10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2012

OR

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    

Commission File Number 001-34108

DIGIMARC CORPORATION

(Exact name of registrant as specified in its charter)

Oregon	26-2828185
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9405 SW Gemini Drive, Beaverton, Oregon 97008

(Address of principal executive offices) (Zip Code)

(503) 469-4800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value Per Share	The NASDAQ Stock Market LLC

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨		Accelerated filer	x
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of common stock, par value $0.001 per share, held by non-affiliates of the registrant, based on the closing price of our common stock on The Nasdaq Global Market on the last business day of the registrant’s most recently completed fiscal second quarter (June 29, 2012), was approximately $174 million. Shares of common stock beneficially held by each officer and director have been excluded from this computation because these persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.

As of February 15, 2013, 7,281,983 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement pursuant to Regulation 14A (the “Proxy Statement”) for its 2013 annual meeting of shareholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K. The registrant intends to file the Proxy Statement not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

Table of Contents

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	18
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 8.	Financial Statements and Supplementary Data	47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	47
Item 9A.	Controls and Procedures	48
Item 9B.	Other Information	50
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	51
Item 11.	Executive Compensation	51
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51
Item 13.	Certain Relationships and Related Transactions, and Director Independence	51
Item 14.	Principal Accountant Fees and Services	51
Item 15.	Exhibits and Financial Statement Schedules	52
SIGNATURES		53
EXHIBIT INDEX		E-1

PART I

Unless the context otherwise requires, references in this Annual Report on Form 10-K to (i) “Digimarc,” “we,” “our” and “us” refer to Digimarc Corporation and (ii) “Old Digimarc” refers to the former Digimarc Corporation, which merged with and into a wholly owned subsidiary of L-1 Identity Solutions, Inc. (“L-1”) on August 13, 2008, and its consolidated subsidiaries (other than us).

All dollar amounts are in thousands, unless otherwise noted.

Digimarc Discover is a registered trademark of Digimarc Corporation. This Annual Report on Form 10-K also includes trademarks and trade names owned by other parties, and all other such trademarks and trade names mentioned in this Annual Report on Form 10-K are the property of their respective owners.

ITEM 1:    BUSINESS

The following discussion of Digimarc’s business contains forward-looking statements relating to future events or the future financial performance of Digimarc. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included in this Annual Report on Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Forward-Looking Statements.”

The following discussion of our business should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.

Overview

Until August 1, 2008, we were a wholly owned subsidiary of DMRC LLC, a wholly owned subsidiary of Old Digimarc to which Old Digimarc contributed all of the assets and liabilities related to its digital watermarking business (the “Digital Watermarking Business”), together with all of Old Digimarc’s cash, including cash received upon the exercise of stock options. On August 1, 2008 Old Digimarc spun off DMRC LLC. Following the spin-off, DMRC LLC merged with and into DMRC Corporation, and each limited liability company interest of DMRC LLC was converted into one share of common stock of DMRC Corporation. After completion of the acquisition of Old Digimarc by L-1, DMRC Corporation changed its name to Digimarc Corporation. On October 16, 2008, each Old Digimarc record holder received one share of Digimarc common stock for every three and one-half shares of Old Digimarc common stock held by the shareholder as of the spin-off record date, and we became an independent, publicly-traded company owning and operating the Digital Watermarking Business. On April 30, 2010, following our Annual Meeting and approval by our shareholders, we changed our state of incorporation from Delaware to Oregon by means of a merger into a newly formed, wholly owned Oregon subsidiary.

Digimarc Corporation enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. Our technology provides the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. Our technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.

Our technologies, and those of our licensees, span a range of media content, enabling our customers and those of our partners to:

• Quickly and reliably identify and effectively manage music, movies, television programming, digital images, e-books, documents and other printed materials, especially in light of new non-linear distribution over the internet;

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• Deter counterfeiting of money, media and goods, and piracy of e-books, movies and music;

• Support new digital media distribution models and methods to monetize media content;

• Leverage the power of ubiquitous computing to instantly link consumers to a wealth of information and/or interactive experiences related to the media and objects they encounter each day;

• Provide consumers with more choice and access to media content when, where and how they want it;

• Enhance imagery and video by associating metadata or authenticating media content for government and commercial uses; and

• Better secure identity documents to enhance national security and combat identity theft and fraud.

At the core of our intellectual property is a signal processing innovation known as “digital watermarking,” which allows imperceptible digital information to be embedded in all forms of digitally designed, produced or distributed media content and some physical objects, including photographs, movies, music, television, personal identification documents, financial instruments, industrial parts and product packages. The digital information can be detected and read by a wide range of computers, mobile phones and other digital devices.

Digital watermarking allows our customers to embed digital data into any media content that is digitally processed at some point during its lifecycle. The technology can be applied to printed materials, video, audio, and images. The inclusion of these digital signals enables a wide range of improvements in security and media management, and new business models for distribution and consumption of media content. Over the years our technology and intellectual property portfolios have grown to encompass many related technologies.

We provide solutions directly and through our licensees. Our proprietary technology has proven to be a powerful element of document security, giving rise to our long-term relationship with a consortium of central banks, which we refer to as the Central Banks, and many leading companies in the information technology industry. We and our licensees have successfully propagated digital watermarking in music, movies, television broadcasts, images and printed materials. Digital watermarks have been used in these applications to improve media rights and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more efficient and effective distribution of valuable media content and enhance consumer entertainment and commercial experiences. Banknote counterfeit deterrence was the first commercially successful use of our technologies in a large scale system. More recently, innovations based on our existing digital watermarking technology and experience have been leveraged to create new products to deter counterfeiting and tampering of driver licenses and other government-issued secure credentials. In parallel, our business partners, under patent or technology licenses from us, are delivering digital watermarking solutions to track and monitor the distribution of music, images, television and movies to consumers. In November of 2007, we announced a relationship with The Nielsen Company (US) LLC, or Nielsen, to license our patents in support of Nielsen’s industry leading television audience measurement.

On July 1, 2009, we commenced operation of two joint ventures with Nielsen. In connection with these joint ventures, we terminated our 2007 agreement with Nielsen, and entered into the joint venture agreements and a new patent license agreement. In March 2012, Digimarc and Nielsen decided to reduce the investments in their two joint ventures to minimal levels while assessing alternative approaches to achieving each of their goals in the emerging market opportunity of synchronized second screen television.

On October 5, 2010, we entered into a patent licensing arrangement with IV Digital Multimedia Inventions, LLC, a Delaware limited liability company affiliated with Intellectual Ventures (“IV”), pursuant to which we granted an exclusive license to sublicense, subject to pre-existing encumbrances and a grant-back license, an aggregate of approximately 900 of the 1,200 patents and applications held by us noted below in the section titled “Technology and Intellectual Property.”

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Our business has further expanded in e-commerce with our recent acquisition of Attributor Corporation (“Attributor”) the global leader in protecting e-books from online piracy. On December 3, 2012, we acquired Attributor, for a purchase price of $5,600 in cash, subject to certain adjustments, and an additional $900 if certain performance objectives are met. Attributor’s Guardian software and services protect book revenue and authors’ rights by finding, reporting on, and assisting in removing pirated content found on the Internet. Online book piracy is a growing and global problem, and with emerging e-book standards and the growing popularity of iPads, Kindles and other e-readers, book piracy is expected to grow dramatically. Attributor is building a promising business in this high growth market, and possesses technical skills and market knowledge that will complement our existing organization. We expect the acquisition to provide many strategic and financial benefits.

On December 6, 2012, we entered into a renewal and extension of the Counterfeit Deterrence System Development and License Agreement with the Central Banks through 2024, with a 5 year extension option.

Financial information about geographic areas is included in Note 6 of our Notes to Consolidated Financial Statements.

Customers and Business Partners

Our revenue is generated through commercial and government applications of our technology. We generate a majority of our revenue from service and license fees paid to us under long-term contracts with IV, Verance Corporation (“Verance”), the Central Banks, Nielsen, and Civolution. The remainder of our revenue is generated primarily from patent and technology license fees and royalties paid by commercial business partners providing media identification and management solutions to movie studios and music labels, television broadcasters, creative professionals and other customers around the world. Patent and technology licensing is expected to continue to contribute most of the revenue from our non-government customers for the foreseeable future.

In 2012, revenue from government contracts accounted for approximately 24% of our total revenue, and revenue generated under our contract with the Central Banks accounted for substantially all of the revenue generated under our government contracts. Our government contracts typically span one or more base years and multiple option years. Government customers generally have the right to not exercise option periods. As part of our work with government customers, we must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts. Government contract laws and regulations affect how we do business with our government customers and, in some instances, impose added costs to on our business.

Information about customers that accounted for 10% or more of revenue in the last three years is included in Note 6 of our Notes to Consolidated Financial Statements.

Products and Services

We provide media identification and management solutions to commercial entities and government customers and license our technology and patent inventions to other solution providers. Our largest government customer is the Central Banks, with whom we have for the last 14 years been developing, deploying, supporting and continuing to enhance a system to deter digital counterfeiting of currency using personal computers and digital reprographics.

We license primarily to commercial entities who use our technology and patented inventions in the media and entertainment industry. Commercial customers use a range of solutions from our business partners and us to identify, track, manage and protect content as it is distributed and consumed—either digitally or physically—and to enable new consumer applications to access networks and information from personal computers and mobile

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devices. Many movie studios, record labels, broadcasters, creative professionals and other customers rely on digital watermarking as a cost-effective means to:

• deter piracy and illegal use of movies, music and images;

• protect entertainment content from copyright infringement;

• track and monitor entertainment content for rights usage and licensing compliance;

• monitor advertisements to verify ad placement and measure return on investment;

• enhance information access, search and marketing capabilities related to media content; and

• enable fair and legitimate use of content by consumers.

Digital watermarks are easily embedded into all forms of media and are imperceptible to human senses, but quickly detected by computers, networks or other digital devices like smartphones. Unlike barcodes and tags, a watermarking solution does not require publishers to give up valuable space in magazines and newspapers; nor does it impact the overall layout or aesthetics of the publication. One of our more recent product offerings is the Digimarc Discover™ platform, which delivers a range of rich media experiences to its readers on their smartphones. Unique to the Digimarc Discover platform is its ability to use various content identification technologies as needed, including our patented digital watermarking technology.

The Attributor acquisition gives us more depth and breadth in our product and service offerings, expands our business relations with publishers, giving us participation in the digital, as well as print aspects of the market, increases our customer base and reduces revenue concentration. We expect to expand our offerings to Attributor’s book publisher customers to include Digimarc Discover and the use of digital watermarking for copyright protection. The digital editions of magazines continue to take greater share of readership and we intend to explore expanding the Attributor customer base to magazine publishers. We see the potential for this new area of our business to provide significant growth for many years.

As part of our intellectual property marketing and patent monetization efforts, our key objectives in building relationships with potential customers and partners are to:

• make progress toward the realization of our vision and mission;

• expand the scope of our license program;

• more effectively monetize our patent assets;

• encourage large scale adoption of our technologies by industry leaders;

• improve our financial performance;

• increase the scale and rate of growth of our products and services business; and

• lay a foundation for continuing innovation.

Current licensees include, but are not limited to, AlpVision SA, AquaMobile, Arbitron Inc., Civolution, Digital Space, IV, Monic, The Nielsen Company, Signum Technologies, Verance and Verimatrix, Inc.

Technology and Intellectual Property

We develop intellectual property to differentiate our products and technology, mitigate infringement risks, and develop opportunities for licensing. Our broad patent portfolio covers a wide range of methods, applications, system architectures and business processes.

Most of our patents relate to various methods for embedding and decoding digital information in video, audio and images, whether the content is rendered in analog or digital formats. The digital information is generally embedded by making subtle modifications to the fundamental elements of the content itself, generally at a signal processing level. The changes necessary to embed this information are so subtle that they are generally

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not noticeable by people during normal use. Because the message is carried by the content itself, it is file-format independent. The embedded digital information generally survives most normal content transformations, including compression, edits, rotation, scaling, re-sampling, file-format transformations, copying, scanning and printing.

Our patent portfolio contains a number of innovations in digital watermarking, pattern recognition (sometimes referred to as “fingerprinting”), digital rights management and related fields. To protect our significant efforts in creating our technology, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world’s most extensive patent portfolios in digital watermarking and related fields, with greater than 1,200 U.S. and foreign patents and pending patent applications as of December 31, 2012. We continue to develop and broaden our portfolio of patented inventions in the fields of media identification and management technology and related applications and systems. We devote significant resources to developing and protecting our inventions and continuously seek to identify and evaluate potential licensees for our patents. The patents in our portfolio have a life of approximately 20 years from invention date, and up to 17 years after the patent has been granted.

For a discussion of activities and costs related to our research and development in the last three years, please read “Research, development and engineering” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Markets

Our patented inventions are used in various media identification and management products and solutions supporting a variety of media objects, from movies and music to banknotes and secure credentials. Each media object enabled by our inventions creates the potential for several applications, such as:

• counterfeiting and piracy deterrence;

• content identification and media management;

• authentication and monitoring;

• linking to networks and providing access to information; and

• enhanced services in support of mobile commerce.

We believe the market for most of these applications is in the early stages of development and that existing solutions represent only a small portion of the potential market for our products, services and technology.

Book publishing is a nearly $80 billion industry. E-books share of book publishing has grown exponentially in the last few years and now accounts for approximately 10% of the book publishing market. Attributor has been growing rapidly as the market expanded, and the compound annual growth rate for the last three years for revenues is over 50%. We are projecting another high-growth year in 2013.

Competition

No single competitor or small number of competitors dominate our market. Our competitors vary depending on the application of our products and services. Our business partners and we generally compete with non-digital watermarking technologies for the security or marketing budgets of the producers and distributors of media objects, documents, products and advertising. These alternatives include, among other things, encryption-based security systems and technologies and solutions based on fingerprinting and pattern recognition. Our competitive position in digital watermarking applications is strong because of our large, high quality, sophisticated patent portfolio and our substantial and growing amount of intellectual property in related media security and

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management innovations that span basic technologies, applications, system designs and business processes. Our intellectual property portfolio allows us to use proprietary technologies that are well regarded by our customers and partners and not available to our competitors. We compete based on the variety of features we offer and a traditional cost/benefit analysis against alternative technologies and solutions. We anticipate that our competitive position within some markets may be affected by factors such as reluctance to adopt new technologies and by changes in government regulations.

Backlog

Based on projected commitments we have for the periods under contract with our respective customers, we anticipate our current contracts as of December 31, 2012 will generate a minimum of $44 million in revenue through early 2015, the remaining term of these contracts. We expect approximately $27 million of this amount to be recognized as revenue during 2013.

Some factors that lead to increased backlog include:

• contracts with new customers;

• renewals with current customers;

• add-on orders to current customers; and

• contracts with longer contractual periods replacing contracts with shorter contractual periods.

Some factors that lead to decreased backlog include:

• recognition of revenue associated with backlog currently in place;

• contracts with shorter contractual periods replacing contracts with longer contractual periods;

• modifications to existing contracts;

• contract minimum payments ending; and

• contracts ending with existing customers.

The mix of these factors, among others, dictates whether our backlog increases or decreases for any given period. Our backlog may not result in actual revenue in any particular period, because the orders, awards and contracts included in our backlog may be subject to modification, cancellation or suspension. We may not realize revenue on certain contracts, orders or awards included in our backlog or the timing of any realization may change.

Employees

At December 31, 2012, we had 124 full-time employees, including 26 in sales, marketing, technical support and customer support; 73 in research, development and engineering, including intellectual property; and 25 in finance, administration, information technology and legal. The total includes 18 full-time employees from our recent acquisition of Attributor. Attributor also contracts with approximately 60 independent contractors.

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.

Available Information

We make available free of charge through our website at www.digimarc.com our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these and other reports filed or furnished by us pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we file these materials with the Securities and Exchange Commission.

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ITEM 1A:     RISK FACTORS

The following risk factors are those risks of which we are aware and that we consider to be material to our business. If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations and cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline. Additionally, we cannot be certain or give any assurance that any actions taken to reduce known risks and uncertainties will be effective.

RISKS RELATED TO OUR BUSINESS

(1) A small number of customers account for a substantial portion of our revenue, and the loss of any large contract could materially disrupt our business.

Historically, we have derived a significant portion of our revenue from a limited number of customers. Five customers, IV, Verance, the Bank for International Settlements (acting on behalf of the Central Banks), Nielsen, and Civolution represented approximately 95% of our revenue for the year ended December 31, 2012. Most of our revenue come from long-term contracts generally having terms of at least three to five years, with some licenses for the life of the associated patents, which could be up to 20 years. The agreements with some of these customers provide minimum or fixed payment obligations that expire within the next few years. Some contracts we enter into contain termination for convenience provisions. If we were to lose such a contract for any reason, or if revenue from variable payment obligations do not replace revenue under the existing fixed payment obligations, our financial results could be adversely affected. For example, in connection with our arrangement with IV, after the second quarter of 2013, the quarterly installments on the license issue fee end. We are not able to reasonably estimate the future cash flow impact of any profit sharing we may earn from IV.

We expect to continue to depend upon a small number of customers for a significant portion of our revenue for the foreseeable future. The loss of, or decline in, orders or backlog from one or more major customers could reduce our revenue and have a material adverse effect on our financial results.

(2) Although we achieved profitability in the last three years, we may not be able to sustain profitability in the future, particularly if we were to lose large contracts.

For the year ended December 31, 2012, we generated net income of $8.3 million. Our profit was primarily due to a licensing arrangement with IV that we entered into in the fourth quarter of 2010, which the quarterly payments will end in May 2013, and a lump sum legal settlement for past due royalties from Verance we received in the first quarter of 2012. On a quarterly basis, our operating results have been inconsistent.

Maintaining profitability in the future will depend upon a variety of factors, including our ability to maintain and obtain more significant partnerships like those we have with the Central Banks, Nielsen, IV, Verance and Civolution. Profitability will also depend on growth in revenue of our licensees and our efficiency in executing our business strategy and capitalizing on new opportunities. Various adverse developments, including the loss of large contracts, the expiration of fixed payment obligations on our contracts or cost overruns on our existing contracts, could have a negative effect on our revenue, margins and profitability.

(3) We may be adversely affected by variability of contracted arrangements.

We have frequently agreed to modify the terms of contractual arrangements with our customers, partners and licensees in response to changes in circumstances underlying the original contractual arrangements, and it is likely that we will do so in the future. As a result of this practice, the terms of our contractual arrangements with our customers, partners and licensees may vary over time and, depending on the particular modification, could have a material adverse effect on our financial position, results of operations or cash flows.

Some of our customers report royalties to us based on their revenue and their interpretation and allocation of contracted royalty rates. For example, IV reports profit sharing to us based on income earned, which is subject to

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IV’s interpretation and allocation of revenue and expenses. It is possible that the originally reported royalties and profit sharing could differ materially from those determined by an audit performed by us or a third party, or self-corrected by the customer.

(4) A significant portion of our current and potential future revenue is subject to commercial and government contracts and development of new markets that may involve unpredictable delays and other unexpected changes. Such volatility and uncertainty might limit our actual revenue in any given quarter or year.

We derive substantial portions of our revenue from commercial contracts tied to development schedules or development of new markets, which could shift for months, quarters or years as the needs of our customers and the markets in which they participate change. Government agencies and commercial customers also face budget pressures that introduce added uncertainty. Any shift in development schedules, the markets in which we or our licensees participate, or customer procurement processes, which are outside our control and may not be predictable, could result in delays in bookings forecasted for any particular period, could affect the predictability of our quarterly and annual results, and might limit our actual revenue in any given quarter or year, resulting in reduced and less predictable revenue and adversely affecting profitability.

We are also expanding into new markets, which involve inherent risk and unpredictability. Until recent years, our business was focused primarily on digital watermarking and related signal processing technology. Our work in that field dated back to the early 1990s, so that by the time of the 1999 public offering of our predecessor company, we were an established competitor or participant in that area, and had a historical perspective that provided certain advantages. Those advantages continued to grow and serve us as our tenure in the field lengthened.

In recent years, particularly with the proliferation of smartphones and increased demands in the public sector for enhanced covert security options, we have investigated other technologies that may provide attractive future opportunities, for example in the packaging and publishing markets. These generally include technologies that leverage our strength in signal processing and support our vision for intuitive, pervasive computing. As we seek to expand outside our areas of historical expertise, we lack the history and insight that benefited us in the watermarking field. We also lack the size and scale typical of contractors providing products and services to the federal government. While we were in the vanguard of commercial application of digital watermarking, we are not so uniquely poised in these other disciplines. Accordingly, it may be difficult for us to replicate our watermarking success in other technologies we might pursue.

(5) The market for our products is highly competitive, and alternative technologies or larger companies that compete with us may undermine, limit or eliminate the market for our products’ technologies, which would decrease our revenue and profits.

The markets in which we compete for business are intensely competitive and rapidly evolving. We expect competition to continue from both existing competitors and new market entrants. We face competition from other companies and from alternative technologies, including some of our customers and licensees. Because the market solutions based on our technologies are still in an early stage of development, we also may face competition from unexpected sources.

Alternative technologies that may directly or indirectly compete with particular 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 an encrypted wrapper, which prevents the media object from being duplicated, used for content distribution and transaction management;

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• Traditional anti-counterfeiting technologies—a number of solutions used by many government agencies (that compete for budgetary outlays) designed to deter counterfeiting, including optically sensitive ink, magnetic threads and other materials used in the printing of currencies;

• Image recognition—one or several pre-specified or learned objects or object classes that can be recognized, usually together with their two-dimensional positions in the image or three-dimensional poses in the scene, such as Google Goggles, which provides a stand-alone program illustration of this function;

• Radio frequency tags—embedding a chip that emits a signal when in close proximity with a receiver, used in some photo identification credentials, labels and tags;

• Internet technologies—numerous existing and potential Internet access and search methods are competitive with Digimarc Mobile systems and the searching capabilities of Digimarc for Images;

• Digital fingerprints and signatures—a metric, or metrics, computed solely from a source image or audio or video track, that can be used to identify an image or track, or authenticate the image or track;

• Smart cards—badges and cards including a semiconductor memory and /or processor, used for authentication and related purposes; and

• Bar codes or QR codes—data-carrying codes, typically visible in nature (but may be invisible if printed in ultraviolet- or infrared-responsive inks).

In the competitive environments in which we operate, product generation, development and marketing processes relating to technology are uncertain and complex, and require accurate prediction of demand as well as successful management of various risks inherent in technology development. In light of these uncertainties, it is possible that our failure to successfully accommodate future changes in technologies related to our technology could have a long-term negative effect on our growth and results of operations.

New developments are expected to continue, and discoveries by others, including current and potential competitors, possibly could render our services and products noncompetitive. Moreover, because of rapid technological changes, we may be required to expend greater amounts of time and money than anticipated to develop new products and services, which in turn may require greater revenue streams from those products and services to cover developmental costs. Many of the companies that compete with us for some of our business, as well as other companies with whom we may compete in the future, are larger and may have greater technical, financial, marketing and political 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 or otherwise impede our progress. We may be unable to compete successfully against current or future participants in our market or against alternative technologies, and the competitive pressures we face could decrease our revenue and profits in the future.

(6) We may not realize all the expected benefits of our patent licensing arrangement with Intellectual Ventures.

In connection with our patent licensing arrangement with IV, we granted an exclusive license to sublicense a substantial portion of our patent assets to IV in exchange for various strategic and financial benefits. We may not realize all the expected benefits of our patent licensing arrangement with IV, including the expected full payment of the license issue fee, profit participation revenue, reduction of patent prosecution and maintenance costs, and full payment for the assistance we provide to IV with respect to the licensed patents. Any failure to realize these expected benefits could have a material adverse effect on our financial position, results of operations or cash flows. We have given IV control over both prosecution and enforcement of these assets. While IV can seek our assistance and has committed to pay for it, we cannot guarantee that IV will seek our assistance in prosecution, nor enforce the patents to the extent we would.

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As provided in the arrangement with IV, we have initiated an audit of the profit participation reports provided by IV to better understand the revenue and expenses IV has included in their calculation of whether we are entitled to any profit participation revenue for 2011, as well as determining whether the expenses included in the calculations are within the terms of the contract. We are currently working through the identified issues through the dispute resolution process provided for in the arrangement.

(7) We recently completed an acquisition and may acquire or invest in other companies or technologies in the future, which could divert management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations and harm our operating results.

We recently completed the acquisition of Attributor Corporation, and we may in the future acquire or invest in businesses, products or technologies that we believe could complement or expand our current product and service offerings, enhance our technical capabilities, expand our operations into new markets or otherwise offer growth opportunities. We cannot assure you that we will realize the anticipated benefits of our recent or any future acquisition. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

There are inherent risks in integrating and managing acquisitions. We may not be able to assimilate or integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following an acquisition. We also may not achieve the anticipated benefits from an acquired business due to a number of factors, including:

• unanticipated costs or liabilities associated with the acquisition;

• incurrence of acquisition-related costs, which would be recognized as a current period expense;

• inability to generate sufficient revenue to offset acquisition or investment costs;

• the inability to maintain relationships with customers and partners of the acquired business;

• the need to implement additional controls, procedures and policies;

• entry into geographic markets in which we have little or no prior experience, and challenges caused by distance, language and cultural differences;

• differences in foreign labor and employment laws, including classification of employees and contractors;

• disruption of our ongoing business;

• the potential loss of key employees; and

• use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

(8) An increase in our operations outside of the U.S. subjects us to risks additional to those to which we are exposed in our domestic operations.

We believe that revenue from sales of products and services to commercial, governmental and other customers outside the U.S. could represent a growing percentage of our total revenue in the future. In addition, as a result of our recent acquisition of Attributor Corporation, we may perform certain functions in various jurisdictions outside of the U.S. International operations are subject to a number of risks that can adversely affect

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our sales of products and services to customers outside of the U.S., or expose us to additional expense or liabilities, including the following:

• difficulties and costs of staffing, developing and managing foreign operations as a result of distance, language and cultural differences;

• the effect of laws governing employee and contractor relationships, and the existence of workers’ councils and labor unions in some jurisdictions;

• changes in foreign government regulations and security requirements;

• export license requirements, tariffs and taxes;

• trade barriers;

• difficulty in protecting intellectual property;

• difficulty in collecting accounts receivable;

• currency fluctuations;

• longer payment cycles than those for customers in the U.S; and

• political and economic instability

We do not have an extensive operational infrastructure for international business. We generally depend on local or international business partners and subcontractors for performance of substantial portions of our business. These factors may result in greater risk of performance problems or of reduced profitability with respect to our international programs in these markets. In addition, if foreign customers, in particular foreign government authorities, terminate or delay the implementation of our products and services, it may be difficult for us, or we may not be able, to recover our potential losses.

(9) Our future growth will depend to some extent on our successful implementation of our technology in solutions provided by third parties.

Our business and strategy rely substantially on deployment of our technology by our licensees and other third-party software developers and original equipment manufacturers. For example, one form of our technology is commonly deployed in image editing applications to permit users of these products to read data embedded in imagery, and thereby identify ownership and discern the identities of image owners. Another form of our technology is used in our anti-counterfeiting products. Our patented inventions are also being deployed as part of Digital Cinema systems to theatres around the world by companies that integrate technologies and subsystems. In addition, we rely on the ability of IV to license our patented inventions to third party licensees pursuant to the patent licensing arrangement we entered into with IV in October 2010. If third parties who include our technology in their products or otherwise license our intellectual property for use in their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technology, or these partners are unsuccessful in their efforts, our efforts to expand deployment of our technology and increase licensing revenue would be adversely affected. Consequently, our ability to increase revenue would be adversely affected and we may suffer other adverse effects to our business. In addition, if our technology does not perform according to market expectations, our future sales would suffer as customers seek other alternatives.

(10) We depend on our management and key employees for our future success. If we are not able to retain, hire or integrate these employees, we may not be able to meet our commitments.

Our success depends to a significant extent on the performance and continued service of our management and our intellectual property team. The loss of the services of any of these employees could limit our growth or undermine customer relationships.

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Due to the high level of technical expertise that our industry requires, our ability to successfully develop, market, sell, license and support our products, services, and intellectual property depends to a significant degree upon the continued contributions of our key personnel in engineering, sales, marketing, operations, legal and licensing, many of whom would be difficult to replace. We believe our future success will depend in large part upon our ability to retain our current key employees and our ability to attract, integrate and retain new personnel in the future. It may not be practical for us to match the compensation some of our employees could garner at other employment. In addition, we may encounter difficulties in hiring and retaining employees because of concerns related to our financial performance or operating results. These circumstances may have a negative effect on the market price of our common stock, and employees and prospective employees may factor in the uncertainties relating to our stability and the value of any equity-based incentives in their decisions regarding employment opportunities and decide to leave our employ. Moreover, our business is based in large part on patented technology, which is a unique and sophisticated signal processing technology. New employees require substantial training, involving significant resources and management attention. Competition for experienced personnel in our business can be intense. If we do not succeed in attracting new, qualified personnel or in integrating, retaining and motivating our current personnel, our growth and ability to deliver products and services that our customers require may be hampered. Although our employees generally have executed agreements containing non-competition clauses, we do not assure you that a court would enforce all of the terms of these clauses or the agreements generally. If these clauses were not fully enforced, our employees could be able to freely join our competitors. Although we generally attempt to control access to and distribution of our proprietary information by our employees, we do not assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Any of these events could have a material adverse effect on our financial and business prospects.

(11) If leading companies in our industry or standard-setting bodies or institutions downplay, minimize or reject the use of our technology, deployment may be slowed and we may be unable to achieve revenue growth, particularly in the media and entertainment sectors.

Many of our business endeavors, such as our licensing of intellectual property in support of audio and video copy-control applications, can be impeded or frustrated by larger, more influential companies or by standard-setting bodies or institutions downplaying, minimizing or rejecting the value or use of our technology. A negative position by these companies, bodies or institutions, if taken, may result in obstacles for us that we would be incapable of overcoming and may block or impede the adoption of digital watermarking, particularly in the media and entertainment market. In addition, potential customers in the media and entertainment industry may delay or reject initiatives that relate to deployment of our technology. Such a development would make the achievement of our business objectives in this market difficult or impossible.

(12) We are subject to risks encountered by companies developing and relying upon new technologies, products and services for substantial amounts of their growth or revenue.

Our business and prospects must be considered in light of the risks and uncertainties to which companies with new and rapidly evolving technology, products and services are exposed. These risks include the following:

• we may be unable to develop sources of new revenue or sustainable growth in revenue because our current and anticipated technologies, products and services may be inadequate or 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 existing and new products and services;

• we may be unable to develop and maintain new technologies upon which our existing and new products and services are dependent in order for our products and services to be sustainable and competitive and in order for us to expand our revenue and business; and

• our licensees may not be able to successfully enter new markets or grow their businesses, limiting the royalties payable to us and our associated revenue and profits.

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Some of our key technology and solutions from our patent or technology licensees are in the development stage. Consequently, products incorporating our technology and solutions are undergoing technological change and are in the early stages of introduction in the marketplace. Delays in the adoption of these products or adverse competitive developments may result in delays in the development of new revenue sources or the growth in our revenue. In addition, we may be required to incur unanticipated expenditures if product changes or improvements are required. Moreover, new industry standards might redefine the products that we or our licensees are able to sell, especially if these products are only in the prototype stage of development. If product changes or improvements are required, success in marketing these products by us or our licensees and achieving profitability from these products could be delayed or halted. We also may be required to fund any changes or improvements out of operating income, which could adversely affect our profitability.

