimarc's watermarking technologies in its Photoshop application, a
leading professional image editing application. Simultaneously, Adobe
granted Digimarc a ten-year license which allows us to use their software
code to develop new applications that are compatible with Adobe's
technology. In the same year, Adobe incorporated Digimarc's technology
into Adobe's ImageReady application, an image processing application
designed specifically for the needs of Web publishers. Between July 1996
and June 1999, Adobe Ventures L.P. purchased shares of our preferred
stock that were converted into 846,692 shares of our common stock upon
consummation of our initial public offering in December 1999.

. Hewlett-Packard. In June 1999, Hewlett-Packard made an investment in
Digimarc by purchasing $1.5 million of our preferred stock to help us
foster new advancements in our digital watermarking technologies and
media commerce applications. Hewlett-Packard's preferred stock was
converted into 300,000 shares of our common stock upon consummation of
our initial public offering in December 1999.

. Corbis. In 1998, Digimarc granted a three-year enterprise-wide license to
Corbis for the use of Digimarc media commerce solutions across Corbis'
image collections. Since that time, Corbis and Digimarc have cooperated
in defining market requirements and advancing standards that promote the
industry-wide use of Digimarc watermarking. In addition, in 1998,
Digimarc purchased certain intellectual property relating to digital
watermarking from Corbis.

Competition

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

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

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

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

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

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

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

Employees

As of March 10, 2000, we had 118 full-time employees, including 44 in sales,
marketing and technical support, 49 in research, development and engineering,
and 25 in finance, administration, legal and corporate communications. Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. Our employees are not covered by any collective
bargaining agreement, and we have never experienced a work stoppage. We believe
that our relations with our employees are good.

Facilities

Our principal administrative, sales, marketing, support, research,
development and engineering facility is currently located in Tualatin, Oregon,
under a lease that expires in December 2004. This facility occupies a total of
approximately 25,550 square feet. We also lease space for sales, marketing and
technical support operations in Tulsa, Oklahoma under a lease that expires in
January 2005. This facility occupies a total of approximately 11,750 square
feet. We will likely require additional space before the end of 2000, but
believe that securing additional suitable space to accommodate our growth will
not be difficult.

Legal Proceedings

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

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MANAGEMENT

Officers and Directors

The following table sets forth certain information regarding our executive
officers, corporate officers and directors as of March 10, 2000:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers
Bruce Davis............. 47 President, Chief Executive Officer and Director
Geoffrey Rhoads......... 37 Chief Technology Officer and Director
E. K. Ranjit............ 50 Chief Financial Officer and Secretary
J. Scott Carr........... 37 Vice President and General Manager, Secure Documents
Indraneel Paul.......... 43 Vice President and General Manager, MediaBridge

Corporate Officers
Burt W. Perry........... 45 Vice President of Engineering
Kathy S. Brogdon........ 47 Vice President of Finance and Operations
William Y. Conwell...... 41 Vice President of Intellectual Property
Karyn Thale............. 39 Vice President of Corporate Communications

Directors
Philip J. Monego, 52 Chairman of the Board
Sr.(1)(2)..............
Brian J. Grossi(1)(2)... 49 Director
John Taysom............. 45 Director
</TABLE>
- --------
(1) Member of the compensation committee
(2) Member of the audit committee

Executive Officers

Bruce Davis has served as our president, chief executive officer and director
since December 1997. Prior to joining us, Mr. Davis served as president of
Titan Broadband Communications, a provider of information technology and
satellite communications systems and services, from April 1997 to December
1997. Prior to that, Mr. Davis served as president of Prevue Networks, Inc., a
supplier of electronic program guides and program promotion services for the
cable and satellite television markets, from July 1996 to February 1997. Prior
to that, Mr. Davis founded and served as president of TV Guide On Screen, a
joint venture of News Corporation and TCI that supplied electronic program
guides and navigational software for the cable television market, from January
1993 to July 1996. Mr. Davis received a B.S. in accounting and psychology and
an M.A. in criminal justice from the State University of New York at Albany and
a J.D. from Columbia University.

Geoffrey Rhoads founded Digimarc in 1995 and now serves as chief technology
officer and director. Previously, Mr. Rhoads served as our interim president
from September to November 1995, and as chairman of the board of directors from
January 1995 to March 1996. Prior to that, Mr. Rhoads was the founder and
president of Pinecone Imaging Corporation, a company which develops imaging
systems for telescopes, since 1992. Mr. Rhoads received his B.A. in physics
from the University of Oregon.

E. K. Ranjit has served as our chief financial officer since August 1999 and
secretary since November 1999. Prior to that, he served as vice president of
finance and treasurer of TriQuint Semiconductor, Inc., a supplier of integrated
circuits for the wireless communications,

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<PAGE>

telecommunications, data communications and aerospace markets from July 1996 to
August 1999, and as its corporate controller from May 1991 to June 1996. Mr.
Ranjit received a B.S. from the University of Texas at Dallas and an M.B.A.
from Pepperdine University.

J. Scott Carr has served as our vice president and general manager of secure
documents since June 1999. Prior to that, he served as our vice president of
marketing and business development from January 1998 to May 1999, and director
of business development from May 1996 to December 1997. Prior to joining us,
Mr. Carr served as vice president of marketing at nCUBE Corporation, a
manufacturer of video servers, from July 1995 to May 1996. Prior to that, Mr.
Carr worked as a staff architect at Sequent Computer Systems, Inc., a computer
equipment manufacturer, from August 1992 to July 1995. Mr. Carr received his
B.S. in computer science from Oregon State University.

Indraneel Paul has served as our vice president and general manager of
MediaBridge since November 1999. From January 1995 through October 1999, Mr.
Paul held various positions with TV Guide Networks, a provider of electronic
television program guides for the cable television industry. His most recent
position at TV Guide Networks was executive vice president of operations. Prior
to that, he served as vice president of engineering and operations at Vyvx, a
provider of fiber optic transmission services for the broadcast television
industry. Mr. Paul received a B.Tech. in electrical engineering from the Indian
Institute of Technology and an M.S. in electrical engineering from Rensselaer
Polytechnic Institute.

Corporate Officers

Burt W. Perry has served as our vice president of engineering since July 1996
and served as interim co-president from August through December 1997. Prior to
that, Mr. Perry worked as an engineering manager at Intel, designing and
managing technology and software development, from June 1993 to July 1996. Mr.
Perry received a B.S. in computer science from the University of Delaware.

Kathy S. Brogdon has served as our vice president of finance and operations
since October 1996 and served as interim co-president from August through
December 1997. Prior to joining us, Ms. Brogdon served as vice president of
finance and operations at Active Arts, Inc., a multimedia company, from
December 1995 to October 1996. Ms. Brogdon worked as the controller and a
partner at Nova Northwest, Inc., a lending, leasing and financial advisory
company, from September 1990 to December 1995. Ms. Brogdon received a B.A. in
accounting and quantitative methods from the University of Oregon and became a
Certified Public Accountant in Oregon in 1978.

William Y. Conwell has served as our vice president of intellectual property
since July 1999. Prior to joining us, Mr. Conwell was a patent attorney at
Klarquist Sparkman Campbell Leigh & Whinston, LLP since 1984, and became a
partner in January 1990. Mr. Conwell received a bachelor's degree in Electrical
Engineering from Georgia Institute of Technology and a J.D. from Emory
University School of Law.

Karyn Thale has recently joined us as vice president of corporate
communications. Prior to joining us, Ms. Thale served as director of marketing
communications for adidas America, an athletic shoe and apparel company, from
April 1993 to January 2000. Prior to adidas America, Ms. Thale served in
several senior management positions at various advertising agencies, and has
served as senior corporate communications manager for Microsoft Corporation, a
software company. Ms. Thale received a B.A. in communications from the
University of Washington.

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Directors

Philip J. Monego, Sr. has been chairman of our board of directors since 1996.
Mr. Monego has served as chief executive officer and chairman of the board of
directors of Voquette, Inc., an Internet media portal company, since May 1999.
Prior to that, Mr. Monego was co-founder, president and chief executive officer
of NetChannel, Inc., an Internet information delivery service, from May 1996 to
June 1998. Prior to that, Mr. Monego was interim president and chief executive
officer of Yahoo! Corporation from April 1995 to September 1995. He is an early
investor in several new media startups and also currently a venture partner in
the Media Technology Venture Fund. Mr. Monego received a B.A. in management
from LaSalle University.

Brian J. Grossi has served as one of our directors since July 1996. Mr.
Grossi co-founded AVI Capital, a venture capital firm specializing in high-
technology companies, in 1994. Prior to that, Mr. Grossi was a general partner
with Alpha Partners, a venture capital firm, from 1982 to 1992. Prior to that,
he worked at the Stanford Research Institute as a research engineer and project
leader from 1976 to 1982. Currently, Mr. Grossi serves as a director of
Apptitude, Inc., Aptia, Inc., Intraspect Software, Inc., InVisio, Inc.,
nCommand, Inc., Vivant! Corporation and Pointbase, Inc. Mr. Grossi received a
B.S. and an M.S. in mechanical engineering from Stanford University.

John Taysom has served as one of our directors since December 1997. Mr.
Taysom has been employed by Reuters, a worldwide television and news agency,
since 1982 and is currently the Managing Director of the Reuters Greenhouse
Fund. Mr. Taysom also serves on the board of directors of TIBCO Software Inc.
and Fantastic Corporation, a Swiss company. Mr. Taysom received a B.Sc. in
economics from Bath University.

Our board of directors is divided into three classes. One class of directors
will be elected each year for a three-year term and until their successors are
selected and qualified or until their earlier resignation or removal. Mr.
Taysom will serve until our 2000 annual meeting of stockholders to be held this
May; Messrs. Monego and Rhoads will serve until our 2001 annual meeting of
stockholders; and Messrs. Davis and Grossi will serve until our 2002 annual
meeting of stockholders. Executive officers are elected by and serve at the
discretion of the board of directors.

Board Committees

The board of directors has established a compensation committee and an audit
committee. The compensation committee, consisting of Messrs. Monego and Grossi,
exercises the authority of the board of directors on all compensation matters,
including both cash and equity incentive compensation, and administers our
employee benefit plans.

The audit committee, consisting of Messrs. Monego and Grossi, recommends the
selection of independent public accountants to the board of directors, reviews
the scope and results of the audit and other services provided by our
independent accountants and reviews our accounting practices and systems of
internal accounting controls.

Director Compensation

Directors who are also employees of Digimarc receive no additional
compensation for their services as directors. Directors who are not employees
of Digimarc do not receive a fee for attendance in person at meetings of the
board of directors or committees of the board of directors, but they are
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection

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<PAGE>

with their attendance of meetings. Non-employee directors have also been
granted stock options in the past and may be granted options in the future
under our non-employee director option program. See "Management--Employee
Benefit Plans--1999 Non-Employee Director Option Program."

Compensation Committee Interlocks and Insider Participation

No member of our compensation committee was at any time during the fiscal
year ended December 31, 1998 an officer or employee of Digimarc. No member of
our compensation committee serves as a member of the board of directors or
compensation committee of any entity that has any executive officer serving as
a member of our board of directors or compensation committee.

Summary Compensation Table

The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our executive
officers whose total salary and bonus exceeded $100,000 in the last fiscal
year. We refer to these people in this prospectus as the named executive
officers.

<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
----------------- ------------
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options (#) Compensation (1)
------------------ ---- -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Bruce Davis(2) .......... 1999 $250,000 $133,500 262,500 $ 3,632
President and Chief
Executive Officer 1998 208,124 75,000 -- 76,369
1997 2,596 -- 400,000 --
Geoffrey Rhoads ......... 1999 125,000 81,250 50,000 --
Chief Technology Officer 1998 123,542 75,000 -- --
1997 90,101 -- -- --
J. Scott Carr ........... 1999 125,000 78,750 87,500 --
Vice President and
General Manager-- 1998 109,167 45,000 -- --
Secure Documents 1997 90,000 -- 50,000 --
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the named executive officers that
are available generally to all salaried employees of our company, and
certain perquisites and other personal benefits received by the named
executive officers that do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus disclosed in this table.
(2) The salary information shown for Mr. Davis reflects compensation paid to
him in his principal position commencing on December 1997 and $76,369 and
$3,632 of other compensation in 1998 and 1999, respectively, represents
reimbursement for relocation expenses.

50
<PAGE>

Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Values

The following table provides summary information, as to the named executive
officers, concerning stock options exercised during 1999 and the number of
shares subject to both exercisable and unexercisable stock options as of
December 31, 1999.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Options at In-the-Money Options at
Shares Fiscal Year-End (#) Fiscal Year-End (2)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce Davis............. 40,400 $40,300 159,600 462,500 $7,900,200 $22,531,250
Geoffrey Rhoads......... -- -- 0 50,000 0 2,417,500
J. Scott Carr........... -- -- 88,555 108,945 4,404,473 5,292,777
</TABLE>
- --------
(1) Value realized is equal to the fair market value of the purchased shares on
the option exercise date less the exercise price paid for those shares.
Fair market value prior to December 2, 1999 (the date our stock began
trading on the Nasdaq National Market), was determined by the board of
directors, and was based upon its assessment of our overall business
prospects and financial condition.
(2) The value of unexercised in-the-money options is calculated based on the
closing price of our common stock on December 31, 1999, $50.00 per share.
Amounts reflected are based on the assumed value minus the exercise price
and do not necessarily indicated that the optionee sold such stock.

Employment Arrangements

In July 1999, we adopted a policy regarding the vesting of all stock options
granted to each of our executive and corporate officers employed at that time.
In January 2000, we extended this policy to executive and corporate officers
employed after July 1999. All shares subject to their options that have not
vested will immediately vest if the following two conditions are met:

. we merge with another company and there is a change of control of our
company or we sell substantially all of our assets to another company;
and

. any officer's employment is terminated, or constructively terminated,
within twelve months thereafter.

Employee Benefit Plans

1995 Stock Incentive Plan

The 1995 plan was approved by our board of directors in October 1995 and by
our shareholders in March 1996. Initially, a total of 500,000 shares of common
stock were reserved for issuance under the 1995 plan. This reserve was amended
several times to reserve a total of 2,800,000 shares of common stock for
issuance under the plan. As of March 10, 2000, options to purchase
577,835 shares of common stock granted had been exercised, options to purchase
2,211,311 shares of common stock were outstanding and zero options to purchase
shares of common stock remained available for grant. The outstanding options
were exercisable at a weighted average exercise price of approximately $1.30
per share. Outstanding options to purchase an aggregate of 641,711 shares are
held by employees and consultants who are not officers or directors of our
company.

All options granted under the 1995 plan that expire without having been
exercised or are cancelled will become available for grant under the 1999 plan.
The 1995 plan will terminate in 2005, unless terminated earlier by our board of
directors. Awards under the 1995 plan consisted of

51
<PAGE>

restricted stock, incentive stock options, which are stock options that qualify
under Section 422 of the Internal Revenue Code, or non-qualified stock options,
which are stock options that do not qualify under that provision.

During an optionee's lifetime, only the optionee can exercise an option. The
optionee cannot transfer their options other than by will or the laws of
descent and distribution. If an optionee's status as an employee or consultant
terminates for any reason other than death or disability, the optionee may
exercise their exercisable options within the three-month period following the
termination. In the event the optionee becomes disabled or dies while the
optionee is an employee or consultant of our company, the options vested as of
the date of disability or death may be exercised prior to the earlier of their
expiration date or 12 months from the date of the optionee's disability or
death. In November 1997, we amended the plan to adjust certain exercise
periods, which affected all grants made after that time. Under this amendment,
the time to exercise after termination was reduced from three months to one
month and the time to exercise after death or disability was reduced from 12
months to four months.

In the event of a proposed sale of all or substantially all of our assets or
a merger by us with or into another company, every option outstanding under the
1995 plan may be assumed or substituted with an equivalent option by the
successor company, or its parent or subsidiary. However, our board of directors
may determine, in lieu of assumption or substitution, that an optionee is
entitled to exercise their options, including options which would not otherwise
be exercisable within thirty days of this determination by the board. Our
officers' stock option grant agreements provide for accelerated vesting of
their options in the event of a change of control. If we liquidate or dissolve,
the options will terminate immediately prior to the completion of the
dissolution or liquidation. However, our board may in its sole discretion
declare that any option terminates on a date fixed by the board and give the
optionees the right to exercise their options, including options which would
not otherwise be exercisable.

The board of directors has the authority to amend or terminate the 1995 plan,
subject to stockholder approval of certain amendments. However, no action may
be taken which will affect any shares of common stock previously issued and
sold or any option previously granted under the 1995 plan, without the
optionee's consent.

1999 Stock Incentive Plan

Our 1999 Stock Incentive Plan was approved by our board of directors in
October 1999 and by our stockholders in November 1999. We anticipate all
further option grants will be made solely under the 1999 Stock Incentive Plan.
Initially, we reserved 1,500,000 shares of our common stock for issuance under
the 1999 Stock Incentive Plan. The number of shares initially reserved will be
increased by the number of shares reserved under our 1995 Stock Incentive Plan
and available for grant as of the date of the closing of this offering, and
represented by awards under the 1995 Stock Incentive Plan that are forfeited,
expire or are cancelled. Commencing on January 1, 2001, the number of shares of
stock reserved for issuance under the 1999 Stock Incentive Plan will be
increased annually by a number equal to the lesser of 3% of the fully-diluted
number of shares outstanding as of that date or a lesser number of shares
determined by the board. However, the maximum number of shares available for
issuance as incentive stock options shall be increased by the lesser of 625,000
shares, 3% of the number of fully-diluted shares outstanding as of that date or
a lesser number of shares determined by the board.

52
<PAGE>

As of March 10, 2000, zero options to purchase shares of our common stock
under the 1999 Stock Incentive Plan have been exercised, 1,028,000 options to
purchase shares of common stock are outstanding, and options to purchase
482,854 shares of common stock remained available for grant prior to this
offering. The outstanding options were exercisable at a weighted average
exercise price of $41.67 per share. Outstanding options to purchase an
aggregate of 533,000 shares are held by employees and consultants who are not
officers or directors of our company.

The purpose of the 1999 Stock Incentive Plan is to attract and retain the
best available personnel, to provide additional incentive to our employees,
directors and consultants and our related entities and to promote the success
of our business. The 1999 Stock Incentive Plan provides for the granting to
employees of incentive stock options, and the granting to our employees,
directors and consultants and our related entities of non-statutory stock
options, stock appreciation rights, dividend equivalent rights, restricted
stock, performance units, performance shares and other equity-based rights.

Under the 1999 Stock Incentive Plan, our board of directors, or the
compensation committee, administers the granting of stock and options to
directors and officers in a way that allows these grants of stock to be exempt
from Section 16(b) of the Securities Exchange Act and determines the
provisions, terms and conditions of each award. When stock or options are
granted to other participants in the 1999 Stock Incentive Plan, our board, or
the compensation committee administers these awards and determines the
provisions, terms and conditions of each award.

During their lifetime, those who hold the incentive stock options granted
under this plan cannot transfer these options. The options may be distributed
by a will or the laws of descent upon the death of the option holder. No one is
allowed to exercise the incentive stock options except the person to whom the
options were first issued while that person is alive. Stock or options other
than incentive stock options which are issued under the 1999 Stock Incentive
Plan can be transferred to the extent agreed upon at the time of the award.

The term of 1999 Stock Incentive Plan awards will be determined by the board
or the compensation committee. The exercise price or purchase price, if any, of
1999 Stock Incentive Plan awards that are not incentive stock options will be
determined by the board or the compensation committee, but will not be less
than 50% of the fair market value of the stock. The form of payment for the
shares of common stock when options are exercised or stock is purchased under a
1999 Stock Incentive Plan award will be determined by the board or the
compensation committee and may include cash, check, shares of common stock or
the assignment of part of the proceeds from the sale of shares acquired upon
exercise or purchase of the award.

Where the award agreement permits the exercise or purchase of an award for a
period of time following the recipient's termination of service with us,
disability or death, that award will terminate to the extent not exercised or
purchased on the last day of the specified period or the last day of the
original term of the award, whichever occurs first.

If a third party acquires us through the purchase of all or substantially all
of our assets, a merger or other business combination, all unexercised options
will terminate unless assumed by the successor corporation. Unless terminated
sooner, the 1999 Stock Incentive Plan will terminate automatically in 2009. The
board has the authority to amend, suspend or terminate the 1999 Stock Incentive
Plan, subject to stockholder approval of certain amendments. However, no action
may be taken which will affect awards previously granted under the 1999 Stock
Incentive Plan unless agreed to by the affected grantees.

53
<PAGE>

1999 Non-Employee Director Option Program

Our 1999 Non-Employee Director Option Program was adopted as part of the 1999
Stock Incentive Plan and is subject to the terms and conditions of the 1999
Stock Incentive Plan. Our 1999 Non-Employee Director Stock Option Program was
approved by our board of directors in October 1999. The purpose of the 1999
Non-Employee Director Stock Option Program is to enhance our ability to attract
and retain the best available non-employee directors, to provide them
additional incentives and, therefore, to promote the success of our business.

The 1999 Non-Employee Director Stock Option Program establishes an automatic
option grant program for the grant of awards to non-employee directors. Under
this program, each of Messrs. Monego, Grossi and Taysom were, and each non-
employee director first elected to our board of directors following the date
hereof will, automatically be granted an option to acquire 10,000 shares of our
common stock at an exercise price per share equal to the fair market value of
our common stock at the date of grant. These options will vest and become
exercisable in four equal installments on each anniversary of the grant date.
Upon the date of each annual stockholders' meeting, each non-employee director
who has been a member of our board of directors for at least six months prior
to the date of the stockholders' meeting will receive an automatic grant of
options to acquire 2,500 shares of our common stock at an exercise price equal
to the fair market value of our common stock at the date of grant. These
options will vest and become fully exercisable on the first anniversary of the
grant date.

The term of each automatic option grant and the extent to which it will be
transferable will be provided in the agreement evidencing the option. The
consideration for the option may consist of cash, check, shares of our common
stock, the assignment of part of the proceeds from the sale of shares acquired
upon exercise of the option or any combination.

The 1999 Non-Employee Director Stock Option Program is administered by the
board of directors so that such awards would be exempt from Section 16(b) of
the Exchange Act. The program administrator shall determine the terms and
conditions of awards, and construe and interpret the terms of the program and
awards granted under the program. Non-employee directors may also be granted
additional incentives, subject to the discretion of the board.

Unless terminated sooner, the 1999 Non-Employee Director Stock Option Program
will terminate automatically in 2009 when the 1999 Stock Incentive Plan
terminates. Our board of directors has the authority to amend, suspend or
terminate the 1999 Non-Employee Director Stock Option Program provided that no
such action may affect awards to non-employee directors previously granted
under the program unless agreed to by the affected non-employee directors.

1999 Employee Stock Purchase Plan

Our 1999 Employee Stock Purchase Plan was approved by our board of directors
in October 1999 and by our stockholders in November 1999. The 1999 Employee
Stock Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code in order to provide our
employees with an opportunity to purchase common stock through payroll
deductions. The 1999 Employee Stock Purchase Plan will be administered by our
board of directors or a committee designated by our board, which will have the
authority to terminate or amend the 1999 Employee Stock Purchase Plan, subject
to specified restrictions, and otherwise to administer the 1999 Employee Stock
Purchase Plan and to resolve all questions relating to its administration.

54
<PAGE>

Initially, we reserved 625,000 shares of our common stock for issuance and
made them available for purchase under the 1999 Employee Stock Purchase Plan.
Commencing on the first day of our fiscal year beginning in 2001, the number of
shares of stock reserved for issuance under this plan will be increased
annually by a number equal to the lesser of 1% of the fully-diluted number of
shares outstanding as of that date, 250,000 shares or a lesser number of shares
determined by the board.

All employees of our company and of our subsidiaries, if any, whose customary
employment is for more than five months in any calendar year and 20 hours or
more per week are eligible to participate in our 1999 Employee Stock Purchase
Plan. Employees are eligible to participate in our 1999 Employee Stock Purchase
Plan, subject to a ten-day waiting period after hiring. Non-employee directors,
consultants and employees subject to the rules or laws of a foreign
jurisdiction that prohibit or make impractical their participation in the 1999
Employee Stock Purchase Plan are not eligible to participate in our 1999
Employee Stock Purchase Plan.