(13) We may not be able to adequately protect or enforce our intellectual property, and we may be subject to infringement claims and other litigation, which could adversely affect our business.

Our success depends in part on licensing our proprietary technology. To protect our intellectual property portfolio, we rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements. Unlicensed copying and use of our intellectual property or infringement of our intellectual property rights may result in the loss of revenue to us. Although we devote significant resources to developing and protecting our technologies, and evaluating 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 face risks associated with our patent position, including the potential need from time to time to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be challenged, and the possibility that third parties will be able to compete against us without infringing our patents. Our recently resolved litigation with Verance, which brought a declaratory judgment action alleging that certain of our patents are invalid or not infringed, is an example. Budgetary concerns may cause us not to file or continue litigation against known infringers of our patent rights, or may cause us not to file for, or pursue, patent protection for all of our inventive technology, in jurisdictions where they may have value. Some governmental entities that might infringe our intellectual property rights may enjoy sovereign immunity from such claims. Failure to reliably enforce our patent rights against infringers may make licensing more difficult. If we fail to protect our intellectual property rights and proprietary technology 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 technology or relating to the intellectual property rights of others, our business could be seriously harmed because the value ascribed to our intellectual property could diminish and result in a lower stock price, or we may incur significant costs in bringing legal proceedings against third parties who are infringing our patents.

Effective protection of intellectual property rights may be unavailable or limited. Patent protection throughout the world is generally established on a country-by-country basis. We have applied for patent protection in the U.S. and in various other countries. We do not assure you, however, that pending patents will be issued or that issued patents will be valid or enforceable. Failure to obtain these patents or failure to enforce those patents that are obtained may result in a loss of revenue to us. We do not assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technologies, duplicate our services or design around any of our patents or other intellectual property rights.

In the ordinary course of building strategic business relationships with potential partners we may encounter companies that we believe are infringing on our patent portfolio. When we encounter these companies we believe are infringing, we try to negotiate a license to our patents. If we are unable to negotiate a license and continue to believe they are infringing on our patents, we may file a lawsuit and incur legal fees in the process.

Patents have finite lives, and our ability to continue to commercially exploit our patents is limited to the term of the patents. Our earliest patents began expiring in July 2012. The size and strength of our portfolio

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depends on the number of patents that have been granted, offset by the number of patents that expire, in any given year. We continue to grow our patent portfolio, but we do not assure you that we will be able to exploit newer patents to the extent that we have our earlier patents.

We are the exclusive licensee under some third-party patents, and may need the assistance of these parties if we choose to enforce any of these patent rights. The cooperation of these third parties cannot be assured. Although we rely on some of these technologies for our products or for our licenses to third parties to date, the licensed patents have not been material to our operations.

As more companies engage in business activities relating to digital watermarking, and develop corresponding 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 and divert management resources. These claims may require us to pay significant damages, cease production of infringing products, terminate our use of infringing technology or develop non-infringing technologies. In these circumstances, continued use of our technology 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 technology may result in liability that threatens our continuing operation.

Some of our contracts include indemnity and similar provisions regarding our non-infringement of third-party intellectual property rights. As deployment of our technology increases, and more companies enter our markets, the likelihood of a third party lawsuit resulting from these provisions increases. If an infringement arose in a context governed by such a contract, we may have to refund to our customer amounts already paid to us or pay significant damages, or we may be sued by the party whose intellectual property has allegedly been infringed upon.

As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, directors, consultants and corporate partners, and attempt to control access to and distribution of our technology, solutions, documentation and other proprietary information. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technology, solutions or other proprietary information or independently develop similar technologies, solutions or information. The steps that we have taken to prevent misappropriation of our solutions, technology or other proprietary information may not succeed.

(14) If our revenue models and pricing structures relating to products and services that are under development do not gain market acceptance, the products and services may fail to attract or retain customers and we may not be able to generate new revenue or sustain existing revenue.

Some of our business involves embedding digital watermarks in traditional and digital media, including secure documents, audio, video and imagery, and licensing our intellectual property. Our revenue stream is based primarily on a combination of development, consulting, subscription and license fees from a variety of media identification and management applications. We also launched our Digimarc Discover initiative during 2011, which incorporates new business and pricing models for licensing access to our online services portal and value added service providers. We have not fully developed revenue models for some of these future digital watermarking applications and licensing endeavors. Because some of our products and services are not yet well-established in the marketplace, and because some of these products and services will not directly displace existing solutions, we cannot be certain that the pricing structure for these products and services will gain market acceptance or be sustainable over time or that the marketing for these products and services will be effective.

(15) If we are unable to respond to regulatory or industry standards effectively, or if we are unable to develop and integrate new technologies effectively, our growth and the development of our products and services could be delayed or limited.

Our future success will depend in part on our ability to enhance and improve the responsiveness, functionality and features of our products and services, and those of our business partners, in accordance with

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regulatory or industry standards. Our ability to remain competitive will depend in part on our ability to influence and respond to emerging industry and governmental standards in a timely and cost-effective manner. If we are unable to influence these or other standards or respond to these standards effectively, our growth and the development of various products and services could be delayed or limited.

Our market is characterized by new and evolving technologies. The success of our business will depend on our ability to develop and integrate new technologies effectively and 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 do not 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 develop or integrate new technologies effectively or respond to these changing needs, our margins could decrease, and our release of new products and services and the deployment of our watermarking technology could be adversely affected.

(16) We may need to retain additional employees or contract labor in the future in order to take advantage of new business opportunities arising from increased demand, which could increase costs and impede our ability to achieve or sustain profitability in the short term.

We have staffed our company with the intent of achieving and sustaining profitability. Our current staffing levels could affect our ability to respond to increased demand for our services. In addition, to meet any increased demand and take advantage of new business opportunities in the future, we may need to increase our workforce through additional employees or contract labor. Although we believe that increasing our workforce would potentially support anticipated growth and profitability, it would increase our costs. If we experience such an increase in costs, we may not succeed in achieving or sustaining profitability in the short term.

(17) The terms and conditions of our contracts could subject us to damages, losses and other expenses if we fail to meet delivery and other performance requirements.

Our service contracts typically include provisions imposing:

• development, delivery and installation schedules and milestones;

• customer acceptance and testing requirements; and

• other performance requirements.

To the extent these provisions involve performance over extended periods of time, risks of noncompliance may increase. From time to time we have experienced delays in system implementation, timely acceptance of programs, concerns regarding program performance and other contractual disputes. If we fail to meet contractual milestones or other performance requirements as promised, or to successfully resolve customer disputes, we could incur liability for damages, as well as increased costs, lower margins, or compensatory obligations in addition to other losses, such as harm to our reputation. Any unexpected increases in costs to meet our contractual obligations or any other requirements necessary to address claims and damages with regard to our customer contracts could have a material adverse effect on our business and financial results.

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(18) Products deploying our technology could have unknown defects or errors, which may give rise to claims against us, divert application of our resources from other purposes or increase our project implementation and support costs.

Products and services as complex as those we offer or develop may contain undetected defects or errors. Furthermore, we often provide complex implementation, integration, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our products. Despite testing, defects or errors in our products and services may occur, which could result in delays in the development and implementation of products and systems, inability to meet customer requirements or expectations in a timely manner, loss of revenue or market share, increased implementation and support costs, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs, increased service and warranty costs and warranty or breach of contract claims. Although we attempt to reduce the risk of losses resulting from warranty or breach of contract claims through warranty disclaimers and liability limitation clauses in our sales agreements when we can, these contractual provisions are sometimes not included and may not be enforceable in every instance. If a court refuses to enforce the liability limiting provisions of our contracts for any reason, or if liabilities arise that were not contractually limited or adequately covered by insurance, the expense associated with defending these actions or paying the resultant claims could be significant.

(19) The security systems used in our product and service offerings may be circumvented or sabotaged by third parties, which could result in the disclosure of sensitive information or private personal information or cause other business interruptions that could damage our reputation and disrupt our business.

Our business relies on computers and other information technologies, both internal and at customer locations. The protective measures that we use may not prevent security breaches, and failure to prevent security breaches may disrupt our business, damage our reputation, and expose us to litigation and liability. A party who is able to circumvent security measures could misappropriate sensitive or proprietary information or materials or cause interruptions or otherwise damage our products, services and reputation, and the property of our customers. If unintended parties obtain sensitive data and information, or create bugs or viruses or otherwise sabotage the functionality of our systems, 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. Further, our insurance coverage may be insufficient to cover losses and liabilities that may result from these events.

In addition, 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. Any protection or remedial measures may not be available at a reasonable price or at all, or may not be entirely effective if commenced.

(20) We are periodically involved in the ordinary course of business in litigation, and an adverse resolution of such litigation may adversely affect our business, financial condition, results of operations, and cash flows.

From time to time, in our normal course of business, we are a party to various legal claims, actions and complaints. As part of our patent licensing program, we bring claims or counterclaims of patent infringement to enforce our patent rights. Given the uncertain nature of litigation, we are not able to estimate the amount or range of gain or loss that could result from an outcome of litigation. Litigation can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal proceedings are often uncertain and difficult to predict. We could incur costs in excess of any currently established accruals and, to the extent available, excess liability insurance. An unfavorable outcome in any legal proceedings could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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RISKS RELATED TO OUR CAPITAL STOCK

(21) Our common stock price may be volatile, and you could lose all or part of your investment in shares of our common stock.

The price of shares of our common stock may fluctuate as a result of changes in our operating performance or prospects and other factors. Some specific factors that may have a significant effect on the price of shares of our common stock include:

• the public’s reaction to our public disclosures;

• actual or anticipated changes in our operating results or future prospects;

• potential changes from originally reported royalties by customers resulting from an audit performed by us or a third party, or self-corrected by the customer;

• strategic actions by us or our competitors, such as acquisitions or restructurings;

• impact of acquisitions on our liquidity and financial performance;

• new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

• changes in accounting standards, policies, guidance, interpretations or principles applicable to us;

• conditions of the industry as a result of changes in financial markets or general economic or political conditions;

• the failure of securities analysts to cover our common stock in the future, or changes in financial estimates by analysts;

• changes in analyst recommendations or earnings estimates regarding us, other comparable companies or the industry generally, and our ability to meet those estimates;

• future issuances of our common stock or the perception that future sales could occur; and

• volatility in the equity securities market.

(22) Our common stock price may increase or decrease on material news or developments.

As a thinly-traded microcap company, volatility in the equity securities market may disproportionately affect swings in our stock price, upward and downward, on positive and negative developments. Over the past year, we have had significant fluctuations, primarily downward push on our stock price and market capitalization despite positive developments, including the $8.0 million past due royalties payment from Verance received in the first quarter of 2012 in connection with the resolution of our litigation. In contrast, in connection with our arrangement with IV, after the second quarter of 2013, the quarterly installments on the license issue fee end, and we are not able to reasonably estimate the future cash flow impact of any profit sharing we may earn from IV, which may or may not have an effect on our stock price. We suspect that the effects of computerized trading also exacerbate fluctuations in our stock price.

(23) Our corporate governance documents, our rights agreement and Oregon law may delay or prevent an acquisition of us that shareholders may consider favorable, which could decrease the value of your shares.

Our articles of incorporation and bylaws and Oregon law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include supermajority voting requirements for shareholders to amend our organizational documents and limitations on actions by our shareholders by written consent. In addition, our board of directors has the right to issue preferred stock without shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. On July 31, 2008, our Board of Directors adopted a rights agreement pursuant to which one one-

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hundredth (1/100) of a preferred stock purchase right will be issued for each outstanding share of our common stock. In general terms, our rights agreement works by imposing a significant penalty upon any person or group that acquires 15% or more of our outstanding common stock without the approval of our Board of Directors. Oregon law also restricts the ability to vote shares of stock acquired in a transaction that causes the acquiring person to control at least one-fifth, one-third or one-half of the votes entitled to be cast in the election of directors. Shares acquired in a control share acquisition have no voting rights except as authorized by a vote of the shareholders. Although we believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some shareholders.

ITEM 1B:     UNRESOLVED STAFF COMMENTS

None.

ITEM 2:    PROPERTIES

We lease our principal administrative, marketing, research, and intellectual property development facility, which is approximately 46,000 square feet in size and located in Beaverton, Oregon. In May 2010 we entered into an amendment with the landlord to extend the length of our facilities lease through August 2016.

We assumed the existing facilities lease agreement for Attributor in San Mateo, California which is approximately 3,500 square feet in size. The original lease term has been extended through April 2013 and we are currently in negotiations to establish a new agreement with the landlord.

See Note 10 of our Notes to Consolidated Financial Statements for further lease related disclosures.

ITEM 3:    LEGAL PROCEEDINGS

We are subject from time to time to legal proceedings and claims arising in the ordinary course of business

Our newly acquired subsidiary, Attributor, is a defendant in a patent infringement lawsuit brought by Blue Spike, LLC (E.D. Texas, Civil Action No: 6:12-cv-540). The case was brought against Attributor in August 2012, and was consolidated with other lawsuits brought by Blue Spike into Civil Action No. 6:12-cv-00499.

Blue Spike asserted infringement by Attributor of four patents. Attributor filed an answer denying that it has infringed any valid claim of the patents in suit, and asserting specified defenses, including non-infringement and invalidity.

The court is consolidating cases that Blue Spike brought against over sixty defendants into one case. After that process is complete, a schedule should be set.

Blue Spike has not alleged a specific amount of monetary damages in its Complaint.

ITEM 4:    MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURTIES

Our common stock began trading on the Nasdaq Stock Market LLC in October 2008 under the symbol “DMRC.” The closing price of our common stock on the Nasdaq Global Market was $22.94 on February 15, 2013. The following table lists the high and low sales prices of our common stock for the periods indicated, as reported by The Nasdaq Global Market.

	Year Ended December 31,
	2012				2011
	High		Low		High		Low
First quarter	$	32.10	$	24.34	$	31.55	$	24.03
Second quarter	$	30.25	$	23.55	$	35.47	$	24.58
Third quarter	$	28.05	$	21.06	$	43.82	$	25.38
Fourth quarter	$	22.80	$	17.68	$	29.31	$	21.00

At February 15, 2013, we had 210 shareholders of record of our common stock, as shown in the records of our transfer agent. Since many holders hold shares in “street name,” we believe that there is a significantly larger number of beneficial owners of our common stock than the number of record holders.

No dividends were declared or paid on our capital stock during the year end December 31, 2011. For the year end December 31, 2012, our Board of Directors declared and paid the following dividends per common share (thousandths, except per share data):

Declaration Date	Dividend Per Common Share		Record Date		Total Amount		Payment Date
April 26, 2012	$	0.11		May 11, 2012	$	779	May 25, 2012
July 26, 2012	$	0.11		August 10, 2012	$	784	August 24, 2012
October 23, 2012	$	0.11		November 6, 2012	$	783	November 20, 2012

In November 2011, our Board of Directors approved a stock repurchase programs authorizing the purchase, at the discretion of management, of shares of up to $5.0 million of our common stock for a one year period through periodic open-market or private transactions at then-prevailing market prices. In December 2012, the program was extended through December 31, 2013. As of December 31, 2012, we had repurchased 43,293 shares under this program at an aggregate purchase price of $1.0 million.

On January 26, 2011, the Company repurchased 552,536 shares of its common stock from Koninklijke Philips Electronics, N.V., in a privately negotiated transaction. The shares were purchased for an aggregate price of $14.9 million, including transaction fees.

In addition to the stock repurchase program described above, we withhold (repurchase) shares of common stock in connection with the vesting of restricted shares from time to time, and we repurchase shares in connection with stock option exercises, to cover the exercise prices and taxes. For the three-month period ended December 31, 2012, we withheld 10,737 shares in connection with stock option exercises for an aggregate purchase price of $212.

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The following table sets forth information regarding purchases of our equity securities during the three-month period ended December 31, 2012:

Period	(a) Total number of shares purchased (1)		(b) Average price paid per share (1)		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Approximate dollar value) of shares that may yet be purchased under the plans or programs
Month 1
October 1, 2012 to October 31, 2012		9,192	$	19.52		—	$	4.2 million
Month 2
November 1, 2012 to November 30, 2012		8,360	$	20.37		—	$	4.2 million
Month 3
December 1, 2012 to December 31, 2012		11,577	$	18.94		10,690	$	4.0 million
Total		29,129	$	19.53		10,690

(1) Includes 18,439 fully vested restricted stock shares of common stock withheld (purchased) by us in satisfaction of required withholding tax liability and 10,690 common stock repurchased under the stock repurchase program.

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STOCK PERFORMANCE GRAPH

The following graph compares the performance of our common stock with the performance of (i) the Nasdaq U.S. Index and (ii) a peer group selected by us. The comparison assumes $100 was invested on October 17, 2008, the first day of trading in our common stock at the closing price on that date and in each of the two indices at the closing price on that date, and assumes reinvestment of any dividends. We believe that the companies in the peer group are comparable to us in terms of line-of-business, market capitalization, revenue, and number of employees, and therefore, comprise an appropriate peer group for purposes of comparing stock performance. The comparisons in the graph are based on historical data and are not indicative of, nor intended to forecast, future performance of our common stock.

Company Name / Index	Base Period 10/17/08		INDEXED RETURNS Years Ending
			12/31/08		12/31/09		12/31/10		12/31/11		12/31/12
Digimarc Corporation		100		106.03		158.62		317.57		252.80		222.45
Nasdaq Index		100		92.15		128.39		151.91		153.96		172.93
Peer Group		100		88.34		135.54		208.44		179.89		204.43

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Companies included in the Peer Group index of the stock performance graph are as follows(1):

8X8 INC CALLIDUS SOFTWARE INC DTS INC GLU MOBILE INC GUIDANCE SOFTWARE IMMERSION CORPORATION KEYNOTE SYSTEMS INC ORBCOMM INC PDF SOLUTIONS INC PERVASIVE SOFTWARE INC PROS HOLDDINGS INC
SUPPORT.COM INC WAVE SYSTEMS CORP ZIX CORPORATION

(1) The peer group does not include seven companies from our 2011 peer group: DemandTec Inc., which was acquired in 2012; and Bitstream Inc., Ditech Networks Inc., Insignia Systems Inc., Selectica Inc., Versant Corp. and Warwick Valley Telephone Co., each of which no longer meet the criteria to be included in our peer group.

ITEM 6: SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report.

On August 1, 2008, Old Digimarc (“predecessor”) spun off its wholly owned subsidiary, DMRC LLC, which was formed in anticipation of the spin-off and held all of the assets and liabilities of Old Digimarc’s Digital Watermarking Business. We changed our name back to Digimarc Corporation shortly after the spin-off.

Until August 1, 2008, we were a wholly owned subsidiary of DMRC LLC, which immediately prior to the spin-off was a wholly owned subsidiary of Old Digimarc. DMRC LLC was formed in Delaware on June 18, 2008, in anticipation of the spin-off of the Digital Watermarking Business. Prior to the spin-off, in a transaction which we refer to as the restructuring, Old Digimarc contributed all of the assets and liabilities related to its Digital Watermarking Business, together with all of Old Digimarc’s cash, including cash received upon the exercise of stock options, to DMRC LLC. The restructuring did not result in the loss of any significant Digital Watermarking Business customers or contracts.

Following the restructuring, all of the limited liability company interests of DMRC LLC were transferred to a newly created trust for the benefit of Old Digimarc record holders on the basis of one limited liability company interest of DMRC LLC for every three and one-half shares of Old Digimarc common stock held by the shareholder as of the spin-off record date and time. DMRC LLC then merged with and into DMRC Corporation, and each limited liability company interest of DMRC LLC was converted into one share of common stock of DMRC Corporation. After completion of the acquisition of Old Digimarc by L-1, DMRC Corporation changed its name to Digimarc Corporation. As a result, upon effectiveness of the Form 10 on October 16, 2008, each Old Digimarc record holder received one share of Digimarc common stock for every three and one-half shares of Old Digimarc common stock held by the shareholder as of the spin-off record date and time, and we became an independent, publicly-traded company owning and operating the Digital Watermarking Business.

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The following tables set forth our selected financial information as of and for each of the years in the five-year period ended December 31, 2012, which has been derived from audited financial statements as of December 31, 2012, 2011, 2010, 2009 and 2008, and as of August 1, 2008, and years ended December 31, 2012, 2011, 2010 and 2009; and for the periods August 2, 2008 through December 31, 2008 and January 1, 2008 through August 1, 2008. The selected predecessor financial information presented may not reflect the results of operations or financial condition that would have resulted had we been operating as an independent, publicly-traded company during the period presented.

Statement of Operations Data (1)

	Successor			Successor			Successor			Successor			Successor			Predecessor (2)			Total*
	Year Ended December 31,																		Year Ended December 31,
	2012			2011			2010			2009			Period August 2, 2008 through December 31, 2008			Period January 1, 2008 through August 1, 2008			2008
Revenue	$	44,375		$	36,039		$	31,150		$	19,071		$	7,832		$	11,950		$	19,782
Gross profit percentage		85	%		81	%		78	%		67	%		70	%		69	%		70	%
Operating income (loss)	$	14,594		$	6,389		$	6,151		$	(2,565	)	$	(357	)	$	836		$	479
Net income (loss)	$	8,272		$	5,656		$	4,174		$	(2,757	)	$	76		$	1,415		$	1,491
Earnings (loss) per common share:
Net income (loss) per common share—basic	$	1.16		$	0.84		$	0.59		$	(0.39	)	$	0.01
Net income (loss) per common share—diluted	$	1.12		$	0.76		$	0.55		$	(0.39	)	$	0.01
Weighted average common shares outstanding—basic		6,757			6,741			7,120			7,140			7,156
Weighted average common shares outstanding—diluted		6,989			7,430			7,623			7,140			7,156
Cash dividends declared per common share	$	0.33		$	—		$	—		$	—		$	—
Pro-forma earnings (loss) per common share:
Net income (loss) per common share—basic and diluted																$	0.20		$	0.21
Weighted average common shares outstanding—basic and diluted																	7,143			7,143

* Used for comparative purposes

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Balance Sheet Data (1)

	Successor		Successor		Successor		Successor		Successor		Predecessor (2)
	As of December 31,
	2012		2011		2010		2009		2008		As of August 1, 2008
Cash, cash equivalents and short-term marketable securities	$	32,269	$	25,663	$	34,781	$	42,786	$	40,168	$	54,749
Long-term marketable securities	$	6,787	$	7,715	$	11,163	$	—	$	5,744	$	—
Total assets	$	57,331	$	45,793	$	55,765	$	50,483	$	52,441	$	64,111
Long-term liabilities	$	673	$	464	$	525	$	99	$	257	$	237
Redeemable preferred stock	$	50	$	50	$	50	$	50	$	50	$	—

(1) The Old Digimarc/L-1 merger agreement provided that all cash and cash equivalents, short-term marketable securities and restricted cash, collectively referred to as the aggregate cash, of Old Digimarc was treated as cash retained by Digimarc in its carved-out financial statements. As a result, the presentation of the financial statements and operating data of Digimarc during the carve-out periods reflect the cash flow of Old Digimarc, including its Secure ID Business, combined with Digimarc.

(2) The predecessor financial statements include certain accounts of Old Digimarc and the assets, liabilities and results of operations of Old Digimarc’s Digital Watermarking Business that were separated, or “carved-out,” from Old Digimarc. The operating expenses included in the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of the expenses was not practicable. The common costs include expenses from Old Digimarc related to various operating shared services cost centers, including: executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology. Management believes that the assumptions underlying the predecessor financial statements are reasonable.

The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor been a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the financial position, results of operations and cash flows of Digimarc’s current business had the predecessor operated as a separate, stand-alone public entity during the period presented in the predecessor financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. Operating costs of Digimarc on a stand-alone basis have been higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the financial position, results of operations and cash flows reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the period reflected in the predecessor financial statements.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included at the end of this discussion, under the caption “Forward-Looking Statements” and Item 1A, “Risk Factors” for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.

All dollar amounts are in thousands, unless otherwise noted.

Overview

Digimarc Corporation enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. Our technology provides the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. Our technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.

Our business has further expanded in e-commerce with our recent acquisition of Attributor Corporation (“Attributor”). Digimarc Guardian^SM (formerly Attributor Guardian) software and services protect book revenue and authors’ rights by finding, reporting on, and assisting in removing pirated content found on the Internet. Online book piracy is a growing and global problem, and with emerging e-book standards and the growing popularity of iPads, Kindles and other e-readers, book piracy is expected to grow dramatically. Attributor is building a promising business in this high growth market, and possesses technical skills and market knowledge that will complement our existing organization. We expect the acquisition to provide many strategic and financial benefits.

Our growth strategy encompasses both our government and commercial businesses. We plan additional investment in research and development of a commercial mobile platform that boosts device specific capabilities.

To protect our significant efforts in creating our technology, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world’s most extensive patent portfolios in the field of digital watermarking and related fields, with greater than 1,200 U.S. and foreign patents and pending patent applications as of December 31, 2012. We continue to develop and broaden our portfolio of patented technology in the fields of media identification and management technology and related applications and systems. We devote significant resources to developing and protecting our inventions and continuously seek to identify and evaluate potential licensees for our patents.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, fixed assets, goodwill, intangible assets, income taxes, long-term service contracts, marketable securities, and contingencies and litigation. We base our estimates

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on historical experience and on various other assumptions we believe to be reasonable in the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Some of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, revenue recognition on license and subscription arrangements, goodwill, impairments and estimation of useful lives of long-lived assets, contingencies and litigation, patent costs, stock-based compensation and income taxes (valuation allowance). We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue recognition:

We derive our revenue primarily from development services and licensing of our patent portfolio:

• Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements and fixed price consulting agreements.

• License revenue, including royalty revenue, originates primarily from licensing our technology and patents where we receive royalties as an income stream. Subscription revenue, which includes subscriptions for products and services, are more recurring in nature.

Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) 605 “Revenue Recognition” and 985 “Software” when the following four criteria are met:

(i) persuasive evidence of an arrangement exists,

(ii) delivery has occurred,

(iii) the fee is fixed or determinable, and

(iv) collection is reasonably assured.

Some customer arrangements encompass multiple deliverables, such as patent license, professional services, software subscriptions, and maintenance fees. For arrangements that include multiple deliverables, we identify separate units of accounting at inception based on the consensus reached under ASC 605-25 “Multiple-Element Arrangements,” which provides that revenue arrangements with multiple deliverables should be divided into separate units of accounting if certain criteria are met. The consideration for the arrangement is allocated to the separate units of accounting using the relative selling price method.

The relative selling price method allocates the consideration based on our specific assumptions rather than assumptions of a marketplace participant, and any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.

Applicable revenue recognition criteria are considered separately for each separate unit of accounting as follows:

• Revenue from professional service arrangements is generally determined based on time and materials. Revenue for professional services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

• License revenue is recognized when amounts owed to Digimarc have been earned, are fixed or determinable (within our normal 30 to 60 day payment terms), and collection is reasonably assured. If the payment terms extend beyond our normal 30 to 60 days, the fee may not be considered to be fixed or determinable, and the revenue would then be recognized when installments are due.

• We record revenue from certain license agreements upon cash receipt as a result of collectability not being reasonably assured.

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• Our standard payment terms for license arrangements are 30 to 60 days. Extended payment terms increase the likelihood we will grant a customer a concession, such as reduced license payments or additional rights, rather than hold firm on minimum commitments in an agreement to the point of losing a potential advocate and licensee of patented technology in the marketplace. Extended payment terms on patent license arrangements are not considered to be fixed or determinable if payments are due beyond our standard payment terms, primarily because of the risk of substantial modification present in our patent licensing business. As such, revenue on license arrangements with extended payment terms are recognized as fees become fixed and determinable.

• Subscription revenue, which includes subscriptions for products and services, is generally paid in advance and recognized over the term of the license or service period, which is generally one month to 24 months.

Deferred revenue consists of billings in advance for professional services, licenses and subscriptions for which revenue has not been earned.

Goodwill: We account for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price, which includes contingent consideration, is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates.

Contingent consideration is recorded at the acquisition date based upon the estimated fair value of the contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any adjustments in fair value being recognized in earnings from operations.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

We review goodwill in June of each year, or on an interim basis if required, for impairment to determine if events or changes in business conditions indicate that the carrying value of the goodwill may not be recoverable. Such reviews assess the fair value of the assets compared to the carrying values.

Impairments and estimation of useful lives of long-lived assets: We periodically assess long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the provisions of ASC 360 “Property, Plant and Equipment.” This statement requires that long-lived assets, including definite-lived intangible assets, 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 undiscounted cash flows expected to be generated by the asset over its remaining useful life. 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. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Also, we periodically review the useful lives of long-lived assets whenever events or changes in circumstances indicate that the useful life may have changed. If the estimated useful lives of the assets do change, we adjust the depreciation or amortization period to a shorter or longer period, based on the circumstances identified.

Contingencies and litigation: We periodically evaluate all pending or threatened contingencies or commitments, if any, that are reasonably likely to have a material adverse effect on our operations or financial position. We assess the probability of an adverse outcome and determine if it is remote, reasonably possible or probable as defined in accordance with the provisions of ASC 450 “Contingencies.” If information available

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prior to the issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of our financial statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then the loss is accrued and charged to operations. If no accrual is made for a loss contingency because one or both of the conditions pursuant to ASC 450 are not met, but the probability of an adverse outcome is at least reasonably possible, we will disclose the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that such an estimate cannot be made.

Patent costs: Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs, also referred to as patent prosecution costs, include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company’s patent portfolio.

Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the respective periods, generally from one to four years.

These patent costs are capitalized in accordance with ASC 350 “Intangibles—Goodwill and Other,” based on our determination that the related patents provide value through the life of the patent. However, we may subsequently determine a patent should be abandoned or has been impaired, in which case the accumulated cost, including maintenance fees, would be written off. Through December 31, 2012, abandonment or write-offs have not been material either individually or in the aggregate.

Stock-based compensation: We account for stock-based compensation in accordance with ASC 718 “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock based on estimated fair values.

For stock options, we use the Black-Scholes option pricing model as our method of valuation. Our determination of the fair value on the date of grant is affected by our stock price as well as assumptions regarding a number of highly subjective variables. These variables include, but are not limited to, the expected life of the award, our expected stock price volatility over the term of the award, the risk-free interest rate and the expected dividend yield. Although the fair value of stock-based awards is determined in accordance with ASC 718 and Staff Accounting Bulletin (“SAB”) No. 107 “Shared-Based Payment,” the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

The fair value of restricted stock awards granted is based on the fair market value of our common stock on the date of the grant (measurement date), and is recognized over the vesting period of the related restricted stock using the straight-line method.

Income taxes (valuation allowance): We account for income taxes in accordance with ASC 740 “Income Taxes.” 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. A valuation allowance is required for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset will not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset. The more-likely-than-not criterion means the likelihood of realization is greater than 50 percent. When evaluating whether it is more likely than not that all or some portion of the deferred tax asset will not be realized, we evaluate all available evidence, both positive and negative, that may affect the realizability of deferred tax assets and that should be identified and considered in determining the appropriate amount of the valuation allowance.

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Results of Operations—the Years Ended December 31, 2012 and December 31, 2011

The following tables present our consolidated statements of operations data for the periods indicated.

	Year Ended December 31, 2012 (1)			Year Ended December 31, 2011
Revenue:
Service	$	10,792		$	12,395
License and subscription		33,583			23,644
Total revenue		44,375			36,039
Cost of revenue:
Service		5,917			6,638
License and subscription		591			299
Total cost of revenue		6,508			6,937
Gross profit		37,867			29,102
Operating expenses:
Sales and marketing		3,827			4,336
Research, development and engineering		8,741			7,327
General and administrative		9,457			9,956
Intellectual property		1,248			1,094
Total operating expenses		23,273			22,713
Operating income		14,594			6,389
Net loss from joint ventures		(1,107	)		(2,174	)
Interest income, net		179			195
Income before income taxes		13,666			3,870
(Provision) benefit for income taxes		(5,394	)		1,786
Net income	$	8,272		$	5,656

(1) Includes the results of operations of Attributor from the date of acquisition, December 3, 2012 to the end of the year.

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	Year Ended December 31, 2012 (2)			Year Ended December 31, 2011
Revenue:
Service		24	%		34	%
License and subscription		76			66
Total revenue		100			100
Cost of revenue:
Service		13			18
License and subscription		1			1
Total cost of revenue		14			19
Gross profit		85			81
Operating expenses:
Sales and marketing		9			12
Research, development and engineering		20			20
General and administrative		21			28
Intellectual property		3			3
Total operating expenses		52			63
Operating income		33			18
Net loss from joint ventures		(2	)		(8	)
Interest income, net		—			1
Income before income taxes		31			11
(Provision) benefit for income taxes		(12	)		5
Net income		19	%		16	%

(2) Percentages do not foot due to rounding

Summary

Our revenue increased in 2012 from 2011 primarily as a result of the $8.0 million past due royalties payment from Verance Corporation (“Verance”) received in the first quarter of 2012 in connection with the resolution of our litigation with Verance and increased license payments from Intellectual Ventures (“IV”) and Verance, offset by lower revenue from the joint ventures with The Nielsen Company (“Nielsen”) due to the suspension of their operations in the first quarter of 2012.

Total operating expense increased slightly primarily as a result of increased investment in research and development and increased stock-based compensation, due to higher headcount and an additional layer of stock-based awards, partially offset by lower legal costs associated with the settlement of the Verance litigation in January 2012. In 2012, we continued to invest in the marketing and enhancing of Digimarc Discover.

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Revenue

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Increase (Decrease)			Percent Increase (Decrease)
Revenue:
Service	$	10,792		$	12,395		$	(1,603	)		(13	)%
License and subscription		33,583			23,644			9,939			42	%
Total	$	44,375		$	36,039		$	8,336			23	%
Revenue (as % of total revenue):
Service		24	%		34	%
License and subscription		76	%		66	%
Total		100	%		100	%

Service. Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements, or fixed price consulting agreements. The majority of our service revenue is derived from contracts with the Central Banks, IV, Nielsen, including the joint venture TVaura LLC, and government agencies and contractors. The agreements range from several months to several years in length, and our longer term contracts are subject to work plans that are reviewed and agreed upon at least annually. These contracts generally provide for billing hours worked at predetermined rates and, to a lesser extent, for cost reimbursement for third party costs and services. Increases or decreases in the services provided under these contracts are generally subject to both volume and price changes. The volume of work is generally negotiated at least annually and can be modified as the customer’s needs change. We also have provisions in our longer term contracts that allow for specific hourly rate price increases on an annual basis to account for cost of living variables. Contracts with other government agencies and contractors are generally shorter term in nature, less linear in billings and less predictable than our longer term contracts because the contracts with other government agencies are subject to government budgets and funding.

The decrease in service revenue was due primarily to lower activity in the joint ventures, due to the suspension of operations, offset by increased program work from the Central Banks.

License and subscription. License revenue originates primarily from licensing our technology and patents where we receive royalties as our income stream. The majority of license revenue is derived from contracts with IV, Verance, Nielsen and Civolution. Subscription revenue, which includes subscriptions for products and services, are more recurring in nature. Revenue from our licensed products have minimal associated direct costs, and thus are highly profitable.

The increase in license and subscription revenue was due primarily to the $8.0 million past due royalties payment from Verance received in the first quarter of 2012 in connection with the resolution of our litigation with Verance and increased license payments from IV and Verance.

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Revenue by geography

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Increase		Percent Increase
Revenue by geography:
Domestic	$	30,736		$	22,660		$	8,076		36	%
International		13,639			13,379			260		2	%
Total	$	44,375		$	36,039		$	8,336		23	%
Revenue (as % of total revenue):
Domestic		69	%		63	%
International		31	%		37	%
Total		100	%		100	%

Domestic revenue increased primarily as a result higher license and royalty payments from Verance and IV, partially offset by lower activity in the joint ventures.

International revenue increased primarily due to increased program work from the Central Banks.

We anticipate a decrease in revenue in 2013 compared to 2012 primarily due to the $8.0 million past due lump sum royalties payment from Verance in 2012, and the quarterly license payments from IV end in May 2013; partially offset by expected revenue growth from revenues associated with our recent acquisition of Attributor and other existing customers and from new customers as we continue to expand the marketing and monetization of our intellectual property portfolio.

Cost of revenue

Service. Cost of service revenue primarily includes costs that are allocated from research, development and engineering, sales and marketing and intellectual property that relate directly to performing services under our customer contracts, and, to a lesser extent, direct costs of program delivery for both personnel and operating expenses. Allocated costs include:

• compensation, benefits, incentive compensation in the form of stock-based compensation expense and related costs of our software developers, quality assurance personnel, product managers, business development managers and other personnel where we bill our customers for time and materials costs;

• payments to outside contractors that are billed to customers;

• charges for equipment directly used by customers;

• depreciation and other charges for machinery, equipment and software directly used by customers;

• travel costs directly attributable to service and development contracts; and

• charges for infrastructure and centralized costs of facilities and information technology.

License and subscription. Cost of license and subscription revenue primarily includes:

• patent or software license costs for any patents licensed from third parties where the party receives a portion of royalties or license revenue received by Digimarc;

• internet service provider connectivity charges and image search data fees to support the services offered to our subscription customers;

• compensation benefits, incentive compensation in the form of stock-based compensation expense and related costs of operations personnel and the cost of contractors to provide our new Guardian subscription service;

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• charges for infrastructure and centralized costs of facilities and information technology; and,

• amortization of capitalized patent costs.

Gross profit

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Increase (Decrease)			Percent Increase (Decrease)
Gross Profit:
Service	$	4,875		$	5,757		$	(882	)		(15	)%
License and subscription		32,992			23,345			9,647			41	%
Total	$	37,867		$	29,102		$	8,765			30	%
Gross Profit (as % of related revenue components):
Service		45	%		46	%
License and subscription		98	%		99	%
Total		85	%		81	%

The decrease in service gross profit was due primarily to lower activity in the joint ventures.

The increases in license and subscription gross profit was due primarily to the payments from IV and Verance.

The increase in total gross profit as a percentage of revenue was due primarily to changes in revenue mix with higher license revenue, which carries a higher margin than service revenue, as a percent of total revenue. The slight decrease in service gross profit as a percentage of revenue resulted from changes in services cost mix provided in our various contracts. The slight decrease in license and subscription gross profit as a percentage of revenue resulted from lower subscription margins from our Guardian product.

Operating expenses

We allocate certain costs of sales and marketing, research, development and engineering and intellectual property to cost of service revenue when they relate directly to our customer contracts.

We record all remaining, or “residual,” costs as sales and marketing costs, research, development and engineering, general and administrative, and intellectual property expenses.

Sales and marketing

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Decrease			Percent Decrease
Sales and marketing	$	3,827		$	4,336		$	(509	)		(12	)%
Sales and marketing (as % of total revenue)		9	%		12	%

Sales and marketing expenses consist primarily of:

• compensation, benefits and related costs of sales and marketing employees and product managers;

• travel and market research costs, and costs associated with marketing programs, such as trade shows, public relations and new product launches;

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• professional services and outside contractors for product and marketing initiatives;

• incentive compensation in the form of stock-based compensation expense; and

• charges for infrastructure and centralized costs of facilities and information technology.

The decrease in sales and marketing expenses resulted primarily from:

• decreased marketing and professional fees of $0.6 million related to the introduction of our Digimarc Discover Platform in 2011; partially offset by

• increased compensation-related expenses of $0.1 million related to an additional layer of stock-based awards.

We anticipate through 2013 that we will continue to incur sales and marketing costs at higher levels to support ongoing sales and marketing growth initiatives.

Research, development and engineering

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Increase		Percent Increase
Research, development and engineering	$	8,741		$	7,327		$	1,414		19	%
Research, development and engineering (as % of total revenue)		20	%		20	%

Research, development and engineering expenses arise primarily from three areas that support our business model:

• Fundamental Research:

• investigation of new watermarking algorithms to increase robustness and/or computational efficiency;

• mobile device usage models and imaging sub-systems in camera-phones;

• industry conference participation and authorship of papers for industry journals;

• survey and study of human and computer interaction models with a focus on mobile devices and modeling of intent;

• development of new intellectual property, including documentation of claims and production of supporting diagrams and materials;

• research in fingerprinting and other content identification technologies; and

• metadata ranking algorithms for match internet file content against reference database.

• Platform Development:

• tuning and optimization of implementation models to improve resistance to non-malicious attacks and routine transformations, such as JPEG, cropping and printing;

• mobile platform creation to leverage device specific capabilities (e.g., instruction sets and Graphics Processing Units (“GPUs”);

• big data analytics transformation and metrics aggregation engine;

• data-driven internet crawling infrastructure with policy-driven feedback loop; and

• assembly of master book publishing catalog based on aggregation and reconciliation of multiple public data sources.

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• Product Development:

• maintaining the Online Services Portal to provide campaign management and routing services for the Digimarc Discover platform;

• maintaining the web-hosted image watermark embedder in support of Digimarc Discover platform;

• iterative development and release of the Digimarc Discover application for the iTunes and Android marketplaces;

• real-time analytics portal to support anti-piracy services for the book industry; and

• consumer book discovery application based on social network connections and shared interests.

Research, development and engineering expenses consist primarily of:

• compensation, benefits, recruiting and related costs of software and hardware developers and quality assurance personnel;

• payments to outside contractors;

• the purchase of materials and services for product development;

• incentive compensation in the form of stock-based compensation expense; and

• charges for infrastructure and centralized costs of facilities and information technology.

The increase in research, development and engineering expense resulted primarily from:

• increased compensation-related expenses of $1.7 million from hiring engineers and scientists in second half of 2011 to facilitate growth in our product and service offerings, including increased investments primarily related to the mobile device market; offset partially by

• decreased recruiting expenses of $0.2 million due to lower hiring in 2012; and

• decreased professional fees of $0.1 million due to increased use of internal resources for those services.

We anticipate through 2013 that we will continue to invest in research, development and engineering expenses at higher levels to support our ongoing research and product initiatives.

General and administrative

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Decrease			Percent Decrease
General and administrative	$	9,457		$	9,956		$	(499	)		(5	)%
General and administrative (as % of total revenue)		21	%		28	%

We incur general and administrative costs in the functional areas of finance, legal, human resources, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes and are allocated to this area as well as each of the areas in costs of services, sales and marketing, research, development and engineering and intellectual property.

General and administrative expenses consist primarily of:

• compensation, benefits and related costs;

• third party and professional fees associated with legal, accounting, human resources and costs associated with being a public company;

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• incentive compensation in the form of stock-based compensation expense; and

• charges for infrastructure and centralized costs of facilities and information technology.

The decrease in general and administrative expenses resulted primarily from:

• decreased legal fees of $1.0 million related to the litigation matter with Verance; and

• decreased accounting fees of $0.2 million related to the transition to our new auditors; partially offset by

• increased compensation-related expenses of $0.6 million related to an additional layer of stock-based awards, and

• increased fees of $0.3 million related to licensee audits.

We anticipate through 2013 that we will continue to incur general and administrative expenses at approximately existing levels while continuing to examine means to reduce general and administrative expenses as a percentage of revenue in the longer term.

Intellectual property

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Increase		Percent Increase
Intellectual property	$	1,248		$	1,094		$	154		14	%
Intellectual property (as % of total revenue)		3	%		3	%

We incur intellectual property expenses that arise primarily from costs associated with documenting, applying for, and maintaining domestic and international patents and trademarks.

Gross expenditures for intellectual property costs, before reflecting the effect of capitalized patent costs, primarily consist of:

• compensation, benefits and related costs of attorneys and legal assistants;

• third party costs, including filing and governmental regulatory fees and fees for outside legal counsel and translation costs, each incurred in the patent process;

• incentive compensation in the form of stock-based compensation expense; and

• charges for infrastructure and centralized costs of facilities and information technology.

Intellectual property expenses can vary from period to period based on:

• the level of capitalized patent activity, and

• prosecution costs and direct labor hours (salaries, payroll taxes and benefits and incentive compensation related to our stock compensation plans) related to the patents that were exclusively licensed to IV that are allocated to cost of revenue.

The increases in intellectual property expenses primarily resulted from increased compensation-related expenses related to an additional layer of stock-based awards.

We anticipate through 2013 that we will continue to invest in intellectual property expenses at approximately existing levels.

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Stock-based compensation

	Year Ended December 31, 2012		Year Ended December 31, 2011		Dollar Increase		Percent Increase
Cost of revenue	$	603	$	593	$	10		2	%
Sales and marketing		409		302		107		35	%
Research, development and engineering		840		560		280		50	%
General and administrative		3,148		2,568		580		23	%
Intellectual property		256		193		63		33	%
Total	$	5,256	$	4,216	$	1,083		25	%

The increases in stock-based compensation expense were primarily due to an additional layer of stock-based awards. We anticipate incurring an additional $8,333 stock-based compensation expense through December 2016 for awards outstanding as of December 31, 2012.

Net loss from joint ventures

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Decrease		Percent Decrease
Net loss from joint ventures	$	(1,107	)	$	(2,714	)	$	1,607		59	%
Net loss from joint ventures (as % of total revenue)		(2	)%		(8	)%

The decreases in the net loss from joint ventures resulted primarily due to the suspension of operations of both joint ventures in March 2012. In connection with this suspension of operations, the joint ventures accrued estimated expenses for the first quarter’s operations and severance costs for joint venture employees. Digimarc’s share of the one-time severance and suspension costs was approximately $500. Pursuant to the plan of suspending operations of the joint ventures with Nielsen, in April 2012 the Company received $104 of remaining cash from TVaura LLC and contributed $796 to TVaura Mobile LLC to fund both the first quarter’s operating expenses as well as the suspension related costs. Payment of all expenses incurred after the suspension of operations of each joint venture is the responsibility of the majority member.

Interest income, net

	Year Ended December 31, 2012		Year Ended December 31, 2011		Dollar Decrease			Percent Decrease
Interest income, net	$	179	$	195	$	(16	)		(8	)%
Interest income, net (as % of total revenue)		*		*

* Less than 1%

The decrease in interest income, net was primarily due to lower interest rates on cash and investments.

Provision for income taxes

For the year ended December 31, 2012, the provision for income taxes reflects current tax expense, deferred tax expense and withholding tax expense in various foreign jurisdictions. The withholding taxes are computed by our customers and paid to foreign jurisdictions on our behalf. In December 2012, we acquired 100% of the outstanding stock of Attributor Corporation in a non-taxable transaction. Due to Attributor’s history of losses and the inability to utilize Attributor losses to offset Digimarc income for state tax purposes, we concluded that is not

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more likely than not that the Attributor state deferred tax assets will be realized and a full valuation allowance has been recorded on the state deferred tax assets of Attributor.

For the year ended December 31, 2011, the provision for income taxes reflects current tax expense, deferred tax benefit, and withholding tax expense in various foreign jurisdictions. Although there is current tax expense, there is no current tax payable due to the utilization of excess tax benefits associated with stock compensation. We recognized a deferred tax benefit of $2,581 during the year ended December 31, 2011 as a result of releasing the valuation allowance on deferred tax assets. Management concluded, based on an analysis of all the facts, including projections of future income, that it was more likely than not that all of our deferred tax assets will be realized.

Results of Operations—the Years Ended December 31, 2011 and December 31, 2010

The following tables present our statements of operations data for the periods indicated.

	Year Ended December 31, 2011			Year Ended December 31, 2010
Revenue:
Service	$	12,395		$	12,324
License and subscription		23,644			18,826
Total revenue		36,039			31,150
Cost of revenue:
Service		6,638			6,464
License and subscription		299			236
Total cost of revenue		6,937			6,700
Gross profit		29,102			24,450
Operating expenses:
Sales and marketing		4,336			3,545
Research, development and engineering		7,327			5,687
General and administrative		9,956			7,864
Intellectual property		1,094			1,203
Total operating expenses		22,713			18,299
Operating income		6,389			6,151
Net loss from joint ventures		(2,714	)		(2,180	)
Interest income, net		195			245
Income before income taxes		3,870			4,216
(Provision) benefit for income taxes		1,786			(42	)
Net income	$	5,656		$	4,174

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	Year Ended December 31, 2011			Year Ended December 31, 2010
Revenue:
Service		34	%		40	%
License and subscription		66			60
Total revenue		100			100
Cost of revenue:
Service		18			21
License and subscription		1			1
Total cost of revenue		19			22
Gross profit		81			78
Operating expenses:
Sales and marketing		12			12
Research, development and engineering		20			18
General and administrative		28			25
Intellectual property		3			4
Total operating expenses		63			59
Operating income		18			19
Net loss from joint ventures		(8	)		(7	)
Interest income, net		1			1
Income (loss) before income taxes		11			13
(Provision) benefit for income taxes		5			—
Net income		16	%		13	%

Summary

Our revenue increased in 2011 from 2010 primarily as a result of revenue derived from our relationships with IV and Verance, a long-term licensee. Our revenue for 2010 included a one-time payment of license fees of $4.5 million from Arbitron in the first quarter of 2010. The improved mix of high margin license revenue to total revenue also contributed favorably to our higher gross profit.

Throughout 2011, we continued to invest in the development and marketing of Digimarc Discover, an application designed for digital devices to hear, see and react to their surroundings, in developing additional intellectual property and in our strategic initiatives. We also continued to incur legal expenses in connection with our litigation matter with Verance. Finally, our deferred tax asset valuation reserve was reversed in the second quarter of 2011 reflecting our determination that it was more likely than not that our deferred tax assets will be realized in current and future periods.

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Revenue

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase		Percent Increase
Revenue:
Service	$	12,395		$	12,324		$	71		1	%
License and subscription		23,644			18,826			4,818		26	%
Total	$	36,039		$	31,150		$	4,889		16	%
Revenue (as % of total revenue):
Service		34	%		40	%
License and subscription		66	%		60	%
Total		100	%		100	%

The increases in service revenue were primarily due to increased program work related to the Central Banks and increased revenue from our relationship with IV, offset by decreased revenue from other government customers.

The increases in license and subscription revenue were primarily attributed to revenue derived from the IV relationship and increased royalty revenue from Verance, offset by the one-time payment of license fees from Arbitron in the first quarter of 2010.

Revenue by geography

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase		Percent Increase
Revenue by geography:
Domestic	$	22,660		$	19,034		$	3,626		19	%
International		13,379			12,116			1,263		10	%
Total	$	36,039		$	31,150		$	4,889		16	%
Revenue (as % of total revenue):
Domestic		63	%		61	%
International		37	%		39	%
Total		100	%		100	%

Domestic revenue increased primarily as a result of increased revenue derived from the IV relationship and increased royalty revenue from Verance, offset by the one-time payment of license fees from Arbitron in the first quarter of 2010.

International revenue increased primarily due to increased royalties from Civolution and increased service revenue from the Central Banks.

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Gross profit

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase (Decrease)			Percent Increase (Decrease)
Gross Profit:
Service	$	5,757		$	5,860		$	(103	)		(2	)%
License and subscription		23,345			18,590			4,755			26	%
Total	$	29,102		$	24,450		$	4,652			19	%
Gross Profit (as % of related revenue components):
Service		46	%		48	%
License and subscription		99	%		99	%
Total		81	%		78	%

Gross profit increased primarily as a result of increased license and royalty revenues from IV and Verance, offset by the one-time payment of license fees from Arbitron in the first quarter of 2010.

The increase in total gross profit as a percentage of revenue was due primarily to changes in revenue mix, where higher margin license revenue was a greater percent of total revenue. The decrease in service gross profit as a percentage of service revenue resulted primarily from a change in mix of labor resources.

Operating expenses

Sales and marketing

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase		Percent Increase
Sales and marketing	$	4,336		$	3,545		$	791		22	%
Sales and marketing (as % of total revenue)		12	%		12	%

The increases in sales and marketing expense resulted primarily from:

• increased headcount and compensation-related expenses of $0.4 million from hiring additional sales and marketing support for our mobile device market initiatives; and

• increased marketing and professional fees of $0.3 million related to a number of sales initiatives, including our Digimarc Discover Platform.

Research, development and engineering

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase		Percent Increase
Research, development and engineering	$	7,327		$	5,687		$	1,640		29	%
Research, development and engineering (as % of total revenue)		20	%		18	%

The increases in research, development and engineering expense resulted primarily from increased headcount and compensation-related expenses of $1.5 million from hiring engineers and scientists to facilitate sales growth of our products and services, including increased investments primarily related to the mobile device market.

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General and administrative

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase		Percent Increase
General and administrative	$	9,956		$	7,864		$	2,092		27	%
General and administrative (as % of total revenue)		28	%		25	%

The increases in general and administrative expenses resulted primarily from:

• increased legal fees of $1.6 million primarily related to the litigation matter with Verance;

• increased compensation-related expenses of $0.5 million primarily related to an additional layer of stock-based awards and payroll taxes related to stock option exercises; and

• increased accounting fees of $0.2 million related to the transition to our new auditors that we engaged in late 2010 for the 2010 audit.

Intellectual property

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Decrease			Percent Decrease
Intellectual property	$	1,094		$	1,203		$	(109	)		(9	)%
Intellectual property (as % of total revenue)		3	%		4	%

The decreases in intellectual property expenses in 2011 compared to 2010 reflect the variable spending levels including a greater portion of patent related costs assumed by IV as part of our 2010 licensing arrangement.

Stock-based compensation

	Year Ended December 31, 2011		Year Ended December 31, 2010		Dollar Increase		Percent Increase
Cost of revenue	$	593	$	373	$	220		59	%
Sales and marketing		302		192		110		57	%
Research, development and engineering		560		314		246		78	%
General and administrative		2,568		2,083		485		23	%
Intellectual property		193		106		87		82	%
Total	$	4,216	$	3,068	$	1,148		37	%

The increases in stock-based compensation expense were primarily due to an additional layer of stock-based awards. We anticipate incurring an additional $9,463 in stock-based compensation expense through December 2015 for awards outstanding as of December 31, 2011.

Net loss from joint ventures

	Year Ended December 31, 2011			Year Ended December 31, 2010			Dollar Increase		Percent Increase
Net loss from joint ventures	$	(2,714	)	$	(2,180	)	$	534		24	%

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The increases in the net loss from joint ventures resulted primarily from increased litigation costs in connection with the legal matter with Walker Digital, and increased research, development and engineering costs for product development.

Interest income, net

	Year Ended December 31, 2011		Year Ended December 31, 2010		Dollar Decrease			Percent Decrease
Interest income, net		195		245		(50	)		(20	)%

The decreases in interest income, net was primarily due to a combination of lower balances and lower interest earned on cash and investment balances. The lower balances primarily resulted from cash expended for stock repurchases, net of cash provided from operations and the lower interest rates reflect continued monetary policy set by the federal government.

Provision for income taxes

For the year ended December 31, 2011, the provision for income taxes reflects current tax expense, deferred tax benefit, and withholding tax expense in various foreign jurisdictions. Although there is current tax expense, there is no current tax payable due to the utilization of excess tax benefits associated with stock compensation. We recognized a deferred tax benefit of $2,581 during the year ended December 31, 2011 as a result of releasing the valuation allowance on deferred tax assets. Management concluded, based on an analysis of all the facts, including projections of future income, that it was more likely than not that all of our deferred tax assets will be realized.

For the year ended December 31, 2010, the provision for income taxes reflects withholding tax expense in various foreign jurisdictions. The withholding taxes are computed by our customers and paid to foreign jurisdictions on our behalf. There was no provision for income taxes related to pre-tax income because the computed amount was completely offset with available federal and state attribute carryforwards and there was a full valuation allowance on net deferred tax assets.

Liquidity and Capital Resources

	December 31, 2012		December 31, 2011
Working capital	$	33,846	$	26,859
Current (liquidity) ratio (1)		10.3:1		8.4:1
Cash, cash equivalents and short-term marketable securities	$	32,269	$	25,663
Long-term marketable securities	$	6,787	$	7,715
Total cash, cash equivalents and all marketable securities	$	39,056	$	33,378

(1) The current (liquidity) ratio is calculated by dividing total current assets by total current liabilities.

The $5.7 million increase in cash, cash equivalents and all marketable securities at December 31, 2012 from December 31, 2011 resulted primarily from:

• improved operating results, driven primarily by the $8.0 million past due royalties payment from Verance; offset by

• acquisition of Attributor

• payment of dividends.

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• investments in our business for both capital and intellectual property initiatives;

• purchases of common stock related to the exercise of stock options, vesting of restricted stock and repurchases made under our stock repurchase programs; and

• higher tax payments due to improved operating results.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. We place our cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Both short- and long-term marketable securities include federal agency notes, company notes, pre-refunded municipal bonds and commercial paper. Our investment policy requires the portfolio to be invested to ensure that the greater of $3 million or 7% of the invested funds will be available within 30 days notice.

Other than cash used for operating needs, which may include short-term marketable securities, our investment policy limits our credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of our cash and cash equivalents and marketable securities or $1 million, whichever is greater, to be invested in any one issuer except for the U.S. government, U. S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. Our investment policy also limits our credit exposure by limiting to a maximum of 40% of our cash and cash equivalents and marketable securities, or $15 million, whichever is greater, to be invested in any one industry category, e.g., financial or energy industries, at the time of purchase. As a result, we believe our credit risk associated with cash and investments to be minimal. A decline in the market value of any security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by us.

Cash flows from investing activities

The components of operating cash flows were:

	Year Ended December 31, 2012			Year Ended December 31, 2011			Dollar Increase (Decrease)			Percent Increase (Decrease)
Net income	$	8,272		$	5,656		$	2,616			46	%
Non-cash items		7,708			4,851			2,857			59	%
Changes in operating assets and liabilities		(379	)		(254	)		(125	)		(49	)%
Net cash provided by operating activities	$	15,601		$	10,253		$	5,348			52	%

	Year Ended December 31, 2011			Year Ended December 31, 2010		Dollar Increase (Decrease)			Percent Increase (Decrease)
Net income	$	5,656		$	4,174	$	1,482			36	%
Non-cash items		4,851			5,892		(1,041	)		(18	)%
Changes in operating assets and liabilities		(254	)		366		(620	)		(169	)%
Net cash provided by operating activities	$	10,253		$	10,432	$	(179	)		(2	)%

Cash flows provided by operating activities in 2012 compared to 2011 increased by $5.4 million primarily as the result of higher net income and non-cash items. The increase in non-cash items was primarily the result of higher stock compensation expense due to an additional layer of stock-based awards, partially offset by the change in deferred tax assets primarily from the reversal of the valuation allowance in 2011.

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Cash flows from investing activities

Cash flows from investing activities decreased by $15.9 million from $6.1 million of cash provided to $9.8 million of cash used. The decrease was primarily the result of net purchases of marketable securities in 2012 compared to net maturities in 2011 and the recent acquisition of Attributor. Additionally, pursuant to the plan for suspending operations of the joint ventures with Nielsen, in April 2012 we received $104 of remaining cash from TVaura LLC and contributed $796 to TVaura Mobile LLC to fund both the first quarter’s operating expenses as well as the suspension-related costs.

Cash flows from financing activities

Cash flows used in financing activities decreased $16.9 million from $19.3 million to $2.4 million. The decrease was primarily the result of fewer purchases of common stock by the Company in the current period and higher excess tax benefits generated on stock-based awards, partially offset by cash dividends paid.

Commitments and contingencies

In May 2010 we entered into an amendment with the landlord of our corporate offices to extend the length of our facilities lease through August 2016 with rent payments totaling $5.3 million.

Our obligations under non-cancelable operating leases for our facilities and various equipment leases totaled $3.3 million as of December 31, 2012 and are payable in monthly installments through August 2016.

Future cash expectations

In connection with the settlement, renewal and extension agreement with Verance, our cash flow was higher in 2012 compared to 2011 as a result of payments of royalties from Verance in 2012. However, due to limited access to Verance’s projected revenue, we are not able to estimate the future cash flow impact of royalty revenue we may earn from Verance.

In connection with our arrangement with IV, our cash flow was higher in 2012 compared to 2011 as a result of the increasing quarterly installments on the license issue fee paid in 2012. After the second quarter of 2013, the quarterly installments on the license issue fee end. We are not able to estimate the future cash flow impact of any profit sharing we may earn from IV.

Our Board of Directors has approved a stock repurchase program of which we have $3,998 available as of December 31, 2012. Shares of our common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions. This repurchase program does not obligate us to acquire any specific number of shares or to acquire shares over any specified period of time.

On February 20, 2013, the Board of Directors declared a quarterly dividend of $0.11 per share, payable on March 11, 2013 to shareholders of record on March 4, 2013. The aggregate amount of the quarterly dividend payment is expected to be approximately $800.

We believe that our current cash, cash equivalents, and short-term marketable securities balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we anticipate continuing to use cash, cash equivalents and marketable securities balances to satisfy our projected working capital and capital expenditure requirements.

We may use cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. In order to take advantage of opportunities, we may find it necessary to obtain additional equity financing, debt financing, or credit facilities. We do not believe at this time, however, that our long-term working capital and capital expenditures would require us to take steps to remedy any such potential deficiencies. If it were necessary to obtain additional financing or credit facilities, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms.

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Contractual Obligations

	Payment Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Total operating lease obligations	$	3,331	$	893	$	1,810	$	628	$	—

Off-Balance Sheet Arrangements

Other than the contractual obligations noted above, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as “may,” “plan,” “should,” “could,” “expect,” “anticipate,” “intend,” “believe,” “project,” “forecast,” “estimate,” “continue,” variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. We believe that the following factors, among others (including those described in Item 1A. “Risk Factors”), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us:

• concentration of revenue with few customers comprising a large majority of the revenue;

• trends and expectations in revenue growth;

• our future level of investment in our business, including investment in research, development and engineering of products and technology, development of our intellectual property, the acquisition of new customers and development of new market opportunities;

• our ability to improve margins;

• anticipated expenses, costs, margins, provision for income taxes and investment activities in the foreseeable future, including estimated increases in stock-based compensation expenses;

• anticipated revenue to be generated from current contracts and as a result of new programs;

• variability of contracted arrangements;

• our profitability in future periods;

• business opportunities that could require that we seek additional financing;

• the size and growth of our markets;

• the existence of international growth opportunities and our future investment in such opportunities;

• the source of our future revenue;

• our expected short-term and long-term liquidity positions;

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• our capital expenditure and working capital requirements and our ability to fund our capital expenditure and working capital needs through cash flow from operations;

• capital market conditions, including the recent economic crisis, interest rate volatility and other limitations on the availability of capital, which could have an impact on our cost of capital and our ability to access the capital markets;

• our use of cash, cash equivalents and marketable securities in upcoming quarters;

• anticipated levels of backlog in future periods;

• the success of our arrangements with Intellectual Ventures;

• the success of our acquisition of Attributor Corporation;

• protection, development and monetization of our intellectual property portfolio; and

• other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in Item 1A. “Risk Factors.”