The 1999 Employee Stock Purchase Plan designates the periods when the stock
is offered, when it can be purchased, and the exercise dates for options. Offer
periods are generally overlapping periods of 24 months. The initial offer
period began on December 2, 1999, and ends on January 31, 2002. Additional
offer periods will commence each December 1 and June 1. Purchase periods are
generally six-month periods, with the initial purchase period having commenced
on December 2, 1999 and ending on May 31, 2000. After December 2, 1999,
purchase periods will commence each December 1 and June 1. Exercise dates are
the last day of each purchase period. If we merge with or into another
corporation, sell all or substantially all of our assets or enter into other
transactions in which our stockholders before the transaction own less than 50%
of the total combined voting power of our outstanding securities following the
transaction, the board may elect to shorten the offer period then in progress.

On the first day of each offer period, a participating employee is granted a
purchase right. A purchase right is a form of option to be exercised
automatically on the forthcoming exercise dates within the offer period. During
the offer period, authorized deductions from the pay of participants are
credited to their accounts under the 1999 Employee Stock Purchase Plan. When
the purchase right is exercised, the participant's withheld salary is used to
purchase shares of common stock. The price per share at which shares of common
stock are to be purchased under the 1999 Employee Stock Purchase Plan during
any purchase period is the lesser of 85% of the fair market value of the common
stock on the date of the grant of the option, which is the beginning of the
offer period, or 85% of the fair market value of the common stock on the
exercise date. The participant's purchase right is exercised in this manner on
each exercise date arising in the offer period unless, on the first day of any
purchase period, the fair market value of the common stock is lower than the
fair market value of the common stock on the first day of the offer period. If
it is, the participant's participation in the original offer period is
terminated, and the participant is automatically enrolled in the new offer
period effective the same date with an exercise price equal to the fair market
value of the stock on the first day of the new offer period.

Payroll deductions may range from 1% to 15% in whole percentage increments of
a participant's regular base pay, including cash payments for commissions,
overtime, bonuses, annual awards and other cash incentive payments.
Participants may not make direct cash payments to their accounts. The maximum
number of shares of common stock that any employee may purchase under the 1999
Employee Stock Purchase Plan during a purchase period is 750 shares. The
Internal Revenue Code imposes additional limitations on the amount of common
stock that may be purchased during any calendar year.

55
<PAGE>

401(k) Plan

In 1997, we implemented the 401(k) plan covering certain of our employees who
are at least 21 years old and have been employed at least four months. Pursuant
to the 401(k) plan, eligible employees may elect to reduce their current
compensation by up to the lesser of 15% of their compensation or the prescribed
annual limit and contribute these amounts to the 401(k) plan. We may make
contributions to the 401(k) plan on behalf of eligible employees. Employees
become 25% vested in these contributions after one year of service, and
increase their vested percentages by an additional 25% for each year of
additional service. The 401(k) plan is intended to qualify under Section 401 of
the Internal Revenue Code so that contributions by employees or by us to the
401(k) plan, and income earned on the 401(k) plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan, and so that
contributions by us, if any, will be deductible by us when made. The trustee
under the 401(k) plan, at the direction of each participant, invests the 401(k)
plan employee salary deferrals in selected investment options. We made no
contributions to the 401(k) plan since it was implemented. We do not presently
expect to make any contributions to the 401(k) plan during fiscal 2000.

Limitation of Liability and Indemnification Matters

Our certificate of incorporation and bylaws provide that we will indemnify
all directors and officers of Digimarc to the fullest extent permitted by
Delaware law. Our certificate of incorporation and bylaws also authorize us to
indemnify our employees and other agents, at our option, to the fullest extent
permitted by Delaware law. We have entered into agreements to indemnify our
directors and officers, in addition to indemnification provided for in our
charter documents. These agreements, among other things, provide for the
indemnification of our directors and officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
Digimarc, arising out of such person's services as a director or officer of
Digimarc or any other company or enterprise to which such person provides
services at the request of Digimarc to the fullest extent permitted by
applicable law. We believe that these provisions and agreements will assist us
in attracting and retaining qualified persons to serve as directors and
officers.

Delaware law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for any breach of the
director's duty of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law for liability arising under Section 174 of the General
Corporation Law of the State of Delaware, or for any transaction from which the
director derived an improper personal benefit. Our certificate of incorporation
provides for the elimination of personal liability of a director for breach of
fiduciary duty, as permitted by Delaware law.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Digimarc in
accordance with the provisions contained in our charter documents, Delaware law
or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by Digimarc of
expenses incurred or paid by a director, officer or controlling person of
Digimarc in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person, we will, unless in
the opinion of our counsel the matter has

56
<PAGE>

been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and we will follow the court's
determination.

We purchased and maintain insurance on behalf of our officers and directors,
insuring them against liabilities that they may incur in such capacities or
arising out of such status.

57
<PAGE>

RELATED PARTY TRANSACTIONS

Reincorporation

We reincorporated in Delaware on December 1, 1999 and our existing
stockholders received shares of common stock and preferred stock of the
Delaware corporation in exchange for their shares of common stock and preferred
stock of the Oregon corporation. In connection with the closing of our initial
public offering in December 1999, each share of Series A and Series B preferred
stock was automatically converted into two shares of common stock and each
share of Series C, Series D and Series D-X preferred stock was automatically
converted into one share of common stock.

Private Placement Transactions

Since our inception, we have issued in private placement transactions shares
of preferred stock as follows:

. an aggregate of 151,411 shares of Series A-1 preferred stock at $2.50 per
share in June 1996 to eight investors;

. an aggregate of 11,089 shares of Series A-1 preferred stock at $4.50 per
share in June 1996 to two investors;

. an aggregate of 902,000 shares of Series B-1 preferred stock at $5.00 per
share in July 1996 to seven investors, including Adobe Ventures L.P., AVI
Capital L.P. and affiliates whose general partner, Brian Grossi, is a
member of our board of directors, Justsystem, Inc., and Softbank
Ventures, Inc.;

. an aggregate of 2,029,786 shares of Series C-1 preferred stock at $2.86
per share in December 1997 to 16 investors, including Philip Monego, Sr.,
chairman of our board of directors, Adobe Ventures L.P., AVI Capital L.P.
and affiliates, Macrovision Corporation, Reuters, Ltd., a general manager
of which is John Taysom, a member of our board of directors, and
Justsystem, Inc.;

. an aggregate of 1,266,000 shares of Series D preferred stock at $5.00 per
share in June 1999 to 14 investors, including Philip Monego, Sr., Adobe
Ventures L.P., AVI Capital L.P. and affiliates, Macrovision Corporation
and Reuters Holdings Switzerland, S.A.; and

. an aggregate of 160,000 shares of Series D-X preferred stock at $5.00 per
share in August 1999 to three investors, including Philip Monego, Sr.

The following table sets forth the number of shares of Series A-1, Series B-
1, Series C-1, Series D and Series D-X preferred stock purchased by our
directors, five percent stockholders and their respective affiliates.

<TABLE>
<CAPTION>
Series A-1* Series B-1* Series C-1 Series D Series D-X
Holders Preferred Preferred Preferred Preferred Preferred
- ------- ----------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Macrovision
Corporation............ -- -- 524,475 400,000 --
Reuters Group........... -- -- 699,300 200,000 --
AVI Capital L.P. and
affiliates............. -- 252,000 233,549 150,000 --
Adobe Ventures L.P...... -- 250,000 231,692 115,000 --
Philip Monego, Sr....... 16,000 -- 34,965 50,000 40,000
</TABLE>
- --------
* Each share of Series A-1 and Series B-1 preferred stock automatically
converted into two shares of common stock upon the closing of our initial
public offering in December 1999.

Investors' Rights Agreement

Some stockholders have registration rights with respect to their shares of
common stock. See "Description of Capital Stock--Registration Rights of Certain
Holders."

58
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth the beneficial ownership of our common stock
as of March 10, 2000 by:

. each person or entity known by us to own beneficially more than five
percent of our common stock;

. our chief executive officer, each of the other named executive officers
and each of our directors; and

. all of our executive officers and directors as a group.

The beneficial ownership is calculated based on 12,764,145 shares of our
common stock outstanding as of March 10, 2000 and shares of common stock
after the completion of this offering. Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Unless otherwise indicated, each person or entity named in the
table has sole voting power and investment power, or shares voting and
investment power with his or her spouse, with respect to all shares of capital
stock listed as owned by that person. Shares issuable upon the exercise of
options that are currently exercisable or become exercisable within sixty days
of March 10, 2000 are considered outstanding for the purpose of calculating the
percentage of outstanding shares of our common stock held by the individual,
but not for the purpose of calculating the percentage of outstanding shares of
our common stock held by any other individual. The address of each of the
executive officers and directors is c/o Digimarc Corporation, 19801 S.W. 72nd
Avenue, Tualatin, Oregon 97062. Each individual entity below has agreed to not
sell any of our common stock (other than stock purchased in our initial public
offering, under our 1999 Employee Stock Purchase Plan or on the open market)
during the period ending 90 days after the effective date of this offering.

<TABLE>
<CAPTION>
Shares
Shares of Common Beneficially
Stock Beneficially Owned Number Owned After
Prior to the Offering of Shares the Offering
--------------------------- Being --------------
Name and Address Number Percent Offered Number Percent
- ---------------- -------------- ------------ --------- ------ -------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Macrovision Corporation
1341 Orleans Drive
Sunnyvale, California
94089................... 924,475 7.24%
Reuters Group PLC (1)
c/o Reuters Ltd. 85
Fleet Street
London, EC4P 4AJ En-
gland................... 899,300 7.05% 89,930
AVI Capital Management
L.P.
and affiliates (2)
One First Street
Los Altos, California
94022................... 887,548 6.95% 88,754
Adobe Systems Incorpo-
rated (3)
c/o Adobe Incentive
Partners
345 Park Avenue
San Jose, California
95110................... 719,688 5.64%
Named Executive Officers
and Directors
Philip J. Monego, Sr.
(4)..................... 257,215 2.00%
Bruce Davis (5).......... 191,845 1.50% 72,250
Geoffrey Rhoads (6)...... 694,864 5.44% 112,594
J. Scott Carr (7)........ 95,372 * 23,750
Brian J. Grossi (8)...... 893,548 7.00%
John Taysom (9).......... 916,700 7.18%
All executive officers
and directors as a group
(10).................... 3,049,544 23.45%
Other Selling
Stockholders
</TABLE>
- --------
*Less than 1%.

59
<PAGE>

(1) Represents 699,300 shares held by Reuters, Ltd. and 200,000 shares held by
Reuters Holdings Switzerland, S.A., affiliates of Reuters Group PLC.
(2) Brian Grossi is a partner of AVI Capital Management, L.P. and of AVI
Management Partners III, L.P. The shares listed represent 754,531 shares
held by AVI Capital, L.P., 104,325 shares held by Associated Venture
Investors III, L.P., 21,452 shares held by AVI Partners Growth Fund II,
L.P. and 7,240 shares held by AVI Silicon Valley Partners, L.P. AVI
Capital Management, L.P. is the general partner of AVI Capital, L.P., and
AVI Management Partners III, L.P. is the general partner of Associated
Ventures Investors III, L.P., AVI Partners Growth Fund II, L.P. and AVI
Silicon Valley Partners, L.P. In such capacity, AVI Capital Management.
L.P. and AVI Management Partners III, L.P., through a committee comprised
of all of their partners, exercises sole voting and investment power with
respect to all shares held of record by the respective named investment
partnerships; individually, no partner of AVI Capital Management, L.P. or
of AVI Management Partners III, L.P., is deemed to have or share such
voting or investment power.
(3) Represents 719,688 shares held by Adobe Incentive Partners. Adobe Systems
Incorporated is the general partner of Adobe Incentive Partners.
(4) Includes options for 90,000 shares of common stock exercisable within 60
days of March 10, 2000 and 10,250 shares owned by Mr. Monego's spouse.
(5) Includes options for 51,445 shares of common stock exercisable within 60
days of March 10, 2000.
(6) Includes options for 5,134 shares of common stock exercisable within 60
days of March 10, 2000. Includes 13,000 shares owned by Amanda Rhoads
Trust, 13,000 shares owned by Hudson Rhoads Trust, 100 shares owned by
Nicole Rhoads--Trustee for the Children of Geoffrey and Nicole Rhoads and
13,000 shares owned by Trevor Rhoads Trust, all of whom are relatives of
Geoffrey Rhoads or trusts established for their benefit. Mr. Rhoads
disclaims beneficial ownership of these shares owned by his relatives.
(7) Represents options for 95,372 shares of common stock exercisable within 60
days of March 10, 2000.
(8) Includes 887,548 shares held by AVI Capital L.P. and affiliates of which
Mr. Grossi is a general partner. Mr. Grossi disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest as a
general partner.
(9) Includes 899,300 shares held by Reuters Group. Mr. Taysom disclaims
beneficial ownership of the shares held by Reuters Group.
(10) Includes options for 241,951 shares of common stock exercisable within 60
days of March 10, 2000.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 30,000,000 shares of common stock
and 5,000,000 shares of undesignated preferred stock. The board of directors
has recently approved an increase in the number of shares of our common stock
to 100,000,000, and we plan to seek approval of this increase at this year's
annual meeting of stockholders. The following description of our capital stock
is subject to, and qualified in its entirety by, the provisions of our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is a part, and by the
provisions of applicable law.

Common Stock

As of March 10, 2000, there were 12,764,145 shares of common stock
outstanding that were held of record by approximately 130 holders. Based on the
shares outstanding as of March 10, 2000, there will be 14,764,145 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options, after giving effect to
the sale of the common stock we are offering.

The holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, including the
election of directors. Subject to preferences that may be granted to any then
outstanding preferred stock, holders of common stock are entitled to receive
ratably those dividends as may be declared by the board of directors out of
funds legally available for such purpose, as well as any distributions to the
stockholders. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in all of our assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of common stock have no preemptive or
other subscription or conversion rights. There are no redemption or sinking
fund provisions applicable to the common stock. All outstanding shares of
common stock are fully paid and non-assessable.

Preferred Stock

As of March 10, 2000, there were zero shares of preferred stock outstanding.
Our board is authorized to issue 5,000,000 shares of preferred stock that will
not be designated as a particular class. Our board of directors has the
authority to issue the undesignated preferred stock in one or more series and
to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the stockholders. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change of control of our
company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. At present, we have no
plans to issue any shares of preferred stock.

Registration Rights of Certain Holders

After the closing of this offering, and assuming we comply with other
requirements, the holders of approximately shares of common stock will
have the right to cause us to register their shares under the Securities Act.
These rights are held under the terms of an investors' rights agreement between
us and the holders of these registrable securities. Under the terms of this
agreement, if we propose to register any of our securities under the Securities
Act, we must give the holders of these registrable securities 30 days' prior
notice of registration and include a portion of

61
<PAGE>

their shares of common stock in the registration. Additionally, upon written
demand of holders of more than 50% of the then-outstanding registrable
securities, we will use our best efforts to promptly register the securities
that the holders request to be registered, provided, among other limitations,
that the aggregate offering price to the public exceeds $10 million. We are not
required to register securities more than twice under the holders' rights to
demand these registrations. We will be required to file a registration
statement on Form S-3 or any similar short-form registration statement if
requested to do so by any of these holders, provided that the aggregate
offering price for the securities to be sold is more than $1,000,000.
Furthermore, we are only required to effect one demand registration on Form S-3
within any 12-month period. The holders cannot demand that we file a
registration statement prior to the date 180 days following the effective date
of any registration statement filed by us.

All expenses in effecting these registrations will be borne by us, excluding
underwriting discounts, selling commissions and stock transfer taxes, which
shall be borne proportionately by the holders of the securities that have been
registered. These registration rights are subject to conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in the registration. We have agreed to indemnify
the holders of these registration rights, and each selling stockholder has
agreed to indemnify us, against liabilities under the Securities Act, the
Securities Exchange Act or other applicable federal or state law.

Anti-Takeover Provisions

Delaware Takeover Statute

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, as amended from time to time. Section 203 provides, with
certain exceptions, that a publicly-held corporation is prohibited from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:

. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; or

. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers, and by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or

. at or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholder, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.

A "business combination" includes the following:

. any merger or consolidation involving the corporation and the interested
stockholder;

. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;

62
<PAGE>

. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;

. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or

. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock. The Delaware takeover statute
may render the removal of directors and management more difficult.

Certificate of Incorporation and Bylaws

Our certificate of incorporation and bylaws contain provisions that could
have the effect of discouraging potential acquisition proposals or making a
tender offer or delaying or preventing a change in control of Digimarc. In
particular, our certificate of incorporation and bylaws, as applicable, among
other things:

. provide that our board of directors will be divided into three classes of
directors (disregarding the effect of any voting rights of holders of
convertible preferred stock), as nearly equal in number as is reasonably
possible, serving staggered terms so that directors' initial terms will
expire at the first, second and third succeeding annual meeting of the
stockholders following our initial public offering, respectively. At each
succeeding annual meeting, directors elected to succeed those directors
whose terms are expiring at that meeting shall be elected for a three-
year term of office. A vote of at least 80% of our capital stock is
required to amend this provision.

. provide that special meetings of the stockholders may be called only by
our president, our secretary or at the direction of the board. Advance
written notice is required, which generally must be received by the
secretary not less than 30 days nor more than 60 days prior to the
meeting, by a stockholder of a proposal or director nomination which that
stockholder desires to present at a meeting of stockholders. Any
amendment of this provision requires a vote of at least 80% of our
capital stock.

. do not include a provision for cumulative voting in the election of
directors. Under cumulative voting, a minority stockholder holding a
sufficient number of shares may be able to ensure the election of one or
more directors. The absence of cumulative voting may have the effect of
limiting the ability of minority stockholders to effect changes in the
board and, as a result, may have the effect of deterring a hostile
takeover or delaying or preventing changes in control or management of
Digimarc.

. provide that vacancies on our board may be filled by a majority of
directors in office, although less than a quorum, and not by the
stockholders.

63
<PAGE>

. allow us to issue up to 5,000,000 shares of undesignated preferred stock
with rights senior to those of the common stock and that otherwise could
adversely affect the rights and powers, including voting rights, of the
holders of common stock. In certain circumstances, this issuance could
have the effect of decreasing the market price of the common stock, as
well as having the anti-takeover effect discussed above.

These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board and in the policies formulated by
them, and to discourage certain types of transactions that may involve an
actual or threatened change in control of Digimarc. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal and
to discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in
our management.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is EquiServe. Its
address is 150 Royale Street, Canton, Massachusetts 02021; its telephone number
is (781) 575-3400; and its website is www.equiserve.com.

64
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering, we will have 14,764,145 shares of
common stock outstanding, assuming that the underwriters do not exercise their
overallotment option and there is no exercise of outstanding options or the
warrant. Of these shares, the 3,000,000 shares sold in this offering, the
4,600,000 shares issued in our initial public offering and the shares
issued upon exercise of options under our option plans and shares issued under
our employee stock purchase plan which we have registered separately will be
freely transferable without restriction or further registration under the
Securities Act, except for any shares held by existing "affiliates" of ours, as
such term is defined by Rule 144 under the Securities Act. The remaining
shares are "restricted shares" as defined in Rule 144.

In addition, substantially all of our stockholders, option holders and our
affiliates, and all of our officers and directors, have agreed under written
"lock-up" agreements not to sell any shares of common stock until May 29, 2000
and all of our officers, directors, affiliates and certain stockholders have
agreed not to sell any shares of common stock for 90 days after the effective
date of this registration statement, without the prior written consent of
FleetBoston Robertson Stephens Inc. See "Underwriting." FleetBoston Robertson
Stephens Inc. has allowed the selling stockholders who signed lock-up
agreements in connection with our initial public offering to sell their stock
in this offering.

Rule 144

In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who owns shares that were purchased from us or any
affiliate at least one year previously, including a person who may be deemed an
affiliate of us, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of:

. 1% of the then outstanding shares of the common stock which will equal
approximately shares immediately after the completion of this
offering; or

. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.

Sales under Rule 144 must be made with the required notice and the
availability of current public information about us.

Any person or persons whose shares are aggregated, who is not deemed to have
been an affiliate of ours at any time during the 90 days preceding a sale, and
who owns shares within the definition of "restricted securities" under Rule 144
under the Securities Act that were purchased from us or any affiliate at least
two years previously, would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements, or notice requirements.

Sales of Restricted Shares

As a result of the foregoing, we expect that:

. shares of common stock are eligible for resale without restriction
under Rule 144(k), of which shares are subject to lock-up
agreements expiring on May 29, 2000; and

65
<PAGE>

. upon the expiration of the lock-up agreements 90 days after the date of
this prospectus, an additional shares of common stock, including
shares of common stock held by affiliates of ours, will be eligible
for sale under Rule 144, subject to the volume and other limitations of
such rule.

The holders of shares of common stock or their transferees have rights
to have their shares registered under the Securities Act. See "Description of
Capital Stock--Registration Rights of Certain Holders." Registration of such
shares under the Securities Act would cause such shares to be freely tradable
without restriction under the Securities Act, except for shares purchased by
affiliates immediately upon the effectiveness of such registration, which could
result in some of such shares becoming eligible for sale in advance of the date
set forth above.

In addition, on February 25, 2000 we filed a registration statement under the
Securities Act covering 2,400,000 shares of common stock covered by the 1995
Stock Incentive Plan, 1,500,000 shares of common stock covered by the 1999
Stock Incentive Plan and 625,000 shares of common stock covered by the 1999
Employee Stock Purchase Plan. The registration statement automatically became
effective upon filing. Following the filing, shares registered under these
plans will, subject to the lock-up agreements described above and Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market upon the exercise of vested options. As of March 10, 1999, options to
purchase an aggregate of 3,239,311 shares were issued and outstanding under the
1995 and 1999 Stock Incentive Plans and no purchases had been made under the
1999 Employee Stock Purchase Plan.

66
<PAGE>

UNDERWRITING

The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., U.S. Bancorp Piper
Jaffray Inc. and Dain Rauscher Incorporated, have severally agreed with us and
the selling stockholders, subject to the terms and conditions of the
underwriting agreement, to purchase from us and the selling stockholders the
number of shares of common stock set forth below opposite their respective
names. The underwriters are committed to purchase and pay for all shares if any
are purchased.

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ...............................
Chase Securities Inc. .............................................
U.S. Bancorp Piper Jaffray Inc. ...................................
Dain Rauscher Incorporated.........................................
---------
Total............................................................ 3,000,000
=========
</TABLE>

The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to certain dealers at that price less
a concession of not in excess of $ per share, of which $ may be reallowed
to other dealers. After this offering, the public offering price, concession
and reallowance to dealers may be reduced by the representatives. No such
reduction shall change the amount of proceeds to be received by us as set forth
on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.

Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 450,000 additional shares of common stock to cover over-
allotments, if any, at the public offering price less the underwriting discount
set forth on the cover page of this prospectus. If the underwriters exercise
their over-allotment option to purchase any of the additional 450,000 shares of
common stock, the underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof as the number
of shares to be purchased by each of them bears to the total number of shares
of common stock offered in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered hereby are being sold. We will be obligated, pursuant to the over-
allotment option, to sell shares to the underwriters to the extent the over-
allotment option is exercised. The underwriters may exercise the over-allotment
option only to cover over-allotments made in connection with the sale of the
shares of common stock offered in this offering.

The following table summarizes the compensation to be paid to the
underwriters by us and the selling stockholders:

<TABLE>
<CAPTION>
Without With
Per Share Over-allotment Over-allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
payable by us........................
Underwriting discounts and commissions
payable by the selling stockholders..
</TABLE>

67
<PAGE>

We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $750,000.

Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters, us and the selling stockholders against certain civil
liabilities, including liabilities under the Securities Act, and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.

Lock-Up Agreements. In connection with our initial public offering in
December 1999, each of our executive officers and directors and a majority of
our other stockholders and optionholders agreed, subject to specified
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights to, any shares of common stock, any
options or warrants to purchase any shares of common stock or any securities
convertible into or exchangeable for shares of common stock owned as of the
date of the prospectus or subsequently acquired directly by the holders or to
which they have or subsequently acquire the power of disposition, without the
prior written consent of FleetBoston Robertson Stephens Inc. The restriction
related to our initial public offering terminates after the close of trading of
our common stock on May 29, 2000. In addition, in connection with this
offering, each of our executive officers, directors, selling stockholders and
certain other stockholders have agreed, for a period of 90 days after the date
of this prospectus, to a lock-up agreement which is similar to the restriction
described above. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion and at any time or from time to time before the termination of any
lock-up period, without notice, release all or any portion of the securities
subject to lock-up agreements. There are no existing agreements between the
representatives and any of our stockholders who have executed a lock-up
agreement, other than the selling stockholders, providing consent to the sale
of shares prior to the expiration of the lock-up periods.

In addition, we have agreed that during the lock-up periods we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the lock-
up periods, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options or warrants to purchase any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than our sale of shares in this
offering, the issuance of our common stock upon the exercise of outstanding
options or warrants, and the issuance of options under existing stock option
and incentive plans provided that those options do not vest prior to the
expiration of the lock-up periods. See "Shares Eligible for Future Sale."

Listing. Our common stock is traded on the Nasdaq National Market under the
symbol "DMRC."

Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some participants in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the shares of common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price
of the common stock. A "syndicate covering transaction" is the bid for or
purchase of common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this

68
<PAGE>

offering if the common stock originally sold by such underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by such underwriter or syndicate
member. The representatives have advised us that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

Passive Market Making. In connection with this offering and before the
commencement of offers or sales of the common stock, certain underwriters who
are qualified market makers on the Nasdaq National Market may engage in passive
market making transactions in the common stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act, during the
business day prior to the pricing of the offering. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for such security; if all independent
bids are lowered below the passive market maker's bid, however, such bid must
then be lowered when certain purchase limits are exceeded.

Relationships. From time to time, some of the underwriters have provided, and
may continue to provide, investment banking services to us. FleetBoston
Robertson Stephens Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffrey
Inc. participated as representatives of the underwriters in our initial public
offering in December 1999 for which they received usual and customary
compensation.

Other. In August 1999, Bayview Investors, Ltd., an affiliate of FleetBoston
Robertson Stephens Inc., purchased 60,000 shares of our Series D-X preferred
stock for $5.00 per share on the same terms and conditions as the other
purchasers of Series D-X preferred stock. The National Association of
Securities Dealers, Inc. deemed these shares to be underwriting compensation in
connection with our initial public offering. As a result, Bayview Investors,
Ltd. has generally agreed that it will not sell, transfer, assign or
hypothecate the common stock that these shares automatically converted into
upon the closing of the initial public offering until December 1, 2000.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us by
Morrison & Foerster LLP, San Francisco, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by
O'Melveny & Myers LLP, San Francisco, California.

Attorneys employed by Morrison & Foerster LLP or investment partnerships of
which they are the beneficial owners hold approximately 61,000 shares of common
stock.

EXPERTS

The financial statements of Digimarc as of December 31, 1998 and 1999, and
for each of the years in the three-year period ended December 31, 1999 have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of the firm as experts in accounting
and auditing.

69
<PAGE>

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We are a public company and file annual, quarterly and special reports, proxy
statements and other information with the SEC. This prospectus is only part of
a registration statement on Form S-1 that we have filed with the SEC under the
Securities Act with respect to the common stock offered in this prospectus.
This prospectus does not contain all of the information in the registration
statement and its exhibits and schedules, portions of which have been omitted
as permitted by the rules and regulations of the SEC. For further information
about us and our common stock, we refer you to the registration statement and
to its exhibits and schedules. Statements in this prospectus about the contents
of any contract, agreement or other document are not necessarily complete and,
in each instance, we refer you to the copy of such contract, agreement or
document that we have filed with the SEC as an exhibit to a filing. Each such
statement is qualified in all respects by reference to the document to which it
refers. Anyone may inspect the registration statement and its exhibits and
schedules and the reports, proxy statements and other information that we file
with the SEC without charge at the public reference facilities the SEC
maintains at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at 7 World Trade Center, Suite 1300, New
York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may obtain copies of all or any part of these materials
from the SEC upon the payment of fees prescribed by the SEC. You may obtain
information on the operation of the Public Reference Room by calling 1-800-SEC-
0300. You may also inspect these reports and other information without charge
at a Web site maintained by the SEC. The address of this site is
http://www.sec.gov.

70
<PAGE>

DIGIMARC CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Digimarc Corporation:

We have audited the accompanying balance sheets of Digimarc Corporation as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digimarc Corporation as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.

/s/ KPMG LLP

Portland, Oregon
February 11, 2000

F-2
<PAGE>

DIGIMARC CORPORATION

BALANCE SHEETS
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,137 $ 90,830
Trade accounts receivable, net............................. 298 2,225
Prepaid expenses and other current assets.................. 98 834
------- --------
Total current assets..................................... 2,533 93,889
Property and equipment, net................................. 329 961
Other assets, net........................................... 116 53
------- --------
Total assets............................................. $ 2,978 $ 94,903
======= ========

LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings...................................... $ 250 $ --
Accounts payable........................................... 228 1,638
Accrued payroll and related costs.......................... 390 504
Other short term liabilities............................... -- 79
Deferred revenue........................................... 345 1,318
Current portion of notes payable to stockholders........... -- 311
Current portion of capital lease obligations............... 124 139
------- --------
Total current liabilities................................ 1,337 3,989
Capital lease obligations, less current portion............. 171 119
Notes payable to stockholders, less current portion......... 298 --
Other long-term liabilities................................. 82 --
------- --------
Total liabilities........................................ 1,888 4,108
------- --------
Convertible redeemable preferred stock; 10,874,000 shares
authorized at December 31, 1998 and no shares authorized at
December 31, 1999; 2,931,786 shares issued and outstanding
at December 31, 1998, and no shares issued and outstanding
at December 31, 1999....................................... 10,185 --
------- --------

Commitments and contingencies (Note 12)

Stockholders' equity (deficit):
Convertible preferred stock; 325,000 shares authorized at
December 31, 1998 and no shares authorized at December 31,
1999
Series A-1, $.001 par value; 162,500 shares and no shares
issued and outstanding at December 31, 1998 and 1999,
respectively............................................ -- --
Series A-N, $.001 par value; no shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ -- --
Preferred stock, no shares authorized at December 31, 1998
and 5,000,000 shares authorized at December 31, 1999; no
shares issued and outstanding at December 31, 1998 and
1999...................................................... -- --
Common stock, $.001 par value; authorized 30,000,000
shares; issued and outstanding 2,313,623 and 12,615,145
shares at December 31, 1998 and 1999, respectively........ 2 13
Additional paid-in capital................................. 878 110,675
Deferred stock compensation................................ -- (8,162)
Warrant.................................................... -- 633
Accumulated deficit........................................ (9,975) (12,364)
------- --------
Total stockholders' equity (deficit)..................... (9,095) 90,795
------- --------
Total liabilities, convertible redeemable preferred stock
and stockholders' equity (deficit)...................... $ 2,978 $ 94,903
======= ========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

DIGIMARC CORPORATION

STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Secure documents........................... $ 25 $ 500 $ 6,727
Media commerce............................. 161 484 202
--------- --------- ---------
Total revenue............................ 186 984 6,929
--------- --------- ---------
Cost of revenue:
Secure documents........................... -- 1,466 3,529
Media commerce............................. 126 114 97
--------- --------- ---------
Total cost of revenue.................... 126 1,580 3,626
--------- --------- ---------
Operating expenses:
Sales and marketing........................ 1,330 825 1,883
Research, development and engineering...... 934 658 936
General and administrative................. 1,282 1,407 2,739
Impairment charge.......................... 453 -- --
Stock-based compensation................... -- -- 527
--------- --------- ---------
Total operating expenses................. 3,999 2,890 6,085
--------- --------- ---------
Operating loss........................... (3,939) (3,486) (2,782)
Other income (expense):
Interest income............................ 76 189 492
Interest expense........................... (86) (119) (94)
Other...................................... (30) (26) (5)
--------- --------- ---------
Loss before provision for income taxes... (3,979) (3,442) (2,389)
Provision for income taxes................... -- -- --
--------- --------- ---------
Net loss................................. $ (3,979) $ (3,442) $ (2,389)
========= ========= =========
Net loss per share--basic and diluted........ $ (1.88) $ (1.50) $ (0.78)
========= ========= =========
Weighted average shares used in computing net
loss per share--basic and diluted........... 2,120,477 2,288,442 3,052,671
========= ========= =========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

DIGIMARC CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
Convertible Preferred
preferred stock stock Common stock Additional
---------------- ------------- ------------------ paid-in Deferred stock Accumulated
Shares Amount Shares Amount Shares Amount capital compensation Warrant deficit
-------- ------ ------ ------ ---------- ------ ---------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1996.. 162,500 $ -- -- $ -- 2,067,393 $ 2 $ 667 $ -- $ -- $ (2,554)
Exercise of
stock options.. -- -- -- -- 62,600 -- 13 -- -- --
Repurchase and
cancellation of
common stock
previously
issued......... -- -- -- -- (56,000) -- (8) -- -- --
Common stock
issued for the
acquisition of
assets......... -- -- -- -- 179,000 -- 179 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- (3,979)
-------- ---- --- ---- ---------- ---- -------- ------- ---- --------
BALANCE AT
DECEMBER 31, 1997.. 162,500 -- -- -- 2,252,993 2 851 -- -- (6,533)
Stock issued.... -- -- -- -- 27,144 -- 13 -- -- --
Exercise of
stock options.. -- -- -- -- 33,486 -- 14 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- (3,442)
-------- ---- --- ---- ---------- ---- -------- ------- ---- --------
BALANCE AT
DECEMBER 31, 1998.. 162,500 -- -- -- 2,313,623 2 878 -- -- (9,975)
Issuance of
common stock
through
conversion of
redeemable
preferred
stock.......... -- -- -- -- 5,259,775 6 17,261 -- -- --
Issuance of
common stock
through initial
public
offering, net.. -- -- -- -- 4,600,000 5 83,796 -- -- --
Issuance of
common stock
through
conversion of
convertible
preferred
stock.......... (162,500) -- -- -- 325,000 -- -- -- -- --
Warrants
issued......... -- -- -- -- -- -- -- -- 633 --
Exercise of
stock options.. -- -- -- -- 116,747 -- 51 -- -- --
Deferred
compensation
related to
stock options.. -- -- -- -- -- -- 8,689 (8,689) -- --
Stock-based
compensation
expense........ -- -- -- -- -- -- -- 527 -- --
Net loss........ -- -- -- -- -- -- -- -- -- (2,389)
-------- ---- --- ---- ---------- ---- -------- ------- ---- --------
BALANCE AT
DECEMBER 31, 1999.. -- $ -- -- $ -- 12,615,145 $ 13 $110,675 $(8,162) $633 $(12,364)
======== ==== === ==== ========== ==== ======== ======= ==== ========
<CAPTION>
Total
stockholders'
equity
(deficit)
-------------
<S> <C>
BALANCE AT
DECEMBER 31, 1996.. $(1,885)
Exercise of
stock options.. 13
Repurchase and
cancellation of
common stock
previously
issued......... (8)
Common stock
issued for the
acquisition of
assets......... 179
Net loss........ (3,979)
-------------
BALANCE AT
DECEMBER 31, 1997.. (5,680)
Stock issued.... 13
Exercise of
stock options.. 14
Net loss........ (3,442)
-------------
BALANCE AT
DECEMBER 31, 1998.. (9,095)
Issuance of
common stock
through
conversion of
redeemable
preferred
stock.......... 17,267
Issuance of
common stock
through initial
public
offering, net.. 83,801
Issuance of
common stock
through
conversion of
convertible
preferred
stock.......... --
Warrants
issued......... 633
Exercise of
stock options.. 51
Deferred
compensation
related to
stock options.. --
Stock-based
compensation
expense........ 527
Net loss........ (2,389)
-------------
BALANCE AT
DECEMBER 31, 1999.. $90,795
=============
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

DIGIMARC CORPORATION

STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (3,979) $ (3,442) $ (2,389)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 100 178 303
Amortization of discount on note payable....... 13 14 13
Asset impairment............................... 453 -- --
Stock-based compensation expense............... -- -- 527
Other non-cash expenses........................ 27 20 632
Gain on forgiveness of debt.................... (33) -- --
Changes in assets and liabilities:
Trade accounts receivable..................... (102) (196) (1,927)
Prepaid expenses and other assets............. (36) (33) (710)
Accounts payable.............................. 43 (107) 1,410
Accrued payroll and related costs............. 199 204 114
Deferred revenue.............................. 173 152 973
-------- -------- --------
Net cash used in operating activities........ (3,142) (3,210) (1,054)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment.............. (23) (8) (762)
Purchases of patents............................ -- (50) (10)
Purchase of tradename........................... -- -- (10)
Sale of tradename............................... -- -- 10
Acquisition of assets........................... (417) -- --
-------- -------- --------
Net cash used in investing activities........ (440) (58) (772)
-------- -------- --------
Cash flows from financing activities:
Proceeds (repayment) of short-term borrowings... 400 (150) (250)
Net proceeds from issuance of preferred stock... 5,744 -- 7,081
Net proceeds from issuance of common stock...... 13 14 83,852
Repurchase of common stock previously issued.... (8) -- --
Principal payments under capital lease
obligations.................................... (42) (97) (164)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 6,107 (233) 90,519
-------- -------- --------
Net increase (decrease) in cash and cash equiva-
lents........................................... 2,525 (3,501) 88,693
Cash and cash equivalents at beginning of peri-
od.............................................. 3,113 5,638 2,137
-------- -------- --------
Cash and cash equivalents at end of period....... $ 5,638 $ 2,137 $ 90,830
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 38 $ 125 $ 95
======== ======== ========
Summary of non-cash investing and financing
activities:
Equipment acquired or exchanged under capital
lease obligations.............................. $ 64 $ 202 $ 127
Common stock issued for the acquisition of
assets......................................... 179 -- --
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)

(1) Summary of Significant Accounting Policies

(a) The Company

Digimarc Corporation (the Company) was originally incorporated in 1995 as an
Oregon corporation. In December 1999, the Company reincorporated in Delaware.
The Company is a 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, the
Company's technologies include reader software that, as a resident application
on PCs and other devices, enables the recognition of embedded codes.

(b) Accounts Receivable

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

<TABLE>
<CAPTION>
December 31,
---------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Balance--beginning of period................................ $ -- $17 $ 2
Provision (recovery)........................................ 17 (7) 5
Charge offs................................................. -- (8) (4)
---- --- ---
Balance--end of period...................................... $ 17 $ 2 $ 3
==== === ===
</TABLE>

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

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

(d) Software Development Costs

Under Statement of Financial Accounting Standards (SFAS) No. 86, Accounting
for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed,
software development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. To date, the establishment of
technological feasibility of the Company's products has occurred shortly before
general release and, therefore, software development costs qualifying for
capitalization have been immaterial. Accordingly, the Company has not
capitalized any software development costs and has charged all such costs to
research and development expense.

F-7
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

(e) Funded Research and Development

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

Revenues recognized under vendor and end-user funding arrangements totaled
$500 and $5,536 for the years ended December 31, 1998 and 1999, respectively.
Direct costs allocated to the arrangement were $1,466 and $2,968 for the year
ended December 31, 1998 and 1999, respectively. There were no such revenues
recognized or cost incurred related to a funding arrangement in 1997.

(f) Other Assets

Other assets consist primarily of the costs of acquired patents and
trademarks, and are amortized by the straight-line method over a useful life of
three to five years. They are shown, net of accumulated amortization, as $63
and $100 at December 31, 1998 and 1999, respectively. Amortization expense of
$14, $46 and $46 for the years ended December 31, 1997, 1998 and 1999

(g) Advertising Costs

Advertising costs are expensed as incurred. Total advertising expenses were
$157, $135 and $86 for the years ended December 31, 1997, 1998 and 1999,
respectively.

(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

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

(i) Revenue Recognition

Revenue is recognized when earned in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software
Revenue Recognition, SOP 98-4, Deferral of the Effective Date of a Provision of
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2,
With Respect to Certain Transactions.

The Company generates revenue from the sale of digital watermarking products
and services for use in authenticating documents, detecting fraudulent
documents and detering unauthorized

F-8
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

duplication or alteration of high-value documents (secure documents) and for
use in communicating copyright, asset management and business-to-business image
commerce solutions (media commerce).

Revenue for licenses of the Company's software products is recognized upon
delivery of software, assuming no significant future obligations or customer
acceptance rights exist.

SOP 98-9 requires that revenue is recognized under certain circumstances
using the "residual method." Under the residual method, revenue is recognized
as follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence (VSOE), is deferred and subsequently
recognized in accordance with the relevant sections of SOP 97-2, and (2) the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements. SOP 98-9 is effective for fiscal years beginning after March 15,
1999.

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

(j) Use of Estimates

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

(k) Income Taxes

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

(l) Stock Split

On October 21, 1999, the Board of Directors approved a one-for-two reverse
stock split of outstanding common and preferred shares which was effected on
December 1, 1999. Common and

F-9
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

preferred share and per share data for all periods presented in the
accompanying financial statements have been adjusted to reflect this stock
split.

(m) Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash and trade receivables. The Company
places its cash and cash equivalents with major banks and financial
institutions. The Company's investment policy limits its credit exposure to any
one financial institution or type of financial instrument. As a result, the
credit risk associated with cash is minimal. The Company had accounts
receivable from one customer representing approximately 83% of trade accounts
receivable at December 31, 1998 and accounts receivable from three customers
representing approximately 91% of trade accounts receivable at Decmber 31,
1999. Loss of or non-performance by these significant customers could adversely
affect the Company's financial position, liquidity or results of operations.

(n) Fair Value of Financial Instruments

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

(o) Stock-Based Employee Compensation

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

(p) Contingencies and Factors that Could Affect Future Results

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

F-10
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

(q) Net Loss Per Share

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

Common stock equivalents related to stock options and warrant of 640,857,
1,327,426, and 1,615,944 are antidilutive in a net loss year and, therefore,
are not included in 1997, 1998 and 1999 diluted net loss per share,
respectively.

(r) Reclassifications

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

(2) Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents.

Cash and cash equivalents include various money market instruments and
investments in government bonds totaling $2,137 and $90,830 at December 31,
1998 and 1999, respectively. Cash equivalents are carried at amortized cost,
which approximates market.

(3) Property and Equipment

<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
----- ------
<S> <C> <C>
Furniture and fixtures........................................ $ 51 $ 185
Office equipment.............................................. 504 1,123
Leasehold improvements........................................ 4 140
----- ------
559 1,448
Less accumulated depreciation and amortization................ (230) (487)
----- ------
$ 329 $ 961
===== ======
</TABLE>

(4) Leases

The Company leases certain office equipment under long-term capital leases,
which expire over the next three years. At December 31, 1998 and 1999, the cost
of these assets was $447 and $584, respectively, and accumulated amortization
was $168 and $329, respectively.

F-11
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

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

<TABLE>
<CAPTION>
Capital Operating
Year ending December 31: leases leases
------------------------ ------- ---------
<S> <C> <C>
2000....................................................... $154 $ 459
2001....................................................... 105 376
2002....................................................... 32 376
2003....................................................... -- 400
2004....................................................... -- 400
---- ------
Total minimum lease payments............................. 291 $2,011
======
Less amount representing interest.......................... 33
----
258
Less current portion of capital lease...................... 139
----
$119
====
</TABLE>

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

Rent expense on the operating leases for the years ended December 31, 1997,
1998 and 1999 totaled $62, $71 and $141, respectively.

(5) Notes Payable

<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Notes payable to stockholders, net of unamortized discount of
$86 and $72 at December 31, 1998 and 1999, respectively,
interest at 7% beginning in 1998, due and payable May 2005 or
earlier under certain conditions, unsecured.................. $ 298 $ 311
------ ------
298 311
Less current portion.......................................... -- 311
------ ------
$ 298 $ --
====== ======
</TABLE>

(6) Defined Contribution Pension Plan

The Company sponsors an employee savings plan (the Plan) which qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Employees become eligible to participate in the Plan after four months of
service. Employees may contribute up to 15% of their pay to the Plan, subject
to the limitations of the Internal Revenue Code. Company matching contributions
are discretionary. For the years ending December 31, 1997, 1998 and 1999 the
Company made no discretionary matching contributions.

F-12
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

(7) Convertible Redeemable Preferred Stock

The Company authorized several series of convertible redeemable preferred
stock. All issued and outstanding convertible redeemable preferred stock was
converted into common stock upon completion of the Company's initial public
offering on December 2, 1999. The title, carrying amount, and number of shares
issued and outstanding were as follows:

<TABLE>
<CAPTION>
December 31,
------------
1998 1999
------- ----
<S> <C> <C>
Series B-1, $.001 par value; 902,000 and no shares issued and
outstanding at December 31, 1998 and 1999, respectively;
liquidation preference $4,510 at December 31, 1998............. $ 4,441 $ --
Series B-N, $.001 par value; no shares issued and outstanding... -- --
Series C-1, $.001 par value; 2,029,786 and no shares issued and
outstanding at December 31, 1998 and 1999 respectively;
liquidation preference $5,805 at December 31, 1998............. 5,744 --
Series C-N, $.001 par value; no shares issued and outstanding at
December 31, 1998 and 1999..................................... -- --
Series D, $.001 par value; no shares issued and outstanding at
December 31, 1998 and 1999..................................... -- --
Series D-X, $.001 par value; no shares issued and outstanding at
December 31, 1998 and 1999..................................... -- --
------- ----
Total convertible redeemable preferred stock.................. $10,185 $ --
======= ====
</TABLE>

During 1999, the Company issued 1,266,000 shares of Series D-1 convertible
redeemable preferred stock for a total aggregate purchase price of $6,291 and
160,000 shares of Series D-X convertible redeemable preferred stock for a total
aggregate purchase price of $790. The terms of the Series D and D-X stock are
substantially identical to the Series B and C stock. See note 10 for features
of convertible redeemable preferred stock. Upon effectiveness of the initial
public offering (the Offering) on December 2, 1999, all outstanding convertible
redeemable preferred stock was converted into common stock.

(8) Initial Public Offering

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

(9) Stockholders' Equity

(a) Preferred Stock

All outstanding preferred stock of the Company was converted to common stock
upon the closing of the Offering. The authorized preferred stock of the Company
following its reincorporation and the Offering consists of 5,000,000 shares of
undesignated preferred. Prior to the Offering, the Company had issued Series A-
1, Series B-1 Series, C-1, Series D and Series D-X preferred stock.

F-13
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

(b) Common Stock

The authorized common stock of the Company following its reincorporation in
Delaware on December 1, 1999, consists of 30,000,000 shares.

Stock compensation expense is based on the difference between the deemed fair
market value of the Company's common stock and the exercise price of options to
purchase that stock on the date of grant, and is being recognized over the
vesting period of the related options, usually four years. The estimated fair
value per share used to determine deferred stock compensation was derived by
reference to preferred stock sales reduced by a discount factor, the execution
of various contracts and letters of intent, the progress toward completion of
new products, and the estimated price range of the common stock at the
effective date of the Offering. No stock-based compensation expense was
recorded for the years ended December 31, 1997 and 1998. Stock-based
compensation expense of $527 was recorded for the year ended December 31, 1999.
The total deferred stock compensation recorded by the Company from inception
through December 31, 1999 was $8.7 million. The Company estimates it will
record stock compensation expense of approximately $2.2 million for each of
year 2000, 2001 and 2002.