We believe that the factors specified above and the risk factors contained in Item 1A, among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Annual Report. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Annual Report on Form 10-K.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and investment risk. We mitigate default risk by investing in low-risk securities. At December 31, 2012, we had an investment portfolio of money market funds, commercial securities and U.S. government securities, including those classified as cash and cash equivalents, and short- and long-term marketable securities, totaling $39.1 million. The original maturities of our investment portfolio range from 43 to 1,000 plus days with an average interest rate of 0.59%. If market interest rates were to decrease immediately and uniformly by 10% from levels as of December 31, 2012, the decline of the fair market value of the fixed income portfolio would not be material.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and the accompanying Notes that are filed as part of this Annual Report are listed under Part III, Item 15, Exhibits and Financial Statement Schedules and are set forth beginning on page F-1 immediately following the signature page of this Form 10-K.

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

None

47

ITEM 9A: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-K.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Form 10-K, were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

Any control system, no matter how well conceived and operated, and because of inherent limitations, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management is committed to continue monitoring our internal controls over financial reporting and will modify or implement additional controls and procedures that may be required to ensure the ongoing integrity of our consolidated financial statements.

With the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO). Based on this evaluation, management has concluded that internal control over financial reporting was effective as of the end of the period covered by this Form 10-K based on those criteria.

We acquired Attributor Corporation (“Attributor”) on December 3, 2012. Management excluded from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012, Attributor’s internal control over financial reporting associated with total assets representing 2% of Digimarc Corporation’s total assets and revenue representing 1% of Digimarc Corporation’s revenues included in the consolidated financial statements of Digimarc Corporation and subsidiary as of and for the year ended December 31, 2012.

There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our independent auditors have issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2012, which is included herein.

48

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Digimarc Corporation:

We have audited Digimarc Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Digimarc Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on Digimarc Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Digimarc Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by COSO.

Digimarc Corporation acquired Attributor Corporation (Attributor) on December 3, 2012, and management excluded from its assessment of the effectiveness of Digimarc Corporation’s internal control over financial reporting as of December 31, 2012, Attributor’s internal control over financial reporting associated with total assets representing 2% of Digimarc Corporation’s total assets and revenues representing 1% of Digimarc Corporation’s revenue included in the consolidated financial statements of Digimarc Corporation and subsidiary as of and for the year-ended December 31, 2012. Our audit of internal control over financial reporting of Digimarc Corporation also excluded an evaluation of internal control over financial reporting of Attributor.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Digimarc Corporation and subsidiary as of December 31, 2012 and December 31, 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 22, 2013 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Portland, Oregon

February 22, 2013

49

ITEM 9B: OTHER INFORMATION

On December 6, 2012, we entered into a renewal and extension of the Counterfeit Deterrence System Development and License Agreement with the Bank of International Settlements through 2024. The agreement is attached as Exhibit 10.2 to this Annual Report on Form 10-K.

50

PART III

Certain information required by Part III of this Annual Report on Form 10-K is incorporated herein by reference to the Proxy Statement for our 2013 annual meeting of shareholders, which we intend to file no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Code of Ethics

We have adopted a Code of Business Conduct that applies to our principal executive officer, principal financial officer and controller, as well as a Code of Ethics for Financial Professionals that applies to our principal financial officer and controller. We have made these codes available in the Corporate Governance section of our website at www.digimarc.com/about/governance. If we waive, or implicitly waive, any material provision of the codes, or substantively amend the codes, we will disclose that fact on our website within four business days.

The other information required by this item is incorporated herein by reference to the information in the Proxy Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K under the captions “Election of Directors,” “Management,” “Audit Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11: EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the information in the Proxy Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, under the captions “Director Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.”

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the information in the Proxy Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the information in the Proxy Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K under the caption “Election of Directors—Determination of Independence,” and “Related Person Transactions.”

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the information in the Proxy Statement, which we intend to file with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, under the caption “Audit Fees.”

51

ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements

The following documents are filed as part of this Annual Report on Form 10-K:

(i) Report of Independent Registered Public Accounting Firm – KPMG LLP

(ii) Consolidated Balance Sheets as of December 31, 2012 and 2011

(iii) Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010

(iv) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010

(v) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

(vi) Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules

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

(a)(3) Exhibits

See the Exhibit Index at page E-1 of this Annual Report on Form 10-K.

52

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DIGIMARC CORPORATION
Date: February 22, 2013	By:	/S/    MICHAEL MCCONNELL
		Michael McConnell Title: Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/S/    BRUCE DAVIS         Bruce Davis	Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)	February 22, 2013
/S/    MICHAEL MCCONNELL         Michael McConnell	Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	February 22, 2013
/S/    PETER W. SMITH         Peter W. Smith	Director	February 22, 2013
/S/    JAMES T. RICHARDSON         James T. Richardson	Director	February 22, 2013
/S/    WILLIAM J. MILLER         William J. Miller	Director	February 22, 2013
/S/    BERNARD WHITNEY         Bernard Whitney	Director	February 22, 2013

53

DIGIMARC CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm – KPMG LLP		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Shareholders’ Equity		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Digimarc Corporation:

We have audited the accompanying consolidated balance sheets of Digimarc Corporation and subsidiary as of December 31, 2012 and 2011 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Digimarc Corporation and subsidiary as of December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Digimarc Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 22, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon

February 22, 2013

F-2

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	December 31, 2012		December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	6,866	$	3,419
Marketable securities		25,403		22,244
Trade accounts receivable, net		4,216		3,502
Other current assets		1,016		1,306
Total current assets		37,501		30,471
Marketable securities		6,787		7,715
Property and equipment, net		1,453		1,395
Intangibles, net		6,721		2,808
Goodwill		1,114		—
Investments in joint ventures		—		415
Deferred tax assets, net		3,589		2,634
Other assets		166		355
Total assets	$	57,331	$	45,793
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	1,143	$	952
Deferred revenue		2,512		2,660
Total current liabilities		3,655		3,612
Deferred rent and other long-term liabilities		673		464
Total liabilities		4,328		4,076
Commitments and contingencies (Note 16)
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500,000 authorized, 10,000 shares issued and outstanding at December 31, 2012 and 2011)		50		50
Common stock (par value $0.001 per share, 50,000,000 authorized, 7,168,359 and 7,008,031 shares issued and outstanding at December 31, 2012 and 2011, respectively)		7		7
Additional paid-in capital		39,869		34,511
Retained earnings		13,077		7,149
Total shareholders’ equity		53,003		41,717
Total liabilities and shareholders’ equity	$	57,331	$	45,793

See Notes to Consolidated Financial Statements.

F-3

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Revenue:
Service	$	10,792		$	12,395		$	12,324
License and subscription		33,583			23,644			18,826
Total revenue		44,375			36,039			31,150
Cost of revenue:
Service		5,917			6,638			6,464
License and subscription		591			299			236
Total cost of revenue		6,508			6,937			6,700
Gross profit		37,867			29,102			24,450
Operating expenses:
Sales and marketing		3,827			4,336			3,545
Research, development and engineering		8,741			7,327			5,687
General and administrative		9,457			9,956			7,864
Intellectual property		1,248			1,094			1,203
Total operating expenses		23,273			22,713			18,299
Operating income		14,594			6,389			6,151
Net loss from joint ventures		(1,107	)		(2,714	)		(2,180	)
Interest income, net		179			195			245
Income before income taxes		13,666			3,870			4,216
(Provision) benefit for income taxes		(5,394	)		1,786			(42	)
Net income	$	8,272		$	5,656		$	4,174
Earnings per common share:
Net income per common share—basic	$	1.16		$	0.84		$	0.59
Net income per common share—diluted	$	1.12		$	0.76		$	0.55
Weighted average common shares outstanding—basic		6,757			6,741			7,120
Weighted average common shares outstanding—diluted		6,989			7,430			7,623
Cash dividends declared per common share	$	0.33		$	—		$	—

See Notes to Consolidated Financial Statements.

F-4

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)

	Preferred Stock				Common Stock					Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Total Shareholders’ Equity
	Shares		Amount		Shares			Amount
BALANCE AT DECEMBER 31, 2009		10,000	$	50		7,205,701		$	7	$	49,283		$	(2,681	)	$	46,659
Exercise of stock options		—		—		313,832			—		3,045			—			3,045
Issuance of restricted common stock		—		—		124,560			—		—			—			—
Forfeiture of restricted common stock		—		—		(3,450	)		—		—			—			—
Purchase and retirement of common stock		—		—		(197,193	)		—		(5,824	)		—			(5,824	)
Stock-based compensation		—		—		—			—		3,105			—			3,105
Net loss		—		—		—			—					4,174			4,174
BALANCE AT DECEMBER 31, 2010		10,000		50		7,443,450			7		49,609			1,493			51,159
Exercise of stock options		—		—		169,420			—		1,651			—			1,651
Issuance of restricted common stock		—		—		190,180			—		—			—			—
Forfeiture of restricted common stock		—		—		(18,120	)		—		—			—			—
Purchase and retirement of common stock		—		—		(776,899	)		—		(22,048	)		—			(22,048	)
Stock-based compensation		—		—		—			—		4,231			—			4,231
Tax benefit from stock-based awards		—		—		—			—		1,068			—			1,068
Net income		—		—		—			—		—			5,656			5,656
BALANCE AT DECEMBER 31, 2011		10,000		50		7,008,031			7		34,511			7,149			41,717
Exercise of stock options		—		—		172,250			—		1,660			—			1,660
Issuance of restricted common stock		—		—		202,340			—		—			—			—
Forfeiture of restricted common stock		—		—		(12,300	)		—		—			—			—
Purchase and retirement of common stock		—		—		(201,962	)		—		(4,760	)		—			(4,760	)
Stock-based compensation		—		—		—			—		5,414			—			5,414
Tax benefit from stock-based awards		—		—		—			—		3,044			—			3,044
Net income		—		—		—			—		—			8,272			8,272
Cash dividends declared		—		—		—			—		—			(2,344	)		(2,344	)
BALANCE AT DECEMBER 31, 2012		10,000	$	50		7,168,359		$	7	$	39,869		$	13,077		$	53,003

See Notes to Consolidated Financial Statements.

F-5

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Cash flows from operating activities:
Net income	$	8,272		$	5,656		$	4,174
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		600			613			565
Amortization and write-off of intangibles		385			143			79
Stock-based compensation		5,256			4,216			3,068
Net loss from joint ventures		1,107			2,714			2,180
Deferred income taxes		(284	)		(3,640	)		—
Tax benefit from stock-based awards		3,688			1,873			—
Excess tax benefit from stock-based awards		(3,044	)		(1,068	)		—
Changes in operating assets and liabilities:
Trade accounts receivable, net		(187	)		(21	)		89
Other current assets		219			240			(473	)
Other assets		201			107			(32	)
Accounts payable and other liabilities		(228	)		(668	)		507
Deferred revenue		(384	)		88			275
Net cash provided by operating activities		15,601			10,253			10,432
Cash flows from investing activities:
Purchase of property and equipment		(570	)		(678	)		(781	)
Capitalized patent costs and purchased intellectual property		(1,170	)		(712	)		(914	)
Investments in joint ventures, net		(692	)		(2,100	)		(2,800	)
Business acquisitions, net of cash acquired		(5,092	)		—			—
Sale or maturity of marketable securities		144,214			74,689			122,176
Purchase of marketable securities		(146,444	)		(65,044	)		(127,878	)
Net cash provided by (used in) investing activities		(9,754	)		6,155			(10,197	)
Cash flows from financing activities:
Issuance of common stock		1,660			1,651			3,045
Purchase of common stock		(4,760	)		(22,048	)		(5,824	)
Cash dividends paid		(2,344	)		—			—
Excess tax benefit from stock-based awards		3,044			1,068			—
Net cash used in financing activities		(2,400	)		(19,329	)		(2,779	)
Net increase (decrease) in cash and cash equivalents		3,447			(2,921	)		(2,544	)
Cash and cash equivalents at beginning of period		3,419			6,340			8,884
Cash and cash equivalents at end of period	$	6,866		$	3,419		$	6,340
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	1,819		$	13		$	42
Supplemental schedule of non-cash investing activities:
Stock-based compensation capitalized to patent costs	$	108		$	65		$	37
Supplemental schedule of non-cash financing activities:
Exercise of stock options	$	1,660		$	1,651		$	3,038

See Notes to Consolidated Financial Statements.

F-6

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(1) Description of Business and Summary of Significant Accounting Policies

Description of Business

Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. The Company’s inventions provide the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. The Company’s technology permits computers and digital devices to quickly and reliably identify relevant data from vast amounts of media content.

Principles of Consolidation

The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires Digimarc to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term license and service contracts, goodwill, impairments and estimation of useful lives of long-lived assets, contingencies and litigation, patent costs, stock-based compensation and income taxes. Digimarc bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Reclassifications

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

Cash Equivalents

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds, certificates of deposit, commercial paper, and pre-refunded municipal bonds totaling $5,878 and $2,992 at December 31, 2012 and 2011, respectively. Cash equivalents are carried at cost or amortized cost, which approximates market.

Marketable Securities

The Company considers all investments with original maturities over 90 days that mature in less than one year from the balance sheet date to be short-term marketable securities. Both short- and long-term marketable securities primarily include U.S. federal agency notes, U.S. treasuries, corporate notes, pre-refunded municipal bonds, and commercial paper. The Company’s marketable securities are classified as held-to-maturity and are reported at amortized cost, which approximates market.

F-7

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

A decline in the market value of any security below amortized cost that is deemed to be other-than-temporary results in a reduction in the carrying amount. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by the Company.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using a method that approximates the effective interest method. Under this method, dividend and interest income are recognized when earned.

Fair Value of Financial Instruments

Accounting Standards Certification (“ASC”) 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S., and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

• Level 1—Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date.

• Level 2—Pricing inputs are quoted for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

• Level 3—Pricing inputs are unobservable for the investment; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

The estimated fair values of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying values due to the short-term nature of these instruments. The Company records marketable securities at amortized cost, which approximates fair value.

F-8

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of December 31, 2012 and 2011, respectively, was as follows:

December 31, 2012	Level 1		Level 2		Level 3		Total
Money market securities	$	901	$	—	$	—	$	901
Certificates of deposits		—		491		—		491
U.S. treasuries		—		289		—		289
U.S. federal agency notes		—		1,637		—		1,637
Pre-refunded and other municipals		—		22,036		—		22,036
Corporate notes		—		10,100		—		10,100
Commercial paper		—		2,614		—		2,614
Total	$	901	$	37,167	$	—	$	38,068

December 31, 2011	Level 1		Level 2		Level 3		Total
Money market securities	$	896	$	—	$	—	$	896
Certificates of deposits		—		736		—		736
U.S. treasuries		—		718		—		718
U.S. federal agency notes		—		7,942		—		7,942
Pre-refunded and other municipals		—		2,800		—		2,800
Corporate notes		—		16,459		—		16,459
Commercial paper		—		3,400		—		3,400
Total	$	896	$	32,055	$	—	$	32,951

The fair value maturities of the Company’s cash equivalents and marketable securities as of December 31, 2012 are as follows:

	Maturities by Period
	Total		Less than 1 year		1-5 years		5-10 years		More than 10 years
Maturities	$	38,068	$	31,200	$	6,868	$	—	$	—

Concentrations of Business and Credit Risk

A significant portion of the Company’s business depends on a limited number of large contracts. The loss of any large contract may result in loss of revenue and margin on a prospective basis. Financial instruments that potentially subject Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. Digimarc places its cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs, which may include short-term marketable securities with the Company’s principal banks, Digimarc’s investment policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of its cash equivalents and marketable securities or $1,000, whichever is greater, to be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. The Company’s investment policy also limits its credit exposure by limiting the maximum of 40% of its cash and cash equivalents and marketable securities, or $15,000, whichever is greater, to be invested in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result, Digimarc’s credit risk associated with cash and cash equivalents and marketable securities is believed to be minimal.

F-9

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Equity Method Investments

The Company accounts for its joint ventures under the equity method of accounting pursuant to ASC 323 “Investments – Equity Method and Joint Ventures.” Under the equity method, investments are carried at cost, plus or minus the Company’s proportionate share, based on present ownership interests, of: (a) the investee’s profit or loss after the date of acquisition; (b) changes in the Company’s equity that have not been recognized in the investee’s profit or loss; and (c) certain other adjustments. Distributions received from the investee (such as dividends) reduce the carrying amount of the investment.

Goodwill

The Company accounts for business combinations under the acquisition method of account in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates.

Contingent consideration is recorded at the acquisition date based upon the estimated fair value of the contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any adjustments in fair value being recognized in earnings from operations.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

The Company reviews goodwill in June of each year, or on an interim basis if required, for impairment to determine if events or changes in business conditions indicate that the carrying value of the goodwill may not be recoverable. Such reviews assess the fair value of the assets compared to the carrying values.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC 360 “Property, Plant and Equipment.” This statement requires that long-lived assets, including definite-lived intangible assets, 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 undiscounted cash flows expected to be generated by the asset over its remaining useful life. 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. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Through December 31, 2012, there have been no such impairment losses.

Research and Development

Research and development costs are expensed as incurred in accordance with ASC 730 “Research and Development.”

F-10

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Software Development Costs

Under ASC 985 “Software,” 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.

Patent Costs

Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs, also referred to as patent prosecution costs, include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company’s patent portfolio.

Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the shorter of the maintenance period or remaining life of the related patent.

Revenue Recognition

See Note 3 for detail disclosures of the Company’s revenue recognition policy.

Stock-Based Compensation

ASC 718 “Compensation – Stock Compensation” requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock based on estimated fair values.

For stock option awards the Company uses the Black-Scholes option pricing model as its method of valuation. The Company’s determination of the fair value on the date of grant is affected by its stock price as well as assumptions regarding a number of highly subjective variables. These variables include, but are not limited to, the expected life of the award, the Company’s expected stock price volatility over the term of the award, the risk-free interest rate and the expected dividend yield. Although the fair value of stock-based awards is determined in accordance with ASC 718 and SAB No. 107 “Shared-Based Payment,” the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

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 basis of assets and liabilities and their financial reporting amounts. 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 deferred tax assets to the amount that is more likely than not expected to be realized.

F-11

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The Company is subject to federal and state income taxes within the U.S. and in the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. The Company is also subject to withholding taxes in various foreign jurisdictions. The withholding taxes are computed by the customers and paid to foreign jurisdictions on our behalf. The Company reports a liability (or contra asset) for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.

(2) Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment,” to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. ASU No. 2012-2 is effective for impairment tests for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company has adopted the provisions of this standard and noted no material impact on the financial condition or results of operations of the Company.

(3) Revenue Recognition

The Company derives its revenue primarily from development services and licensing of its patent portfolio:

• Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements and fixed price consulting agreements.

• License revenue, including royalty revenue, originates primarily from licensing the Company’s technology and patents where the Company receives royalties as its income stream. Subscription revenue, which consists of products and services, are more recurring in nature.

Revenue is recognized in accordance with ASC 605 “Revenue Recognition” and ASC 985 “Software” when the following four criteria are met:

(i) persuasive evidence of an arrangement exists,

(ii) delivery has occurred,

(iii) the fee is fixed or determinable, and

(iv) collection is reasonably assured.

Some customer arrangements encompass multiple deliverables, such as patent license, professional services, software subscriptions, and maintenance fees. For arrangements that include multiple deliverables, the Company identifies separate units of accounting at inception based on the consensus reached under ASC 605-25 “Multiple-Element Arrangements,” which provides that revenue arrangements with multiple deliverables should be divided into separate units of accounting if certain criteria are met. The consideration for the arrangement is allocated to the separate units of accounting using the relative selling price method.

F-12

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The relative selling price method allocates the consideration based on the Company’s specific assumptions rather than assumptions of a marketplace participant, and any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.

Applicable revenue recognition criteria is considered separately for each separate unit of accounting as follows:

• Revenue from professional service arrangements is generally determined based on time and materials. Revenue for professional services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

• License revenue is recognized when amounts owed to the Company have been earned, are fixed or determinable (within the Company’s normal 30 to 60 day payment terms), and collection is reasonably assured. If the payment terms extend beyond the normal 30 to 60 days, the fee may not be considered to be fixed or determinable, and the revenue would then be recognized when installments are due.

• The Company records revenue from certain license agreements upon cash receipt as a result of collectability not being reasonably assured.

• The Company’s standard payment terms for license arrangements are 30 to 60 days. Extended payment terms increase the likelihood the Company will grant a customer a concession, such as reduced license payments or additional rights, rather than hold firm on minimum commitments in an agreement to the point of losing a potential advocate and licensee of patented technology in the marketplace. Extended payment terms on patent license arrangements are not considered to be fixed or determinable if payments are due beyond the Company’s standard payment terms, primarily because of the risk of substantial modification present in the Company’s patent licensing business. As such, revenue on license arrangements with extended payment terms are recognized as fees become fixed or determinable.

• Subscription revenue, which includes subscriptions for products and services, is generally paid in advance and s recognized over the term of the license or service period, which is generally one month to twenty-four months.

Deferred revenue consists of billings in advance for professional services, licenses and subscriptions for which revenue has not been earned.

(4) Acquisition of Attributor Corporation

On December 3, 2012, Digimarc acquired Attributor pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among Digimarc, DA Sub Inc., a wholly owned subsidiary of Digimarc (“Merger Sub”), Attributor, and Fortis Advisors LLC, as the representative for Attributor’s security holders. In accordance with the terms of the Merger Agreement, Merger Sub merged with and into Attributor (the “Merger”), with Attributor surviving the Merger as a wholly owned subsidiary of Digimarc.

Under the terms of the Merger Agreement, the closing merger consideration to be paid was $5,632 in cash less certain adjustments. The amount of cash paid by Digimarc after adjustments was $5,442. Additionally, $150 of the closing merger consideration was placed into an escrow account and subject to indemnification claims for a period up to 17 months. The Attributor stockholders may also receive up to an additional $900 of cash consideration that is contingent upon meeting certain performance objectives for the fiscal years ending December 31, 2012 and 2013, as set forth in the Merger Agreement. The contingent cash payment, if earned, will be made in March 2014. In addition, certain key employees of Attributor received $1,000 of restricted shares of common stock of Digimarc, issued pursuant to Digimarc’s 2008 Incentive Plan, which vest over a two-year period and are contingent upon continued employment.

F-13

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The total purchase price is as follows:

Closing merger consideration	$	5,442
Fair value of contingent consideration		190
Total purchase price	$	5,632

The estimated fair value of the contingent consideration of $190 at December 31, 2012 is included in other long-term liabilities on the Consolidated Balance Sheet.

The Company incurred $0.2 million of transaction related expenses associated with the Attributor acquisition during the year ended December 31, 2012, which are reflected in general and administrative expense in the Consolidated Statements of Operations.

Preliminary Purchase Price Allocation

The Company accounted for the transaction using the acquisition method. Under the acquisition method of accounting, total purchase price as shown in the table above is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information currently available, and Digimarc may adjust the preliminary purchase price allocation after obtaining more information. The final purchase price allocation is pending the completion of our review of the acquired tax assets and liabilities, which is expected to be completed by mid-2013.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The preliminary allocation of the purchase price estimated at the December 3, 2012 acquisition date is as follows:

Total purchase price				$	5,632
Less: Estimated fair value of net tangible assets acquired and (liabilities assumed):
Cash and cash equivalents	$	350
Trade accounts receivable, net		527
Other current assets		18
Property and equipment, net		102
Deferred tax assets		1,225
Accounts payable and other accrued liabilities		(499	)
Deferred revenue		(225	)
Less: Estimated fair value of identifiable intangible assets acquired:
Existing technology		1,560
Customer relationships		290
Backlog		760
Tradenames		290
Non-solicitation agreements		120
Preliminary goodwill				$	1,114

The goodwill is not deductible for tax purposes. Key factors that make up the goodwill created by the transaction include knowledge and experience of the acquired workforce and infrastructure and expected synergies from the combination of operations.

F-14

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Fair Value of Intangible Assets Acquired

The following table summarizes the estimated fair value of intangible assets acquired, their estimated useful lives and the amortization in the Consolidated Statements of Operations for the year ended December 31, 2012:

	Fair Value		Estimated Life (years)		Amortization Expense
Amortization expense:
Cost of revenue:
Existing technology	$	1,560		5	$	26
Sales and marketing:
Customer relationships		290		7		3
Backlog		760		2		32
Tradenames		290		3		8
General and administrative:
Non-solicitation agreements		120		1		10
Total	$	3,020				79

The fair value of the acquired intangible assets was determined using a discounted cash flow valuation methodology using Level 3 inputs.

The operating results of Attributor are included in the Company’s results of operations since the date of acquisition.

Unaudited Actual and Pro Forma Information

Our consolidated revenues for the year ended December 31, 2012 included $0.2 million from Attributor and our consolidated net income for the year ended December 31, 2012 included a $0.2 million net loss from Attributor subsequent to the acquisition date and without any intercompany allocations. Both revenues and the net loss from Attributor for the year ended December 31, 2012 were negatively impacted by a $0.2 million purchase accounting adjustment.

The following table presents the unaudited pro forma results for the periods set forth below. The unaudited pro forma financial information combines the results of operations as though the acquisition had occurred on January 1, 2011. No pro forma adjustments have been made for our incremental transaction or integration-related costs. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had occurred on January 1, 2011: (in thousands):

	Pro-Forma		Pro-Forma
	Year Ended December 31, 2012		Year Ended December 31, 2011
	(unaudited)		(unaudited)
Revenue	$	49,273	$	39,445
Net income	$	6,807	$	2,265
Net income per common share—basic	$	0.95	$	0.33
Net income per common share—diluted	$	0.92	$	0.30

F-15

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The pro forma information above includes the following pro forma adjustments that effected net income (in thousands):

	Year Ended December 31, 2012			Year Ended December 31, 2011
	(unaudited)			(unaudited)
Revenue adjustment	$	145		$	(233	)
Amortization expense		(830	)		(950	)
Stock-based compensation expense		(505	)		(505	)
Direct transaction costs		190			(190	)
Income tax benefit		834			1,747
Total impact to net income of pro forma adjustments	$	(166	)	$	(131	)

(5) Patent Licensing Arrangement with Intellectual Ventures

On October 5, 2010, the Company entered into a patent licensing arrangement with IV Digital Multimedia Inventions, LLC, a Delaware limited liability company affiliated with Intellectual Ventures (“IV”), pursuant to which the Company granted an exclusive license to sublicense, subject to pre-existing encumbrances and a grant-back license, 597 patents and 288 patent applications held by the Company.

The Company also assigned to IV the related causes of action and other enforcement rights and IV has the sole right, but not the obligation, to prepare, file, prosecute, maintain, defend and enforce the licensed patents at its expense. IV may at any time abandon its license or other rights to all or any of the licensed patents, in which case, certain licensed patents that IV opts to release revert back to the Company.

The Company also entered into a patent rights agreement pursuant to which the Company granted IV an exclusive call option to purchase all or any number of the licensed patents and/or patent applications. The agreement further provides for the grant by IV to the Company the right to put all or any number of patents within the licensed patents to IV if IV threatens or commences an action or proceeding with respect to infringement of a licensed patent.

The financial aspects of the IV agreement for the Company include:

• a license issue fee of $36 million, paid to the Company in increasing quarterly installments over three years ($11,400 in 2011, $12,550 in 2012 and $6,775 in 2013);

• 20% of the profits generated from the IV licensing program, which profits consist of sublicensing and other monetization revenue less specified expenses, including the license issue fee;

• IV assumes responsibility for approximately $1 million per year in prosecution and maintenance costs previously borne by the Company;

• a minimum of $4 million of paid support services over five years from the Company to assist IV in maximizing the value of the licensed assets; and

• a royalty-free grant-back license to the licensed patents to continue the Company’s existing business related to those assets, including maintaining and renewing existing patent licenses, and providing software and services.

F-16

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The payment terms extend beyond the Company’s normal 30 to 60 day payment terms, thus the license revenue is being recognized when the installments are due, and the support services will be recognized as the services are performed.

(6) Segment Information

Geographic Information

The Company derives its revenue from a single reporting segment: media management solutions. Revenue is generated in this segment through licensing of intellectual property, subscriptions to various products and services, and the delivery of services pursuant to contracts with various customers. The Company markets its products in the U.S. and in non-U.S. countries through its sales and licensing personnel.

Revenue, based upon the “bill-to” location, by geographic area is as follows:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Domestic	$	30,736	$	22,660	$	19,034
International		13,639		13,379		12,116
Total	$	44,375	$	36,039	$	31,150

Major Customers

Customers who accounted for more than 10% of the Company’s revenues are as follows:

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
IV		30	%		33	%		18	%
Verance Corporation (“Verance”)		27	%		*			*
Central Banks		23	%		27	%		30	%
The Nielsen Company (“Nielsen”)		*			11	%		12	%
Arbitron		—			—			14	%

* Less than 10%

(7) Stock-Based Compensation

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include option grants, restricted stock awards and preferred stock.

Stock-based compensation expense related to internal legal labor is capitalized to patent costs based on direct labor hours charged to capitalized patent costs.

Determining Fair Value

Preferred Stock

The Board of Directors authorized 10,000 shares of Series A Redeemable Nonvoting Preferred stock (Series A Preferred) that were issued to certain executive officers at the time of formation. The Series A Preferred has no voting rights, except as required by law, and may be redeemed at the option of the Company’s Board of Directors at any time on or after June 18, 2013.

F-17

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The Series A Preferred is redeemable based on the stated fair value of $5.00 per share. The Series A Preferred has no dividend rights and no rights to the undistributed earnings of the Company.

Stock Options

Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. Stock options granted generally vest over three to four years for employee grants and one to two years for director grants, and have contractual terms of ten years.

Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the expected life of the award.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the expected life of the award.

Expected Dividend Yield. The expected dividend yield used is derived using a formula which uses the Company’s expected annual dividend rate over the expected term divided by the fair value of the Company’s common stock at the grant date.

A summary of the weighted average assumptions and results for options granted are as follows:

	Year Ended December 31, 2012	Year Ended December 31, 2011	Year Ended December 31, 2010
Expected life (in years)	N/A	5.28 – 5.75	5.2 – 6.0
Expected volatility	N/A	42% – 44%	52% – 55%
Risk-free interest rate	N/A	1.0% – 2%	2.5% – 3.0%
Expected dividend yield	N/A	0%	0%

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December  31, 2010
Fair value of stock options granted	$	—	$	2,464	$	1,159

Expected Forfeitures. The Company uses a zero forfeiture for both the stock options granted to employees, which vest monthly, and the stock options granted to the Company’s directors. Initial option grants, for new directors, vest 50% on the first anniversary of the date of grant and then monthly thereafter, and annual option grants, for continuing directors, vest monthly. The Company records stock-based compensation expense only for those awards that are expected to vest, including awards made to directors who are expected to continue with the Company through the year following the date of grant.