(d) Stock Incentive Plan

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

In October 1999, the 1999 Stock Incentive Plan (the 1999 Plan) was approved
by our Board of Directors. The Company initially reserved 1,500,000 shares of
it common stock for issuance under the 1999 Plan. Upon completion of the
Company's Offering, shares available for grant from the 1995 Plan were
transferred to the 1999 Plan. The exercise price and term of options granted
under the 1999 Plan will be determined by our Board of Directors or by a
committee they designate.

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

F-14
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

SFAS No. 123 defines a fair value based method of accounting for an employee
stock option and similar equity instrument. As is permitted under SFAS No. 123,
the Company has elected to continue to account for its stock-based compensation
plans under APB Opinion No. 25. The Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1997, 1998 and
1999 using the Black-Scholes option pricing model as prescribed by SFAS No. 123
with the following weighted average assumption for grants:

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.................................... 6.25% 6.00% 6.25%
Expected dividend yield.................................... -- -- --
Expected life (in years)................................... 4 4 4
Expected volatility........................................ 100% 100% 100%
</TABLE>

Using the Black-Scholes methodology, the total value of options granted
during 1997, 1998 and 1999 was $97, $175 and $9,015, respectively, which would
be amortized on a pro forma basis over the vesting period of the options. The
weighted average fair value of options granted during 1997, 1998 and 1999 was
$0.08, $0.09 and $7.91 per share, respectively. If the Company had accounted
for its stock-based compensation plans in accordance with SFAS No. 123, the
Company's loss per share would approximate the pro forma disclosures below:

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss............................ $ (4,053) $ (3,552) $ (5,700)
Pro forma net loss per share.................. $ (1.91) $ (1.55) $ (1.87)
</TABLE>

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

Transactions involving the stock incentive plans are summarized as follows:

<TABLE>
<CAPTION>
Weighted
Number of average
shares exercise price
--------- --------------
<S> <C> <C>
Options outstanding, December 31, 1996............. 577,550 $ .30
Granted........................................... 416,900 .50
Exercised......................................... (62,600) .22
Canceled.......................................... (19,650) .50
--------- -----
Options outstanding, December 31, 1997............. 912,200 .40
Granted........................................... 646,800 .50
Exercised......................................... (33,486) .50
Canceled.......................................... (220,714) .50
--------- -----
Options outstanding, December 31, 1998............. 1,304,800 .42
Granted........................................... 1,516,750 3.67
Exercised......................................... (116,747) .44
Canceled.......................................... (47,992) .50
--------- -----
Options outstanding, December 31, 1999............. 2,656,811 $2.28
========= =====
</TABLE>

F-15
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

At December 31, 1999, the range of exercise prices and the weighted average
remaining contractual life of outstanding options were $.15-$59.63 and nine
years, respectively.

<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------- ----------------
Number Remaining Weighted Number Weighted
of Contractual Average of Average
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
.15....................... 252,800 6.45 .15 230,000 .15
.50....................... 917,261 7.89 .50 452,161 .50
1.50....................... 484,000 9.39 1.50 -- 1.50
1.65....................... 50,000 4.36 1.65 -- 1.65
2.50....................... 843,750 9.73 2.50 -- 2.50
20.00....................... 97,000 9.92 20.00 -- 20.00
55.38....................... 4,000 9.99 55.38 -- 55.38
59.63....................... 8,000 9.94 59.63 -- 59.63
</TABLE>

At December 31, 1999, options to purchase 682,161 shares of common stock were
exercisable at a weighted average exercise price of $.38, and 1,214,354 shares
were available for grant.

(e) Employee Stock Purchase Plan

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

(f) Warrant

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

The value of the warrant at December 31, 1999 was $4,122. Of this amount, the
Company recorded $633 of sales and marketing expense during 1999 which related
to the vested portion of the warrant. The value and expense of the warrant was
calculated using the Black-Scholes method, assuming a 6.25% risk-free interest
rate, three year expected life, and 100% volatility. The Company will continue
to record non-cash charges in its statement of operations based on the fair
value of the newly-vested portions of the warrant. As of December 31, 1999, no
portion of the warrant had been exercised.

F-16
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

(10) Income Taxes

Due to the Company's losses before the provision for income taxes for the
years ended December 31, 1997, 1998 and 1999, there has been no provision for
federal and state taxes. The reconciliation of the statutory federal income tax
rate to the Company's effective income tax rate is as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate.................. (34)% (34)% (34)%
Increase (decrease) resulting from:
State income taxes, net of federal tax
benefit............................... (4) (4) (5)
Change in valuation allowance.......... 39 40 43
Other, net............................. (1) (2) (4)
-------- -------- --------
Effective tax rate.................... --% --% --%
======== ======== ========
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets and deferred tax
liabilities as of December 31 are as follows:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 3,284 $ 3,482
Capitalized research and experimentation costs.......... 238 170
Tax basis intangible assets, due to differences in
amortization........................................... 82 57
Research and experimentation credits.................... 113 113
Accrued expenses........................................ -- 430
Deferred revenue........................................ -- 491
Other................................................... 22 8
------- -------
Total gross deferred tax assets........................ 3,739 4,751
Less valuation allowance................................. (3,699) (4,723)
------- -------
Net deferred tax assets................................ 40 28
------- -------
Deferred tax liabilities:
Unamortized discount on notes payable................... 33 28
Plant and equipment, due to differences in
depreciation........................................... 7 --
------- -------
Total deferred tax liabilities......................... 40 28
------- -------
Net deferred tax liability (asset)..................... $ -- $ --
======= =======
</TABLE>

The valuation allowance for deferred tax assets as of December 31, 1998 and
1999, respectively, was $3,699 and $4,723. The net change in the total
valuation allowance for the year ended December 31, 1997, 1998 and 1999 was an
increase of $1,418, $1,385, and $1,024, respectively.

F-17
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

At December 31, 1999, the Company had net operating loss carryforwards of
approximately $9,078 to offset against future income for federal and state tax
purposes, and research and experimentation credits of $113. These carryforwards
expire through 2019.

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

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

(11) Segment Information

(a) Geographic Information

The Company derives its revenue from a single operating segment, digital
watermarking applications. Revenue is generated in this segment through
licensing and subscription of its media commerce and secure documents products
and the delivery of contracted and consulting services related to secure
documents.

The Company operates solely within the United States, and all assets are
located within the United States. Sales to identifiable foreign customers were
approximately $17, $89 and $351 for the years ended December 31, 1997, 1998 and
1999, respectively.

(b) Major Customers

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

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1998 1999
-------------------------
<S> <C> <C> <C>
Customer A......................................... $ 30 $ -- $ --
Customer B......................................... 25 503 6,136
------ ------- ---------
$ 55 $ 503 $ 6,136
====== ======= =========
</TABLE>

No single customer accounted for more than 10% of trade accounts receivable
outstanding at December 31, 1997. The Company had accounts receivable from
three customers representing approximately 83% of trade accounts receivable at
December 31, 1998. Accounts receivable from one customer represented 91% of
trade receivables at December 31, 1999.

F-18
<PAGE>

DIGIMARC CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)

(12) Commitments and Contingencies

In October 1999, the Company entered into a binding letter of agreement with
Wired magazine (Wired) in which the Company and Wired will jointly promote
Internet-enabled advertising. Under the agreement, the Company has agreed to
provide a non-exclusive license to Wired for MediaBridge, as well as provide
Wired with all reasonable and necessary development tools, training, software
and cameras for it to comply with its obligations under the agreement. Wired
has agreed to remit to the Company a portion of the revenue it receives from
MediaBridge-enabled advertising.

F-19
<PAGE>

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

[THE DIGIMARC CORPORATION LOGO AND WEB ADDRESS.]

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The expenses to be paid by the Registrant in connection with the distribution
of the securities being registered, other than underwriting discounts and
commissions, are as follows:

<TABLE>
<CAPTION>
Amount*
--------
<S> <C>
Securities and Exchange Commission Filing Fee...................... $ 60,617
NASD Filing Fee.................................................... 23,118
Nasdaq National Market Listing Fee................................. 17,500
Accounting Fees and Expenses....................................... 125,000
Blue Sky Fees and Expenses......................................... 5,000
Legal Fees and Expenses............................................ 200,000
Transfer Agent and Registrar Fees and Expenses..................... 8,000
Printing Expenses.................................................. 150,000
Director's and Officer's Insurance................................. 150,000
Miscellaneous Expenses............................................. 10,765
--------
Total.......................................................... $750,000
========
</TABLE>
- --------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
director and other corporate agents under certain circumstances and subject to
certain limitations. Digimarc's certificate of incorporation and bylaws provide
that Digimarc shall indemnify its directors, officers, employees and agents to
the full extent permitted by Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. In addition, Digimarc has entered into separate indemnification
agreements with its directors, officers and certain employees which require
Digimarc, among other things, to indemnify them against certain liabilities
which may arise by reason of their status as directors, officers or certain
other employees. Digimarc also intends to maintain director and officer
liability insurance, if available on reasonable terms.

These indemnification provisions and the indemnification agreement entered
into between Digimarc and its officers and directors may be sufficiently broad
to permit indemnification of Digimarc officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities
Act.

The underwriting agreement, which is Exhibit 1.1 to this registration
statement, provides for indemnification by our underwriters and their officers
and directors for certain liabilities arising under the Securities Act or
otherwise.

II-1
<PAGE>

Item 15. Recent Sales of Unregistered Securities

Since January 1, 1997, the Registrant has issued and sold the following
unregistered securities:

1. Between January 1, 1997 and February 25, 2000, the Registrant granted
3,314,150 shares of restricted common stock and options to purchase shares
of common stock at prices ranging from $0.50 to $74.13 to employees,
directors and consultants pursuant to its 1995 and 1999 Stock Incentive
Plans. Such sales were made in reliance on Rule 701 of the Securities Act.

2. In July 1997, the Registrant issued an aggregate of 179,000 shares of its
common stock in connection with its acquisition of certain assets of
NetRights, LLC. Such issuance was made in reliance on Section 4(2) of the
Securities Act.

3. In December 1997, the Registrant issued and sold an aggregate of 2,029,786
shares of its Series C-1 preferred stock to a total of 16 investors for an
aggregate purchase price of $5,805,189. Such sales were made in reliance on
Section 4(2) of the Securities Act.

4. In January 1998, the Registrant issued an aggregate of 13,572 shares of its
common stock to each of Sandra Kinsler and Daniel Romano in exchange for the
release of certain claims against the Registrant. Such issuances were made
in reliance on Section 4(2) of the Securities Act.

5. In June 1999, the Registrant issued and sold an aggregate of 1,266,000
shares of its Series D preferred stock to a total of 14 investors for an
aggregate purchase price of $6,330,000. Such sales were made in reliance on
Section 4(2) of the Securities Act.

6. In August 1999, the Registrant issued and sold an aggregate of 160,000
shares of its Series D-X preferred stock to a total of 3 investors for an
aggregate purchase price of $800,000. Such sales were made in reliance on
Section 4(2) of the Securities Act.

7. In October 1999, the Registrant issued a warrant to purchase 150,000 shares
of its common stock to Hearst Communications, Inc. as part of a marketing
agreement. The warrant was issued in reliance on Section 4(2) of the
Securities Act.

The issuances of the securities in the transactions above were deemed to be
exempt from registration under the Securities Act in reliance on either Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering, where the purchasers represented their intention to acquire the
securities for investment only and not with a view to distribution and received
or had access to adequate information about the Registrant, or, in the case of
paragraph 1 above, Rule 701 promulgated under the Securities Act as
transactions pursuant to a compensatory benefit plan or a written contract
relating to compensation.

Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No underwriters were employed in any
of the above transactions.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

The exhibits are as set forth in the Exhibit Index.

(b) Financial Statement Schedules

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

II-2
<PAGE>

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The Registrant hereby undertakes that:

(1) For purposes of any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Tualatin, State of
Oregon, on the 17th day of March 2000.

Digimarc Corporation

/s/ Bruce Davis
By: _________________________________
Bruce Davis
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bruce Davis and E.K. Ranjit, and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to sign any
registration statements for the same offering covered by the Registration
Statements that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933 and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitutes, may lawfully
do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce Davis President, Chief Executive March 17, 2000
_________________________ Officer and Director
(Bruce Davis) (Principal Executive Officer)
/s/ E.K. Ranjit Chief Financial Officer (Principal March 17, 2000
_________________________ Financial and Accounting Officer)
(E.K. Ranjit) and Secretary
/s/ Geoffrey Rhoads Chief Technology Officer March 17, 2000
_________________________ and Director
(Geoffrey Rhoads)
/s/ Philip Monego, Sr. Chairman of the Board of Directors March 17, 2000
_________________________
(Philip Monego, Sr.)
/s/ Brian J. Grossi Director March 17, 2000
_________________________
(Brian J. Grossi)
Director
_________________________
(John Taysom)
</TABLE>

II-4
<PAGE>

Exhibit Index

<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Bylaws of the Registrant, as amended
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2* Second Amended and Restated Investor Rights Agreement, dated as of
November 2, 1999, between the Registrant and the holders of the
Registrant's preferred stock
4.3* Specimen Stock Certificate of the Registrant
5.1** Opinion of Morrison & Foerster LLP as to the legality of the common
stock
10.1* Form of Indemnification Agreement between the Registrant and each of
its executive officers and directors
10.2 Registrant's 1995 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement
on Form S-8 (Commission File No. 333-31114) which became effective on
February 25, 2000)
10.3 Registrant's 1999 Stock Incentive Plan, including forms of agreements
thereunder (incorporated by reference to Exhibit 99.2 to the
Registrant's Registration Statement on Form S-8 (Commission File No.
333-31114) which became effective on February 25, 2000)
10.4 Registrant's 1999 Employee Stock Purchase Plan, as amended, including
forms of agreements thereunder (incorporated by reference to Exhibit
99.3 to the Registrant's Registration Statement on Form S-8
(Commission File No. 333-31114) which became effective on February 25,
2000)
10.5* Office Lease Agreement, dated as of April 16, 1998, between the
Registrant and Property Reserve, Inc.
10.6* Sublease, dated as of April 23, 1998, between the Registrant and
Southern Pacific Funding Corporation
10.7* Sublease, dated as of April 27, 1998, between the Registrant and
Southern Pacific Funding Corporation
10.8* Lease Agreement, dated as of June 25, 1999, between the Registrant and
Southplace Associates LLC
10.9+* Counterfeit Deterrence System Development and License Agreement, dated
as of January 1, 1999
10.10 First Amendment to Lease Agreement, dated as of February 17, 2000,
between the Registrant and Southplace Associates LLC
10.11 CityPlex Towers Lease Agreement, dated as of January 4, 2000, between
the Registrant and Oral Roberts University
23.1 Consent of KPMG LLP, Independent Certified Public Accountants
23.2** Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1
24.1 Powers of Attorney. Reference is made to Page II-4
27.1 Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference to the same exhibit number to the Registrant's
Registration Statement on Form S-1 (Commission File No. 333-87501) which
became effective on December 1, 1999.
** To be filed by amendment.
+ Confidential treatment has been granted with regard to certain portions of
this document. Such portions have been filed separately with the Securities
and Exchange Commission.

<PAGE>

EXHIBIT 3.1

SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIGIMARC CORPORATION

DIGIMARC CORPORATION, a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:

1. That the name of the Corporation is Digimarc Corporation. The
Corporation was originally incorporated under the name Digimarc-Delaware, Inc.;
and the original Certificate of Incorporation of the Corporation and Restated
Certificate of Incorporation were filed with the Secretary of State of the State
of Delaware on the 27th day of September, 1999 and the 5th day of November,
1999, respectively.

2. That the Corporation filed a Certificate of Merger effective
December 1, 1999, merging Digimarc Corporation, an Oregon corporation ("Digimarc
Oregon"), with and into Digimarc-Delaware, Inc., and succeeded to the
resolutions passed by the Board of Directors of Digimarc Oregon.

3. That by unanimous written consent of the Board of Directors of
Digimarc Oregon, dated as of the 14th day of Septmeber, 1999, filed with the
minutes of the Corporation, resolutions were duly adopted setting forth the
proposed amendment and restatement of the Restated Certificate of Incorporation
of the Corporation and declaring said amendment and restatement to be advisable.
The resolution setting forth the proposed amendment and restatement is as
follows:

RESOLVED, that conditioned upon the closing of the Initial Public
Offering and subject to the approval of the stockholders, the Certificate of
Incorporation of the Corporation shall be amended and restated in its
entirety to read as set forth in the attached Second Restated Certificate of
Incorporation.

4. That thereafter, pursuant to resolutions of its Board of Directors,
the shareholders of Digimarc Oregon approved such amendment and restatement at a
special meeting of the stockholders called and held upon notice in accordance
with Title VII, Chapter 60 of the Oregon Revised Statutes. A majority of the
outstanding stock entitled to vote thereon has been voted in favor of said
amendment and restatement.

5. That said amendment and restatement was duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware. This Second Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of the Corporation as follows:

1
<PAGE>

SECTION 1.

The name of the corporation is Digimarc Corporation (the "Corporation").

SECTION 2.

The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, in the City of Wilmington, Delaware 19801, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.

SECTION 3.

The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the Delaware General Corporation Law.

SECTION 4.

4.1 The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is 35,000,000, consisting of 30,000,000 shares of
common stock, $.001 par value per share ("Common Stock"), and 5,000,000 shares
of preferred stock ("Preferred Stock"), $.001 par value per share.

4.2 Any of the shares of Preferred Stock may be issued from time to time
in one or more series. The rights privileges, preferences and restrictions of
any such series may be subordinated to, made pari passu with (including, without
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or made senior to any of those of any present or future class or series of
Preferred Stock or Common Stock. Subject to the limitations and restrictions set
forth in this Section 4, the Board of Directors or a Committee of the Board of
Directors, to the extent permitted by law and the bylaws of the Corporation or a
resolution of the Board of Directors, by resolution or resolutions, is
authorized to create or provide for any such series, and to fix the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, including,
without limitation, the authority to fix or alter the dividend rights, dividend
rates, conversion rights, exchange rights, voting rights, rights and terms of
redemption (including sinking and purchase fund provisions), the redemption
price or prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and the
number of shares constituting any such series, and the designation thereof, or
any of them and to increase or decrease the number of shares of any series so
created, subsequent to the issue of that series but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.

There shall be no limitation or restriction on any variation between any of
the different series of Preferred Stock as to the designations, preferences and
relative, participating, optional

2
<PAGE>

or other special rights, and the qualifications, limitations or restrictions
thereof; and the several series of Preferred Stock may, except as otherwise
expressly provided herein, vary in any and all respects as fixed and determined
by the resolution or resolutions of the Board of Directors or by Committee of
the Board of Directors, providing for the issuance of the various series;
provided, however, that all shares of any one series of Preferred Stock shall
- -------- -------
have the same designation, preferences and relative, participating, optional or
other special rights and qualifications, limitations and restrictions.

Except as otherwise required by law, or as otherwise fixed by resolution or
resolutions of the Board of Directors with respect to one or more series of
Preferred Stock, the entire voting power and all voting rights shall be vested
exclusively in the Common Stock, and each stockholder of the Corporation who at
the time possesses voting power for any purpose shall be entitled to one vote
for each share of such stock standing in his name on the books of the
Corporation.

SECTION 5.

5.1 Common Stock. Except as expressly set forth in this Second Amended
------------
and Restated Certificate of Incorporation, the shares of Common Stock have
voting rights of one vote per share on all matters, and are entitled to receive
the net assets of the Corporation upon liquidation.

5.2 Repurchase of Shares. Subject to Delaware law, this Corporation is
--------------------
authorized to purchase shares of Common Stock from holders thereof pursuant to
arrangements approved by the Board of Directors, without taking into account the
preferential liquidation rights of holders of Preferred Stock set forth herein
when applying the provisions of the Delaware General Corporation Law to
determine the lawfulness of the purchase.

SECTION 6.

6.1 Directors. Except as otherwise provided herein or the General
---------
Corporation Law of the State of Delaware, the business and affairs of the
Corporation shall be managed by or under the direction of a board of directors
consisting of one or more members. Directors need not be stockholders of the
Corporation. The number of directors shall be fixed from time to time, within
the limits specified in the Bylaws, by a Bylaw or amendment thereof duly adopted
by the vote of a majority of the shares entitled to vote represented at a duly
held meeting at which a quorum is present, or by the board of directors.

The directors shall be divided into three classes, designated Class I,
Class II and Class III, as nearly equal in number as the then total number of
directors permits, serving staggered terms so that the initial terms of each
such class will expire, respectively, at the 2000, 2001, and 2002 annual
meetings of the stockholders. At each such succeeding annual meeting of
stockholders, directors elected to succeed those directors whose terms are
expiring at such meeting shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders following such election. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional directors of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining

3
<PAGE>

term of that class, but in no case will a decrease in the number of directors
shorten the term of any incumbent director. Notwithstanding the foregoing,
whenever the holders of any one or more classes or series of preferred stock
issued by the Corporation shall have the right, voting separately by class or
series, to elect directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Certificate of
Incorporation or the Bylaws applicable thereto, and such directors so elected
shall not be divided into classes pursuant to this Section 6.1 unless expressly
provided by such terms.

Any amendment, change or repeal of this Section 6.1, or any other amendment
to this Certificate of Incorporation that will have the effect of permitting
circumvention of or modifying this Section 6.1, shall require the favorable
vote, at a stockholders' meeting, of the holders of at least eighty percent
(80%) of the then-outstanding shares of stock of the Corporation entitled to
vote.

Except as provided below, the directors shall be elected by a plurality
vote of the shares represented in person or by proxy at the stockholders annual
meeting in each year and entitled to vote on the election of directors. Elected
directors shall hold office until the next annual meeting for the years in which
their terms expire and until their successors shall be duly elected and
qualified. If, for any cause, the board of directors shall not have been
elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in this Certificate of Incorporation or the Bylaws.

6.2 Vacancies. Except as otherwise provided by the Certificate of
---------
Incorporation or any amendments thereto, vacancies and newly created
directorships resulting from any increase in the number of authorized directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director, and each director so elected shall
hold office for the unexpired portion of the term of the director whose place
shall be vacant, and until his successor shall have been duly elected and
qualified. A vacancy in the board of directors shall be deemed to exist under
this Section 6.2 in the case of the death, removal or resignation of any
director, or if the stockholders fail at any meeting of stockholders at which
directors are to be elected to elect the number of directors then constituting
the whole board.

6.3 Resignation. Any director may resign by delivering his written
-----------
resignation to the Corporation at its principal office, addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. When one or more directors shall resign from the board, effective
at a future date, a majority of the directors then in office, including those
who have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office for the unexpired
portion of the term of the director whose place shall be vacated and until his
successor shall have been duly elected and qualified.

4
<PAGE>

SECTION 7.

7.1 Indemnification. To the fullest extent permitted by Delaware
---------------
statutory or decisional law, as amended or interpreted, no director of this
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. This Section
7.1 does not affect the availability of equitable remedies for breach of
fiduciary duties.

7.2 Amendments. Any amendment, change or repeal of this Section shall
----------
only be prospective and no repeal or modification hereof shall adversely affect
the rights under this Section in effect at the time of the alleged occurrence of
any action or omission to act that is the cause of any Proceeding.

SECTION 8.

The board of directors is expressly authorized to make, alter, or repeal
the Bylaws of the Corporation.

SECTION 9.

Elections of directors need not be by written ballot unless the bylaws of
the Corporation shall so provide.

SECTION 10.

Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof, or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.

SECTION 11.

The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.

5
<PAGE>

IN WITNESS WHEREOF, the Corporation has caused this Second Amended and Restated
Certificate of Incorporation to be signed by its duly authorized officer, this
10th day of December, 1999.

By: /s/ Bruce Davis
--------------------------
Bruce Davis, President

<PAGE>

EXHIBIT 3.2

BYLAWS

DIGIMARC CORPORATION

a Delaware corporation

Amended 12/10/99
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
ARTICLE I OFFICES............................................................... 1
Section 1.1 Registered Office............................................. 1
Section 1.2 Other Offices................................................. 1
ARTICLE II STOCKHOLDERS' MEETINGS............................................... 1
Section 2.1 Place of Meetings............................................. 1
Section 2.2 Annual Meetings............................................... 1
Section 2.3 Special Meetings.............................................. 1
Section 2.4 Notice of Meetings............................................ 2
Section 2.5 Quorum and Voting............................................. 2
Section 2.6 Voting Rights................................................. 3
Section 2.7 Voting Procedures and Inspectors of Elections................. 4
Section 2.8 List of Stockholders.......................................... 5
Section 2.9 Stockholder Proposals at Annual Meetings...................... 5
Section 2.10 Nominations of Persons for Election to the Board of Directors. 6
Section 2.11 Action Without Meeting........................................ 7
ARTICLE III DIRECTORS........................................................... 7
Section 3.1 Number and Term of Office..................................... 7
Section 3.2 Powers........................................................ 8
Section 3.3 Vacancies..................................................... 8
Section 3.4 Resignations and Removals..................................... 8
Section 3.5 Meetings...................................................... 9
Section 3.6 Quorum and Voting............................................. 10
Section 3.7 Action Without Meeting........................................ 10
Section 3.8 Fees and Compensation......................................... 10
Section 3.9 Committees.................................................... 11
ARTICLE IV OFFICERS............................................................. 11
Section 4.1 Officers Designated........................................... 12
Section 4.2 Tenure and Duties of Officers................................. 13

</TABLE>
<PAGE>

<TABLE>
<S> <C> <C>
ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF
SECURITIES OWNED BY THE CORPORATION............................................ 13
Section 5.1 Execution of Corporate Instruments............................ 13
Section 5.2 Voting of Securities Owned by Corporation..................... 13
ARTICLE VI SHARES OF STOCK...................................................... 14
Section 6.1 Form and Execution of Certificates............................ 14
Section 6.2 Lost Certificates............................................. 14
Section 6.3 Transfers..................................................... 15
Section 6.4 Fixing Record Dates........................................... 16
Section 6.5 Registered Stockholders....................................... 16
ARTICLE VII OTHER SECURITIES OF THE CORPORATION................................. 16
ARTICLE VIII CORPORATE SEAL..................................................... 16
ARTICLE IX INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES
AND AGENTS..................................................................... 16
Section 9.1 Right to Indemnification...................................... 16
Section 9.2 Authority to Advance Expenses................................. 16
Section 9.3 Right of Claimant to Bring Suit............................... 17
Section 9.4 Provisions Nonexclusive....................................... 17
Section 9.5 Authority to Insure........................................... 18
Section 9.6 Survival of Rights............................................ 18
Section 9.7 Settlement of Claims.......................................... 18
Section 9.8 Effect of Amendment........................................... 18
Section 9.9 Subrogation................................................... 18
Section 9.10 No Duplication of Payments.................................... 19
ARTICLE X NOTICES............................................................... 19
ARTICLE XI AMENDMENTS........................................................... 20
</TABLE>
<PAGE>

BYLAWS

DIGIMARC CORPORATION

ARTICLE I

Offices

Section 1.1 Registered Office.

The registered office of the corporation in the State of Delaware shall be
in the City of Wilmington, County of New Castle.

Section 1.2 Other Offices.

The corporation shall also have and maintain an office or principal place
of business at One Center Pointe Drive, Suite 500, Lake Oswego, Oregon 97035-
8615, and may also have offices at such other places, both within and without
the State of Delaware as the Board of Directors may from time to time determine
or the business of the corporation may require.

ARTICLE II

Stockholders' Meetings

Section 2.1 Place of Meetings.

Meetings of the stockholders of the corporation shall be held at such
place, either within or without the State of Delaware, as may be designated from
time to time by the Board of Directors, or, if not so designated, then at the
office of the corporation required to be maintained pursuant to Section 1.2 of
Article I hereof.

Section 2.2 Annual Meetings.

The annual meetings of the stockholders of the corporation, commencing with
the year 2000, for the purpose of election of directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors, or, if
not so designated, then at 10 a.m. on March 1 in each year if not a legal
holiday, and, if a legal holiday, at the same hour and place on the next
succeeding day not a holiday.

Section 2.3 Special Meetings.

Special Meetings of the stockholders of the corporation may be called, for
any purpose or purposes, by the President, the Secretary, or by the Board of
Directors at any time.

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<PAGE>

Section 2.4 Notice of Meetings.

(a) Except as otherwise provided by law or the Certificate of
Incorporation, written notice of each meeting of stockholders, specifying the
place, date and hour and purpose or purposes of the meeting, shall be given not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote thereat, directed to his address as it
appears upon the books of the corporation; except that where the matter to be
acted on is a merger or consolidation of the Corporation or a sale, lease or
exchange of all or substantially all of its assets, such notice shall be given
not less than twenty (20) nor more than sixty (60) days prior to such meeting.

(b) If at any meeting action is proposed to be taken which, if taken,
would entitle shareholders fulfilling the requirements of section 262(d) of the
Delaware General Corporation Law to an appraisal of the fair value of their
shares, the notice of such meeting shall contain a statement of that purpose and
to that effect and shall be accompanied by a copy of that statutory section.

(c) When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken unless the adjournment is for more
than thirty days, or unless after the adjournment a new record date is fixed for
the adjourned meeting, in which event a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

(d) Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, either before or after such meeting, and to the extent
permitted by law, will be waived by any stockholder by his attendance thereat,
in person or by proxy. Any stockholder so waiving notice of such meeting shall
be bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.

(e) Unless and until voted, every proxy shall be revocable at the pleasure
of the person who executed it or of his legal representatives or assigns, except
in those cases where an irrevocable proxy permitted by statute has been given.

Section 2.5 Quorum and Voting.

(a) At all meetings of stockholders, except where otherwise provided by
law, the Certificate of Incorporation, or these Bylaws, the presence, in person
or by proxy duly authorized, of the holders of a majority of the outstanding
shares of stock entitled to vote shall constitute a quorum for the transaction
of business. Shares, the voting of which at said meeting have been enjoined, or
which for any reason cannot be lawfully voted at such meeting, shall not be
counted to determine a quorum at said meeting. In the absence of a quorum, any
meeting of stockholders may be adjourned, from time to time, by vote of the
holders of a majority of the shares represented thereat, but no other business
shall be transacted at such meeting. At such adjourned meeting at which a quorum
is present or represented any business may be transacted which might have been
transacted at the original meeting. The stockholders present at a duly called or
convened meeting, at which a quorum is present, may continue to transact
business
2
<PAGE>

until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum.

(b) Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the voting
power represented at any meeting at which a quorum is present shall be valid and
binding upon the corporation.

(c) Where a separate vote by a class or classes is required, a majority of
the outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority of
shares of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class.

Section 2.6 Voting Rights.

(a) Except as otherwise provided by law, only persons in whose names
shares entitled to vote stand on the stock records of the corporation on the
record date for determining the stockholders entitled to vote at said meeting
shall be entitled to vote at such meeting. Shares standing in the names of two
or more persons shall be voted or represented in accordance with the
determination of the majority of such persons, or, if only one of such persons
is present in person or represented by proxy, such person shall have the right
to vote such shares and such shares shall be deemed to be represented for the
purpose of determining a quorum.

(b) Every person entitled to vote or execute consents shall have the right
to do so either in person or by an agent or agents authorized by a written proxy
executed by such person or his duly authorized agent, which proxy shall be filed
with the Secretary of the corporation at or before the meeting at which it is to
be used. Said proxy so appointed need not be a stockholder. No proxy shall be
voted on after three years from its date unless the proxy provides for a longer
period.

(c) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to subsection (b) of
this section, the following shall constitute a valid means by which a
stockholder may grant such authority:

(1) A stockholder may execute a writing authorizing another
person or persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing such
writing or causing his or her signature to be affixed to such writing by any
reasonable means including, but not limited to, by facsimile signature.

(2) A stockholder may authorize another person or persons to act
for him as proxy by transmitting or authorizing the transmission of a telegram,
cablegram, or other means of electronic transmission to the person who will be
the holder of the proxy or to a proxy solicitation firm, proxy support service
organization or like agent duly authorized by the person who will be the holder
of the proxy to receive such transmission, provided that any such telegram,
cablegram or other means of electronic transmission must either set forth or be
submitted with information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the stockholder.
Such authorization can be
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<PAGE>

established by the signature of the stockholder on the proxy, either in writing
or by a signature stamp or facsimile signature, or by a number or symbol from
which the identity of the stockholder can be determined, or by any other
procedure deemed appropriate by the inspectors or other persons making the
determination as to due authorization.

(3) If it is determined that such telegrams, cablegrams or other
electronic transmissions are valid, the inspectors or, if there are no
inspectors, such other persons making that determination shall specify the
information upon which they relied.

(d) Any copy, facsimile telecommunication or other reliable reproduction
of the writing or transmission created pursuant to subsection (c) of this
section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.

Section 2.7 Voting Procedures and Inspectors of Elections.

(a) The corporation shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting and make a written report
thereof. The corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his ability.

(b) The inspectors shall (i) ascertain the number of shares outstanding
and the voting power of each, (ii) determine the shares represented at a meeting
and the validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.

(c) The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the Inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.

(d) In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 212(c)(2) of the Delaware General Corporation Law, ballots and the
regular books and records of the corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable information for the

4
<PAGE>

limited purpose permitted herein, the inspectors at the time they make their
certification pursuant to subsection (b)(v) of this section shall specify the
precise information considered by them including the person or persons from whom
they obtained the information, when the information was obtained, the means by
which the information was obtained and the basis for the inspectors' belief that
such information is accurate and reliable.

Section 2.8 List of Stockholders.

The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held and which place shall
be specified in the notice of the meeting, or, if not specified, at the place
where said meeting is to be held, and the list shall be produced and kept at the
time and place of meeting during the whole time thereof, and may be inspected by
any stockholder who is present.

Section 2.9 Stockholder Proposals at Annual Meetings.

At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, otherwise properly brought before the meeting by or at
the direction of the Board of Directors or otherwise properly brought before the
meeting by a stockholder. In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation, not
less than 45 days nor more than 75 days prior to the date on which the
corporation first mailed its proxy materials for the previous year's annual
meeting of shareholders (or the date on which the corporation mails its proxy
materials for the current year if during the prior year the corporation did not
hold an annual meeting or if the date of the annual meeting was changed more
than 30 days from the prior year). A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of the stockholder proposing
such business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.

Notwithstanding anything in the By-Laws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 2.9, provided, however, that nothing in this Section 2.9
shall be deemed to preclude discussion by any stockholder of any business
properly brought before the annual meeting in accordance with said procedure.

5
<PAGE>

The Chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 2.9, and if he should
so determine he shall so declare to the meeting, and any such business not
properly brought before the meeting shall not be transacted.

Nothing in this Section 2.9 shall affect the right of a stockholder to
request inclusion of a proposal in the corporation's proxy statement to the
extent that such right is provided by an applicable rule of the Securities and
Exchange Commission.

Section 2.10 Nominations of Persons for Election to the Board of Directors.

In addition to any other applicable requirements, only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors. Nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of stockholders by or at
the direction of the Board of Directors, by any nominating committee or person
appointed by the Board of Directors or by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 2.10. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation, not less than 45 days nor
more than 75 days prior to the date on which the corporation first mailed its
proxy materials for the previous year's annual meeting of shareholders (or the
date on which the corporation mails its proxy materials for the current year if
during the prior year the corporation did not hold an annual meeting or if the
date of the annual meeting was changed more than 30 days from the prior year).
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of the corporation which are beneficially owned by the person, and (iv)
any other information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Rule 14a under
the Securities Exchange Act of 1934; and (b) as to the stockholder giving the
notice, (i) the name and record address of the stockholder, and (ii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder. The corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the corporation to determine
the eligibility of such proposed nominee to serve as a director of the
corporation. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth herein.
These provisions shall not apply to nomination of any persons entitled to be
separately elected by holders of preferred stock.

The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.

6
<PAGE>

Section 2.11 Action Without Meeting.

Unless otherwise provided in the Certificate of Incorporation, any action
required by statute to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, are signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. To be effective, a written consent must be delivered to the
corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to a corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. Every written consent
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty days of the earliest dated consent delivered in the
manner required by this Section to the corporation, written consents signed by a
sufficient number of holders to take action are delivered to the corporation in
accordance with this Section. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.

ARTICLE III

Directors

Section 3.1 Number and Term of Office.

The number of directors of the corporation shall not be less than five (5)
nor more than eleven (11) until changed by amendment of the Certificate of
Incorporation or by a Bylaw amending this Section 3.1 duly adopted by the Board
of Directors. The exact number of directors shall be fixed from time to time,
within the limits specified in the Certificate of Incorporation or in this
Section 3.1, by a bylaw or amendment thereof duly adopted by the vote of a
majority of the shares entitled to vote represented at a duly held meeting at
which a quorum is present, or by the written consent of the holders of a
majority of the outstanding shares entitled to vote, or by the Board of
Directors. Subject to the foregoing provisions for changing the number of
directors, the number of directors of the corporation has been fixed at five
(5).

The directors shall be divided into three classes, designated Class I,
Class II, and Class III, as nearly equal in number as the then total number of
directors permits. Class I directors shall serve until the 2000 annual meeting,
Class II directors shall serve until the 2001 annual meeting and Class III
directors shall serve until the 2002 annual meeting. At each succeeding annual
meeting of stockholders beginning in 2000, successors to the class of directors
whose terms expires at that annual meeting shall be elected for a three-year
term. If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that class, but
in no case will a

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decrease in the number of directors shorten the term of any incumbent director.
Notwithstanding the foregoing, whenever the holders of any one or more classes
or series of Preferred Stock issued by the Corporation shall have the right,
voting separately by class or series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of these
Bylaws applicable thereto, and such directors so elected shall not be divided
into classes pursuant to this Section 3.1 unless expressly provided by such
terms.

Any amendment, change or repeal of this Section 3.1, or any other amendment
to these Bylaws that will have the effect of permitting circumvention of or
modifying this Section 3.1, shall require the favorable vote, at a stockholders'
meeting, of the holders of at least 80% of the then-outstanding shares of stock
of the Corporation entitled to vote.

With the exception of the first Board of Directors, which shall be elected
by the incorporators, and except as provided in Section 3.3 of this Article III,
the directors shall be elected by a plurality vote of the shares represented in
person or by proxy, at the stockholders annual meeting in each year and entitled
to vote on the election of directors. Elected directors shall hold office until
the next annual meeting for the years in which their terms expire and until
their successors shall be duly elected and qualified. Directors need not be
stockholders. If, for any cause, the Board of Directors shall not have been
elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.

Section 3.2 Powers.

The powers of the corporation shall be exercised, its business conducted
and its property controlled by or under the direction of the Board of Directors.

Section 3.3 Vacancies.

Vacancies and newly created directorships resulting from any increase in
the authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director,
and each director so elected shall hold office for the unexpired portion of the
term of the director whose place shall be vacant, and until his successor shall
have been duly elected and qualified. A vacancy in the Board of Directors shall
be deemed to exist under this section in the case of the death, removal or
resignation of any director, or if the stockholders fail at any meeting of
stockholders at which directors are to be elected (including any meeting
referred to in Section 3.4 below) to elect the number of directors then
constituting the whole Board.

Section 3.4 Resignations and Removals.

(a) Any director may resign at any time by delivering his written
resignation to the Secretary, such resignation to specify whether it will be
effective at a particular time, upon receipt by the Secretary or at the pleasure
of the Board of Directors. If no such specification is made it shall be deemed
effective at the pleasure of the Board of Directors. When one or more directors
shall resign from the Board, effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies,

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the vote thereon to take effect when such resignation or resignations shall
become effective, and each director so chosen shall hold office for the
unexpired portion of the term of the director whose place shall be vacated and
until his successor shall have been duly elected and qualified.

(b) At a special meeting of stockholders called for the purpose in the
manner herein above provided, the Board of Directors, or any individual
director, may be removed from office, with or without cause, and a new director
or directors elected by a vote of stockholders holding a majority of the
outstanding shares entitled to vote at an election of directors. Unless the
certificate of incorporation otherwise provides, if the board of directors is
classified, shareholders may effect removal only for cause.

Section 3.5 Meetings.

(a) The annual meeting of the Board of Directors shall be held
immediately after the annual stockholders' meeting and at the place where such
meeting is held or at the place announced by the Chairman at such meeting. No
notice of an annual meeting of the Board of Directors shall be necessary and
such meeting shall be held for the purpose of electing officers and transacting
such other business as may lawfully come before it.

(b) Except as hereinafter otherwise provided, regular meetings of the
Board of Directors shall be held in the office of the corporation required to be
maintained pursuant to Section 1.2 of Article I hereof. Regular meetings of the
Board of Directors may also be held at any place within or without the State of
Delaware which has been designated by resolutions of the Board of Directors or
the written consent of all directors.

(c) Special meetings of the Board of Directors may be held at any time
and place within or without the State of Delaware whenever called by the
Chairman of the Board or, if there is no Chairman of the Board, by the
President, or by a majority of the directors.

(d) Written notice of the time and place of all regular and special
meetings of the Board of Directors shall be delivered personally to each
director or sent by telegram or facsimile transmission at least 48 hours before
the start of the meeting, or sent by first class mail at least 120 hours before
the start of the meeting. Notice of any meeting may be waived in writing at any
time before or after the meeting and will be waived by any director by
attendance thereat.

Section 3.6 Quorum and Voting.

(a) A quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time in accordance with Section
3.1 of Article III of these Bylaws, but not less than one; provided, however, at
any meeting whether a quorum be present or otherwise, a majority of the
directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.

(b) At each meeting of the Board at which a quorum is present all
questions and business shall be determined by a vote of a majority of the
directors present, unless a different vote be required by law, the Certificate
of Incorporation, or these Bylaws.

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(c) Any member of the Board of Directors, or of any committee thereof,
may participate in a meeting by means of conference telephone or similar
communication equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means shall
constitute presence in person at such meeting.

(d) The transactions of any meeting of the Board of Directors, or any
committee thereof, however called or noticed, or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice, if a
quorum be present and if, either before or after the meeting, each of the
directors not present shall sign a written waiver of notice, or a consent to
holding such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.

Section 3.7 Action Without Meeting.

Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors or of any committee thereof may be taken without a meeting, if all
members of the Board or of such committee, as the case may be, consent thereto
in writing, and such writing or writings are filed with the minutes of
proceedings of the Board or committee.

Section 3.8 Fees and Compensation.

Directors and members of committees may receive such compensation, if any,
for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors.

Section 3.9 Committees.

(a) Executive Committee: The Board of Directors may appoint an Executive
Committee of not less than one member, each of whom shall be a director. The
Executive Committee, to the extent permitted by law, shall have and may exercise
when the Board of Directors is not in session all powers of the Board in the
management of the business and affairs of the Corporation, except such committee
shall not have the power or authority to amend these Bylaws or to approve or
recommend to the stockholders any action which must be submitted to stockholders
for approval under the General Corporation Law.

(b) Other Committees: The Board of Directors may, by resolution passed
by a majority of the whole Board, from time to time appoint such other
committees as may be permitted by law. Such other committees appointed by the
Board of Directors shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committee, but in no
event shall any such committee have the powers denied to the Executive Committee
in these Bylaws.

(c) Term: The members of all committees of the Board of Directors shall
serve a term coexistent with that of the Board of Directors which shall have
appointed such committee. The Board, subject to the provisions of subsections
(a) or (b) of this Section 3.9, may at any time increase or decrease the number
of members of a committee or terminate the existence of a committee; provided,
that no committee shall consist of less than one member. The membership

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of a committee member shall terminate on the date of his death or voluntary
resignation, but the Board may at any time for any reason remove any individual
committee member and the Board may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.

(d) Meetings: Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 3.9 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter; special meetings of any such
committee may be held at the principal office of the corporation required to be
maintained pursuant to Section 1.2 of Article I hereof; or at any place which
has been designated from time to time by resolution of such committee or by
written consent of all members thereof, and may be called by any director who is
a member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time after the meeting
and will be waived by any director by attendance thereat. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.

ARTICLE IV

Officers

Section 4.1 Officers Designated.

The officers of the corporation shall be a President, a Secretary, and a
Treasurer. The Board of Directors or the President may also appoint a Chairman
of the Board, one or more Vice-Presidents, assistant secretaries, assistant
treasurers, and such other officers and agents with such powers and duties as it
or he shall deem necessary. The order of the seniority of the Vice- Presidents
shall be in the order of their nomination, unless otherwise determined by the
Board of Directors. The Board of Directors may assign such additional titles to
one or more of the officers as they shall deem appropriate. Any one person may
hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other compensation
of the officers of the corporation shall be fixed by or in the manner designated
by the Board of Directors.

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Section 4.2 Tenure and Duties of Officers.

(a) General: All officers shall hold office at the pleasure of the Board
of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors. Nothing in these Bylaws shall be construed as creating any
kind of contractual right to employment with the corporation.

(b) Duties of the Chairman of the Board of Directors: The Chairman of
the Board of Directors (if there be such an officer appointed) shall, when
present, preside at all meetings of the shareholders and the Board of Directors.
The Chairman of the Board of Directors shall perform such other duties and have
such other powers as the Board of Directors shall designate from time to time.

(c) Duties of President: The President shall be the chief executive
officer of the corporation and shall preside at all meetings of the shareholders
and at all meetings of the Board of Directors, unless the Chairman of the Board
of Directors has been appointed and is present. The President shall perform such
other duties and have such other powers as the Board of Directors shall
designate from time to time.

(d) Duties of Vice-Presidents: The Vice-Presidents, in the order of
their seniority, may assume and perform the duties of the President in the
absence or disability of the President or whenever the office of the President
is vacant. The Vice-President shall perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.

(e) Duties of Secretary: The Secretary shall attend all meetings of the
shareholders and of the Board of Directors and any committee thereof, and shall
record all acts and proceedings thereof in the minute book of the corporation.
The Secretary shall give notice, in conformity with these Bylaws, of all
meetings of the shareholders, and of all meetings of the Board of Directors and
any Committee thereof requiring notice. The Secretary shall perform such other
duties and have such other powers as the Board of Directors shall designate from
time to time. The President may direct any Assistant Secretary to assume and
perform the duties of the Secretary in the absence or disability of the
Secretary, and each Assistant Secretary shall perform such other duties and have
such other powers as the Board of Directors or the President shall designate
from time to time.

(f) Duties of Treasurer: The Treasurer shall keep or cause to be kept
the books of account of the corporation in a thorough and proper manner, and
shall render statements of the financial affairs of the corporation in such form
and as often as required by the Board of Directors or the President. The
Treasurer, subject to the order of the Board of Directors, shall have the
custody of all funds and securities of the corporation. The Treasurer shall
perform all other duties commonly incident to his office and shall perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time. The President may direct any
Assistant Treasurer to assume and perform the duties of the Treasurer in the
absence or disability of the Treasurer, and each Assistant Treasurer shall
perform such
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other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.

ARTICLE V

Execution of Corporate Instruments, and
Voting of Securities Owned by the Corporation

Section 5.1 Execution of Corporate Instruments.

(a) The Board of Directors may, in its discretion, determine the method
and designate the signatory officer or officers, or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law, and such execution
or signature shall be binding upon the corporation.

(b) Unless otherwise specifically determined by the Board of Directors
or otherwise required by law, formal contracts of the corporation, promissory
notes, deeds of trust, mortgages and other evidences of indebtedness of the
corporation, and other corporate instruments or documents requiring the
corporate seal, and certificates of shares of stock owned by the corporation,
shall be executed, signed or endorsed by the Chairman of the Board (if there be
such an officer appointed) or by the President; such documents may also be
executed by any Vice-President and by the Secretary or Treasurer or any
Assistant Secretary or Assistant Treasurer. All other instruments and documents
requiring the corporate signature, but not requiring the corporate seal, may be
executed as aforesaid or in such other manner as may be directed by the Board of
Directors.

(c) All checks and drafts drawn on banks or other depositaries on funds
to the credit of the corporation, or in special accounts of the corporation,
shall be signed by such person or persons as the Board of Directors shall
authorize so to do.

Section 5.2 Voting of Securities Owned by Corporation.