F-18

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Restricted Stock

The Compensation Committee of the Board of Directors has awarded restricted stock shares under the Company’s 2008 Stock Incentive Plan to certain employees and directors. The shares subject to the restricted stock awards vest over a certain period, usually three to four years for employees and one year for directors, following the date of the grant. Specific terms of the restricted stock awards are governed by Restricted Stock Agreements between the Company and the award recipients. Restricted stock awards are treated as outstanding when granted.

The fair value of restricted stock awarded is based on the fair market value of the Company’s common stock on the date of the grant (measurement date), and is recognized over the vesting period using the straight-line method.

The Company records stock-based compensation expense for restricted stock awards only for those awards that are expected to vest, including awards made to directors who are expected to continue with the Company through the year following the date of grant.

Stock-based Compensation

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Stock-based compensation:
Cost of revenue	$	603	$	593	$	373
Sales and marketing		409		302		192
Research, development and engineering		840		560		314
General and administrative		3,148		2,568		2,083
Intellectual property		256		193		106
Stock compensation expense		5,256		4,216		3,068
Capitalized to patent costs		108		65		37
Total stock-based compensation	$	5,364	$	4,281	$	3,105

The following table sets forth total unrecognized compensation cost related to non-vested stock-based awards granted under all equity compensation plans, including preferred stock, stock options and restricted stock:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Unrecognized compensation costs	$	8,333	$	9,463	$	6,212

Total unrecognized compensation costs will be adjusted for any future changes in estimated forfeitures.

The Company expects to recognize the unrecognized compensation costs as of December 31, 2012 for stock options and restricted stock over a weighted average periods through December 2016 as follows:

	Stock Options		Restricted Stock
Weighted average period		1.13 years		1.46 years

F-19

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

(8) Net Income Per Common Share

The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method as the Company’s unvested restricted stock is a participating security given these awards contain non-forfeitable rights to receive dividends. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed.

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance sheet date, as adjusted for the potential dilutive effect of non-participating securities. The following table reconciles earnings per common share for the year ended December 31, 2012:

	Year Ended December 31, 2012
Basic EPS:
Net income	$	8,272
Less: Net income allocable to participating securities		(426	)
Net income allocable to common shares	$	7,846
Weighted average common shares outstanding – basic (in thousands)		6,757
Basic earnings per common share	$	1.16
	Year Ended December 31, 2012
Diluted EPS:
Net income	$	8,272
Less: Net income allocable to participating securities		(426	)
Net income allocable to common shares	$	7,846
Weighted average common shares outstanding – basic (in thousands)		6,757
Dilutive effect of non-participating securities (in thousands)		232
Weighted average common shares outstanding – dilutive (in thousands)		6,989
Diluted earnings per common share	$	1.12

There were 215,000 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted net income per share calculations for the year ended December 31, 2012 as their exercise prices were higher than the average market price of the underlying common stock for the period.

Net income per common share was calculated under the treasury stock method in prior periods because the impact of applying the two-class method for computing basic and diluted earnings per common share was not

F-20

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

material. Basic and diluted net income per share were 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.

	Year Ended December 31, 2011						Year Ended December 31, 2010
	Income (Numerator)		Shares (in thousands) (Denominator)		Per Share Amount		Income (Numerator)		Shares (in thousands) (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	5,656		6,741	$	0.84	$	4,174		7,120	$	0.59
Effect of Dilutive Securities
Options				393						440
Restricted stock				296						63
Diluted EPS
Income available to common shareholders	$	5,656		7,430	$	0.76	$	4,174		7,623	$	0.55

There were 136,957 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted net income per share calculations for 2011 as their exercise prices were higher than the average market price of the underlying common stock for the period.

There were no common stock equivalents related to stock options that were anti-dilutive for 2010 because their exercise prices were lower than the average market price of the underlying common stock for the period.

(9) Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount.

	December 31, 2012		December 31, 2011
Trade accounts receivable	$	4,216	$	3,502
Allowance for doubtful accounts		—		—
Trade accounts receivable, net	$	4,216	$	3,502
Unpaid deferred revenue included in accounts receivable	$	1,589	$	2,084

Allowance for doubtful accounts

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

F-21

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Unpaid deferred revenue

The unpaid deferred revenue that are included in trade accounts receivable are billed in accordance with the provisions of the contracts with the Company’s customers. Unpaid deferred revenue from the Company’s cash-basis customers are not included in trade accounts receivable nor deferred revenue accounts.

Major customers

Customers who accounted for more than 10% of trade accounts receivable, are as follows:

	December 31, 2012			December 31, 2011
Central Banks		30	%		45	%
Nielsen		24	%		29	%
Civolution		14	%		14	%

(10) Property and Equipment

Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.

Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally two to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.

	December 31, 2012			December 31, 2011
Office furniture and fixtures	$	420		$	410
Equipment		1,886			1,872
Leasehold improvements		1,083			1,041
Gross property and equipment		3,389			3,323
Less accumulated depreciation and amortization		(1,936	)		(1,928	)
Property and equipment, net	$	1,453		$	1,395

Leases

Future minimum lease payments under non-cancelable operating leases are as follows:

Year ending December 31:	Operating Leases
2013	$	893
2014		890
2015		920
2016		628
2017		—
Thereafter		—
Total minimum lease payments	$	3,331

F-22

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Rent expense on the operating leases are as follows:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Rent expense	$	776	$	866	$	832

(11) Intangibles

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Amortization of capitalized patent costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years.

Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.

	Estimated  Life (years)		December 31, 2012			December 31, 2011
Capitalized patent costs		17-20	$	3,973		$	3,035
Intangible assets acquired:							—
Purchased patents and intellectual property		3-10		250			13
Existing technology		5		1,560			—
Customer relationships		7		290			—
Backlog		2		760			—
Tradenames		3		290			—
Non-solicitation agreements		1		120			—
Gross intangible assets				7,243			3,048
Accumulated amortization				(522	)		(240	)
Intangible assets, net			$	6,721		$	2,808

The aggregate amortization expense recorded in 2012, 2011 and 2010 was $315, $124 and $79, respectively. For intangible assets recorded at December 31, 2012, the estimated future aggregate amortization expense for the years ending December 31, 2012 through 2017 is approximately:

Year ending December 31:	Amortization Expense
2013	$	1,061
2014		975
2015		572
2016		477
2017		441

F-23

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

(12) Shareholders’ Equity

Preferred Stock

In June 2008, the Board of Directors authorized 2,500,000 shares of preferred stock, par value $0.001 per share. The 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 shareholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company without further action by shareholders and may adversely affect the voting and other rights of the holders of common stock.

The Board of Directors authorized 10,000 shares of Series A Redeemable Nonvoting Preferred stock (“Series A Preferred”) that were issued to certain executive officers at the time of formation. The Series A Preferred has no voting rights, except as required by law, and may be redeemed at the option of the Company’s Board of Directors at any time on or after June 18, 2013.

The Series A Preferred is redeemable based on the stated fair value of $5.00 per share. The Series A Preferred has no dividend rights and no rights to the undistributed earnings of the Company.

Common Stock

In June 2008, the Board of Directors authorized 50,000,000 shares of common stock, par value $0.001 per share. The holders of Digimarc common stock are entitled to one vote for each share held of record on all matters submitted to a vote of our shareholders, 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 Company’s shareholders. The Series A Preferred does not have any dividend preferences. In the event of the Company’s liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of the Company’s 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.

Stock Incentive Plan

On July 31, 2008 the Company’s Board of Directors initially adopted the 2008 Incentive Plan, or the 2008 Plan. The 2008 Plan provides for the grant of stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance shares, performance units, and cash-based awards, which may be granted to officers, directors, employees, consultants, agents, advisors and independent contractors who provide services to the Company and its affiliated companies.

The 2008 Plan authorizes the issuance of up to 2,500,000 shares of common stock. The shares authorized under the 2008 Plan are subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar event. Shares issued under the 2008 Plan will consist of authorized and unissued shares or shares held by the Company as treasury shares. If an award granted under the 2008 Plan lapses, expires, terminates or is forfeited or surrendered without having been fully exercised or without the issuance of all the shares subject to

F-24

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

the award, the shares covered by that award will again be available for use under the 2008 Plan. Shares that are (i) tendered by a participant or retained by the Company as payment for the purchase price of an award or to satisfy tax withholding obligations or (ii) covered by an award that is settled in cash, or in some manner that some or all of the shares covered by the award are not issued, will be available for issuance under the 2008 Plan. In addition, awards granted as substitute awards in connection with acquisition transactions will not reduce the number of shares authorized for issuance under the 2008 Plan.

Stock Options

As of December 31, 2012, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 799,415 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.

Options granted, exercised, canceled and expired under the stock incentive plan are summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Grant  Date Fair Value		Aggregate Intrinsic Value
Options outstanding, December 31, 2009		1,167,323		$	9.65	$	6.28
Granted		140,000		$	15.64	$	8.28
Exercised		(313,832	)	$	9.70	$	6.32
Canceled		—			—		—
Options outstanding, December 31, 2010		993,491		$	10.47	$	6.55
Granted		215,000		$	27.84	$	11.46
Exercised		(169,420	)	$	9.75	$	6.33
Canceled		(10,833	)	$	9.64	$	6.28
Options outstanding, December 31, 2011		1,028,238		$	14.23	$	7.61
Granted		—			—		—
Exercised		(172,250	)	$	9.64	$	6.29
Canceled		—			—		—
Options outstanding, December 31, 2012		855,988		$	15.16	$	7.88	$	6,280
Options exercisable, December 31, 2012		693,248		$	12.78			$	6,110
Options unvested, December 31, 2012		162,740		$	25.28			$	170

The aggregate intrinsic value is based on the closing price of $20.70 per share of Digimarc common stock on December 31, 2012, which would have been received by the optionees had all of the options with exercise prices less than $20.70 per share been exercised on that date.

F-25

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The following table summarizes information about stock options outstanding at December 31, 2012:

	Options Outstanding						Options Exercisable
Exercise Price	Number Outstanding		Remaining Contractual Life (Years)		Weighted Average Price		Number Exercisable		Remaining Contractual Life (Years)		Weighted Average Price
$9.64 – $9.91		508,072		5.86	$	9.66		508,072		5.86	$	9.66
$14.99 – $18.01		132,916		7.08	$	15.67		103,126		7.10	$	15.87
$24.35 – $30.01		215,000		8.57	$	27.84		82,050		8.49	$	28.26
$9.64 – $30.01		855,988		6.73	$	15.16		693,248		6.36	$	12.78

Restricted Stock

The Compensation Committee of the Board of Directors awarded restricted stock shares under the Company’s 2008 Plan to certain employees. The shares subject to the restricted stock awards will vest over a certain period, usually four years, following the date of the grant. Specific terms of the restricted stock awards are governed by Restricted Stock Agreements between the Company and the award recipients.

The following table reconciles the unvested balance of restricted stock:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2009		111,000		$	10.02
Granted		124,560		$	16.77
Vested		(34,350	)	$	9.89
Canceled		(3,450	)	$	13.05
Unvested balance, December 31, 2010		197,760		$	14.25
Granted		190,180		$	29.12
Vested		(73,110	)	$	20.82
Canceled		(18,120	)	$	19.24
Unvested balance, December 31, 2011		296,710		$	21.51
Granted		202,340		$	22.51
Vested		(117,667	)	$	22.52
Canceled		(12,300	)	$	22.05
Unvested balance, December 31, 2012		369,083		$	21.72

(13) 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. The Plan combines both an employee savings plan and company matching plan into one plan under Section 401(k), including a 401(k) Roth option. Employees become eligible to participate in the Plan at the beginning of the month following the employee’s hire date. Employees may contribute up to 75% of their pay to the Plan, subject to the limitations of the Internal Revenue Code. Company matching contributions are mandatory. The previous Plan was terminated as of December 31, 2008.

F-26

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The Company made matching contributions in the aggregate amount as follows:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Matching contributions	$	366	$	349	$	323

(14) Joint Venture and Related Party Transactions

In June 2009, the Company entered into two joint venture agreements with Nielsen to launch two new companies; TVaura LLC and TVaura Mobile LLC. The two joint venture agreements and a revised patent license agreement expanded and replaced the previous license and services agreement between the Company and Nielsen that had been in operation since late 2007. Under the new agreements, the Company and Nielsen agreed to work together to develop new products and services, including the expansion and deployment of those products and services that were in development under the prior agreement.

Under the terms of the patent license agreement, Nielsen agreed to pay Digimarc $18,750 during the period from July 2009 through January 2014, and Digimarc granted to Nielsen a non-exclusive license to Digimarc’s patents for use within Nielsen’s business. Unless earlier terminated in accordance with the agreement, the license will continue until the expiration of the last to expire of the licensed patents. The payment terms extend beyond the Company’s normal 30 to 60 day payment terms, thus the license revenue is being recognized when the installments are due.

The Company provided technical and development services to the joint ventures totaling $6,848 during the period 2009 through 2012. Service revenue was recognized as the services are performed.

The Company and Nielsen each made initial cash contributions aggregating $3,500 payable quarterly from July 2009 through July 2011 to fund TVaura LLC and initial cash contributions aggregating $2,500 payable quarterly from July 2009 through July 2011 to fund TVaura Mobile LLC.

In March 2012, Digimarc and Nielsen decided to reduce the investments in their two joint ventures to minimal levels while assessing alternative approaches to achieving each of their goals in the emerging market opportunity of synchronized second screen television. In connection with this plan for the suspension of operations, the joint ventures accrued estimated expenses for the first quarter’s operations and severance costs for joint venture employees. Digimarc’s share of the one-time severance and suspension costs was approximately $500. Pursuant to the plan of suspending operations of the joint ventures with Nielsen, in April 2012 the Company received $104 of remaining cash from TVaura LLC and contributed $796 to TVaura Mobile LLC to fund both the first quarter’s operating expenses as well as the suspension related costs. Payment of all expenses incurred after the suspension of operations of each joint venture is the responsibility of the majority member.

Pursuant to the terms of the agreements and ASC 810 “Consolidation,” the joint ventures are not consolidated with the Company because the minority member has substantive participating rights, or veto rights, such that no member has majority control.

F-27

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The Company recorded the following net losses on the joint ventures based on the Company’s pro-rata share of the net losses incurred by TVaura LLC and TVaura Mobile LLC:

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
The Company’s pro-rata share—net loss
TVaura LLC	$	(27	)	$	(1,376	)	$	(1,440	)
TVaura Mobile LLC	$	(1,100	)	$	(1,338	)	$	(740	)
Total	$	(1,127	)	$	(2,714	)	$	(2,180	)
The Company’s gain / (loss) on investment
TVaura LLC	$	70
TVaura Mobile LLC	$	(50	)
Total	$	20

Summarized financial information for the joint ventures has not been provided as the disclosures are immaterial to the Company’s filing given the operations of the joint ventures have been suspended and the Company’s investment in each joint venture is $0 as of December 31, 2012.

Related Party Transactions

	Year Ended December 31, 2012			Year Ended December 31, 2011		Year Ended December 31, 2010
TVaura LLC:
Capital contributions (return of capital)	$	(104	)	$	1,200	$	1,600
Revenue (1)	$	—		$	2,640	$	2,723
TVaura Mobile LLC:
Capital contributions	$	796		$	900	$	1,200
Revenue (1)	$	272		$	—	$	—
Total:
Capital contributions, net	$	692		$	2,100	$	2,800
Revenue (1)	$	272		$	2,640	$	2,723

(1) Technical and development services

(15) Income Taxes

For the year ended December 31, 2012, the provision for income taxes reflects current tax expense, deferred tax expense and withholding tax expense in various foreign jurisdictions. The withholding taxes are computed by the Company’s customers and paid to foreign jurisdictions on the Company’s behalf. The effective tax rate for the year ended December 31, 2012 was 39%. Excess tax benefits associated with stock compensation are being utilized in the current year to offset tax payable and credit additional paid-in capital.

For the year ended December 31, 2011, the provision for income taxes reflects current tax expense, deferred tax benefit and withholding tax expense in various foreign jurisdictions. The effective tax rate for the year ended December 31, 2011 was a tax benefit of 46%. Excess tax benefits associated with stock compensation were being utilized in 2011 to offset tax payable and credit additional paid-in capital. The Company recognized a deferred

F-28

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

tax benefit of $2,581 during the year ended December 31, 2011 as a result of releasing the valuation allowance on deferred tax assets. The Company concluded, based on an analysis of all the facts, including projections of future income, that it was more likely than not that all of its deferred tax assets will be realized.

Components of tax expense (benefit) allocated to continuing operations include the following:

	Year Ended December 31, 2012		Year Ended December 31, 2011			Year Ended December 31, 2010
Current:
Federal	$	4,699	$	1,066		$	—
State		570		3			—
Foreign		1		(20	)		42
Sub-total		5,270		1,049			42
Deferred:
Federal		97		(2,470	)		—
State		27		(365	)		—
Foreign		—		—			—
Sub-total		124		(2,835	)		—
Total tax (benefit) expense	$	5,394	$	(1,786	)	$	42

The reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31, 2012			%			Year Ended December 31, 2011			%			Year Ended December 31, 2010			%
Income taxes computed at statutory rates	$	4,647			34	%	$	1,316			34	%	$	1,434			34	%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit		705			5	%		194			5	%		220			5	%
Federal and state research and experimentation credits		(122	)		(1	)%		(784	)		(20	)%		(353	)		—
Change in valuation allowance		12			—			(2,581	)		(67	)%		(1,275	)		(32	)%
Transaction costs		65			1	%		—			—			—			—
Impact of federal graduated rates		39			—			—			—			—			—
Other		48			—			69			2	%		16			—
Total	$	5,394			39	%	$	(1,786	)		(46	)%	$	42			7	%

F-29

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

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 are as follows:

	December 31, 2012			December 31, 2011
Deferred tax assets:
Stock based compensation	$	2,636		$	1,976
Federal and state net operating losses		1,900			—
Goodwill		1,146			1,254
Accrued compensation		50			—
Deferred rent		170			190
Federal and state research and experimentation credits		—			458
Other		—			21
Total gross deferred tax assets		5,902			3,899
Less valuation allowance		(184	)		—
Net deferred tax assets	$	5,718		$	3,899
Deferred tax liabilities:
Patent expenditures	$	(1,385	)	$	(1,051	)
Fixed asset differences		(167	)		(13	)
Intangible asset differences		(506	)		(13	)
Other		(18	)		(13	)
Total deferred tax liabilities	$	(2,076	)	$	(1,064	)
Net deferred tax assets	$	3,642		$	2,835

For the year ended December 31, 2012, the Company acquired 100% of the outstanding stock of Attributor Corporation in a non-taxable transaction. Due to Attributor’s history of losses and the inability to utilize Attributor losses to offset the Company’s income for state tax purposes, the Company concluded that it is not more likely than not that the Attributor state deferred tax assets will be realized and a full valuation allowance has been recorded on the state deferred tax assets of Attributor. The valuation allowance recorded as of December 31, 2012 and 2011 is $184 and $0, respectively, and relates to state deferred tax assets acquired as part of the Attributor acquisition.

For the year ended December 31, 2011, the Company determined that it was more likely than not that the net deferred tax assets would be realized and the entire valuation allowance in the amount of $2,581 was released.

As of December 31, 2012, the Company has federal and state net operating loss carry-forwards of $4,873 and $4,873, respectively, which have a carry-forward of 8 – 20 years depending on the jurisdiction. The deferred tax assets, before valuation allowance, for federal and state net operating loss carryforwards acquired in the Attributor acquisition have been reduced to the amount of losses allowed to be utilized in the post-acquisition period before expiration after considering the applicable limitations of IRC Sec. 382. As of December 31, 2012, the Company has federal and state research and experimental tax credits of $49 and $12, respectively, which have a carry-forward of 5 – 19 years depending on the jurisdiction and for which the benefits upon usage will be

F-30

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

recorded in additional paid-in capital from the effects of stock options. As of December 31, 2012, the Company has foreign tax credits of $56 which have a carry-forward of 7 – 9 years and for which the benefits upon usage will be recorded in additional paid-in capital from the effects of stock options.

The Company records accrued interest and penalties associated with uncertain tax positions in income tax expense in the consolidated statements of operations. On initial adoption of ASC 740 and through December 31, 2010, the Company recognized no uncertain tax positions nor accrued interest and penalties associated with uncertain tax positions. For the years ended December 31, 2012 and 2011, the Company recognized uncertain tax positions and no accrued interest and penalties associated with uncertain tax positions. The Company does not anticipate any unrecognized benefits that will significantly increase or decrease within the next 12 months.

A summary reconciliation of the Company’s uncertain tax positions is as follows:

	December 31, 2012		December 31, 2011
Beginning balance	$	102	$	—
Addition for current year tax positions		6		30
Addition for prior year tax positions		—		72
Settlements with taxing authorities		—		—
Lapsing of statutes of limitations		—		—
Ending balance	$	108	$	102

The balance for uncertain tax positions is classified as a long-term liability on the consolidated balance sheet. All uncertain tax positions if reversed would affect the effective tax rate.

The Company is subject to examination in the federal jurisdiction for the tax years ending December 31, 2012, 2011 and 2010 and other state jurisdictions for the tax years ending December 31, 2012, 2011, 2010, 2009 and 2008.

(16) Commitments and Contingencies

Certain of the Company’s product license and services agreements include an indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.

Our newly acquired subsidiary, Attributor, is a defendant in a patent infringement lawsuit brought by Blue Spike, LLC (E.D. Texas, Civil Action No: 6:12-cv-540). The case was brought against Attributor in August 2012, and was consolidated with other lawsuits brought by Blue Spike into Civil Action No. 6:12-cv-00499.

Blue Spike asserted infringement by Attributor of four patents. Attributor filed an answer denying that it has infringed any valid claim of the patents in suit, and asserting specified defenses, including non-infringement and invalidity.

The court is consolidating cases that Blue Spike brought against over sixty defendants into one case. After that process is complete, a schedule should be set.

Blue Spike has not alleged a specific amount of monetary damages in its Complaint.

F-31

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business.

(17) Stock Repurchases

Summary of common stock shares repurchased:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Private transaction		—		552,536		—
Repurchase program		50,900		104,577		—
Exercise of stock options		69,272		48,432		102,077
Tax withholding obligations on stock options		39,005		46,401		81,610
Tax withholding obligations on restricted shares		42,785		24,953		13,506
Total		201,962		766,899		197,193

Value of common stock shares repurchased:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Private transaction	$	—	$	14,927	$	—
Repurchase program		1,201		3,099		—
Exercise of stock options		1,660		1,651		3,037
Tax withholding obligations on stock options		949		1,658		2,435
Tax withholding obligations on restricted shares		950		713		352
Total	$	4,760	$	22,048	$	5,824

On January 26, 2011, the Company repurchased 552,536 shares of its common stock from Koninklijke Philips Electronics, N.V., in a privately negotiated transaction. The shares were purchased for an aggregate price of approximately $14,927, including transaction fees. To facilitate the repurchase, the Company sold $10,752 and $2,996 of short- and long-term marketable securities, respectively, prior to their maturity date at an immaterial gain.

In each of April 2009 and November 2011, the Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of shares of the Company’s common stock through either periodic open-market or private transactions at then-prevailing market prices. Under the April 2009 program that expired in April 2012, the Company repurchased 223,851 shares at an aggregate purchase price of $4,858. Under the November 2011 program, the Board of Directors approved an additional $5,000. In December 2012, the program was extended through December 31, 2013. As of December 31, 2012, the Company had repurchased 43,293 shares under this program at an aggregate purchase price of $1,002.

As part of the Company’s 2008 Stock Incentive Plan, stock options are granted and restricted stock shares are awarded to certain employees and directors.

Pursuant to the terms of the stock option grants, the Company purchases a number of whole shares of common stock having a fair market value (as determined as of the date of exercise) equal to the amount of the total value of the aggregate exercise price of the options exercised. In addition, the Company withholds

F-32

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

(purchases) from shares issued upon exercise of the stock options a number of whole shares of common stock having a fair market value (as determined by the Company as of the date of vesting) equal to the amount of tax required to be withheld by law, in order to satisfy the tax withholding obligations of the Company in connection with the exercise of such options.

Pursuant to the terms of the restricted stock award agreement, the Company withholds (purchases) from fully vested shares of common stock otherwise deliverable to the employee, a number of whole shares of common stock having a fair market value (as determined as of the date of vesting) equal to the amount of tax required to be withheld by law, in order to satisfy the tax withholding obligations of the Company in connection with the vesting of such shares.

(18) Subsequent Events

On February 20, 2013, the Board of Directors declared a quarterly dividend of $0.11 per share, payable on March 11, 2013 to shareholders of record on March 4, 2013.

(19) Quarterly Financial Information—Unaudited

Quarter ended:	March 31			June 30			September 30			December 31
2012
Service revenue	$	3,048		$	2,609		$	2,616		$	2,519
License and subscription revenue		13,998			6,503			6,287			6,795
Total revenue		17,046			9,112			8,903			9,314
Total cost of revenue		1,810			1,583			1,467			1,648
Gross profit		15,236			7,529			7,436			7,666
Gross profit percent, service revenue		44	%		44	%		48	%		45	%
Gross profit percent, license and subscription revenue		99	%		98	%		98	%		96	%
Gross profit percent, total		89	%		83	%		84	%		82	%
Sales and marketing	$	1,007		$	970		$	937		$	913
Research, development and engineering		1,998			2,146			2,320			2,277
General and administrative		2,758			2,191			2,282			2,226
Intellectual property		319			291			309			329
Operating income		9,154			1,931			1,588			1,921
Net income		4,999			1,216			1,003			1,054
Earnings per common share:
Net income per common share—basic	$	0.74		$	0.17		$	0.14		$	0.15
Net income per common share—diluted	$	0.70		$	0.17		$	0.14		$	0.14
Weighted average common shares outstanding—basic		6,738			6,737			6,761			6,791
Weighted average common shares outstanding—diluted		7,140			6,993			6,984			6,966

F-33

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except share and per share data)

Quarter ended:	March 31			June 30			September 30			December 31
2011
Service revenue	$	3,069		$	3,165		$	3,108		$	3,053
License and subscription revenue		6,022			6,308			5,442			5,872
Total revenue		9,091			9,473			8,550			8,925
Total cost of revenue		1,649			1,690			1,742			1,856
Gross profit		7,442			7,783			6,808			7,069
Gross profit percent, service revenue		48	%		49	%		46	%		42	%
Gross profit percent, license and subscription revenue		99	%		99	%		99	%		99	%
Gross profit percent, total		82	%		82	%		80	%		79	%
Sales and marketing	$	1,102		$	1,017		$	1,166		$	1,051
Research, development and engineering		1,775			1,884			1,958			1,710
General and administrative		2,847			2,270			2,000			2,839
Intellectual property		301			266			259			268
Operating income		1,417			2,346			1,425			1,201
Net income		938			3,626			639			453
Earnings per common share:
Net income per common share—basic	$	0.14		$	0.54		$	0.10		$	0.07
Net income per common share—diluted	$	0.12		$	0.50		$	0.09		$	0.06
Weighted average common shares outstanding—basic		6,864			6,696			6,706			6,699
Weighted average common shares outstanding—diluted		7,505			7,245			7,344			7,279

F-34

EXHIBIT INDEX

In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Digimarc or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:

• should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate;

• may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

• may apply standards of materiality in a manner that is different from what may be viewed as material to you or other investors; and

• were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments.

Accordingly, there representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Digimarc may be found elsewhere in this Annual Report on Form 10-K and in Digimarc’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

Exhibit Number	Exhibit Description
2.1	Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with respect to certain sections, L-1 Identity Solutions, Inc. (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to the Company’s Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108))†
2.2	Agreement and Plan of Merger dated April 30, 2010 between Digimarc Corporation, a Delaware corporation, and Digimarc Oregon Corporation, an Oregon corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-34108))
2.3	Agreement and Plan of Merger, dated December 3, 2012, by and among Digimarc, DA Sub Inc., a wholly owned subsidiary of Digimarc Corporation, Attributor, and Fortis Advisors LLC, as the representative for Attributor’s security holders (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Commission on December 4, 2012 (File No. 001-34108))†
3.1	Articles of Incorporation of Digimarc Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-34108))
3.2	Bylaws of Digimarc Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-34108))
4.1	Specimen common stock certificate of Digimarc Corporation (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K, filed with the Commission on February 27, 2009 (File No. 001-34108))
4.2	Rights Agreement, dated July 31, 2008, between Digimarc Corporation and Computershare Trust Company, N.A. as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K, filed with the Commission on February 27, 2009 (File No. 001-34108))

E-1

Exhibit Number	Exhibit Description
4.3	Form of Certificate of Designation of Series R Preferred Stock (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto)
4.4	Form of Rights Certificate (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto)
10.1	License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company (incorporated by reference to Exhibit 10.2 to Amendment No. 4 to the Company’s Registration Statement on Form 10, filed with the Commission on October 2, 2008 (File No. 001-34108))(1)
10.2	Counterfeit Deterrence System Development and License Agreement, dated as of December 6, 2012, between Digimarc Corporation and the Bank for International Settlements(4)
*10.3	Form of Indemnification Agreement between DMRC Corporation and each of its executive officers and directors (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the Company’s Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108))
*10.4	Employment Agreement, effective as of November 1, 2011, between Digimarc Corporation and Bruce Davis (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on November 7, 2011 (File No. 001-34108))
*10.5	Digimarc Corporation 2008 Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 24, 2008 (File No. 001-34108))
*10.6	Form of Notice of Stock Option Award and Stock Option Award Agreement under the Digimarc Corporation 2008 Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 24, 2008 (File No. 001-34108))
*10.7	Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2008 Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on November 24, 2008 (File No. 001-34108))
*10.8	Form of Indemnification Agreement between Digimarc Corporation and each of its executive officers and directors (incorporated by reference to Exhibit 10.1 to Digimarc Corporation’s Annual Report on Form 10-K, as filed by Digimarc Corporation with the Securities and Exchange Commission on March 13, 2006 (File No. 000-28317))
*10.9	Form of Change of Control Retention Agreement entered into by and between Digimarc Corporation and each of Messrs. McConnell, Chamness, Knudson and Meyer
10.10	Patent License Agreement, dated as of June 11, 2009 between Digimarc Corporation and The Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)
10.11	Limited Liability Company I Agreement, dated June 11, 2009 between Digimarc Corporation and The Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)
10.12	Limited Liability Company II Agreement, dated June 11, 2009 between Digimarc Corporation and The Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)

E-2

Exhibit Number	Exhibit Description
10.13	Lease Agreement, dated March 22, 2004, between Digimarc Corporation and PS Business Parks, L.P., as amended on May 13, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed with the Commission on July 30, 2010 (File No. 001-34108))
10.14	Patent License Agreement, effective as of October 5, 2010, between Digimarc Corporation and IV Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))(3)
10.15	Grant-Back License Agreement, dated October 5, 2010, between Digimarc Corporation and IV Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))(3)
10.16	Patent Rights Agreement, dated October 5, 2010, between Digimarc Corporation and IV Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))
10.17	Work Agreement, dated October 5, 2010, by and among Digimarc Corporation, Invention Law Group, P.C. and IV Digital Multimedia Inventions, LLC (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))(3)
21.1	List of Affiliates
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Label Linkbase Document

* Management contract or compensatory plan or arrangement.

† Schedules and certain exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Digimarc hereby undertakes to furnish to the Securities and Exchange Commission (the “Commission”) copies of the omitted schedules and exhibits upon request by the Commission.

(1) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission on October 21, 2008, under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

E-3

(2) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission on September 10, 2009, under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

(3) Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission on March 17, 2011, under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

(4) Confidential treatment has been requested for certain portions omitted from this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

E-4

EX-10.2

EXHIBIT 10.2

CONFIDENTIAL PORTIONS OMITTED

Counterfeit Deterrence System

Development and License Agreement

Table of Contents:

1.	DEFINITIONS AND PRINCIPLES OF INTERPRETATION	3
2.	SCOPE OF THE SERVICES	11
3.	PROGRAM MANAGEMENT	13
4.	DELIVERABLES	16
5.	RESPONSIBILITIES OF THE CBCDG	17
6.	PRICE AND PAYMENT	18
7.	CHANGE MANAGEMENT	20
8.	INTELLECTUAL PROPERTY MATTERS	22
9.	INTELLECTUAL PROPERTY INDEMNIFICATION	24
10.	REPRESENTATIONS AND WARRANTIES OF DIGIMARC	27
11.	REPRESENTATIONS AND WARRANTIES OF THE BIS	29
12.	CONFIDENTIALITY	29
13.	AUDIT AND INSPECTION	32
14.	DISPUTE RESOLUTION	33
15.	TERM AND TERMINATION	33
16.	FORCE MAJEURE	36
17.	NOTICES	36
18.	MISCELLANEOUS PROVISIONS	37

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Counterfeit Deterrence System

Development and License Agreement

This Counterfeit Deterrence System Development and License Agreement (the “Agreement”) is made

Between

DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at 9405 SW Gemini Drive, Beaverton, Oregon, U.S.A. 97008 (“Digimarc”)

and

BANK FOR INTERNATIONAL SETTLEMENTS, created pursuant to The Hague Agreements of January, 1930 having its head office at Centralbahnplatz 2, CH-4051 Basel, Switzerland (“BIS”)

Recitals

WHEREAS:

Effective 1 January 1999, the predecessor to Digimarc (then also known as Digimarc Corporation and subsequently merged into L-1 Identity Solutions Inc. in 2008) and the BIS entered into an agreement entitled the “Counterfeit Deterrence System Development and License Agreement.”

WHEREAS:

On 14 March 2000, 28 December 2001, 1 January 2002 and 1 January 2004, the predecessor to Digimarc and the BIS entered into Amendments to the Counterfeit Deterrence System Development and License Agreement (hereinafter the First, Second, Third and Fourth Amendments). On 18 August 2008, the BIS consented to assignment of the Agreement of 1999 and its amendments to Digimarc.

WHEREAS:

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	2	Confidential

The parties agreed to restate the Counterfeit Deterrence System Development and License Agreement to include the First, Second, Third and Fourth Amendments into a new agreement and to make additional amendments. The restated and revised agreement was effective from 1 October 2009 (the “2009 Agreement”).

WHEREAS:

The parties wish to renew and extend this Counterfeit Deterrence System Development and License Agreement by entering into this renewal and extension agreement effective 1 January 2013.

WHEREAS:

The parties have agreed that all Services performed prior to 1 January 2013 shall be governed by the previous versions of this Development and License Agreement in effect at the time of those Services.

NOW THEREFORE:

Inconsideration of the promises and covenants set out in the Agreement and other good and valuable considerations, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows:

1. DEFINITIONS AND PRINCIPLES OF INTERPRETATION

1.1 Definitions – Whenever used in this Agreement, the following words and terms shall have the meanings set out below:

“Agreement” means these articles of agreement, including the Schedules, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time;

“Allowable Cost” means a cost of the kind identified in Schedule F;

“Arbitration Agreement” means the agreement attached as Schedule G;

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	3	Confidential

“BIS Technology” means that technology that the BIS has the right to license, including (a) [**], that the BIS licences to Digimarc on the terms set out in clause 8.1 to use, design or implement the CDS and all Intellectual Property Rights in that licensed [**];

“Business Day” means a day on which both the BIS and Digimarc are open for business at their respective addresses noted above;

“CBCDG” means a committee of representatives from various [**] called “Central Bank Counterfeit Deterrence Group”, previously known as “[**]”;

“CBCDG Contract Authority” means the chairman of the CBCDG Executive Committee;

“CBCDG Project Director” means the project director appointed by the CBCDG Contract Authority from time to time on notice to the Digimarc Contract Authority;

“CBCDG Project Office” means the project office established by the CBCDG Contract Authority, or its staff as the case may be, and that is responsible for the oversight of the overall relationship among the BIS, the CBCDG, the [**] the CDS Technology, and Digimarc and for the key day-to-day contract management;

“CBCDG Task” has the meaning assigned to it by clause 5.1;

“CDS Technology” collectively, means whatever of the BIS Technology, the Digimarc Technology and the Project Technology is incorporated into the CDS;

[**]

“Confidential Information” means information disclosed during the Term of this Agreement in any form which, if disclosed in tangible form, is labelled “Confidential”, “Proprietary” or with a similar legend, or if disclosed orally is information that by its nature would be understood to be confidential to the Discloser;

“Contract Authority” means either the CBCDG or Digimarc Contract Authority, as the context requires;

“Counterfeit Deterrence System” or “CDS” or “System” means a system for [**] that includes [**]. The System incorporates means for [**];

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	4	Confidential

“Deliverable” means a product, document or tool to be delivered by Digimarc identified in a Statement of Work;

“Dependency” means any of the following dependencies of Digimarc on [**] and their employees, agents, representatives and subcontractors:

(a) performing a task upon which Digimarc’s performance of any part of the Services is dependent;

(b) timely providing to Digimarc the relevant technical information, [**];

(c) timely returning/negotiating [**], documents of understanding as necessary to protect Digimarc or BIS intellectual property;

(d) having attendance of the relevant [**] employees or consultants at key briefings and review meetings; and

(e) such dependencies as are expressly identified in a Statement of Work;

“Device” means any device in which the [**] device;

“[**]” means the [**] of a [**];

“Digimarc Contract Authority” means the individual designated by Digimarc in writing to the CBCDG Contract Authority from time to time;

“Digimarc Project Director” means the Project Director appointed by the Digimarc Contract Authority in accordance with the provisions of clause 3.3;

“Digimarc Technology” means:

(a) the technology partially described in Schedule B developed or owned by Digimarc prior to 1 January 1999 to the extent that it forms part of the CDS;

(b) all Improvements to the technology described in (a) made by or on behalf of Digimarc other than under this Agreement to the extent that they form part of the CDS;

(c) all Improvements to the technology described in (a) made by or on behalf of Digimarc under this Agreement to the extent that they relate to or form part of the CDS; and

(d) all Intellectual Property Rights in all such technology and Improvements;

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	5	Confidential

“Digital Watermark” refers to [**] (including [**]) that are [**] from [**] by [**] of [**], which [**] of [**] and yet do not significantly [**] from the aesthetics of the [**] or [**] thereby. Examples include:

(a) generally imperceptible changes to [**] or placement in [**];

(b) [**] of a substrate, where the [**] substantially uniform to human touch;

(c) slight localized changes to [**] or [**] of a printed document;

(d) slight changes to [**]; or

(e) [**] of substantially [**];

“Discloser” means a party which has disclosed or otherwise made available its Confidential Information to the other party;

“DLA Labour Costs” means the labour costs defined in Schedule F;

“DLA Labour Rates” means the rates for Services set in accordance with Schedule F;

[**]

“Effective Date” means 1 January 2013;

[**]

“[**] Support Services” means Integration Support, Training and conducting Verification Tests;

“Escrow Agent” means a custodian appointed by the CBCDG Contract Authority;

“Escrowed Materials” means any and all materials deposited or to be deposited by Digimarc with the Escrow Agent under this Agreement including the Improvements pertaining to the CDS Technology which shall include the following:

(a) all Deliverables and work completed by Digimarc (including all [**], [**] and [**] deliverables, supporting documentation, tools and any other product created by Digimarc) in support of delivery of the Services since the last escrow deposit;

(b) details of the deposit including: full name and version details, number of media items, media type and density, file or archive format, list or retrieval commands, archive hardware and operating system details;

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	6	Confidential

(c) name and functionality of each module or application of the Escrowed Materials;

(d) names and versions of development tools;

(e) documentation describing the procedures for building, compiling, executing and using the software which forms part of the Escrowed Materials (e.g., technical notes, user guides);

(f) hardcopy directory listings and tables of the contents of the computer media, manuals and other materials; and

(g) name and contact details of employee(s) with knowledge of how to maintain and support the Escrowed Materials;

[**]

“Improvement” means any change in the CDS Technology made by or at the direction of Digimarc after 1 January 1999 which enhances, whether by improvement, enhancement, correction, addition or otherwise, the properties, characteristics or manufacture of the CDS and any change to the CDS Technology and/or the [**] made by any [**] in connection with the [**] of the CDS by any [**] that Digimarc has rights in, including customization, improvements, enhancements, corrections, and changes to the [**] so that it can interface properly to a [**];

“Integration Support” means the consulting and programming services to be provided by Digimarc as requested by a [**] to assist the [**] to ensure that the [**] is [**] in a [**];

“Intellectual Property Rights” means all intellectual property rights existing now and in the future including trade secrets, trademarks, copyright, database rights, know-how, topographies, patents and patent applications;

“[**]” means an entity responsible for [**];

“[**]” means the template license agreement with that name agreed upon between the CBCDG and Digimarc, as amended from time to time;

“[**]” means the template license agreement with that name agreed upon between the CBCDG and Digimarc, as amended from time to time;

“Key Personnel” mean those personnel identified in clause 3.5;

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	7	Confidential

“[**]” means an [**] licensed by Digimarc pursuant to clause 2.2;

“[**]” means an entity that is authorized by a [**] and/or the CBCDG Contract Authority and [**] containing [**] pursuant to clause 2.3;

“[**]” means the template license agreement agreed upon between the CBCDG and Digimarc, as amended from time to time;

“Person” means any individual or other legal entity, including a sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, or a natural person in the capacity of trustee, executor, administrator or other legal representative;

“Plan Budget” means the document approved under clause 3.12 defining a minimum spend commitment for a particular calendar year by the CBCDG, subject to clause 3.13;

“Planning Process” means the process for the development of the Statements of Work and Roadmap as agreed to in writing between the CBCDG Project Office and Digimarc;

“Pricing Formula” means the formula defined in Schedule F, clause 9;

“[**]” means the template license agreement with that name agreed upon between the CBCDG and Digimarc, as amended from time to time;

“[**]” means the template license agreement with that name agreed upon between the CBCDG and Digimarc, as amended from time to time;

“Problem Report” means a report of a problem in a format agreed to by the CBCDG Project Director and Digimarc;

“Project Director” means either the CBCDG or Digimarc Project Director, as the context requires;

“Project Technology” means the technology described in Schedule C developed by or on behalf of Digimarc under this Agreement after 1 January 1999, all Improvements to that technology or to the BIS Technology, and all Intellectual Property Rights in that technology and those Improvements;

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CDS DLA 1-January 2013	8	Confidential

“Properly Embedded” when used in reference to a [**] means that the [**] is [**] in accordance with the written instructions provided with the [**] used to [**] and is capable of passing the Verification Test;

“Recipient” means a party to which the Confidential Information of the other party has been disclosed or otherwise made available;

“Roadmap” means the rolling five year project and budget plan agreed to in writing by the CBCDG Contract Authority and Digimarc and updated annually;

“Schedule” means a schedule to this Agreement;

[**]

“Security Requirements” means the requirements for physical security including electronic systems security set out in Schedule D;

“Services” means the services required to be performed by Digimarc as set out in clause 2, and other services reasonably necessary to comply with its obligations under this Agreement;

“SOW Budget” means the amount approved under clause 3.11 defining a minimum spend commitment related to a Statement of Work for a particular calendar year by the CBCDG, subject to clause 3.13;

“Specifications” for the CDS or any part thereof means the technical specifications for the products and tools of the CDS or part thereof to be delivered or already accepted by the CBCDG Project Director under this Agreement;

“Statement of Work” means the document that captures and defines the work activities, deliverables and timeline Digimarc will execute against in performance of specified work developed in accordance with the Planning Process;

“Term” means the period commencing on the Effective Date and ending on 31 December 2024;

“Training” means the training in the use and operation of the [**] described in Schedule E; and

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“Verification Test” means a test or tests to determine if [**]. The Verification Test is defined in the Verification Test procedure and is executed using the Verification Test tool.

1.2 Interpretation – in this Agreement:

1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America;

1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such Person or Persons or circumstances as the context otherwise permits;

1.2.3 whenever a provision of this Agreement requires an acceptance, approval or consent by a party to this Agreement and notice of such acceptance, approval or consent is not delivered within the applicable time, then the party shall be conclusively deemed to have withheld the acceptance, consent or approval;

1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day;

1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be:

(a) the terms of this Agreement, excluding Schedules;

(b) the Schedules;

(c) the Statement of Work;

(d) as between the delivery schedules forming part of a Statement of Work, and other provisions for such Statement of Work, the delivery schedules shall take precedence;

1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise;

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1.2.7 the words “includes” or “including” will be construed as meaning “includes without limitation” and “including without limitation” as the case may be; and

1.2.8 a clause or Schedule, unless the context requires otherwise, is a reference to a clause to, a Schedule of, or a paragraph of a Schedule to, this Agreement, as amended from time to time in accordance with this Agreement.

1.3 Applicable Law – The Agreement and all amendments thereto shall be construed in accordance with the laws of England to the exclusion of its rules of conflicts of laws.

1.4 Schedules – The Schedules to this Agreement, listed below, are an integral part of this Agreement.

Schedule	Description
Schedule A	System Description
Schedule B	Digimarc Technology
Schedule C	Project Technology
Schedule D	Security Requirements
Schedule E	Training
Schedule F	Allowable Costs
Schedule G	Arbitration Agreement

2. SCOPE OF THE SERVICES

2.1 Digimarc shall provide the Services as stated in the Statements of Work.

2.2 Digimarc shall, when requested by the CBCDG Contract Authority, make an irrevocable offer to an [**] to grant the [**] a [**] to the relevant CDS Technology in connection with the banknotes of the [**] on terms no less favourable to the Issuing Authority than those set out in the [**] for CBCDG Members or the [**], as applicable.

2.3 Digimarc shall, when requested by the CBCDG Contract Authority and/or [**]:

(a) make an irrevocable offer to [**] designated by the CBCDG Contract Authority and/or [**] a [**] to the relevant CDS Technology in connection with [**] of a [**], on terms no less favourable to the [**] than those set out in the [**] as applicable; and

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(b) deliver the relevant CDS Technology to the [**] referred to above at no charge and provide the Training to the [**] for the charges to the [**] described in clause 2.6 within thirty (30) Business Days after the [**] acceptance of the offer to [**], or at such other times as may be agreed between Digimarc and the [**].

2.4 No later than sixty (60) Business Days after every written request made by a [**] during the Term, Digimarc shall provide Integration Support to the [**] on a date or dates agreed between Digimarc and the [**] for the charges described in clause 2.6.

2.5 No later than twenty (20) Business Day after every written request made by a [**] during the Term, Digimarc shall conduct Verification Tests of [**] on a date or dates agreed between Digimarc and the [**], as the case may be, for the charges specific in clause 2.6.

2.6 The amount charged by Digimarc to the [**] for [**] Support Services will be in accordance with the Allowable Costs.

2.7 Digimarc shall continue to provide support to [**] for the two (2) most recently released versions of the [**] unless the CBCDG Project Director instructs otherwise.

2.8 Digimarc [**] the relevant CDS Technology to all [**] at the request of the CBCDG Project Director on terms no less favourable to the [**] than those set out in the [**].

2.9 Digimarc shall continue to support all deployed versions of the [**] and [**] as instructed by the CBCDG Project Director.

2.10 The BIS hereby grants Digimarc a [**] the BIS may have or acquire under clause 8.2 of the Agreement.

2.11 Digimarc shall be responsible for compliance with laws and regulations governing export from the United States. As between Digimarc and the CBCDG Contract Authority, the CBCDG Contract Authority shall be responsible for advising those using the CDS on compliance with laws and regulations governing export from their countries and on compliance with United States law concerning re-export. Upon request from the CBCDG Project Director, Digimarc shall provide assistance to support the CBCDG Project Director advising such users of the CDS on compliance with laws and regulations governing export from their countries and on compliance with United States law concerning re-export. Costs that Digimarc incurs in compliance with this clause 2.11 are an Allowable Cost.

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[**]

2.12 Digimarc acknowledges and confirms the BIS’ right to enforce clauses 2.2, 2.3 and 2.8 by an application for specific performance or otherwise.

2.13 Digimarc shall at all times comply, and shall ensure that its employees, agents and subcontractors comply, with the Security Requirements.

2.14 The CBCDG Project Office and Digimarc shall develop a plan that establishes a procedure which, upon notice of termination of this Agreement, facilitates the orderly winding down of the Services or the orderly, effective and efficient transition of the operational capability, knowledge of the Services and the responsibility for the provision of the Services, from Digimarc to an alternate supplier (“Termination Assistance Plan” or “TAP”). The TAP shall be reviewed annually and updated as required. The CBCDG Contract Authority agrees to pay for such assistance as provided under the TAP.

3. PROGRAM MANAGEMENT

3.1 The BIS designates the CBCDG Contract Authority, the CBCDG Project Director and the CBCDG Project Office as its agents to carry out the responsibilities designated to each of them respectively throughout this Agreement. They shall each have only the powers specified in the respective provisions of this Agreement. The BIS hereby agrees to procure the performance of any obligations that are expressed to be performed by any of the CBCDG, the CBCDG Contract Authority, the CBCDG Project Director or the CBCDG Project Office.

3.2 The CBCDG Project Director shall be responsible for coordinating fulfillment by the BIS of its obligations under this Agreement and directing Digimarc in respect of prioritizing effort and timing of Services in relation to any [**] and/or [**] in accordance with the agreed upon Statement of Work and changes thereto. Except as expressly set out in this Agreement, the CBCDG Project Director shall have no authority to amend this Agreement, approve payments or approve or accept Deliverables or other Services or proposals on behalf of the BIS.

3.3 Digimarc shall designate a responsible individual with adequate authority and competence as the Digimarc Project Director. The Digimarc Project Director shall be responsible for coordinating the performance of the Services by Digimarc including serving as project leader and primary interface with the CBCDG, but shall have no authority to agree to an amendment of this Agreement on behalf of Digimarc.

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3.4 The respective Project Directors or Contract Authorities may from time to time appoint one or more persons to represent him or her on prior written notice to the other Project Director or Contract Authority.

3.5 The CBCDG Project Director and Digimarc Project Director shall agree on the list of Key Personnel whose knowledge and skill set make them critical to the delivery of the Services. The list of Key Personnel shall be sent to the CBCDG Contract Authority annually by 31 December. If it becomes necessary for Digimarc to provide substitute or add Key Personnel for any reason, the CBCDG Contract Authority must approve such Key Personnel in advance, which approval shall not be unreasonably withheld. Digimarc shall, at Digimarc’s cost, train the replacement Key Personnel about the job specifics so the replacement personnel shall be able to perform the Services of the replaced Key Personnel at the particular state the Services had reached when the personnel change occurred.

3.6 Digimarc shall replace within a reasonable time under the circumstances any of its employees or authorized subcontractors engaged in fulfilling its obligations under this Agreement, including its Project Director, whose removal is required by the CBCDG Contract Authority, provided that the CBCDG Contract Authority specifies reasonable cause for such removal in writing.

3.7 Digimarc undertakes that all personnel assigned to perform the Services shall be employees or a non-material subcontractor of Digimarc. Digimarc shall provide reasonable prior written notice of its intent to use a material subcontractor. The CBCDG Project Director shall have the right to approve all material subcontractors, which approval shall not be unreasonably withheld. Digimarc undertakes that it shall obtain from each subcontractor prior to permitting that subcontractor to do any part of the Services a written undertaking that all Intellectual Property Rights in any work developed by that subcontractor while providing the Services shall vest absolutely in Digimarc upon the date of creation. Digimarc shall remain responsible for any obligations which are performed by a subcontractor and for the conduct of subcontractors as if they were the acts or omissions of Digimarc.

3.8 Digimarc shall report on progress of the Services in the format and with the frequency directed in writing by the CBCDG Contract Authority. Digimarc will attend such review meetings as requested by the CBCDG Project Director. There will be at least six (6) such review meetings per year or as otherwise agreed by the parties to review technical, planning and resource matters. Each such meeting will last no more than two (2) days

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unless otherwise agreed upon in advance and will be held at a mutually agreeable date and location. At least half of the review meetings will be held at Digimarc. Digimarc will also provide a presentation for the CBCDG [**] on development and [**] progress at least once per year if requested by the CBCDG Project Director.

3.9 In the event that it becomes evident to a Project Director that a failure or delay to perform in accordance with a party’s obligations under this Agreement will result in a material impact on the completion of the Services in accordance with the applicable Statement of Work, then the relevant Project Director shall immediately bring the issue to the attention of the other Project Director.

3.10 As of the Effective Date, the CBCDG Contract Authority shall have approved the 2013 Statement of Work and the 2014 Plan Budget.

3.11 The Statement of Work and associated SOW Budget for the next calendar year (starting with 2014) shall be prepared by Digimarc in collaboration with the CBCDG Project Director and provided to the CBCDG no later than 31 May of each year or such later date as agreed between the CBCDG Project Director and Digimarc. The CBCDG Contract Authority shall, by 30 June of each year or such later date as agreed between the CBCDG Project Director and Digimarc, notify Digimarc in writing of the CBCDG’s approval of the Statement of Work and associated SOW Budget for the next calendar year.

3.12 The Plan Budget for the calendar year following the next calendar year (starting with 2015) shall be prepared by Digimarc in collaboration with the CBCDG Project Director and provided to the CBCDG no later than 31 May of each year or such later date as agreed between the CBCDG Project Director and Digimarc. The CBCDG Contract Authority shall, by 30 June of each year or such later date as agreed between the CBCDG Project Director and Digimarc, notify Digimarc in writing of the CBCDG’s approval of such Plan Budget for the calendar year following the next calendar year. The Plan Budget for any given calendar year shall be the basis for creating the SOW Budget for that same calendar year.

3.13 If Digimarc is ready, willing and able to provide the Services at the level of such SOW Budget amounts and such Plan Budget amounts and is not otherwise in material breach of this Agreement, the CBCDG Contract Authority shall pay Digimarc at least such SOW Budget amounts and such Plan Budget amounts for the relevant years. In the event of any termination of the Agreement, the terms of clause 15 shall take precedence over this clause.

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3.14 The total value of the Services set out in the Statement of Work for any given year must be greater or equal to the initial approved Plan Budget for that year.

3.15 The CBCDG Project Office and Digimarc shall hold planning meetings in accordance with the Planning Process as needed to review the scope and status of current and planned projects under the Statement of Work and Roadmap relative to the schedule, expenditures and budgets and to establish Statements of Work for subsequent periods.

3.16 The CBCDG Project Office and Digimarc shall meet at least once in each calendar year to discuss [**] and similar issues related to the development, [**] and [**] of the CDS. If both parties agree that this meeting is not required in any given year, the meeting will not be held.

4. DELIVERABLES

4.1 Deliverables shall be approved by the CBCDG Contract Authority in accordance with the timing and criteria set out in the relevant Statement of Work.

4.2 Where a Deliverable depends upon acceptance and Digimarc fails to produce a Deliverable acceptable to the CBCDG Contract Authority in accordance with the acceptance criteria set out in the applicable Statement of Work then the CBCDG Contract Authority may, in its sole discretion, by written notice to Digimarc, either:

(a) allow additional time for Digimarc to produce a Deliverable acceptable to the CBCDG Contract Authority, whereupon the time for completion of all other Deliverables which depend on the acceptance shall automatically be extended by one day for each additional day or such other period as may be agreed in writing between the respective Contract Authorities; or

(b) cancel any further work on the Deliverable and all Deliverables which depend on the acceptance, whereupon the Statement of Work which provides for the cancelled work or Deliverables which depend on the acceptance shall be deemed to be amended to exclude them.

4.3 Digimarc shall not be responsible to the extent any failure by Digimarc to perform the Services in accordance with this Agreement is directly attributable to: a) a delay to perform any CBCDG Task applicable to the affected part of the Services; b) a Dependency applicable to the affected part of the Services not being fulfilled by a [**]; or c) a force majeure event (as defined in clause 16.1).

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4.4 If any version of the [**] fails to meet the Specifications for that version within one (1) year of the date of acceptance thereof by the CBCDG Contract Authority, and such failure could not have been discovered by the CBCDG Contract Authority using reasonable diligence during the acceptance procedure for that version, then Digimarc shall, at its own expense, within sixty (60) days after receipt of a Problem Report from the CBCDG Project Director or such other period as the CBCDG Project Director may agree, rectify the failure and at the direction of the CBCDG Project Director provide a corrected [**] to which Digimarc had previously provided the [**].

4.5 If any version of a [**] provided by Digimarc to any Person during the Term for incorporation into any Device, fails to meet the relevant Specifications within one (1) year of the date of acceptance thereof by the CBCDG Contract Authority, and such failure could not have been discovered by the CBCDG Contract Authority using reasonable diligence during the acceptance procedure for that version, then Digimarc shall, at its own expense, within sixty (60) days after receipt of written notice of a Problem Report from the CBCDG Project Director or such other period as the CBCDG Project Director may agree, rectify the failure and at the direction of the CBCDG Project Director provide [**] to all Persons to which Digimarc had previously provided such a [**].

5. RESPONSIBILITIES OF THE CBCDG

5.1 The CBCDG Project Director shall ensure that the CBCDG performs all tasks assigned to it in a Statement of Work by the dates set out therein (herein referred to as the CBCDG Tasks) provided that Digimarc has provided the CBCDG Project Director with reasonable notice that there is a Digimarc action that is dependent on that CBCDG Task.

5.2 Unless otherwise expressly set out in this Agreement, the CBCDG Contract Authority or the CBCDG Project Director shall respond in writing within ten (10) Business Days to every written request for consent required by this Agreement received from Digimarc.

5.3 If there is a delay in complying with any of the obligations under clauses 5.1 or 5.2 for any reason not attributable to Digimarc, and such delay will cause a delay in the completion and delivery by Digimarc of any Services, then Digimarc shall reasonably promptly advise the CBCDG Project Director of the impact of the delay. The time for completion of the Services and all subsequent Services dependent thereon, shall then be extended automatically by one day for each day of delay or such other period as may be agreed in writing between the respective Contract Authorities. If Digimarc suffers

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increased costs by reason of such delay, other than a delay due to a force majeure event (as defined in clause 16.1), such costs reasonably and necessarily incurred by Digimarc shall be borne by the CBCDG Contract Authority. Digimarc shall make every reasonable effort to reassign staff and otherwise mitigate the increased costs associated with such a delay. If the delay is due to a force majeure event, such costs shall be borne equally by the CBCDG Contract Authority and Digimarc. If there are any additional costs to be borne by the CBCDG Contract Authority otherwise than as agreed under clause 6 of this Agreement, Digimarc shall reasonably promptly notify the CBCDG Contract Authority of such and the CBCDG Contract Authority shall either approve such costs and/or request a change to the Services under clause 7 of this Agreement. Such change request shall ask Digimarc to describe the effect the costs and delay under this clause 5.3 will have on the applicable Statements of Work. If after Digimarc describes the effect the costs and delay under this clause 5.3 will have on the applicable Statements of Work, the CBCDG Contract Authority requests such a change, the Statements of Work shall be amended so that Digimarc remains within the previously approved SOW Budget. This clause 5.3 sets forth Digimarc’s only remedy for a delay by the CBCDG in complying with any such obligation.

6. PRICE AND PAYMENT

6.1 The BIS designates the CBCDG Contract Authority as its agent to make all payments owed by the BIS under or in connection with this Agreement. Digimarc shall notify the BIS if any payment is not received within thirty (30) days of when such payment is due.

6.2 Subject to the limits set out in this Agreement and unless otherwise expressly set out herein, the CBCDG Contract Authority shall reimburse Digimarc for all the Allowable Costs reasonably and properly incurred by Digimarc during each calendar month to perform the Services. Digimarc shall send its invoice to the CBCDG Contract Authority monthly in arrears for such Allowable Costs. Each invoice shall specify the Expenses (as defined in Schedule F) incurred and the time spent by the staff and sub-contractors of Digimarc in performing the Services and shall give a breakdown of the Allowable Costs.

6.3 The CBCDG Contract Authority shall pay Digimarc each amount which is owed Digimarc under this Agreement no later than thirty (30) days after the later of the payment due date and the date on which the CBCDG Contract Authority receives a detailed and correct invoice for the amount.

6.4 For a period of five (5) years following their creation, Digimarc shall maintain proper, up-to-date, accurate and complete books, records and other documentation substantiating

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the Allowable Costs invoiced under this Agreement including time sheets showing the hours spent on each task which forms part of the Services and receipts for all Expenses. Digimarc shall produce such books, records and documentation to the CBCDG Project Office or its representatives for inspection and copying at Digimarc’s premises (with the right to take such copies from Digimarc’s premises as long as Digimarc is notified in writing what copies are removed from Digimarc’s premises and the copies are handled by the CBCDG Project Office or its representative in accordance with the confidentiality obligations under clause 12) at all reasonable times on request by the CBCDG Project Director.

6.5 Except as otherwise expressly provided in this Agreement, the CBCDG Contract Authority shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the [**] which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid under this Agreement.

6.6 Digimarc is responsible for, and shall indemnify the BIS against, and hold the BIS harmless from, the payment of all taxes levied by any government on or in respect of Digimarc’s income and any amounts required by law to be paid in respect of social benefits for Digimarc’s employees relating to or arising out of the performance of the Services by Digimarc. If required by law, the BIS shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities.

6.7 The BIS may set off against any amount which the BIS owes Digimarc under or in connection with this Agreement any amount which Digimarc owes the BIS under or in connection with this Agreement including damages for breach.

6.8 Any equipment or software [**] purchased for over [**] as an Allowable Cost shall be owned by the BIS or another entity designated by the CBCDG Contract Authority and shall be held in trust by Digimarc. Digimarc shall ensure that the BIS or the designated entity is identified on such [**] and [**] as the owner. Unless such [**] or [**] needs to be used in a manner that it was not designed for and the CBCDG Contract Authority is made aware of such need, Digimarc shall, at its own risk, use such [**] or [**] in a reasonably careful and proper manner and in accordance with all operating instructions. In any event such [**] and [**] shall be used by Digimarc solely for the provision of the Services. Upon termination of this Agreement and at the request of the CBCDG’s Project Director, Digimarc shall promptly deliver such [**] and [**] to the CBCDG Project Office at the CBCDG’s expense. Such [**] and [**] shall be returned in the same condition as originally received by Digimarc, reasonable wear and tear excepted.