All stock and other securities of other corporations owned or held by the
corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person authorized
so to do by resolution of the Board of Directors or, in the absence of such
authorization, by the Chairman of the Board (if there be such an officer
appointed), or by the President, or by any Vice-President.

ARTICLE VI

Shares of Stock

Section 6.1 Form and Execution of Certificates.

Certificates for the shares of stock of the corporation shall be in such
form as is consistent with the Certificate of Incorporation and applicable law.
Every holder of stock in the corporation shall be entitled to have a certificate
signed by, or in the name of the corporation by, the Chairman of the Board (if
there be such an officer appointed), or by the President or any Vice-

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President and by the Treasurer or Assistant Treasurer or the Secretary or
Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be a facsimile.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. If the corporation shall be authorized to
issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the Delaware General
Corporation Law, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.

Section 6.2 Lost Certificates.

The Board of Directors may direct a new certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to indemnify the
corporation in such manner as it shall require and/or to give the corporation a
surety bond in such form and amount as it may direct as indemnity against any
claim that may be made against the corporation with respect to the certificate
alleged to have been lost or destroyed.

Section 6.3 Transfers.

Transfers of record of shares of stock of the corporation shall be made
only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a certificate or certificates for a like
number of shares, properly endorsed.

Section 6.4 Fixing Record Dates.

(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on

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which notice is given, or, if notice is waived, at the close of business on the
day next preceding the date on which the meeting is held. A determination of
stockholders of record entitled notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by the Delaware General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.

(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.

Section 6.5 Registered Stockholders.

The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as such owner, and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.

ARTICLE VII

Other Securities of the Corporation

All bonds, debentures and other corporate securities of the corporation,
other than stock certificates, may be signed by the Chairman of the Board (if
there be such an officer appointed),

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or the President or any Vice-President or such other person as may be authorized
by the Board of Directors and the corporate seal impressed thereon or a
facsimile of such seal imprinted thereon and attested by the signature of the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer;
provided, however, that where any such bond, debenture or other corporate
security shall be authenticated by the manual signature of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signature of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation, or such other person as may be
authorized by the Board of Directors, or bear imprinted thereon the facsimile
signature of such person. In case any officer who shall have signed or attested
any bond, debenture or other corporate security, or whose facsimile signature
shall appear thereon or before the bond, debenture or other corporate security
so signed or attested shall have been delivered, such bond, debenture or other
corporate security nevertheless may be adopted by the corporation and issued and
delivered as though the person who signed the same or whose facsimile signature
shall have been used thereon had not ceased to be such officer of the
corporation.

ARTICLE VIII

Corporate Seal

The corporate seal shall consist of a die bearing the name of the
corporation and the state and date of its incorporation. Said seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.

ARTICLE IX

Indemnification of Officers, Directors, Employees and Agents

Section 9.1 Right to Indemnification.

Each person who was or is a party or is threatened to be made a party to or
is involved (as a party, witness, or otherwise), in any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (hereinafter a "Proceeding"), by reason of the fact that he, or
a person of whom he is the legal representative, is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation or
of a partnership, joint venture, trust, or other enterprise, including service
with respect to employee benefit plans, whether the basis of the Proceeding is
alleged action in an official capacity as a director, officer, employee, or
agent or in any other capacity while serving as a director, officer, employee,
or agent (hereafter an "Agent"), shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended or interpreted (but, in the
case of any such amendment or interpretation, only to the extent that such
amendment or interpretation permits the corporation to provide broader
indemnification rights than were permitted prior thereto) against all expenses,
liability,

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and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid or to be paid in settlement, and any interest,
assessments, or other charges imposed thereon, and any federal, state, local, or
foreign taxes imposed on any Agent as a result of the actual or deemed receipt
of any payments under this Article) reasonably incurred or suffered by such
person in connection with investigating, defending, being a witness in, or
participating in (including on appeal), or preparing for any of the foregoing
in, any Proceeding (hereinafter "Expenses"); provided, however, that except as
to actions to enforce indemnification rights pursuant to Section 9.3 of this
Article, the corporation shall indemnify any Agent seeking indemnification in
connection with a Proceeding (or part thereof) initiated by such person only if
the Proceeding (or part thereof) was authorized by the Board of Directors of the
corporation. The right to indemnification conferred in this Article shall be a
contract right.

Section 9.2 Authority to Advance Expenses.

Expenses incurred by an officer or director (acting in his capacity as
such) in defending a Proceeding shall be paid by the corporation in advance of
the final disposition of such Proceeding, provided, however, that if required by
the Delaware General Corporation Law, as amended, such Expenses shall be
advanced only upon delivery to the corporation of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Article or otherwise. Expenses incurred by other Agents of
the corporation (or by the directors or officers not acting in their capacity as
such, including service with respect to employee benefit plans) may be advanced
upon such terms and conditions as the Board of Directors deems appropriate. Any
obligation to reimburse the corporation for Expense advances shall be unsecured
and no interest shall be charged thereon.

Section 9.3 Right of Claimant to Bring Suit.

If a claim under Section 9.1 or 9.2 of this Article is not paid in full by
the corporation within 180 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense
(including attorneys' fees) of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending a Proceeding in advance of its final disposition where the
required undertaking has been tendered to the corporation) that the claimant has
not met the standards of conduct that make it permissible under the Delaware
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed. The burden of proving such a defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper under the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant had not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that claimant has not met the applicable standard of conduct.

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Section 9.4 Provisions Nonexclusive.

The rights conferred on any person by this Article shall not be exclusive
of any other rights that such person may have or hereafter acquire under any
statute, provision of the Certificate of Incorporation, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office. To the extent that any provision of the Certificate, agreement, or vote
of the stockholders or disinterested directors is inconsistent with these
bylaws, the provision, agreement, or vote shall take precedence.

Section 9.5 Authority to Insure.

The corporation may purchase and maintain insurance to protect itself and
any Agent against any Expense, whether or not the corporation would have the
power to indemnify the Agent against such Expense under applicable law or the
provisions of this Article.

Section 9.6 Survival of Rights.

The rights provided by this Article shall continue as to a person who has
ceased to be an Agent and shall inure to the benefit of the heirs, executors,
and administrators of such a person.

Section 9.7 Settlement of Claims.

The corporation shall not be liable to indemnify any Agent under this
Article (a) for any amounts paid in settlement of any action or claim effected
without the corporation's written consent, which consent shall not be
unreasonably withheld; or (b) for any judicial award if the corporation was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.

Section 9.8 Effect of Amendment.

Any amendment, repeal, or modification of this Article shall not adversely
affect any right or protection of any Agent existing at the time of such
amendment, repeal, or modification.

Section 9.9 Subrogation.

In the event of payment under this Article, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Agent, who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the corporation effectively to bring suit to enforce such
rights.

Section 9.10 No Duplication of Payments.

The corporation shall not be liable under this Article to make any payment
in connection with any claim made against the Agent to the extent the Agent has
otherwise actually received payment (under any insurance policy, agreement,
vote, or otherwise) of the amounts otherwise indemnifiable hereunder.

18
<PAGE>

ARTICLE X

Notices

Whenever, under any provisions of these Bylaws, notice is required to be
given to any stockholder, the same shall be given in writing, timely and duly
deposited in the United States Mail, postage prepaid, and addressed to his last
known post office address as shown by the stock record of the corporation or its
transfer agent. Any notice required to be given to any director may be given by
the method herein above stated, or by telegram or other means of electronic
transmission, except that such notice other than one which is delivered
personally, shall be sent to such address or (in the case of facsimile
telecommunication) facsimile telephone number as such director shall have filed
in writing with the Secretary of the corporation, or, in the absence of such
filing, to the last known post office address of such director. If no address
of a stockholder or director be known, such notice may be sent to the office of
the corporation required to be maintained pursuant to Section 1.2 of Article I
hereof. An affidavit of mailing, executed by a duly authorized and competent
employee of the corporation or its transfer agent appointed with respect to the
class of stock affected, specifying the name and address or the names and
addresses of the stockholder or stockholders, director or directors, to whom any
such notice or notices was or were given, and the time and method of giving the
same, shall be conclusive evidence of the statements therein contained. All
notices given by mail, as above provided, shall be deemed to have been given as
at the time of mailing and all notices given by telegram or other means of
electronic transmission shall be deemed to have been given as at the sending
time recorded by the telegraph company or other electronic transmission
equipment operator transmitting the same. It shall not be necessary that the
same method of giving be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
The period or limitation of time within which any stockholder may exercise any
option or right, or enjoy any privilege or benefit, or be required to act, or
within which any director may exercise any power or right, or enjoy any
privilege, pursuant to any notice sent him in the manner above provided, shall
not be affected or extended in any manner by the failure of such a stockholder
or such director to receive such notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation, or of these Bylaws, a waiver thereof in writing signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Whenever notice is required
to be given, under any provision of law or of the Certificate of Incorporation
or Bylaws of the corporation, to any person with whom communication is unlawful,
the giving of such notice to such person shall not be required and there shall
be no duty to apply to any governmental authority or agency for a license or
permit to give such notice to such person. Any action or meeting which shall be
taken or held without notice to any such person with whom communication is
unlawful shall have the same force and effect as if such notice had been duly
given. In the event that the action taken by the corporation is such as to
require the filing of a certificate under any provision of the Delaware General
Corporation Law, the certificate shall state, if such is the fact and if notice
is required, that notice was given to all persons entitled to receive notice
except such persons with whom communication is unlawful.

19
<PAGE>

ARTICLE XI

Amendments

These Bylaws may be repealed, altered or amended or new Bylaws adopted by
written consent of stockholders in the manner authorized by Section 2.11 of
Article II, or at any meeting of the stockholders, either annual or special, by
the affirmative vote of a majority of the stock entitled to vote at such
meeting, unless a larger vote is required by these Bylaws or the Certificate of
Incorporation. The Board of Directors shall also have the authority to repeal,
alter or amend these Bylaws or adopt new Bylaws (including, without limitation,
the amendment of any Bylaws setting forth the number of directors who shall
constitute the whole Board of Directors) by unanimous written consent or at any
annual, regular, or special meeting by the affirmative vote of a majority of the
whole number of directors, subject to the power of the stockholders to change or
repeal such Bylaws and provided that the Board of Directors shall not make or
alter any Bylaws fixing the qualifications, classifications, or term of office
of directors.

20
<PAGE>

CERTIFICATE OF SECRETARY

The undersigned, Secretary of Digimarc Corporation, a Delaware
corporation, hereby certifies that the foregoing is a full, true and correct
copy of the Bylaws of said corporation, with all amendments to date of this
Certificate.

WITNESS the signature of the undersigned this 10th day of December,
1999.

/s/ E.K. Ranjit
---------------------------------
E.K. Ranjit, Secretary

<PAGE>

Exhibit 10.10

FIRST AMENDMENT TO LEASE AGREEMENT
----------------------------------

THIS FIRST AMENDMENT TO LEASE AGREEMENT, dated as of February 17, 2000, is
entered into by and between SOUTHPLACE ASSOCIATES LLC, an Oregon limited
liability company, ("Landlord") and DIGIMARC, an Oregon corporation ("Tenant").

Recitals:
---------

A. Landlord and Tenant entered into a written lease agreement, dated
June 25, 1999 (the "Lease"). (Initially capitalized terms not otherwise defined
herein have the same meaning as in the Lease.)

B. Landlord and Tenant desire to amend the Lease in the manner and
form hereinafter set forth

NOW, THEREFORE, for good and valuable consideration, Landlord and Tenant
hereby agree as follows:

1. The rentable square footage of the Premises is increased to
approximately 25,551 rentable square feet of space by the addition of
approximately 9,042 rentable square feet of space, comprising two portions of
the 1/st/ floor of the Building consisting of approximately 5,875 rentable
square feet of space and approximately 3,167 rentable square feet of space
(collectively, the "Additional Space") in the locations outlined on the diagram
of the 1st floor of the Building, attached hereto as Exhibit A and made a part
hereof by reference for the term of the Lease on the following basis:

A. Tenant's right to occupy the Additional Space and its obligation
to pay Base Rent and Tenant's Pro Rata Share of increases in Operating Expenses
for the Additional Space shall commence on the date that the Additional Space is
delivered Ready for Occupancy in accordance with the Work Letter (the
"Additional Space Commencement Date") and terminates with the Term of the Lease.

B. As of the Additional Space Commencement Date, any reference to
"Premises" in the Lease includes the Additional Space as a part of the Premises
and Tenant's occupancy thereof is subject to all terms of the Lease except as
otherwise specifically herein provided.

2. Commencing on the Additional Space Commencement Date, Tenant will pay
monthly Base Rent for the Additional Space in accordance with the Lease as
follows:

Period Monthly Payment
------ ---------------

Additional Space Commencement Date - 12/31/00 $16,200.25
1/1/01 - 12/31/02 $17,142.13
1/1/03 - 12/31/04 $18,272.38

Base Rent for the Additional Space is in addition to Base Rent payable by Tenant
for the other portions of the Premises. Base Rent for any partial month that
Tenant's obligations for the Additional Space are in effect will be prorated
based upon the actual number of days in the month that Tenants obligation to pay
rent for the Additional Space, or portion thereof, was in effect.
Notwithstanding anything to the contrary set forth above, Tenant may occupy the
Premises and defer payment of Base Rent Tenant's Pro Rata Share of increases in
Operating Expenses for the entire Premises for a period commencing on the
Additional Space Commencement Date and terminating 30 days from such date (the
"Deferred Rent Period"). Rents payable hereunder are allocable to, and will be
accrued by the parties during, their fiscal periods in which the same is
actually paid. No portion of the Base Rent paid by Tenant during periods after
the expiration of the Deferred Rent Period will be allocated to such Deferred
Rent Period, nor is such Rent intended to be allocable to the Deferred Rent
Period. If at any time during the Term, an Event
<PAGE>

of Default occurs, Tenant owes Landlord, in addition to all other amounts, Base
Rent and Tenant's Pro Rata Share of increases in Operating Expenses deferred
pursuant to this Paragraph. Tenant has no obligation to pay the deferred amounts
if no Event of Default occurs prior to the expiration of the Term.

3. Commencing on the Additional Space Commencement Date, Tenant will pay
Tenant's Pro Rata Share of increases of Operating Expenses attributable to the
Additional Space. Tenant's Pro Rata Share for the entire Premises for periods
commencing on the Additional Space Commencement Date and thereafter shall be
35.488%.

4. Landlord agrees to perform certain remodeling of the Additional Space
(the "Finish Work"). The Finish Work will be completed and paid for in
accordance with and subject to the terms and provisions of the Work Letter,
attached hereto as Exhibit B. Other than the Finish Work described on Exhibit B,
Landlord has no obligation for improving the Additional Space and Tenant accepts
the Additional Space in its "as is" condition on the Additional Space
Commencement Date for the Term of the Lease.

5. Tenant has deposited and will keep on deposit at all times during the
Term with Landlord the amount of $18,272.38 (the "Deposit") as security for the
payment and performance of Tenant's obligations under this Lease. If, at any
time, Tenant is in default, Landlord has the right to use the Deposit, or so
much thereof as necessary, in payment of Rent, in reimbursement of any expense
incurred by Landlord, and in payment of any damages incurred by Landlord by
reason of such default. In such event, Tenant shall on demand of Landlord
forthwith remit to Landlord a sufficient amount in cash to restore the Deposit
to the original amount. If the entire Deposit has not been utilized, the
remaining amount will be refunded to Tenant or to whoever is then the holder of
Tenant's interest in this Lease, without interest, within 60 days after full
performance of this Lease by Tenant. Landlord may commingle the Deposit with
other funds of Landlord. Landlord may deliver the Deposit to any purchaser of
Landlord's interest in the Premises and Landlord shall be discharged from
further liability therefor. Tenant agrees that if a Mortgagee succeeds to
Landlord's interest in the Premises by reason of foreclosure or deed in lieu of
foreclosure, Tenant has no claim against the Mortgagee for the Deposit or any
portion thereof unless such Mortgagee has actually received the same from
Landlord. If claims of Landlord exceed the Deposit, Tenant shall remain liable
for the balance. Notwithstanding the foregoing, Tenant may request to meet its
security deposit requirements under this Amendment by amending the amount of the
Letter of Credit currently in effect with regard to the Lease to increase it by
the amount of the Deposit; the form of such amendment shall be subject to
Landlord's prior approval.

6. Commencing on the Additional Space Commencement Date, Tenant's parking
allotment will be increased pursuant to the per square foot ratio set forth in
Section 1.9 of the Lease based on the number of square feet then a part of the
Premises. Tenant's use of the parking spaces shall be subject to and in
accordance with the Lease.

7. The RFR Space referred to in Section 1 of the Addendum to the Lease
shall hereafter mean approximately 4,912 rentable square feet of space on the
1st floor of the Building as outlined on the diagram of the 1st floor of the
Building, attached hereto as Exhibit C and made a part hereof by reference.
Section 1.1 of said Section 1 is modified be the deletion of the parenthetical
"(other than Praegitzer Industries, Inc.)" therefrom.

8. Landlord grants Tenant an option (the "Option") to extend the term of
the Lease for one (1) additional term of five (5) years (the "Option Term"). The
Option applies only to the Premises, and any additional space added, and is on
the following conditions:

2
<PAGE>

A. Notice of Tenant's interest in exercising the Option must be
given to Landlord no earlier than 12 months and no later than 8 months prior to
the Expiration Date ("Tenant's Notice"). Not later than thirty (30) days after
receiving Tenant's Notice, Landlord will notify Tenant of Landlord's
determination of the applicable Base Rent during the Option Term in accordance
with subparagraph E below ("Landlord's Notice").

B. Tenant has 15 days after receipt of Landlord's Notice to exercise
an Option or dispute the rental rate quoted by Landlord by delivering notice of
exercise or dispute to Landlord. If Tenant exercises an Option, the Term will be
deemed extended on the terms of this Section and the parties will execute an
amendment evidencing the extension. If Tenant disputes Landlord's determination
of the rental rate, Tenant shall give notice of such dispute ("Dispute Notice")
within the 15-day period and the rental rate shall thereafter be determined in
accordance with Section F below.

C. Unless Landlord is timely notified by Tenant in accordance with
Sections A or B above, it will be conclusively deemed that Tenant has not
exercised the Option and the Lease will expire in accordance with its terms on
the Expiration Date.

D. Tenant's rights pursuant to this Section are personal to Tenant
and may not be assigned (except as permitted under Section 14.7 of the Lease).
Tenant's right to exercise the Option is conditioned on: (i) there not being an
Event of Default at the time of exercise or at the time of commencement of the
Option Term; and (ii) Tenant not having vacated or subleased more than 25% of
the Premises or assigned any of the Premises (except as permitted under Section
14.7 of the Lease) as of the commencement of the Option Term. Upon an assignment
of the Lease (except as permitted under Section 14.7 of the Lease) this
Paragraph is null and void.

E. The Option granted hereunder will be upon the terms of the Lease,
except that the Base Rent during the Option Term will be the rate set forth in
Landlord's Notice or as determined under subparagraph F below, if applicable.

F. Following delivery of Tenant's Dispute Notice, Landlord and
Tenant shall promptly initiate negotiations to determine a mutually acceptable
Base Rent. If the parties mutually agree upon a Base Rent rate, such agreed rate
shall be the Base Rent rate applicable during the Option Term. If the parties
have not agreed upon the terms as of the 20th day after the date of Tenant's
Dispute Notice, then Landlord and Tenant shall, within thirty (30) days after
Tenant's delivery of Tenant's Dispute Notice, agree upon a qualified commercial
real estate broker of good reputation, having at least five (5) years'
experience in the suburban Tualatin, Oregon, real estate market to act as
"Arbitrator"; if Landlord and Tenant cannot agree upon the broker, then they
shall each select, within the foregoing twenty-day period, a real estate broker
who meets the above qualifications and together such brokers will then select as
the arbitrator a real estate broker who meets the above qualifications (the
broker selected shall be deemed the "Arbitrator" hereunder). Within ten (10)
days of selection of the Arbitrator, Landlord and Tenant each shall state, in
writing, their determination of the Prevailing Market Rental Rate supported by
the reasons therefor and shall make counterpart copies for each other and the
Arbitrator, under an arrangement for simultaneous exchange of the
determinations. The Arbitrator will review each party's declaration of the
Prevailing Market Rental Rate and select the one which he determines most
accurately reflects such Arbitrator's determination of the Prevailing Market
Rental Rate and such selection shall be binding on both parties. The Arbitrator
shall have no right to propose a middle ground or any modifications of either of
the two proposed resolutions. The Base Rent to paid during the Option Term shall
be the Prevailing Market Rental Rate so determined and Tenant shall have the
right to receive the allowance and concessions, if any, set forth in Landlord's
Notice. The costs incurred in connection with engaging the Arbitrator shall be
shared equally by Landlord and Tenant, and shall be determined at the time the

3
<PAGE>

Arbitrator is selected. For purposes of this Paragraph, Prevailing Market Rental
Rate shall mean the annual amount per square foot (including the then-current
Operating Expenses) that a willing tenant would pay and a willing landlord would
accept following arms-length negotiations with respect to an "Assumed Lease" (as
defined below) under the circumstances then obtaining. "Assumed Lease" means (i)
a lease or renewal having a commencement date within 6 months of Tenant's Notice
for space of approximately the same size as the Premises of the Building or a
"Comparable Building," as hereinafter defined, located in a portion of the
Building or such Comparable Building, and with a view and floor height similar
to the portion of the Premises for which Prevailing Market Rental Rate is being
determined, for a term equal in length to the Option Term; (ii) assuming that a
real estate commission is payable with respect to such lease to the extent a
third-party commission with respect to extension is agreed or obligated to be
paid by Landlord; and (iii) taking into consideration and making adjustment to
reflect allowances, concessions provided in Landlord's Notice, if any, and
parking to be provided in accordance with Section 29; and the use of the Base
Operating Expenses provided in Section E during the Option Term. "Comparable
Building" shall mean any existing building or building hereafter constructed in
a 6-mile radius of the Building which is of a size, location, quality and
prestige comparable to, and with a size and efficiency of floor plate,
amenities, and with tenants of a stature reasonably comparable with the
Building, provided that appropriate adjustments shall be made to adjust for
differences in the size, location, age, efficiency of floorplate, and quality
between such other buildings and the Building.

G. After exercise of, or failure to exercise the Option, Tenant
shall have no further rights to extend the Term.

9. Tenant represents it has not employed any broker with respect to this
Amendment and has no knowledge of any broker's involvement in this transaction
except Cushman & Wakefield of Oregon, Inc. and Grubb & Ellis (collectively, the
"Brokers") for which Landlord is responsible for payment of commissions under
separate agreement with the Brokers. Tenant and Landlord shall each indemnify
the other against any expense incurred by the other as a result of any claim for
commissions or fees by any other broker, finder, or agent, whether or not
meritorious, employed by the other or claiming by, through, or under the other,
other than the Brokers. Tenant acknowledges Landlord is not liable for any
representations by the Brokers regarding the Premises, Building, Building
Complex, or this Lease.

10. If there is any conflict between the terms of this Amendment and the
terms of the Lease, the terms of this Amendment govern. The Lease as hereby
amended is in full force and effect, is hereby ratified and affirmed by the
parties, and is binding upon the parties in accordance with its terms.

11. Time is of the essence herein.

IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written and is effective upon delivery of a fully executed
copy to Tenant.

4
<PAGE>

DIGIMARC, an Oregon corporation SOUTHPLACE ASSOCIATES LLC, a
Oregon limited liability company

By: /s/ Kathy Brogdon By: /s/ Paul Hogan
---------------------------- -------------------------------
Print Name: Kathy Brogdon Authorized Signatory
--------------------
Print Title: VP Finance/Ops
-------------------

ATTEST: "Landlord"

By: /s/ THOMAS M. HORYUN
----------------------------
Print Name: Thomas M. Horyun
--------------------
Print Title: Director of Leasing
-------------------

"Tenant"

<PAGE>

Exhibit 10.11

CITYPLEX TOWERS LEASE AGREEMENT

THIS LEASE AGREEMENT (the "Lease") is made and entered into on this the
4th day of January, 2000 between Oral Roberts University, an Oklahoma
Corporation ("Landlord") and Digimarc Corporation ("Tenant").