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If, however, the [**] or [**] needs to be used in a manner that it was not designed for and the CBCDG Project Director is made aware of such need, then such [**] and [**] shall be returned “as is.” The CBCDG Contract Authority shall reimburse Digimarc for any unrecovered costs of such [**] or [**] (i.e. costs not recovered through depreciation charges), subject to receipt of a correct and properly due invoice.

6.9 DLA Labour Rates as set out and adjusted in accordance with Schedule F shall be no greater than the then-current rates charged to Digimarc’s most favored customers, [**].

6.10 If an approved Plan Budget for any calendar year is at least [**]), but does not amount to at least [**]),

(a) Digimarc can start a review of the DLA Labour Rates for all DLA labour positions set out in Schedule F according to the agreed upon Pricing Formula. The review will be completed within three months of the day Digimarc gives the CBCDG notice that it is initiating a review under Schedule F. Any adjustment to the DLA Labour Rates under this review will be effective on the January 1 of the year that the lower Plan Budget would be effective. The DLA Labour Rates for that same January 1 date shall also be adjusted in accordance with the indexation formula of clause 7 of Schedule F; and

(b) The CBCDG Contract Authority shall pay Digimarc all of its actual and reasonable costs incurred in connection with the reduced Plan Budget including:

(i) third party contract termination costs;

(ii) employee re-deployment or termination costs including severance, outplacement, benefits, acceleration of stock compensation, employer paid payroll taxes; and

(iii) accounting, legal and travel costs associated with the reduced Plan Budget and related negotiations.

Digimarc shall use commercially reasonable efforts to mitigate all such costs.

7. CHANGE MANAGEMENT

7.1 The CBCDG Project Director or Digimarc may request a change to the Statements of Work from time to time by submitting a request in writing to the other party’s Project Director. Any such request shall indicate the nature of the new work to be performed in a form sufficient for Digimarc to investigate the effect of the change.

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7.2 On making such a change request or within ten (10) Business Days after receiving a change request from the CBCDG Project Director, Digimarc shall inform the CBCDG Project Director of the amount, if any, which Digimarc intends to invoice to investigate the effect the change will have on the applicable Statements of Work and the Allowable Costs for the applicable Statements of Work.

7.3 Within ten (10) Business Days after receiving the written authorization of the CBCDG Project Director to conduct the investigation of a change, or such longer period as may be authorized by the CBCDG Project Director, Digimarc shall report to the CBCDG Project Director, in writing, on the results of the investigation.

7.4 Within ten (10) Business Days after the CBCDG Project Director receives the report and, if the change will not increase the approved SOW Budget for a given year as set out in the approved Statements of Work, then the CBCDG Project Director shall notify Digimarc whether or not the change is authorized. If the change will increase the approved SOW Budget for a given year as set out in the approved Statements of Work, then the CBCDG Contract Authority must notify Digimarc whether or not the change is authorized.

7.5 The Statements of Work shall be updated quarterly to reflect all authorized changes to properly state the new obligations of Digimarc. If both parties agree that an update to the Statement of Work is not required for any given quarter, none shall be provided.

7.6 Digimarc shall not implement any change to the Services until the change is authorized in writing by the CBCDG Project Director or the CBCDG Contract Authority, as set out in clause 7.4. Digimarc shall implement any change directed and authorized pursuant to clause 7.4 provided:

(a) the change is technically feasible and is within the capabilities of Digimarc;

(b) the costs associated with such change identified by Digimarc in its investigative report and approved under clause 7.4 as part of the approval of the change are borne by the CBCDG Contract Authority; and

(c) Digimarc is given commensurate relief in the manner and to the extent as specified in the authorized change from prior commitments under the Statements of Work.

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7.7 Pending receipt of a written authorization from the CBCDG Project Director or the CBCDG Contract Authority, Digimarc shall proceed with the Services in accordance with the approved Statements of Work.

8. INTELLECTUAL PROPERTY MATTERS

8.1 The BIS grants to Digimarc a [**] such BIS Technology which is incorporated into the CDS or needed by Digimarc in order to comply with its obligations under this Agreement and to sublicense the same in any license agreement entered into by Digimarc as directed or permitted by the CBCDG Contract Authority under this Agreement and for no other purpose.

8.2 The BIS and Digimarc agree to renew and extend the [**] to the BIS as set out at clauses 8.4-8.11 of the 2009 Agreement, in the manner set out in this clause 8. Accordingly, Digimarc hereby renews and extends the [**] to the BIS of the [**] the Digimarc Technology and the Project Technology, and all Improvements thereto, and [**] of the Digimarc Technology and the Project Technology and such Improvements to other Persons, for the purposes of:

(a) [**], the [**] and any such component thereof, and making the [**] and any component available to others; and

(b) [**];

[**].

The [**] to the BIS and renewed and extended by this clause 8.2 applies to Digimarc Technology and the Project Technology and all Improvements existing on or before the effective date of this Agreement and created on an on-going basis under any subsequent Statements of Work approved under this Agreement. [**]

[**], including [**]. For greater certainty, the uses permitted by the license are limited to [**].

The [**] to the BIS does not permit any other uses, [**].

8.3 The [**] to the BIS and described in clause 8.2 has effect in respect of each specific item of Digimarc Technology, Project Technology or Improvements created as set out in clause 8.2 on the earliest of:

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(a) the date on which the CBCDG Contract Authority pays Digimarc all sums properly due to Digimarc under this Agreement for the development of that specific item;

(b) sixty (60) days following the effective date of termination of this Agreement in accordance with the provisions of clause 15.2(a), (b), (d) or (e) unless Digimarc demonstrates within such sixty (60) day period that, notwithstanding the occurrence of the events giving rise to the termination, Digimarc is willing and able to comply with its obligations under the Agreement; or

(c) the effective date of termination of this Agreement in accordance with the provisions of clauses 15.2(c), 15.2(f), 15.2(g), 15.3, 15.5 or 15.9.

8.4 Nothing in this Agreement shall be construed to grant or create any broader license rights than those expressly granted by this Agreement.

8.5 From time to time during the Term, on no less than thirty (30) Business Days prior written notice by the CBCDG Project Director, Digimarc shall, at Digimarc’s premises, present representatives of the Escrow Agent with all the Escrowed Materials, in any form, in Digimarc’s possession or control. The representatives may identify any or all of such material and Digimarc shall arrange, at the expense of the BIS, for a complete, accurate and up-to-date copy of the selected material to be made and sent to the Escrow Agent within five (5) Business Days of the selection being made for deposit. All work to prepare and deliver the Escrow Materials to the Escrow Agent will be Allowable Costs.

8.6 The CBCDG Contract Authority shall inform Digimarc within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to (i) [**]; (ii) [**]; (iii) [**]; and (iv) any other part of the CDS, [**] the CBCDG [**], or caused or permitted to be made, as a result of access to and use of the Escrowed Materials or the Digimarc Confidential Information. The CBCDG Contract Authority shall provide to Digimarc within a reasonable period of time following request, the information for those improvements requested by Digimarc in writing.

8.7 The BIS hereby grants to Digimarc a royalty-free, non-exclusive, non-transferable, worldwide license to use and license the improvements described in clause 8.6 and in any patents thereon owned or otherwise licensable by the BIS.

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8.8 For greater certainty, the obligations set out in clauses 8.6 and 8.7 shall not apply to any improvement which the CBCDG Contract Authority can demonstrate would have been made irrespective of access to the Escrowed Materials or Digimarc Confidential Information.

8.9 The CBCDG Contract Authority shall take all reasonable steps to ensure that Persons to whom it allows access to the Escrowed Materials will be contractually bound in accordance with terms substantially like those set forth in clauses 8.6, 8.7 and 8.8, granting rights in favour of Digimarc.

8.10 On the date on which the grant of the license to the BIS (as set out in clause 8.2) takes effect in respect of a specific item of Digimarc Technology, Project Technology or Improvements, the CBCDG [**], copy and use the Escrowed Materials relating to such item.

9. INTELLECTUAL PROPERTY INDEMNIFICATION

9.1 (a) The BIS shall provide Digimarc with prompt written notice of any claim, demand or action against the BIS based on an allegation that the CDS, the Digimarc Technology or the Project Technology or any Improvements thereto or any part thereof, infringes any Intellectual Property Right of any Person (referred to below as a “Claim”).

(b) Upon such notice, Digimarc shall at its own expense resolve any Claim, including settlements or litigation proceedings, and pay all costs associated with the resolution of such Claim.

(c) Any counsel hired to assist in the resolution of such Claim shall be selected by mutual agreement between the BIS and Digimarc.

(d) Digimarc shall consult and work in cooperation with the BIS in connection with the resolution of any Claim, taking into account the BIS’ special status as an international organization.

(e) The BIS shall comply with all reasonable requests for assistance from Digimarc in connection with the settlement or defense of any Claim.

9.2 Notwithstanding any other provision of this Agreement to the contrary but subject to these clauses 9.1-9.3 (including the notice in clause 9.1(a)), Digimarc shall indemnify the BIS against and save the BIS harmless from all loss, costs, liabilities including, for greater certainty an award of damages, and expenses and reasonable legal fees, arising from each Claim. The obligation set out in these clauses 9.1-9.3 shall not apply in respect of any settlement made by the BIS without the consent of Digimarc.

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9.3 If the CDS, the Digimarc Technology or the Project Technology, or any Improvement thereto or part thereof is held to infringe, or if Digimarc believes that it is likely to be held to infringe, any of the Intellectual Property Rights described in clause 9.1, Digimarc shall, in addition to its other obligations set out above, at its own expense either:

(a) procure for the BIS the right to continue using the allegedly infringing materials; or

(b) replace or modify the materials to the reasonable satisfaction of the BIS so that the materials are no longer infringing but remain functionally equivalent.

Failing either of which result the BIS may, at its option, terminate this Agreement without prejudice to the BIS’ other rights and remedies available in law, at equity or otherwise.

9.4 Digimarc shall provide the BIS with prompt written notice of any claim, demand or action against Digimarc based on an allegation that the BIS Technology or any part thereof, infringes any Intellectual Property Right of any person (referred to below as a “BIS Technology Claim”). Digimarc shall comply with all reasonable requests for assistance from the BIS in connection with the settlement or defense of any BIS Technology Claim.

9.5 Notwithstanding any other provision of this Agreement to the contrary, the BIS shall indemnify Digimarc against and save Digimarc harmless from all loss, costs, liabilities including, for greater certainty an award of damages, and expenses and reasonable legal fees, arising from each BIS Technology Claim. The obligation set out in this clause 9.5 shall not apply in respect of any settlement made by Digimarc without the consent of the BIS.

9.6 If the BIS Technology or any part thereof is held to infringe, or if the BIS believes that it is likely to be held to infringe, any of the Intellectual Property Rights described in clause 9.4, the BIS may, in addition to its other obligations set out above, at its own expense either:

(a) procure for Digimarc the right to continue using the allegedly infringing materials; or

(b) replace or modify the materials to the reasonable satisfaction of Digimarc so that the materials are no longer infringing but remain functionally equivalent.

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9.7 Digimarc hereby undertakes to assume and be responsible for the provision of intellectual property (IP) infringement indemnification in respect of any infringement or alleged infringement of any third party IP rights of any kind (“IP Indemnification”) arising in respect of [**] that Digimarc [**] after 10 January [**] (“[**]”). [**]: (a) Digimarc has the right to direct the defense of any infringement and indemnity claim; (b) the [**] shall take such actions as are reasonably requested by Digimarc in connection with managing, defending, and settling any claim or demand, including mitigation of damages; (c) to facilitate mitigation or avoid infringement, Digimarc can supply, at its own cost, to the [**] with the CBCDG Contract Authority’s prior approval which shall not be unreasonably withheld; and (d) if the [**] the CBCDG Contract Authority [**] as of the date of the notice.

9.8 Unless otherwise agreed between Digimarc and the CBCDG Project Director, [**]. Digimarc and the CBCDG Project Director shall mutually agree on a [**], such agreement not to be unreasonably withheld.

9.9 Subject to clause 9.12(c), the [**]. [**], Digimarc shall provide indemnification [**] in accordance with its obligations under this Agreement, [**] provided that the IP Indemnification is not terminated or that the Agreement is not terminated or otherwise expires.

9.10 In addition to any other BIS [**] obligations in this Agreement and in consideration of Digimarc’s continuing compliance at all times with its obligations under clauses 9.7-9.12, the CBCDG Contract Authority shall [**] Digimarc for the IP Indemnification an[**]. [**].

9.11 [**] is not included under the provisions of clauses 9.7-9.12.

9.12 (a) The BIS has the option, at its sole discretion, to terminate the IP Indemnification obligations of Digimarc under clauses 9.7-9.12:

(i) at the end of a calendar year and discontinue the [**] under clause 9.10 as of the end of that same calendar year with written notice by 15 November of that same calendar year; or

(ii) immediately on written notice if this Agreement is terminated pursuant to clauses 15.2, 15.3 or 15.5.

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(b) Digimarc has the option to terminate the indemnification obligations of Digimarc under clauses 9.7-9.12 if [**] under clause 9.10 and [**] is not made within thirty (30) days of receipt of an IP Indemnification termination notice from Digimarc.

(c) Upon termination of this IP Indemnification under clauses 9.12(a) or 9.12(b) or termination of the Agreement for any reason, Digimarc shall [**] from and the CBCDG Contract Authority shall arrange for [**] except that if a [**] before such termination and Digimarc [**] within thirty (30) days of such termination, Digimarc shall [**], in accordance with clauses 9.7-9.12, [**].

10. REPRESENTATIONS AND WARRANTIES OF DIGIMARC

10.1 Digimarc represents, warrants and undertakes to the BIS that from and after the Effective Date:

(a) the Services shall be of professional quality conforming to generally accepted [**] practices and shall be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the work that would be expected of an [**] of the same or similar type as the [**] which comprises the CDS Technology and in the case of other Services, in a manner that would be expected of a competent and experienced provider of the same or similar type of Services;

(b) Digimarc shall ensure that its personnel are appropriately qualified, skilled, trained and experienced to undertake the Services and tasks assigned to them, and that each of its personnel shall possess the qualifications and experience which Digimarc has represented them to possess;

(c) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement;

(d) to the best of its knowledge, neither this Agreement nor the Services will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty, any laws or regulations in effect in the United States governing export;

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(e) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms;

(f) Digimarc owns all rights in and to, or is properly licensed in respect of, the Digimarc Technology and the Project Technology;

(g) Digimarc shall at all material times have the right to grant the licenses to the Digimarc Technology, the Project Technology and the Improvements thereon as required by this Agreement; and

(h) for greater certainty, with the exception of the [**], neither the Project Technology, the Digimarc Technology or Improvements thereon infringe any Intellectual Property Right of any Person.

10.2 Digimarc represents, warrants and undertakes to the BIS that:

(a) incorporated as part of its [**] practices and procedures are those measures and security procedures commercially and reasonably available on the date for delivery of a component of the CDS [**] in the CDS that could interfere with the use of the CDS or corrupt, interfere with or damage any data;

(b) the CDS shall contain no lock, clock, timer, counter, copy protection feature, replication device or intentional defects (including “viruses” or “worms” as such terms are commonly used in the computer industry), CPU serial number reference, or other device which might:

(i) lock, disable or erase the CDS or any data which is loaded on the CDS so as to prevent full use of the CDS by authorized Persons; or

(ii) require action or intervention by Digimarc or any other Person to allow properly trained and authorized Persons to use the CDS;

(c) the source code for the CDS, including that deposited with the Escrow Agent, shall, without reference to Digimarc or any of its employees or authorized subcontractors, be understandable and usable by expert personnel familiar with the programming languages, and scientific and processing techniques, used therein, and shall not involve any programming components that such personnel could not reasonably be expected to understand, and if necessary such source

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code shall contain sufficient commentary to enable such personnel to understand and use such components; and

(d) the Escrowed Materials deposited with the Escrow Agent under this Agreement shall contain all information in human readable form and on suitable media to enable an expert technical consultant, familiar with the scientific and processing techniques used therein, to understand and use the same without reference to Digimarc or any of its employees and authorised subcontractors.

10.3 Digimarc represents, warrants and undertakes to the BIS that:

(a) [**] accepted by the CBCDG Contract Authority shall meet the Specifications for that version from the date that it is accepted by the CBCDG Contract Authority until the earlier of the date on which the next version is accepted by the CBCDG Contract Authority and the last day of the Term; and

(b) until the last day of the Term, every [**] provided by Digimarc to any Person for incorporation into any Device shall be capable of meeting the performance criteria which formed part of the Specifications for the version of the [**] last accepted by the CBCDG under this Agreement at the time such detector was so provided.

10.4 [**] shall not be counted in the determination under clause 10.3 as to whether or not an [**] meets the Specifications.

11. REPRESENTATIONS AND WARRANTIES OF THE BIS

11.1 The BIS represents and warrants to Digimarc that:

(a) the BIS has full power and authority to enter into this Agreement;

(b) this Agreement when executed and delivered by the BIS shall constitute a valid, binding and enforceable obligation of the BIS; and

(c) the BIS will at all material times have the right to grant the licenses required by this Agreement to the BIS Technology.

12. CONFIDENTIALITY

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12.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement.

12.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information.

12.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser’s Confidential Information in the Recipient’s possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement.

12.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 12.1, give the Discloser’s Confidential Information to the Recipient’s employees, authorized subcontractors or representatives provided that such employee, subcontractor or representative shall have entered into a non-disclosure agreement in respect of such Confidential Information in favor of the Discloser on terms requiring at least five years of confidentiality from the date of disclosure of such Confidential Information but that are in all other respects materially similar to the provisions of this clause 12. For greater certainty, the BIS’ representatives shall include the CBCDG Contract Authority, the CBCDG Project Director and all representatives of members of the CBCDG.

12.5 The obligations set out in this clause 12 shall not apply to any Confidential Information that:

(a) is or becomes publicly available other than through the fault of the Recipient;

(b) was known to the Recipient prior to disclosure as shown by documentation sufficient to establish such knowledge;

(c) was or is lawfully disclosed to the Recipient by a third party who did not breach any obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish the same; or

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(d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order.

The fact that Confidential Information, or any part thereof, can be linked together by a search of publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above.

12.6 If either party is required by applicable law or regulation, by legal process or by the U.S. Securities and Exchange Commission or listing requirements of any exchange or quotation system on which securities of any party may be listed or quoted, to disclose the terms of this Agreement (such disclosure being referred to herein as “Legally Required Disclosure”), such party shall provide the other party with prompt notice of such requirement so that the other party may seek an appropriate protective order or remedy. In the event the other party fails to obtain an order or remedy that would permit the requested party not to disclose the required terms, the disclosure shall be permitted, but the disclosing party shall use all reasonable efforts to have the disclosure treated confidentially by the recipient.

12.7 Nothing in this Agreement shall be construed to require the BIS or any representative of the BIS including, for greater certainty, the CBCDG Project Director or the CBCDG Contract Authority, to disclose any information which is confidential to a third party including for greater certainty a [**].

12.8 The BIS shall not reverse-engineer, disassemble, or decompile any [**] forming part of the CDS, including the [**] (except to the extent that (i) any such activity is reasonably necessary to permit the BIS to exercise its [**] clause 8.2 of this Agreement or (ii) the BIS’ right to do so may not be contractually restricted under applicable law), and shall contractually assure that any other Person to whom the BIS provides [**] shall be similarly obliged.

12.9 For greater certainty the obligations imposed by this clause 12 shall apply to the Escrowed Material.

12.10 General attributes of the CDS may be disclosed in connection with promotion of the CDS to the [**] and [**], and to customers or prospects in related markets; information

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relating to the CDS Technology may be disclosed to [**], [**] subject to a nondisclosure agreement on terms requiring at least [**] years of confidentiality from the date of disclosure of such Confidential Information, but that are in all other respects materially similar to the provisions of this clause 12, but in all such cases Digimarc may disclose information relating to the [**] only to [**] but to no others. The existence and terms of this Agreement may be disclosed to the parties’ professional advisors, to members of the CBCDG, and to Digimarc’s shareholders, institutional and corporate investors, and commercial and investment bankers, who have a reasonable need to know such information subject to a non-disclosure agreement, or as required by applicable law or regulations.

13. AUDIT AND INSPECTION

13.1 The CBCDG Contract Authority, or its duly authorised representatives, may from time to time, without notice, at its own expense, conduct an audit or inspection during normal business hours to verify Digimarc’s compliance with its obligations under this Agreement. Digimarc shall facilitate such audit activities by providing access to its premises, as well as any books, records, and other information relating to this Agreement and the Services as may be reasonably requested by the CBCDG Contract Authority. The CBCDG Contract Authority shall promptly advise Digimarc in writing of the results of any audit. If the CBCDG Contract Authority exercises this right more frequently than twice in each calendar year, the CBCDG Contract Authority shall reimburse Digimarc’s reasonable costs related thereto which costs are in addition to the Allowable Costs otherwise contemplated by this Agreement except in the case where the exercise of such right is reasonably required to follow-up on a non-compliance detected during a previous audit or inspection.

13.2 If, as a result of any such audit, the CBCDG Contract Authority is of the view that Digimarc has engaged in or is about to engage in any act, or has omitted to perform any act, which act or omission is not in compliance with Digimarc’s obligations under this Agreement, the CBCDG Contract Authority may issue to Digimarc a directive requiring Digimarc to refrain from engaging in such act or to perform such act or acts as the CBCDG Contract Authority deems necessary, acting reasonably, for Digimarc to comply with this Agreement and Digimarc shall promptly comply with such directive at its own expense.

13.3 No act performed by the CBCDG Contract Authority or its duly authorised representatives pursuant to the provisions of this clause 13 and no omission by any of

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them to perform an act pursuant to the provisions of this clause 13 shall in any way affect Digimarc’s obligation to comply with this Agreement.

14. DISPUTE RESOLUTION

14.1 Any Dispute, as defined in the Arbitration Agreement, shall be finally settled by arbitration in accordance with the Arbitration Agreement.

14.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party’s right to terminate this Agreement, the Services shall continue during the arbitration proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular Service or payment is the subject matter of the proceedings. Notwithstanding the foregoing, the CBCDG Contract Authority may at its sole discretion instruct Digimarc to continue the performance of that Service, and Digimarc shall act in accordance with those instructions, subject to payment in accordance with this Agreement.

15. TERM AND TERMINATION

15.1 This Agreement shall take effect on the Effective Date and shall remain in force throughout the Term unless sooner terminated as provided herein. This Agreement may be extended for five additional years upon mutual agreement.

15.2 The BIS may in its sole discretion terminate this Agreement effective immediately on notice to Digimarc if:

(a) Digimarc makes a general assignment or any other arrangement for the benefit of its creditors;

(b) a proposal or arrangement under applicable bankruptcy or insolvency legislation, or a petition is filed by or against Digimarc under applicable bankruptcy or insolvency legislation and is not discontinued within thirty (30) days;

(c) Digimarc is declared or adjudicated bankrupt or goes into liquidation;

(d) a liquidator, trustee in bankruptcy, custodian, receiver, administrator, administrative - receiver, manager, or any other officer with similar power is appointed over all or any part of the assets and undertaking of Digimarc;

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(e) Digimarc commits an act of bankruptcy, institutes proceedings to be adjudged bankrupt or insolvent, consents to the initiation of such appointment or proceedings or admits in writing inability to pay debts generally as they become due;

(f) Digimarc assigns this Agreement without the BIS` consent in breach of clause 18.7; or

(g) Digimarc ceases or threatens to cease business.

15.3 Either party may terminate this Agreement effective immediately on notice to the other party if:

(a) the other party fails, or is unable or refuses to perform any of its obligations under this Agreement (hereinafter referred to as a “Breach”) and fails to remedy such Breach within sixty (60) days after receiving written notice of such Breach from the other party; or

(b) an event of force majeure (as defined in clause 16) has continued for a period longer than sixty (60) continuous days or such longer period as the parties may agree and no satisfactory alternative arrangements have been agreed to continue the Services.

15.4 Notwithstanding the foregoing, the BIS has no right to terminate this Agreement for Breach under clause 15.3 if the Breach consists of a failure by Digimarc to perform a particular task the performance of which proves to be technically infeasible provided that the CBCDG Project Director has agreed with the Digimarc Project Director in writing before the task is commenced that the task may be technically infeasible.

15.5 The BIS may terminate the Agreement for convenience without cause. Such termination shall be effective no earlier than six months from the date on which the BIS gives written notice of such termination to Digimarc.

15.6 In the event of a termination for convenience under this clause 15, Digimarc shall be paid all of its actual and reasonable termination costs including:

(a) third party contract termination costs;

(b) employee re-deployment or termination costs including severance, outplacement, benefits, acceleration of stock compensation and employer paid payroll taxes;

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(c) stay bonuses approved by the CBCDG Contract Authority to retain key employees through contract termination date;

(d) undepreciated capital costs of assets purchased exclusively for the project, plus [**]; and

(e) accounting, legal and travel costs associated with termination and termination negotiations (all collectively “Termination Costs”).

Digimarc shall use commercially reasonable efforts to mitigate all Termination Costs.

15.7 Actual and reasonable Termination Costs shall be capped [**].

15.8 Under a termination for convenience under clause 15, Digimarc shall also be paid an amount equal to [**].

15.9 If an approved Plan Budget for any calendar year does not amount to at least [**], Digimarc has the option to consider this a termination for convenience. If Digimarc exercises this option, Digimarc shall be paid the amounts in clauses 15.6-15.8. Within [**] months of the approval of a Plan Budget below [**], Digimarc can exercise the option with notice. If Digimarc exercises this option, the agreement will terminate [**] months after notice from Digimarc.

15.10 On termination of this Agreement for any reason, the TAP shall be implemented and Digimarc shall be reimbursed for all Services performed through the date of termination and for any transition services provided under the TAP.

15.11 On termination of this Agreement for any reason, the [**] by Digimarc under clauses 2.2, 2.3 and 2.8 shall continue, but the CBCDG Contract Authority shall make arrangements to assume all of: (a) Digimarc’s obligations of support and other Digimarc resource allocation; and (b) Digimarc’s obligations arising from or related to any third party threat or claim for IP infringement brought against any such licensees, subject to clause 9.12(c).

15.12 On termination of this Agreement for any reason, Digimarc shall within fifteen (15) Business Days deliver to the Escrow Agent all work in progress done up to the effective date of termination which has not previously been deposited with the Escrow Agent and issue to the CBCDG Contract Authority a certificate signed by an authorized representative of Digimarc that it has fully complied with this obligation. Digimarc shall be entitled to charge for its reasonable costs in providing such assistance calculated in accordance with the Allowable Costs.

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16. FORCE MAJEURE

16.1 If the performance by any of the BIS, Digimarc, the CBCDG, the CBCDG Contract Authority, the CBCDG Project Director or the CBCDG Project Office (the “Obstructed Party) of any of its obligations under this Agreement is prevented or delayed by any circumstance of force majeure, which shall mean fire, flood, earthquakes, war, riots, or insurrection, the Obstructed Party shall immediately provide notice under clause 17.

16.2 The time period within which the Obstructed Party is obliged to perform its obligations shall be delayed during the period such circumstance exists. During the period of delay the Obstructed Party shall use commercially reasonable efforts to make alternate arrangements satisfactory to the other Persons mentioned in clause 16.1 to avoid delay or resume performance.

17. NOTICES

17.1 All notices under this Agreement shall be delivered by fax, or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below as evidenced by a delivery receipt or the addressee’s registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party shall be sent to the party’s authorized representative identified below and all notices from a party shall be sent by the party’s authorized representative identified below.

17.2 Any notice to Digimarc shall be sent to, and any notice from Digimarc shall be sent by:

Mr. Robert Chamness

Executive Vice President and

Chief Legal Officer and Secretary

Digimarc Corporation

9405 SW Gemini Drive

Beaverton, Oregon 97008 USA

FAX:   (503) 469-4777

With a copy to:    Mr. George Rieck

Vice President, Government Programs and

Digimarc Project Director

Digimarc Corporation

9405 SW Gemini Drive

Beaverton, Oregon 97008 USA

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FAX:   (503) 469-4777

17.3 Any notice to the BIS shall be sent to, and any notice from the BIS shall be sent by:

Bank for International Settlements

[**]

Centralbahnplatz 2

CH-4002 Basel, Switzerland

[**]

With a copy to:     [**]

Any notice to the CBCDG shall be sent to, and any notice from the CBCDG shall be sent by:

[**]

With a copy to:    Bank for International Settlements

[**]

Centralbahnplatz 2

CH-4002 Basel, Switzerland

[**]

17.4 A party may change its addressee(s) or address(es) for notice by notice to the other party in accordance with the provisions of this clause 17.

18. MISCELLANEOUS PROVISIONS

18.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement:

(a) each and every right, power and remedy of a party shall be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement;

(b) the exercise or partial exercise of any right, power or remedy shall neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party; and

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(c) a party terminating this Agreement in accordance with the provisions of this Agreement shall have no liability or obligation to the other as a result of or with respect to the termination.

18.2 Severability.   If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or by any other competent authority to be void or unenforceable, the parties agree that such determination shall not result in the nullity or unenforceability of the remaining parts of this Agreement, which shall continue in force to the fullest extent permitted by law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part.

18.3 Counterparts.   This Agreement may be executed in separate counterparts, and by facsimile, each of which shall be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument.

18.4 Entire Agreement.   This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and shall supersede any and all prior correspondence, conversations, negotiations, agreements or understandings between the parties relating to the same subject matter from the Effective Date. Nothing in this clause 18.4 shall operate so as to limit or exclude any liability for fraud or fraudulent misrepresentation.

18.5 Amendments.   No change in, modification of or addition to the terms and conditions contained herein shall be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each party and which specifically states that it constitutes an amendment to this Agreement.

18.6 Waiver.   No waiver of any term, provision, or condition of this Agreement shall be effective unless in a written document signed by the waiving party and no such waiver in any one or more instances, will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement.

18.7 Assignment and Successors.   This Agreement may not be assigned, novated or otherwise transferred by Digimarc without the prior written consent of the BIS, which consent shall

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CDS DLA 1-January 2013	38	Confidential

not be unreasonably withheld. For the purpose of this Agreement, an assignment includes a change in the voting control of Digimarc or the sale or other disposal of substantially all of Digimarc’s assets. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto.

18.8 Captions.   Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation or construction, of this Agreement, nor as evidence of the intention of the parties.

18.9 Disclaimer of Agency.   Nothing contained in this Agreement is intended or shall be interpreted so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be deemed or considered to be an employee of the other party or of both parties.

18.10 The parties agree that from time-to-time it will be beneficial to both parties to issue press releases and other public announcements concerning benefits arising from the [**] of the CDS. Each party agrees to submit such releases or announcements for prior approval by the other party if the name of the other party is mentioned, which approval may be withheld by the other party in its sole discretion. Any Digimarc press releases and public announcements that mention the CDS or the CBCDG must be pre-approved by the CBCDG Project Director.