W I T N E S S E T H:
--------------------

1. Definitions.
------------

(a) "Project" shall mean the real property described in Exhibit "A"
attached hereto and made a part hereof and the improvements constructed thereon.

(b) "Building" shall mean the CityPlex Towers Building, located on
the real property described in Exhibit "A" attached hereto and made a part
hereof which has a street address of 2448 E. 81st Street, Suite 4300, Tulsa,
Oklahoma 74137.

(c) "Premises" shall mean the suite of offices outlined on the floor
plan attached to this Lease as Exhibit "B" attached hereto and made a part
hereof. Landlord warrants that the Premises contain 11,750 square feet of "Net
Rentable Area" (as hereafter defined). The Premises are located in the Building.

(d) "Base Rental" shall mean the sum of $(See Addendum) per annum as
--------------
adjusted under Paragraph 29 hereof. The Base Rental due for the first month of
the Lease Term (as hereafter defined) has been deposited with Landlord by Tenant
contemporaneously with the execution hereof.

(e) "Commencement Date" shall mean January 15, 2000, except as such
date may be delayed pursuant to the provisions of Paragraph 3(c) hereof.

(f) "Lease Term" shall mean the term commencing on the Commencement
Date and continuing until forty-eight (48) months after the first day of the
first full month following the Commencement Date.

(g) "Security Deposit" shall mean the sum of $11,260.42.

(h) "Building Common Areas" shall mean those areas devoted to lobbies
and entryways.

(i) "Common Areas" shall mean the Building Common Areas and
corridors, elevator foyers, restrooms, mechanical rooms, janitorial closets,
electrical and telephone closets, vending areas and other similar facilities
provided for the common use or benefit of tenants generally and/or the public.

(j) "Single Floor Common Areas" shall mean that part of the Common
Areas located on a designated floor.

(k) "Service Areas" shall mean those areas within the outside walls
of the Building used for elevator mechanical rooms, building stairs, fire
towers, elevator shafts, flues, vents, stacks, pipe shafts and vertical ducts
(but shall not include any such areas for the exclusive use of a particular
Tenant).

(l) "Net Rentable Area" of one floor of the Building shall mean the
gross area within the inside surface of the outer glass or other material
comprising the exterior walls of the Building excluding the Common Areas and
Service Areas.

(m) "Net Rentable Area of the Building" shall mean the total of the
Net Rentable Area of all floors of the Building.

(n) "Net Rentable Area of the Premises" shall mean the gross area
within the inside surface of the outer glass or other material comprising the
exterior walls of the Premises to the mid-point of any walls separating portions
of the Premises from those of adjacent tenants and to the Common Areas or
Service Areas side of walls separating the Premises from Common Areas and
Service Areas, subject to the following:

1
<PAGE>

(1) Net Rentable Area of the Premises shall not include any
Service Areas and shall not include Exterior Common Areas.

(2) Net Rentable Area of the Premises shall include a pro rata
part of the Building Common Areas plus a pro rata part of the Single Floor
Common Areas on the floor on which the Premises are located, such
prorations based upon an allocation to each floor of the Building of
Building Common Areas (based upon the Net Rentable Area of each floor and
the Net Rentable Area of the Building, exclusive of Building Common Areas)
and upon the ratio of the Net Rentable Area of the Premises to the total
Net Rentable Area of such floor.

(3) Net Rentable Area of the Premises shall include any columns
and/or projection(s), which protrude into the Premises and/or the Common
Areas.

(o) "Basic Costs" intentionally omitted.

(p) "Exterior Common Areas" shall mean those areas of the Project
which are not located within the Building and which are provided and maintained
for the common use and benefit of Landlord and Tenants of the Building generally
and the employees, invitees and licensees of Landlord and such Tenants;
including without limitation all parking areas, enclosed or otherwise, all
streets, sidewalks and landscaped areas located within the Project.

(q) "Tenant Improvements", when used herein, shall mean those
improvements to the Premises which Landlord has agreed to provide pursuant to
the plans and specifications ("Plans") attached (or to be attached) hereto as
Exhibit "C" and made a part hereof. In the event the Plans are not attached to
this Lease as of the date of execution hereof, this Lease shall terminate, at
Landlord's option, on the day next following the 14th day from the date hereof
unless Landlord and Tenant initial and attach the Plans to this Lease on or
before such date. Landlord's approval of and initialing of any plans and
specifications shall be at Landlord's sole discretion. All Tenant Improvements
shall be made and constructed only by Landlord using Landlord's regular
contractors or Landlord's designee. Except to the extent otherwise agreed (and
described on an addendum to the Plans), the making and constructing of the
Tenant Improvements shall be at Tenant's expense. "Building Standard" shall mean
the type, brand and/or quality of materials Landlord designates from time to
time to be the minimum quality to be used in the Building or the exclusive type,
grade or quality of material to be used in the Building.

2. Lease Grant. Subject to and upon the terms herein set forth, Landlord
-----------
leases to Tenant and Tenant leases from Landlord the Premises.

3. Lease Term.
-----------

(a) This Lease shall continue in force during a period beginning on
the Commencement Date and continuing until the expiration of the Lease Term,
unless this Lease is sooner terminated or extended to a later day under any
other term or provision hereof.

(b) If by the date specified in Paragraph l(e) the Tenant
Improvements have not been substantially completed pursuant to the Plans due to
omission, delay or default by Tenant or anyone acting under or for Tenant,
Landlord shall have no liability as a result of such noncompletion and the
obligations of this Lease (including without limitation, the obligation to pay
rent) shall nonetheless commence as of the Commencement Date.

(c) If, however, the Tenant Improvements are not substantially
completed as of the Commencement date, but not more than fifteen (15) days after
the Commencement Date due to any reason other than an omission, delay or default
by Tenant or someone acting under or for Tenant, then, as Tenant's sole remedy
for the delay in Tenant's occupancy of the Premises, the Commencement Date shall
be delayed and the rent herein provided shall not commence until the earlier to
occur of actual occupancy by Tenant or completion of the Tenant Improvements.
If, however, the Tenant Improvements are not substantially completed within
fifteen (15) days after the Commencement Date due to any reason other than an
omission, delay or default by tenant or someone acting under or for Tenant,
then, as Tenant's sole remedy for the delay in Tenant's occupancy of the
Premises, the commencement Date shall be delayed and the rent herein provided
shall not commence until after Tenant has occupied the Premises for a number of
days equal to the Delay Period. The "Delay Period" means the number of days
from and

2
<PAGE>

including the Commencement Date to the earlier of the date the Tenant occupies
the Premises or the day after the Tenant Improvements are complete. The Tenant
Improvements will not be considered to be complete until the later of the date
the Tenant Improvements are actually completed or ten (10) business days after a
ten (10) day written notice is given to Tenant by Landlord of the date on which
the Tenant Improvements will be completed. If Tenant is given such ten (10) day
notice and the Tenant Improvements are not completed on or before the date
provided in the notice, then an additional ten (10) days shall be added to the
Delay Period after it is calculated as otherwise set forth in this paragraph.

4. Use. The Premises shall be used for office purposes and for no other
---
purpose. Tenant agrees not to use or permit the use of the Premises for any
purpose which is illegal including the sale, directly or indirectly, of
pornographic material, or the sale of any other product or service which, in
Landlord's judgement, creates a nuisance or which would increase the cost of
insurance coverage with respect to the Project or the Building.

5. Base Rental.
-----------

(a) Tenant agrees to pay to Landlord during the Lease Term, without
any setoff or deduction whatsoever, the Base Rental and all such other sums of
money as shall become due hereunder as additional rent, all of which are
sometimes herein collectively called "rent", for the nonpayment of which
Landlord shall be entitled to exercise all such rights and remedies as are
herein provided in the case of the nonpayment of Base Rental. The annual Base
Rental for each calendar year or portion thereof during the Lease Term, together
with any estimated adjustments thereto pursuant to Paragraphs 20, 21, and 29
hereof, shall be due and payable in advance in equal monthly installments on the
first day of each calendar month during the Lease Term and any extensions or
renewals thereof, and Tenant hereby agrees to pay such Base Rental and any
adjustments thereto to Landlord at Landlord's address provided herein (or such
other address in Tulsa County as may be designated by Landlord in writing from
time to time) monthly, in advance, and without demand. If the Lease Term
commences on a day other than the first day of a calendar month or terminates on
a day other than the last day of a calendar month, then the installments of Base
Rental and any adjustments thereto for such month or months shall be prorated,
based on the number of days in such month.

(b) In the event any installment of rent is not paid within five (5) days
of receipt of written notice, Tenant shall pay a late charge of $25.00 per day
for each day of delinquency.

6. Basic Cost Increase Adjustment. Intentionally omitted.
------------------------------

7. Services to be Furnished by Landlord. Landlord agrees to furnish
------------------------------------
Tenant the following services:

(a) Hot and cold water at those points of supply provided for general
use of tenants in the Building on the floor(s) on which the Premises are located
and central heat and air conditioning in the Premises in season, at such
temperatures and in such amounts as are reasonably considered by Landlord to be
standard or as required by governmental authority. Landlord shall provide
heating, air-conditioning and electricity twenty-four (24) hours per day, seven
(7) days per week.

(b) Routine maintenance and electric lighting service for all
Exterior Common Areas, Building Common Areas, Single Floor Common Areas on the
floor on which the Premises are located, and Service Areas in the manner and to
the extent reasonably deemed by Landlord to be standard for comparable office
buildings in the Tulsa, Oklahoma area.

(c) Janitor service in the Premises, Monday through Friday, excluding
New Year's Day, Memorial Day, Independence Day, Thanksgiving, and Christmas;
provided, however, if Tenant's floor covering or other improvements require
special treatment, Tenant shall pay the additional cleaning cost attributable
thereto as additional rent upon presentation of a statement therefore by
Landlord. Tenant shall cooperate with Landlord's employees in the furnishing by
Landlord of janitorial services. Janitorial services performed by Landlord shall
be performed in such a manner as to not interfere unreasonably with Tenant's use
of the Premises. Such janitorial service shall be performed at time other than
during Normal Business Hours, as that term is defined in Paragraph 7(a).

(d) Subject to the provisions of Paragraph 13, facilities to provide
all electrical current required by Tenant in its use and occupancy of the
Premises.

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(e) All Building Standard fluorescent bulb replacement in the
Premises and fluorescent and incandescent bulb replacement in the Building
Common Areas, Single Floor Common Areas on the floor on which the Premises are
located, and Service Areas.

(f) Landlord shall provide security in the form of limited access to
the Building during other than Normal Business Hours. Such security shall
include the provision to Tenant of individual elevator access codes for access
to the Premises at times other than Normal Business Hours. Tenant shall provide
Landlord with a list of persons who have been given such access codes
periodically. Landlord, however, shall have no liability to Tenant, its
employees, agents, invitees or licensees for losses due to theft or burglary, or
for damages done by unauthorized persons on the Premises and Landlord shall not
be required to insure against any such losses. Tenant shall cooperate fully in
Landlord's efforts to maintain security in the Building and shall follow all
reasonable regulations promulgated by Landlord with respect thereto.

The failure by Landlord to any extent to furnish these services or the
interruption or termination of these defined services in whole or in part,
resulting from causes beyond the reasonable control of Landlord shall neither
render Landlord liable in any respect nor be construed as an eviction of Tenant,
nor work an abatement of rent, nor relieve Tenant from the obligation to fulfill
any covenant or agreement hereof so long as Landlord takes reasonable steps to
return such machinery or equipment to full working order. Should any of the
equipment or machinery used in the provision of such services for any cause
cease to function properly, Tenant shall have no claim for offset or abatement
of rent or damages on account of an interruption in service occasioned thereby
or resulting therefrom. However, to the extent Tenant is unable to use the
Premises as contemplated herein as a result of such failure, rent shall be
abated during the period of such inability.

8. Tenant Improvements. Except for those of the Tenant Improvements to
-------------------
be at Landlord's cost, all installations of fixtures or similar improvements now
or hereafter placed on the Premises shall be for Tenant's account and at
Tenant's cost (and Tenant shall pay any applicable ad valorem taxes and/or any
increased insurance thereon or attributable thereto). All such installations and
improvements must be approved in writing by Landlord in advance of installation
or construction.

9. Maintenance and Repair by Landlord. Except for repairs or
----------------------------------
replacements which Tenant is expressly required to make under this Lease,
Landlord shall pay for and make all other repairs and replacements to the
Premises, the Building, and the Project, including, without limitation, all
Exterior Common Areas, building Common Areas, Single Floor Common Areas, and
Service Areas. Landlord shall make the repairs and replacements to maintain the
building in a condition comparable to other comparable office buildings in the
Tulsa, Oklahoma area. This maintenance shall include the roof, foundation,
exterior walls, interior structural walls, all structural components, and all
systems such as mechanical, electrical, HVAC, and plumbing.

10. Graphics. Tenant shall not erect or install any sign or other type
--------
display whatsoever, either upon the exterior of the Building, upon or in any
window, or in any lobby, without the prior express written consent of Landlord.
The color and fabric of the lining of all drapes or, if unlined, the draperies
themselves which Tenant desires to place on exterior windows or openings of the
Building must be approved by Landlord prior to their installation so that a
uniform color appearance may be preserved from the exterior of the Building.
Landlord agrees to furnish a directory of the names and locations of its tenants
and to install and maintain the same at a convenient location in the lobby of
the Building. The initial listing of the name and room number of the Tenant
shall be furnished without charge. The listings of additional names or room
numbers and changes or revisions of listings shall be made by Landlord at the
cost of Tenant.

11. Care of the Premises by Tenant. Tenant agrees not to commit or allow
------------------------------
any waste to be committed on any portion of the Premises, and at the termination
of this Lease to deliver up the Premises to Landlord in as good condition as at
the date of the commencement of the term of this Lease, excepting ordinary wear
and tear; installations, alterations, and improvements as permitted by this
Lease unless consent was reasonably and expressly conditioned upon their
removal; and damage arising from any cause not required to be repaired or
replaced by Tenant.

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12. Repairs and Alterations by Tenant. Tenant covenants and agrees with
---------------------------------
Landlord that all repairs and replacements to the Building or Project occasioned
by damage done to the Building or Project or any part thereof caused by Tenant
or Tenant's agents, employees, invitees, or visitors shall be made by Landlord
or Landlord's designee at the Tenant's sole cost and expense. Such repairs shall
restore the Building or Project to as good a condition as it was in prior to
such damage and shall be effected in compliance with all applicable laws. Tenant
shall pay the Landlord's cost of such repairs and alterations to the Landlord in
advance as additional rent. Tenant agrees with Landlord not to make or allow to
be made any alterations to the Premises, install any vending machines on the
Premises, or place signs on the Premises which are visible from outside the
Premises, without first obtaining the prior written consent of Landlord in each
such instance, which consent shall not be unreasonably withheld, conditioned or
delayed. Any and all alterations to the Premises shall be made by Landlord or
Landlord's designee and shall become the property of Landlord upon termination
of this Lease (except for movable equipment or furniture owned by Tenant).
Subject to paragraph 11, Landlord may, nonetheless, require Tenant to remove any
and all fixtures, equipment and other improvements installed by Tenant on the
Premises which removal, if required, shall be performed by Landlord or
Landlord's designee and, in such event Tenant shall pay to Landlord on demand
Landlord's cost of restoring the Premises to Building Standard.

13. Use of Electrical Services by Tenant. Tenant's use of electrical
------------------------------------
services furnished by Landlord shall be subject to the following:

(a) Tenant's electrical equipment shall be restricted to that
equipment which individually does not have a rated capacity greater than .5
kilowatts per hour and/or require voltage other than 120/208 volts, single
phase, except for the computer equipment provided for in Tenant's designated
computer room(s) and lab in the Premises. Collectively, Tenant's equipment shall
not have an electrical design load greater than an average of 2 watts per square
foot of Net Rentable Area of the Premises.

(b) Tenant's lighting shall not have a design load greater than an
average of 2 watts per square foot of Net Rentable Area of the Premises.

(c) If Tenant's consumption of electrical services exceeds either the
rated capacities and/or design loads as per Paragraphs 13(a) and 13(b), or
generates heat in excess of that Landlord's air conditioning system is designed
to handle, then Tenant shall remove such equipment and/or lighting to achieve
compliance within ten (10) days after receiving notice from landlord or, upon
receiving Landlord's prior written approval, such equipment and/or lighting may
remain in the Premises, subject to the following:

(i) Tenant shall pay for all costs of installation and
maintenance of submeters, wiring, additional air conditioning systems and
other items required by Landlord, in Landlord's reasonable discretion, to
accommodate Tenant's excess design loads and capacities or heat generation.

(ii) Tenant shall reimburse to Landlord, upon demand, the cost
of the excess demand and consumption of electrical service at rates charged
to Landlord (which rates shall be in accordance with any applicable laws)
as well as all costs of operating additional air conditioning systems
reasonably deemed necessary by Landlord on account of Tenant's excess
consumption and/or heat generation.

(iii) Tenant shall have the right, upon giving thirty (30)
days' prior written notice to Landlord, to contract directly with public
utility companies at Tenant's cost for the supplying of such extraordinary
utility service and/or air conditioning service to the Premises. Landlord
shall reasonably cooperate with Tenant in permitting such direct
acquisition and provision of service.

14. Parking. During the term of this Lease, Tenant shall have the non-
-------
exclusive use in common with Landlord, other tenants of the Building, their
guests and invitees, of the nonreserved common automobile parking areas,
driveways, and footways, subject to rules and regulations for the use thereof as
prescribed from time to time by Landlord; provided, Landlord represents that
such areas shall provide not less than 45 parking spaces for the use, of Tenant.
Landlord reserves the right to designate parking areas within the Project or in
reasonable proximity thereto, for Tenant and Tenant's agents and employees.
Tenant shall provide Landlord with a list of all license numbers for the cars
owned by Tenant, its agents and employees which will be regularly parked in the
Building's parking areas. In the event that Tenant, its agents and

5
<PAGE>

employees, park on portions of the Common Area other than those assigned to
Tenant, Landlord reserves the right to charge Tenant as additional rental
hereunder Twenty-five Dollars ($25.00) for each such occurrence.

15. Laws and Regulations. Tenant agrees to comply with all applicable
--------------------
laws, ordinances, rules and regulations of any governmental entity or agency
having jurisdiction of the Premises.

16. Building Rules. Tenant will comply with the rules of the Building
--------------
and the Project adopted and altered by Landlord from time to time and will cause
all of its agents, employees, invitees and visitors to do so; all changes to
such rules will be sent by Landlord to Tenant in writing. The initial rules for
the Project are attached hereto as Exhibit "D" and made a part hereof.

17. Entry by Landlord. Tenant agrees to permit Landlord or its agents or
-----------------
representatives to enter into and upon all or any part of the Premises or to the
Building at all reasonable hours on 24-hours notice (and in emergencies at all
times) to inspect the same, to show the Premises to prospective purchasers,
mortgagees, tenants or insurers, or to clean or make repairs, alterations or
additions thereto, and Tenant shall not be entitled to any abatement or
reduction of rent by reason thereof; provided however Landlord shall not
interfere with or hinder the normal prosecution of Tenant's business during any
such entry.

18. Assignment and Subletting.
-------------------------

(a) Tenant shall not assign, sublease, transfer, sell or encumber
this Lease or any interest therein without Landlords prior written consent which
shall not be unreasonably withheld, conditioned or delayed. Any attempted
assignment, sublease, transfer, sale or encumbrance by Tenant in violation of
the term and covenants of this paragraph shall be void. However, Tenant shall
have the right to assign this Lease, without any requirement of consent by
Landlord, to any entity into which Tenant is merged or any entity that is a
parent or subsidiary of Tenant, whether such status is presently existing or
results from a merger or otherwise. Tenant shall also have the right to assign
this Lease, upon obtaining Landlord's consent (which consent shall not be
unreasonably withheld, conditioned or delayed) and in addition the consent of
Landlord's mortgagee, to any entity which is the same or similar line of
business as that of Tenant so long as such assignee is in a similar or better
financial condition to the condition of Tenant on the Commencement Date,
provided, that no assignment, approved or otherwise, shall relieve Tenant from
liability hereunder.

(b) All cash or other proceeds of any assignment, sublease, transfer,
or sale of Tenant's interest in this Lease, whether consented to by Landlord or
not, shall be paid to Landlord. However, the amount in the foregoing sentence
shall not exceed the amount which is directly attributable to the assignment,
sublease, transfer, or sale of such interest and is expressly provided as being
so attributable in such assignment, sublease, transfer, or sale. Landlord may
agree to waive the foregoing in writing. Tenant hereby assigns to Landlord all
rights it might have or ever acquire in any such proceeds. This convenant and
assignment shall run with the land and shall bind Tenant and Tenant's heirs,
executors, administrators, personal representatives, successors and assigns. Any
assignee, sublessee, transferee, or purchaser of Tenant's interest in this Lease
(all such assignees, sublessees, transferees, and purchasers being hereinafter
referred to as "Successors"), by assuming Tenant's obligations hereunder, shall
assume liability to Landlord for all amounts paid to persons other than Landlord
by such Successor.

19. Mechanic's Liens. Tenant will not permit any mechanic's or
----------------
materialman's lien or liens to be placed upon the Premises, the Building, or the
Project and nothing in this Lease shall be deemed or construed in anyway as
constituting the consent or request of Landlord, express or implied, by
inference or otherwise, to any person for the performance of any labor or the
furnishing of any materials to the Premises, the Building, or the Project, or
any part thereof, nor as giving Tenant any right, power, or authority to
contract for or permit the rendering of any services or the furnishing of any
materials that would give rise to any mechanic's, materialman's, or other liens
against the Premises. In the event any such lien is attached to the Premises,
then, in addition to any other right or remedy of Landlord, Landlord may, but
shall not be obligated to, discharge the same. Any amount paid by Landlord for
any of the aforesaid purposes shall be paid by Tenant to Landlord on demand as
additional rent.

6
<PAGE>

20. Insurance.
---------

(a) Landlord shall maintain fire and extended coverage insurance on
the Building and the Premises in such amounts, as the Building's mortgagees
shall require payable solely to Landlord or the mortgagees of the Building, as
their interests shall appear. Landlord shall, at Tenant's request from time to
time, provide Tenant with current certificates of insurance evidencing
Landlord's compliance with this Paragraph 20(a) and Paragraph 20(b). Tenant
shall maintain at its expense, in an amount equal to full replacement cost, fire
and extended coverage insurance on all of its personal property, including
removable trade fixtures, located in the Premises and in such additional amounts
as are required to meet Tenant's obligations pursuant to Paragraph 24 hereof.
Tenants insurance pursuant to the provisions of Paragraphs 20(a) and 20(b)
hereof shall provide that such insurance may not be cancelled or expire without
at least thirty (30) days' prior written notice to Landlord from the insurer.
Tenant shall, at Landlord's request from time to time, provide Landlord with
current certificates of insurance evidencing Tenant's compliance with this
Paragraph 20(a) and Paragraph 20(b).

(b) Tenant and Landlord shall, each at its own expense, maintain a
policy or policies of comprehensive general liability insurance with respect to
the respective activities of each in the Building with the premiums thereon
fully paid on or before due date, issued by and binding upon an insurance
company reasonably approved by Landlord, such insurance to afford minimum
protection of not less than $1,000,000 combined single limit coverage of bodily
injury, property damage or combination thereof and shall name Landord and Tower
Realty Group, Inc. as additional insureds. Landlord shall not be required to
maintain insurance against thefts within the Premises, the Building or the
Project generally.

21. Property Taxes. Landlord agrees (subject to the provisions of
--------------
Paragraph 6 hereof) to pay all ad valorem taxes levied against the Project, but
Tenant shall be liable for all taxes levied against personal property and trade
fixtures placed by Tenant in the Premises. If any taxes for which Tenant is
liable under this Paragraph are levied against Landlord or Landlord's property
and if Landlord elects to pay the same or if the assessed value of Landlord's
property is increased by inclusion of personal property and trade fixtures
placed by Tenant in the Premises and Landlord elects to pay the taxes based on
such increase, Tenant shall pay to Landlord upon demand that part of such taxes
for which Tenant is liable hereunder.

22. Indemnity. Landlord and its officers, agents, managers, and employees
---------
shall not be liable to Tenant, or to Tenant's agents, servants, employees,
customers, or invitees for any injury to person or damage to property caused by
any act, omission, or neglect of Tenant, its agents, servants, or employees,
invitees, licensees or any other person entering the Project under the
invitation of Tenant or arising out of the use of the Premises by Tenant and the
conduct of its business or out of a default by Tenant in the performance of its
obligations hereunder. Tenant hereby indemnifies and holds Landlord and its
officers, agents, managers, and employees harmless from all liability and claims
for any such damage or injury.

23. Waiver of Subrogation Rights. Anything in this Lease to the contrary
----------------------------
notwithstanding, Landlord and Tenant each hereby waives, and shall cause their
respective insurance carriers to waive, any and all rights of recovery, claim,
action, or cause of action, against the other, its agents, officers, managers,
or employees, for any loss or damage that may occur to the Premises, or any
improvements thereto, or the Building or the Project, or any improvements
thereto, or any personal property of such party therein, by reason of fire, the
elements, or any other cause(s) which are required to be insured against under
the terms of the insurance policies referred to in Paragraph 20 hereof or which
are actually insured against under valid insurance policies otherwise carried by
the parties, regardless of cause or origin, including negligence of the other
party hereto, its agents, officers, managers, or employees.

24. Casualty Damage. If the Premises or any part thereof shall be damaged
---------------
by fire or other casualty, Tenant shall give prompt written notice thereof to
Landlord. In case the Building shall be so damaged to the extent of forty
percent (40%) or more (whether or not the Premises shall have been damaged by
such casualty) or in the event any mortgagee of the Building should require that
the insurance proceeds payable as a result of a casualty be applied to the
payment of the mortgage debt or in the event of any material uninsured loss to
the Building (provided Landlord maintains insurance as required by Paragraph
20), Landlord may, at its option, terminate this Lease by notifying Tenant in
writing of such termination within ninety (90) days after the date of such
damage. Such notice must specify the termination date, which shall

7
<PAGE>

be at lease thirty (30) days but not more than sixty (60) days after the date
such notice is given, in case the building shall be so damaged to the extent of
forty percent (40%) or more (whether or not the Premises shall have been damaged
by such casualty), Tenant may, at its option, terminate this Lease by notifying
Landlord in writing of such termination within thirty (30) days after the date
of such damage. Such notice must specify the termination date, which shall be at
lease thirty (30) days but not more than sixty (60) days after the date such
notice is given. If Landlord and Tenant do not thus elect to terminate this
Lease, Landlord shall commence and proceed promptly and diligently to restore
the Building to substantially the same condition in which it was immediately
prior to the happening of the casualty, except that Landlord's obligation to
restore shall not exceed the scope of the work required to be done by Landlord
at Landlord's expense in originally constructing the Building and installing the
Tenant Improvements, nor shall Landlord be required to spend for such work an
amount in excess of the insurance proceeds actually received by Landlord as a
result of the casualty. When the portions of the Premises originally furnished
at Landlord's expense have been restored by Landlord, Tenant may, at Tenant's
expense, complete the restoration of the Premises, including the reconstruction
of all improvements in excess of those Tenant Improvements originally installed
at Landlord's expense, and the restoration of Tenant's furniture and equipment.
Landlord shall not be liable for any inconvenience or annoyance to Tenant or
injury to the business of Tenant resulting in any way from such damage or the
repair thereof, except that, subject to the provisions of the next sentence,
Landlord shall allow Tenant a fair diminution of rent during the time and to the
extent the Premises are unfit for occupancy. If the Premises or any other
portion of the Building or the Project be damaged by fire or other casualty
resulting from the fault or negligence of Tenant or any of Tenant's agents,
employees, or invitees, the rent hereunder shall not be diminished during the
repair of such damage and Tenant shall be liable to Landlord for the cost of the
repair and restoration of the Building or the Project caused thereby to the
extent such cost and expense is not covered by insurance proceeds.

If the Premises, any part of the building providing essential services to
the Premise, and/or access to the Premises (the "Relevant space") are damaged in
part or whole by fire or other casualty and this Lease is not terminated by
Landlord or Tenant as permitted herein and such damage can be substantially
repaired and restored within one hundred eighty (180) days from the date of such
casualty, Landlord shall, at its expense, proceed promptly and diligently to
repair and restore the Premises as provided for above in this Paragraph 24. This
repair and restoration shall be made within such one hundred and eighty (180)
day period unless delay is due to causes beyond Landlord's control. If the
Relevant Space cannot be substantially repaired and restored within such one
hundred eighty (180) day period, Landlord or tenant may, prior to commencement
of such repair and restoration but within ten (10) days after reasonably
determining that the repairs and restoration cannot be made within such one
hundred eighty (180) day time period, terminate this Lease by giving written
notice to the other. Nevertheless, if the Relevant space is not repaired and
restored within such one hundred eighty (180) day time period, tenant may (i)
terminate this Lease at any time after the one hundred Eightieth (180) day and
before the two hundred tenth (210/th/) day following the date of casualty, or
(ii) exercise any and all rights necessary to cause Landlord to complete such
repair and restoration, including, without limitation, collection of damages.

25. Condemnation. If the whole or substantially the whole of the Building
------------
or the Premises should be taken for any public or quasi-public use, by right of
eminent domain or otherwise, or should be sold in lieu of condemnation, then
this Lease shall terminate as of the date when physical possession of the
Building or the Premises is taken by the condemning authority. If less than the
whole or substantially the whole of the Building is thus taken or sold, Landlord
(whether or not the Premises are affected thereby) may terminate this Lease by
giving written notice thereof to Tenant; if such taking would leave the
remainder of the Building unsuitable for use as an office building in a manner
comparable to the Building's use prior to such taking; in which event, this
Lease shall terminate as of the date when physical possession of such portion of
the Building or Premises is taken by the condemning authority. If less than the
whole or substantially the whole of the Premises is thus taken or sold, Landlord
or Tenant may terminate this Lease by giving written notice thereof to the
other; in which event this Lease shall terminate as of the date when physical
possession of such portion of the Premises is taken by the condemning authority.
If this Lease is not so terminated as provided above upon any such taking or
sale, the Base Rental payable hereunder shall be diminished in proportion to the
amount of the Premises taken, and Landlord shall, to the extent Landlord deems
feasible, restore the Building and the Premises to substantially their former
condition, but such work shall not exceed the scope of the work done by Landlord
in originally construction the Building and the Tenant Improvements, nor shall
Landlord in any event be required to spend for such work an amount in excess of
the amount received by Landlord as compensation for such taking. All amounts

8
<PAGE>

awarded upon a taking of any part or all of the Building or the Premises shall
belong to Landlord, and Tenant shall not be entitled to, and expressly waives
all claims to, any such compensation.

26. Damages From Certain Causes. Landlord shall not be liable to Tenant
---------------------------
for any loss or damage to any property or person occasioned by theft, fire, act
of God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, or order of governmental body or authority or by any other cause
beyond the control of Landlord. Nor shall Landlord be liable for any damage or
inconvenience, which may arise through repair or alteration of any part of the
Building, the Project, or the Premises.

27. Events of Default/Remedies.
--------------------------

(a) The following events shall be deemed to be events of default by
Tenant under this Lease: (i) Tenant shall fail to pay rental installments when
due or within five (5) days after receipt of notice. (ii) Tenant shall fail to
comply with any other provision of this Lease after a period of thirty (30)
business days or the additional time, if any, that is reasonably necessary to
promptly and diligently cure the failure, after it receives notice from Landlord
setting forth in reasonable detail the nature and extent of the failure and
identifying the applicable Lease provision(s); (iii) the leasehold hereunder
demised shall be taken on execution or other process of law in any action
against Tenant; (iv) Tenant shall fail to move into and take possession of the
Premises within ninety (90) days after the Premises are ready for occupancy or
shall cease to do business in or abandon any substantial portion of the
Premises; (v) Tenant shall be adjudicated insolvent or bankrupt and Tenant fails
to vacate or stay such adjudication within one hundred twenty (120) days after
such adjudication occurs; (vi) Tenant files a petition under any section or
chapter of the United States Bankruptcy code, as amended, or under any similar
law or statute of the United States or any State thereof; or a petition shall be
filed against Tenant under any such statute, and Tenant fails to vacate or stay
such action or petition within ninety (90) days after the date of the filing of
such petition; or (vii) a receiver or trustee shall be appointed for tenant's
leasehold interest in the Premises or for all or a substantial part of the
assets of Tenant and Tenant fails to vacate or stay such appointment within
ninety (90) days after the date of such appointment.

(b) Upon the occurrence of any event or events of default by Tenant,
Landlord shall have the option to pursue any one or more of the following
remedies after five (5) days from the date of notice: (i) terminate this Lease
by written notice to Tenant, in which event Tenant shall immediately surrender
the Premises to Landlord; (ii) terminate Tenant's right to occupy the Premises
and re-enter and take possession of the Premises (without terminating this
Lease); (iii) enter upon the Premises and do whatever Tenant is obligated to do
under the terms of this Lease; and Tenant further agrees that Landlord shall not
be liable for any damages resulting to the Tenant from such action; and (iv)
exercise all other remedies available to Landlord at law or in equity,
including, without limitation, injunctive relief of all varieties.

Subject to the foregoing, in the event Landlord elects to re-enter or
take possession of the Premises after Tenant's default, Tenant hereby waives
notice of such re-entry or repossession and of Landlord's intent to re-enter or
take possession. Landlord may, without prejudice to any other remedy which he
may have for possession or arrearages in rent, expel or remove Tenant any other
persons who may be occupying said Premises or any part thereof. In addition, the
provisions of Paragraph 30 hereof shall apply with respect to the period from
and after the giving of notice of such election to Tenant. All Landlords'
remedies shall be cumulative and not exclusive. Forbearance by Landlord to
enforce one or more of the remedies herein provided upon an event of default
shall not be deemed or construed to constitute a waiver of such default.

(c) Landlord shall mitigate its damage by making reasonable efforts
to relet the Premises on reasonable terms. If Landlord relets for a period of
time longer than the current Lease Term, then any special concessions given to
the new tenant shall be allocated throughout the entire term of such reletting
so as to not unduly reduce the amount of consideration received by Landlord
during the remaining period of Tenant's Lease Term.

(d) This Paragraph 27 shall be enforceable to the maximum extent not
prohibited by applicable law, and the unenforceability of any portion thereof
shall not thereby render unenforceable any other portion. To the extent any
provision of applicable law requires some action by Landlord to evidence or
effect the termination of this Lease or to evidence the termination of Tenant's
right of occupancy, Tenant and Landlord hereby agree that notice shall

9
<PAGE>

comply with such law and, in addition, shall be in writing and shall be
delivered to Tenant via Certified United States Mail.

(e) Landlord shall be in default hereunder in the event Landlord has
not begun and pursued with reasonable diligence the cure of any failure of
Landlord to meet its obligations hereunder within thirty (30) days of the
receipt by Landlord of written notice from Tenant of the alleged failure to
perform. In the event of such a default, Tenant shall have the right, in
addition to any other remedies at law or equity, to terminate or rescind this
Lease. In addition, Tenant hereby covenants that, prior to the exercise of any
such remedies, it will give the mortgagees holding mortgages on the Building
notice and a reasonable time to cure any default by Landlord.

28. Peaceful Enjoyment. Tenant shall, and may peacefully have, hold, and
------------------
enjoy the Premises, subject to other terms hereof, provided that Tenant pays the
rent and other sums herein recited to be paid by Tenant and performs all of
Tenant's covenants and agreements herein contained. This covenant and any and
all other covenants of Landlord shall be binding upon each of Landlord and its
successors only with respect to breaches occurring during the respective periods
of ownership of each of the Landlord's interest hereunder.

29. Consumer Price Index Adjustment. Effective the first day following
-------------------------------
each one-year period of the Lease Term beginning February 1, 2001, the Base
Rental hereunder shall be increased over the Base Rental payable hereunder
during the preceding year by an amount which equals the lesser of three percent
(3%) or the percentage increase in the CPI (hereafter defined) between the most
recent CPI publication prior to the commencement of the preceding one-year
period and the most recent CPI publication as of the date thirty (30) days prior
to such annual adjustment in Base Rental. CPI shall mean the Consumer Price
index for All Urban consumers (CPI-U) for all items (Dallas/Fort Worth, Texas
area) published by the Bureau of Labor Statistics, U.S., U.S. Department of
Labor (1967 equals 100). If the bureau of Labor Statistic shall ever cease to
compile or publish the CPI-U, then CPI shall thereafter mean such other index of
prices published by the U.S. Government as most nearly approximates the CPI-U
now published. All calculations made hereunder shall, if necessary, be adjusted
to reflect any change in the base year used in calculating the CPI.

30. Holding Over. In the event of holding over by Tenant after expiration
------------
or other termination of this Lease, or in the event Tenant continues to occupy
the Premises after the termination of Tenant's right of possession pursuant to
Paragraph 27 (c)(ii) hereof, Tenant shall, throughout the entire holdover
period, pay rent equal on a per diem basis, to one and one-half (1 1/2) times
the Base Rental, as adjusted, applicable at the time of such expiration or
termination. No holding over by Tenant after the expiration of the Lease Term
shall be construed to extend the term of the Lease. The provision of this
paragraph shall not be in place of or in lieu of, but shall be in addition to,
the provisions of Paragraph 27(b).

31. Subordination to Mortgage. Tenant accepts this Lease subject and
-------------------------
subordinate to any mortgage, deed of trust or other lien presently existing or
hereafter arising upon the Premises, upon the Building or upon the Project as a
whole, and to any renewals, refinancing and extensions thereof, but Tenant
agrees that any such mortgagee shall have the right at any time to subordinate
such mortgage, deed of trust or other lien to this Lease on such terms and
subject to such conditions as such mortgagee may reasonably deem appropriate.
Tenant agrees to execute such further instruments subordinating this Lease or
attorning to the holder of any such liens as Landlord may reasonably request.
The terms of this Lease are subject to approval by the Building's permanent
lender(s), and such approval is a condition precedent to Landlord's obligations
hereunder. Notwithstanding Tenant's obligation to subordinate and attorn under
this paragraph, upon any default by Landlord under any interest, right, or
encumbrance superior to this Lease, this Lease shall continue in conformance
with its terms and Tenant's quiet possession of the Premises shall not be
disturbed provided Tenant is not in default under Paragraph 27(a) of this Lease.
Tenant agrees that it will from time to time upon request by Landlord execute
and deliver to such persons as Landlord shall request a statement in recordable
form certifying that this Lease is unmodified and in full force and effect (or
if there have been modifications, that the same is in full force and effect as
so modified), stating the dates to which rent and other charges payable under
this lease have been paid, stating that, to Tenant's knowledge, Landlord is not
in default hereunder (or if Tenant alleges a default stating the nature of such
alleged default) and further stating such other matters as Landlord shall
reasonably require.

10
<PAGE>

32. Attorney's Fees. In the event either party defaults in the
---------------
performance of any of the terms of this Lease and the other party employs an
attorney in connection therewith, the defaulting party agrees to pay the other
party's reasonable attorney's fees.

33. No Implied Waiver. The failure of Landlord or Tenant to insist at any
-----------------
time upon the strict performance of any covenant or agreement of this Lease or
to exercise any option, right, power or remedy contained in this Lease shall not
be construed as a waiver or a relinquishment thereof for the future. No payment
by Tenant or receipt by Landlord of a lesser amount than the monthly installment
of rent due under this Lease shall be deemed to be other than on account of the
earliest rent due hereunder, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment of rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
in this Lease provided.

34. Personal Liability. The liability of Landlord to Tenant for any
------------------
default by Landlord under the terms of this Lease shall be limited to the
interest of Landlord in the Project, including rental income and proceeds from
sale, and Tenant agrees to look solely to such interest in the Project for the
recovery of any judgment from the Landlord, it being intended that Landlord
shall not be personally liable for any judgment or deficiency.

35. Security Deposit. The Security Deposit shall be held by Landlord
----------------
without liability for interest and as security for the performance by Tenant of
Tenant's covenants and obligations under this Lease, it being expressly
understood that the Security Deposit shall not be considered an advance payment
or rental or a measure of Tenant's damages in case of default by Tenant. Unless
otherwise provided by mandatory non-waivable law or regulation, Landlord may
commingle the Security Deposit with Landlord's other funds. Landlord may, from
time to time, without prejudice to any other remedy, use the Security Deposit to
the extent necessary to make good any arrearages of rent or to satisfy any other
covenant or obligation of Tenant hereunder. Following any such application of
all or any part of the Security Deposit, Tenant shall pay to Landlord on demand
the amount so applied in order to restore the Security Deposit to its original
amount. If Tenant is not in default at the termination of this Lease, the
balance of the Security Deposit remaining after any such application shall be
returned by Landlord to Tenant within ten (10) business days. If Landlord
transfers its interest in the Premises during the term of the Lease, Landlord
may assign the Security Deposit to the transferee and thereafter shall have no
further liability for the return of such Security Deposit.

36. Notice. Any notice in the Lease provided for must, unless otherwise
------
expressly provided herein, be in writing, and must, unless otherwise in this
Lease expressly provided, be given or be served by depositing the same in the
United State's mail, postpaid and certified and addressed to the party to be
notified, with return receipt requested. Notice deposited in the mail in the
manner hereinabove described shall be effective from and after the expiration of
three (3) days after it is so deposited. Notices mailed shall be addressed to
the parties at the following addresses:

If to Landlord: If to Tenant:

Oral Roberts University Digimarc Corporation
c/o Tower Realty Group, Inc. 2448 East 81st Street, Suite 4300
2488 E. 81st St., Suite 188 Tulsa, OK 74137
Tulsa, OK 74137

or in each case to such other address as either party may from time to
time designate in writing.

37. Severability. If any term or provision of this Lease, or the
------------
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Lease shall be valid and enforced to the fullest
extent permitted by law.

38. Recordation. Tenant agrees not to record this Lease.
-----------

39. Governing Law. This Lease and the rights and obligations of the
-------------
parties hereto shall be interpreted, construed, and enforced in accordance with
the laws of the State of Oklahoma.

11
<PAGE>

40. Force Majeure. Whenever a period of time is herein prescribed for the
-------------
taking of any action by Landlord, Landlord shall not be liable or responsible
for, and there shall be excluded from the computation of such period of time,
any delays due to strikes, riots, acts of God, shortages of labor or materials,
war, governmental laws, regulations or restrictions, or any other cause
whatsoever beyond the control of Landlord.

41. Time of Performance. Except as expressly otherwise herein provided,
-------------------
with respect to all required acts of Landlord and Tenant time is of the essence
of this Lease.

42. Transfers by Landlord. Landlord shall have the right to transfer and
---------------------
assign, in whole or in part, all its rights and obligations hereunder and in the
Premises, the Building, the Project, and property referred to herein. In such
event and upon such transfer other than transfers for security purposes only,
Landlord shall be released from any further obligations hereunder accruing after
such transfer and Tenant agrees to look solely to Landlord's successor in
interest then occupying Landlord's position hereunder for the performance of
such obligations.

43. Commissions. Landlord and Tenant hereby indemnify and hold each
-----------
other harmless against any loss, claim, expense, or liability with respect to
any commissions or brokerage fees claimed on account of the execution and/or
renewal of this Lease and due to any action of the indemnifying party.

44. Effect of Delivery of This Lease. This Lease shall not be effective
--------------------------------
until a copy or an original has been executed by both Landlord and Tenant.

45. Relocation. In the event the Premises contain 5,000 square feet or
----------
of Net Rentable Area of the Premises, Landlord shall be entitled to cause
Tenant to relocate from the Premises to a comparable space ("Relocation Space")
within the Building at any time after reasonable written notice not in excess of
ninety (90) days is given to Tenant of Landlord's election. Any such relocations
shall be entirely at the expense of Landlord or the third party tenant replacing
Tenant in the Premises. Such a relocation shall not terminate or otherwise
affect or modify this Lease except that from and after the date of such
relocation, "Premises" shall refer to the Relocation Space into which Tenant has
been moved, rather than the original Premises as herein defined.

46. Building Name. Landlord reserves the right at any time and from time
-------------
to time to change the name by which the Building is designated.

47. Corporate Authority. If Tenant is a corporation, Tenant warrants
-------------------
that it has legal authority to operate and is authorized to do business in the
state of Oklahoma. Tenant and the person executing this Lease on behalf of
Tenant warrant that the person or persons executing this Lease on behalf of
Tenant has authority to do so and to fully obligate Tenant to all terms and
provisions of this Lease. Tenant shall, upon request from Landlord, furnish
Landlord with a certified copy of resolutions of Tenant's Board of Directors
authorizing this Lease and granting authority to execute it to the person or
persons who have executed it on Tenant's behalf.

48. Exhibits. Exhibits "A", "B", "C", "D", and "Addendum" are attached
--------
hereto and incorporated herein and made a part of this Lease for all purposes:

49. Tenant acknowledges that prior to its entering into of this Lease the
Landlord and Tower Realty Group, Inc. have disclosed to Tenant that:

(a) Tower Realty Group, Inc. is a licensed real estate broker in
Oklahoma, and,

(b) with regard to the Building, Tower Realty Group, Inc. is the
Landlord's leasing agent and property manager.

50. Broker. The parties hereto agree that the sole broker who negotiated
------
and brought about this transaction was Austin Neal of Tower Realty Group, Inc.
and Landlord agrees to pay a commission therefor as per separate agreement.

Tenant represents it neither consulted nor negotiated with any broker other
that Austin Neal of Tower Realty Group, Inc. and with regard to the Leased
Premises. Tenant agrees to indemnify, defend and save Landlord harmless from
and against and claims for fees or commissions from anyone other than Austin
Neal of Tower Realty Group, Inc., and with whom

12
<PAGE>

Tenant has dealt in connection with the Leased Premises or this Lease. Tenant is
not obligated to pay commission to Tower Realty Group, Inc.

The representations and indemnities contained in this Section 50 shall
survive the expiration or earlier termination of this Lease.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in
multiple counterparts as of the day and year first above written.

LANDLORD
--------

Oral Robert University,
WITNESS: an Oklahoma corporation

/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- --------------------- ----------------------------
Name Title Vice President
-------------------------

TENANT
------

Digimarc Corporation

/s/ INDRANEEL PALL
-------------------------------

WITNESS: By INDRANEEL PALL
----------------------------

/s/ [ILLEGIBLE] Title VP/GM, Paper as Portal
- --------------------- --------------------------
Name

<PAGE>

EXHIBIT 23.1

CONSENT OF KPMG LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Digimarc Corporation:

We consent to the use of our Independent Auditors' Report dated February 11,
2000 relating to the balance sheets of Digimarc Corporation as of December 31,
1998 and 1999, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1999 which report is included in the Registration Statement and
Prospectus, dated on or about March 17, 2000, of Digimarc Corporation, and to
the reference to our firm under the headings "Selected Financial Data" and
"Experts" in the Prospectus.

/s/ KPMG LLP

Portland, Oregon
March 17, 2000

<PAGE>

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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 90,830
<SECURITIES> 0
<RECEIVABLES> 2,228
<ALLOWANCES> (3)
<INVENTORY> 0
<CURRENT-ASSETS> 93,889
<PP&E> 1,448
<DEPRECIATION> (487)
<TOTAL-ASSETS> 94,903
<CURRENT-LIABILITIES> 3,989
<BONDS> 0
0
0
<COMMON> 110,688
<OTHER-SE> (19,893)
<TOTAL-LIABILITY-AND-EQUITY> 94,903
<SALES> 202
<TOTAL-REVENUES> 6,929
<CGS> 97
<TOTAL-COSTS> 3,626
<OTHER-EXPENSES> 6,085
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<INCOME-PRETAX> (2,389)
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