18.11 Effectiveness.   This Agreement shall be effective only after it is signed by both of the parties.

18.12 Ambiguities.   Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement.

18.13 Survival.   All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement shall do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions set out in clauses 1.3, 2.14, 6.1-6.8, 8, 9.1-9.6, 9.10, 9.12(c) and 10-18 of this Agreement shall survive termination of this Agreement by either party for any reason.

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CDS DLA 1-January 2013	39	Confidential

18.14 No third party Person shall have any right to enforce any provision of this Agreement under the Contracts (Rights of Third Parties) Act 1999.

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Effective Date.

BANK FOR INTERNATIONAL SETTLEMENTS	DIGIMARC CORPORATION
/s/ [**]	/s/ Robert Chamness
Signature	Signature
Name: [**]	Name: Robert Chamness
Title:   [**]	Title: Executive Vice President, Chief Legal Officer and Secretary
Date:     6 December 2012	Date:   December 6, 2012

/s/ [**]                                                   

Signature

Name: [**]

Title: [**]

Date:   6 December 2012

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CDS DLA 1-January 2013	40	Confidential

SCHEDULE A

SYSTEM DESCRIPTION

1.0 GENERAL DESCRIPTION OF THE COUNTERFEIT DETERRENCE SYSTEM (“CDS”)

The CDS is a system for the deterrence of the unauthorized digital reproduction of bank notes by the use of personal computer-based equipment. [**]

The capitalized terms in this Schedule A have the meanings provided in the Renewed and Extended Counterfeit Deterrence System Development and License Agreement and are not elaborated herein.

2.0 FUNCTIONAL DESCRIPTION OF THE CDS

The CDS is comprised of the following three subsystems:

1. [**]

2. [**]

3. [**]

The functions of the various subsystems and components described below may be changed by the [**].

2.1 [**]

  2.1.1   [**]

  1.   [**]

  2.   [**]

  3.   [**]

  4.   [**]

  2.1.2   [**]

  1.   [**]

  2.   [**]

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Schedule A: System Description - 1 January 2013	1

  3. [**]

2.2 [**]

  1. [**]

  2. [**]

  3. [**]

  4. [**]

(a) [**]

(b) [**]

(c) [**]

  5. [**]

  6. [**]

  7. [**]

  8. [**]

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Schedule A: System Description - 1 January 2013	2

SCHEDULE B

DIGIMARC TECHNOLOGY

The Digimarc Technology includes techniques and system applications for [**].

This technology is partially described in the following issued representative U.S. and International patents:

	US 5,768,426
US 5,636,292 C1	US 5,809,160
US 5,710,834	US 5,832,119 C1
US 5,721,788	US 5,850,481 C1
US 5,745,604	[**]
US 5,748,763

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Schedule B: Digimarc Technology - 1 January 2013	1

SCHEDULE C

PROJECT TECHNOLOGY

The Project Technology includes:

1. The modification of techniques for using the Digimarc Technology and the BIS Technology in the [**].

2. The effects and behaviors of [**] when used in [**].

3. The effects of various types [**].

4. Improvements to Digimarc’s testing and certification processes used in testing and certifying [**].

5. The improvement of [**].

6. The use of [**].

7. Examples of Project Technology include:

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Schedule C: Project Technology - 1 January 2013	1

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Schedule C: Project Technology - 1 January 2013	2

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Schedule C: Project Technology - 1 January 2013	3

[**]

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Schedule C: Project Technology - 1 January 2013	4

SCHEDULE D

SECURITY REQUIREMENTS

1. Digimarc shall implement the security measures normally followed by a [**] and distributor comparable to Digimarc in number of employees and revenue engaged in the development and distribution of [**] and maintain such security measures in effect at all times throughout the Term. The security measures will include:

1.1. Electronic security for protection of the network and protection of the CDS [**] products that are under development.

(a) Network protection which will ensure that unauthorized users will not get access to [**]. This protection will include:

    i. erecting barriers to prevent hackers, whether inside or outside the Digimarc facility, from accessing the secure network; and

    ii. the customizing of developmental and operational procedures for the software development team that maximizes security while not impeding the team’s ability to work efficiently and effectively.

1.2         Physical security, including the following:

(a) the Digimarc facility at which the Services will be performed will be secure from unauthorized visitors;

(b) the development laboratory and the computer network employed in the Services shall be secure;

(c) all personnel authorized to have access to sensitive CDS information, data and designs including the employees of authorized subcontractors will be properly screened; and

(d) production and handling of interim and final versions of the Deliverables will be carefully controlled, monitored and audited.

2. [**]

3. The CBCDG can conduct an audit, at its own expense, of the security measures with ten (10) Business Days’ notice.

4. Following any such audit, the CBCDG Project Director shall submit an audit report to Digimarc which will prescribe the actions which Digimarc must take, if any, to improve the security measures to be followed by Digimarc to make such measures consistent with item 1 of this Schedule D and the dates by which Digimarc shall take them.

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Schedule D: Security Requirements - 1 January 2013	1

SCHEDULE E TRAINING

1.0 As part of the Services, Digimarc shall develop a program of training acceptable to the CBCDG Project Director in the [**].

2.0 Digimarc shall deliver Training as follows:

2.1 Digimarc shall provide the Training for multiple people simultaneously. The exact number of trainees is to be agreed upon by both parties prior to Training. The trainees will be experienced in digital design operation.

2.2 Digimarc shall conduct the Training at the facilities of the [**] or at the request of the [**] at Digimarc’s facilities or at some other place agreed between Digimarc and the [**].

2.3 Digimarc shall give the [**] reasonable notice concerning the equipment which Digimarc will require in order to conduct the Training. The [**] shall provide all such equipment at its own expense. If the parties are unable to agree on the equipment to be provided either party may refer the matter for decision to the CBCDG Contract Authority.

2.4 Digimarc shall conduct the Training using a [**] or other training designs as provided by Digimarc.

2.5 Digimarc shall provide a training manual in English to every trainee. Any translation or interpretation which the trainees may require will be provided by the [**] at its own expense.

2.6 Digimarc shall conduct the training in English. Any translation or interpretation which the trainees may require will be provided by the [**] at its own expense.

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Schedule E: Training - 1 January 2013	1

SCHEDULE F

ALLOWABLE COSTS

1. For the purposes of this Schedule F:

[**]

[**]

[**]

[**]

[**]

[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]

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Schedule F: Allowable Costs - 1 January 2013	1

[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]
[**]
[**]

[**]	[**]
[**]	1.        [**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	1.        [**]
[**]	[**]
[**]	[**]
[**]	1.        [**]

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Schedule F: Allowable Costs - 1 January 2013	2

SCHEDULE G

ARBITRATION AGREEMENT

This is an Agreement by and among the Parties to the Agreements listed in Schedule A to submit for final and binding resolution by international arbitration all Disputes (as defined below) arising out of or otherwise connected to a project relating to the development and potential licensing, marketing and servicing of a Counterfeit Deterrence System (as defined in the Renewed and Extended Development and License Agreement identified below) and the services of Digimarc (as defined below) in relation to the project.

WHEREAS, Digimarc Corporation, a corporation existing under the laws of the State of Oregon, USA, has developed and is developing, in conjunction with a group of central banks known as the Central Bank Counterfeit Deterrence Group (the “CBCDG”) technology [**] (the “Counterfeit Deterrence System” or “CDS” as defined in the Development and License Agreement identified below);

WHEREAS, the CBCDG has asked the Bank for International Settlements, an international organisation created as a result of the Hague Agreements of January 1930 (the “BIS”), to provide it with limited assistance in connection with the development and potential subsequent licensing of the CDS as set out in a Renewed and Extended Development and License Agreement (the “DLA”) effective from 1 January 2013;

WHEREAS, in the course of performance of the DLA, Digimarc may be directed to issue licenses to certain [**] in accordance with standard forms of license agreement which are approved by the CBCDG;

WHEREAS, [**], pursuant to an [**], as amended from time to time, (the “[**]”), agreed to compensate and to indemnify and hold harmless the [**] in respect of any liability in connection with the project;

WHEREAS, given the international nature of the Agreements (as defined below), all the Parties (as defined below) to the Agreements are desirous to avoid recourse to national courts and the potential expense and delay of prosecuting connected Claims (as defined below) in more than one proceeding and also to exclude the risk of having to apply contradictory or inconsistent fact-findings, conclusions, judgments or awards for any Dispute (as defined below) which may arise between or among the Arbitrating Parties (as defined below) and instead wish to resort to international arbitration as the exclusive means of resolving in a final, binding and consistent manner all Disputes arising in

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Schedule G: Arbitration Agreement - 1 January 2013	1

connection with the Agreements for the CDS and of establishing through this Arbitration Agreement a mechanism to these ends.

The Parties agree as follows:

1. The meaning of the following terms in this Arbitration Agreement shall be as set out below:

a) “Agreements” shall mean the agreements, contracts, schedules or other arrangements in connection with the development or licensing or marketing or servicing of the CDS listed in Schedule A, as amended from time to time.

b) “Appointing Authority” shall mean the [**].

c) “Arbitrating Party” or “Arbitrating Parties” shall mean (i) any and all Parties which have become involved in any arbitration under this Arbitration Agreement as Claimants or Respondents or (ii) any and all Parties which have been otherwise joined to any arbitration under this Arbitration Agreement or (iii) the BIS, Digimarc, any [**] or any [**] in the aforementioned circumstances or when it or they has or have exercised their right of Intervention in any arbitration under this Arbitration Agreement.

d) “[**]” shall mean any [**] which is represented on the CBCDG from time to time.

e) “CBCDG Project Office” shall mean the project office established by the CBCDG, or its staff as the case may be, and that is responsible for the oversight of the overall relationship among the BIS, the [**] and Digimarc and for the key day to day project management.

f) “Claim” shall include without limitation any claim or counterclaim or crossclaim made by an Arbitrating Party.

g) “Claimant” or “Claimants” shall mean any Party which, either separately or together with any other Party or Parties, initiates arbitration under this Arbitration Agreement.

h) “Dispute” shall mean any dispute, difference, controversy or claim between or among the parties arising out of or relating to or in connection with this Arbitration Agreement or any of the Agreements listed in Schedule A, including their signature, validity, interpretation, performance, amendment, breach, termination and post-termination obligations.

i) “Intervention” shall mean the right of any of the BIS, Digimarc, any [**] or any [**] under Articles 8(e)-(h) to intervene into a particular arbitration as an Arbitrating Party even when it is not a Claimant or Respondent and has not been joined into any

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Schedule G: Arbitration Agreement - 1 January 2013	2

arbitration by an Arbitrating Party.

j) “[**]” shall mean an entity responsible for the [**] that is licensed by Digimarc to use the CDS.

k) “Notice of Arbitration” shall mean the document given when initiating recourse to arbitration or to join any Party as Arbitrating Party as well as to initiate recourse in arbitration against any Party which is already an Arbitrating Party.

l) “Party” or “Parties” shall mean any person, company or organization that is party to one of the Agreements listed in Schedule A and that has agreed in writing to be bound by the terms of this Arbitration Agreement.

m) “Respondent” or “Respondents” shall mean any Party which, either separately or together with any other Party, is named as a Respondent in arbitration by any Claimant or Claimants.

n) In interpreting this Arbitration Agreement, singular shall be read for plural where appropriate to reflect the multi-party nature of any arbitration.

2. Any Dispute shall be finally settled by arbitration under the [**] as in force at the date of commencement of this Arbitration Agreement except as the [**] Rules are modified in the body and Schedule B of this Arbitration Agreement and to the exclusion of any provisions of the [**] Rules as are inconsistent with the express provisions of this Arbitration Agreement or with the multi-party nature of an arbitration under this Arbitration Agreement.

3. The language used in any arbitration shall be English. All documents submitted into any arbitration shall be in English or submitted with a complete English translation. Oral evidence may be submitted in a language other than English provided that the Arbitrating Party submitting the oral evidence makes provision for its simultaneous interpretation into English. The cost of any translation or interpretation into English shall be borne entirely by the Arbitrating Party on whose behalf the non-English document or oral evidence is submitted and shall not be included among the “costs of arbitration” apportioned pursuant to Article 40 of the [**] Rules.

4. The place of Arbitration shall be [**].

5. Arbitration pursuant to this Arbitration Agreement shall be the sole and exclusive means for resolving any Dispute.

6. No entity shall become a Party unless that entity has agreed in writing to be bound by the terms of this Arbitration Agreement.

7. Each Party to this Arbitration Agreement hereby expressly accepts the addition of new

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Schedule G: Arbitration Agreement - 1 January 2013	3

parties to this Agreement.

8.

a) Any Claimant or Claimants shall initiate recourse to arbitration by giving to each Respondent a Notice of Arbitration and statement of claim which specify, inter alia, the Agreement or Agreements involved in the Dispute. Any Claimant or Claimants shall also at the same time send a copy of the same Notice of Arbitration and statement of claim to all other Arbitrating Parties, the BIS, the CBCDG Project Office and the [**]. Arbitration shall be deemed to commence upon receipt of the Notice of Arbitration and statement of claim by the [**].

b) Within thirty (30) days of the date on which each Respondent received the Notice of Arbitration, a Respondent may give a third party Notice of Arbitration in order to join into the arbitration any Party or Parties as an Arbitrating Party or Arbitrating Parties. The Respondent shall also at the same time send a copy of any third party Notice of Arbitration to all other Arbitrating Parties, the BIS, the CBCDG Project Office and the [**].

c) Any third party joined as an Arbitrating Party may, within thirty (30) days of receipt of any third party Notice of Arbitration, give fourth party Notices of Arbitration in order to join any Party or Parties as an Arbitrating Party or Arbitrating Parties. The third party shall also at the same time send a copy of any fourth party Notice of Arbitration to all other Arbitrating Parties, the BIS, the CBCDG Project Office and the [**].

d) Other Parties may be joined as further additional Arbitrating Parties by any Arbitrating Party or Arbitrating Parties until such time as thirty (30) days have elapsed without a new Arbitrating Party being joined into the arbitration.

e) The BIS, whether or not joined as a Respondent or as a further additional Arbitrating Party, shall have the right to intervene in any arbitration by giving a Notice of Arbitration to each of the Arbitrating Parties within thirty (30) days after receipt of the copy of a Notice of Arbitration from the last Arbitrating Party to be joined or from the last Party to request permission to intervene under Article 8(f). The BIS shall also at the same time send a copy of the Notice of Arbitration to the CBCDG Project Office, the [**] and to all other Arbitrating Parties.

f) Digimarc, any [**], whether or not joined as a Respondent or as a further additional Arbitrating Party, shall have the right to ask the arbitrator for permission to intervene in any arbitration by giving a Notice of Arbitration to each of the Arbitrating Parties within thirty (30) days after receipt of the copy of a Notice of Arbitration from the last Arbitrating Party to be joined or from the BIS. The Party requesting to intervene shall also at the same time send a copy of the Notice of Arbitration to the BIS, the CBCDG Project Office, the [**] and to all other Arbitrating Parties.

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Schedule G: Arbitration Agreement - 1 January 2013	4

g) The CBCDG Project Office shall, upon receipt of any Notice of Arbitration under this Article 8 of this Arbitration Agreement, send a copy of such Notice of Arbitration to all Parties.

h) The arbitral tribunal, once constituted and after affording the Arbitrating Parties a reasonable period of time in which to comment, shall have the authority to require by an order that any Party or Parties which is not or are not an Arbitrating Party or Arbitrating Parties (including Digimarc, any [**] requesting intervention under Article 8(f)) shall nonetheless be joined into the arbitration as an Arbitrating Party or Arbitrating Parties should the arbitral tribunal determine that: (a) the absence of said Party or Parties from the pending arbitration would prevent the according of complete relief in regard to the Claims of the Arbitrating Parties; or (b) that the Party or Parties has or have a real and significant interest in the Agreement or Agreements out of or in connection with which the Disputes involved in the pending arbitration have arisen and that the absence of said Party or Parties would significantly impede its or their ability to protect that interest. Any such order issued by the arbitral tribunal shall be final and binding upon the Parties that are the subject of that order and such Parties will be considered Arbitrating Parties to that Claim or Dispute.

i) Any Arbitrating Party may join into a pending arbitration any Dispute which presents issues of law or fact common with those in the Dispute or Disputes already in the pending arbitration by issuing, within 30 days of its receipt of a Notice of Arbitration, a Notice of Arbitration and a statement of claim which specify, inter alia, the Agreement or Agreements involved in the Dispute and set out the issues of law or fact it alleges are common with those in the Dispute or those Disputes already in the pending arbitration.

j) The arbitral tribunal shall determine by an order, which shall be final and binding upon the Arbitrating Parties, any issue raised by an Arbitrating Party as to whether or not a Dispute joined into any pending arbitration did, in fact, at the time it was joined into the arbitration, present issues of law or fact common with those presented in other Disputes in the pending arbitration. Any Dispute which is found not to have presented common issues of law or fact shall be dismissed without prejudice from the pending arbitration.

k) Joinder of any Party or Parties or of any Dispute or Disputes to any arbitration pursuant to this Arbitration Agreement shall be permitted only when made in accordance with the provisions of this Arbitration Agreement, including the strict time limits and no joinder or Intervention other than those provided for shall be permitted.

l) Any multi-party arbitration arising as a result of there being more than two Arbitrating Parties will be conducted as a single arbitration involving all Arbitrating Parties.

m) Any Arbitrating Party giving any Notice of Arbitration or sending any copy of a

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Schedule G: Arbitration Agreement - 1 January 2013	5

Notice of Arbitration shall send to each recipient according to the provisions set out above a full copy of the document by international courier or other appropriate means of ensuring rapid and certain delivery and, when required to send documents to several recipients, the Arbitrating Party shall send all documents on the same day.

n) Any advances deemed necessary to cover the costs of any arbitration shall be made in equal shares by all Arbitrating Parties, provided that multiple Claimants or multiple Respondents shall be deemed to constitute one Arbitrating Party for purposes of this subparagraph only, and provided further that should any Arbitrating Party fail to advance its share (a “Defaulting Arbitrating Party”), it shall be the responsibility of the Arbitrating Party which gave the Notice of Arbitration against the Defaulting Arbitrating Party or Defaulting Arbitrating Parties to advance the share due from the Defaulting Arbitrating Party or Defaulting Arbitrating Parties. Any Claim brought by a Defaulting Arbitrating Party shall be dismissed without prejudice. However, the recipient of any Notice of Arbitration given by a Defaulting Arbitrating Party shall continue to be an Arbitrating Party if it has itself given any Notice of Arbitration, unless it withdraws any such Notice of Arbitration. Should any Defaulting Arbitrating Party commence arbitration in order to reassert any Claim which has been dismissed pursuant to this subparagraph, that Claim shall be consolidated with the pending arbitration from which it was dismissed and the Defaulting Arbitrating Party shall not be permitted to proceed with that Claim until it has advanced its share of the costs of the pending arbitration.

9. If any Dispute arises whilst an arbitration is pending in accordance with the provisions of this Arbitration Agreement, but one or more of the Arbitrating Parties to that Dispute cannot be joined to the pending arbitration in accordance with the provisions of Article 8 of this Arbitration Agreement, the Dispute and the Arbitrating Parties thereto shall nonetheless be joined into the pending arbitration at the request of a Party which is an Arbitrating Party in both the pending arbitration and the Dispute which has arisen so that the Disputes may be resolved in the same arbitration, provided the arbitral tribunal decides that the later Dispute presents issues of law or fact common with those in the pending arbitration and that joinder under these circumstances would not result in undue delay for the pending arbitration.

10. Each Party agrees that neither an arbitral tribunal established pursuant to this Arbitration Agreement nor the Parties shall be authorised to take or seek from any arbitral tribunal or judicial authority any interim measure or any pre-award relief against the BIS, any provision of the [**] Rules notwithstanding. Nothing in this Arbitration Agreement shall operate or be regarded as a waiver, renunciation or other modification of the [**] BIS [**], of whatever nature and wherever situated, under international convention or under any applicable law. Except as otherwise provided in this Article 10 with regard to the BIS, each Party irrevocably agrees that, to the extent that it or any of its assets has or hereafter may acquire any right of immunity, whether characterized as sovereign immunity or otherwise, from any legal proceedings, whether in [**] or elsewhere, to enforce or collect upon any obligation of that Party in connection with the transaction contemplated under any Agreement, including, without limitation, immunity from

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Schedule G: Arbitration Agreement - 1 January 2013	6

jurisdiction of any arbitral tribunal, immunity from service of process, immunity from execution of judgment and immunity of any of its property from attachment prior to the rendering of an arbitral award under this Arbitration Agreement or entry of judgment, it hereby expressly and irrevocably waives all such immunity.

11.

a) Any Dispute, regardless of the number of Arbitrating Parties, shall be submitted to an arbitral tribunal of three (3) arbitrators appointed by the Appointing Authority.

b) The arbitral tribunal shall be appointed by the Appointing Authority once the time has terminated during which i) any Party is entitled to give a Notice of Arbitration to join any other Party, ii) the BIS is entitled to intervene and (iii) Digimarc, any [**] is entitled to request permission to intervene.

c) The presiding arbitrator of the arbitral tribunal shall be a British national and shall have been admitted to practice as a barrister or solicitor in England and shall also have significant expertise in the resolution of disputes in international commercial matters. All arbitrators shall have a full command of the English language.

d) The arbitrators appointed in accordance with this Arbitration Agreement shall be remunerated in accordance with the provisions of the rules of the [**] in effect at the time any arbitration is commenced.

12. Awards shall be final and binding as from the date the awards are made. The Arbitrating Parties undertake to carry out all awards without delay and waive their right to any form of appeal or recourse to a court of law or other judicial authority, insofar as any such waiver may validly be made. All awards may, if necessary, be enforced by any court having jurisdiction in the same manner as the judgment of any such court.

13. Each Arbitrating Party explicitly agrees hereby that it shall recognise any arbitral award rendered in arbitration under this Arbitration Agreement as final and binding upon it unless a competent arbitral tribunal or a competent judicial authority determines that said Arbitrating Party never received notice of the pendency of the arbitration in which the award was rendered.

14. Any arbitral award rendered under this Arbitration Agreement shall be accorded res judicata effect by any arbitral tribunal appointed under this Arbitration Agreement in regard to those Arbitrating Parties which are bound by an award pursuant to Article 13.

15. The obligations of the Parties to the Agreements shall not be altered or suspended by reason of any arbitration being conducted during the life of any Agreement.

16. Any Agreement in regard to which a Dispute has arisen shall be governed by the applicable law as specified in that Agreement.

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Schedule G: Arbitration Agreement - 1 January 2013	7

17. This Arbitration Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of the Parties, subject to all Parties respecting Articles 6 and 7 hereto.

18. This Arbitration Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.

19. Any provision of this Arbitration Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

20. This Arbitration Agreement shall enter into full force and effect on 1 January 2013 or such later date on which a Party agrees in writing to be bound by the terms of this Arbitration Agreement and shall continue in full force and effect indefinitely, unless it is terminated by mutual written consent of all of the Parties.

21. This Arbitration Agreement shall be governed by and construed in all respects in accordance with the laws of England, to the exclusion of its rules of conflicts of law.

The Parties have caused this Arbitration Agreement to be executed in multiple copies, with effect from 1 January 2013.

[Signatures]

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Schedule G: Arbitration Agreement - 1 January 2013	8

Schedule A to Arbitration Agreement

The following are considered to be Agreements:

1. Renewed and Extended Development and License Agreement

2. [**]

3. [**]

4. [**]

5. [**]

6. [**]

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Schedule G: Arbitration Agreement - 1 January 2013	9

Schedule B to Arbitration Agreement

In accordance with Article 1.1 of the [**] Rules, in addition to such other modifications of the [**] Rules as are contained in this Arbitration Agreement, the Parties to this Arbitration Agreement and to the Agreements modify the [**] Rules as follows:

a) Notwithstanding Article 3.1 of the [**] Rules, a Notice of Arbitration may be given by any Arbitrating Party to multiple parties so as to join said parties into any pending arbitration and this Arbitration Agreement shall allow for multi-party arbitration involving third parties, fourth parties and any further additional parties.

b) Notwithstanding Article 3.2 of the [**] Rules, arbitral proceedings under this Arbitration Agreement shall be deemed to commence on the date on which the Claimant’s Notice of Arbitration is received by the [**].

c) Notwithstanding Article 3.3(g), Article 3.4(a) and Article 3.4(b) of the [**] Rules, the Notice of Arbitration shall not contain a proposal as to the number or appointment or the notification of the appointment of arbitrators (and, if made, any such proposal shall be disregarded).

d) Notwithstanding Article 21.3 of the [**] Rules, any Arbitrating Party must make any counter-claim or claim for the purpose of set-off in its statement of defense and not at a later stage of the arbitral proceedings.

e) Notwithstanding Article 22 of the [**] Rules, the arbitral tribunal shall, in considering whether it is appropriate to allow a party to amend or supplement a written communication (given the interests of economy, efficiency and the desire to avoid the risk of inconsistent awards), have particular regard to the multi-party nature of any arbitration proceeding, the consequences in terms of delay and the objective of resolving related Claims in a single arbitration involving all relevant Parties.

f) Notwithstanding Article 25 of the [**] Rules, in considering whether an extension of a time-limit for the communication of written statements is justified, the arbitral tribunal shall have particular regard to the multi-party nature of any arbitration proceeding and the consequences in terms of delay.

g) Notwithstanding Article 26 of the [**] Rules, no interim measures shall be sought or applied against the BIS in connection with any Dispute by either an arbitral tribunal established pursuant to this Arbitration Agreement or any judicial authority.

** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Schedule G: Arbitration Agreement - 1 January 2013	1

EX-10.9

Exhibit 10.9

CHANGE OF CONTROL RETENTION AGREEMENT

This Change of Control Retention Agreement (“this Agreement”) is made as of the      day of             , 2013, between Digimarc Corporation, an Oregon corporation, with its principal offices at Beaverton, Oregon (hereinafter called the “Company”), and                      (hereinafter called “Executive”).

It is made with reference to the following facts:

A. The Board of Directors of the Company (the “Board”) believes it imperative that the Company and the Board be able to rely upon Executive to continue in Executive’s position, and that they be able to receive and rely upon Executive’s advice as to the best interests of the Company and its shareholders, without concern that Executive might be distracted or his or her advice affected by the circumstances described in Section 1.2 below;

B. [The existing Change of Control Retention Agreement (the “Existing Agreement”) between the Company and Executive expires by its terms on December 31, 2012;]

C. Executive is willing to enter into this Agreement for the purposes and on the terms and conditions described herein;

NOW, THEREFORE, the parties hereto agree as follows:

1. Definitions

1.1 “Approved Group” shall mean any employee benefit plan of the Company or of any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan.

1.2 “Effective Date” shall mean the day preceding the first to occur of the following events (the “Change of Control Events”):

(a) Any Person (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the Approved Group or a broker, bank, or trust company holding common stock of the Company for the account of customers who are not members of a “group” (within the meaning of Section 13(d) of the Exchange Act), becoming the record or beneficial owner of 50% or more of any class of the Company’s voting equity securities, as disclosed by the Company’s stock records or in any other way, including, without limitation, any filing with the Securities and Exchange Commission or otherwise; or

(b) Upon the purchase of 50% or more of any class of the Company’s voting equity securities pursuant to any tender offer or exchange offer for shares of the Company’s stock, other than one made by the Company or the Approved Group; or

(c) Upon approval by the shareholders of the Company (or, if later, approval by the shareholders of a third party) of any merger, consolidation, reorganization or other transaction providing for the conversion or exchange of more than fifty percent (50%) of the outstanding shares of the Company’s stock into securities of a third party, or cash, or property, or a combination of any of the foregoing; or

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(d) A transaction or series of related transactions in which assets to which more than 50% of the Company’s revenues (as measured during the four completed fiscal quarters immediately preceding such transaction or the first in the series of such transactions) are attributable are sold or effectively sold (such as through an exclusive license or comparable arrangement).

1.3 “Fiscal Year” shall mean the 12-month period ending on December 31.

1.4 “Good Reason,” when used with reference to a voluntary termination by Executive of his or her employment with the Company, shall mean:

(a) a substantial reduction in Executive’s level of duties or responsibilities; provided, that (i) a change in title or (ii) a change in title or status resulting from the Company, or any affiliate of the Company by which Executive is then employed, being a direct or indirect subsidiary of a parent company following a Change of Control Event, with no corresponding substantial reduction in Executive’s level of duties and responsibilities, shall not, in and of itself, constitute Good Reason;

(b) a material reduction in Executive’s Minimum Base Salary, benefits or total cash compensation (consisting of base salary and target bonus, if any), unless such reduction is part of an overall reduction for all employees at the same level as Executive;

(c) the Company’s mandatory transfer of Executive to another geographic location that is more than 35 miles from the location where Executive was employed at the Effective Date, except for required travel on the Company’s business to an extent substantially consistent with Executive’s business travel obligations immediately prior to the Effective Date hereof;

(d) the failure by the Company to obtain an assumption of the obligations of the Company to perform this Agreement by any successor to the Company, to the extent legally required; or

(e) the repudiation or failure by the Company or its successor to comply with any of its obligations under this Agreement.

1.5 “Contract Period” shall mean the period commencing on the Effective Date and ending on the first (1st) anniversary of the Effective Date.

1.6 “Disability” shall mean a physical or mental incapacity of Executive which entitles Executive to commence the receipt of benefits under the long-term disability plan maintained by the Company.

1.7 “Cause,” when used in connection with the termination of Executive’s employment by the Company, shall mean (a) the willful engaging by Executive in misconduct which is significantly injurious to the Company, monetarily or otherwise; (b) any act by the Executive of fraud, dishonesty, embezzlement, misrepresentation or theft of property of the

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Company; (c) Executive’s conviction of or plea of no contest to a felony or any crime involving moral turpitude; (d) Executive’s breach of this Agreement or any other agreements with the Company; (e) Executive’s unauthorized disclosure of the Company’s proprietary or confidential information or breach of any confidentiality/invention/proprietary information agreement(s) with the Company; (f) Executive’s violation of the Company’s Code of Ethics (if applicable), Code of Business Conduct and Ethics or any other employment rule, code or policy, as such policies currently exist or may be amended or implemented during Executive’s employment with the Company; (g) Executive’s failure or refusal to follow the lawful instructions of the Company, if such failure or refusal continues for a period of five (5) calendar days after the Company delivers to Executive a written notice stating the instructions that Executive has failed or refused to follow; (h) the entry by a court of competent jurisdiction of an order, or the entering into by Executive of a consent decree, barring Executive from serving as an officer or director of a public company; or (i) Executive’s failure to meet and sustain an acceptable level of performance of Executive’s duties and obligations to the Company (other than by reason of Disability), which failure continues thirty (30) days after the Company has given written notice thereof to Executive. For purposes of this definition, no act, or failure to act, on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive in bad faith and without reasonable belief that the action or omission was in the best interests of the Company.

1.8 “Without Cause,” when used in connection with the termination of Executive’s employment by the company, shall mean any termination of employment of Executive by the Company which is not a termination of employment for Cause or for Disability.

1.9 “Termination Date” shall mean the effective date as provided in this Agreement for the termination of Executive’s employment.

1.10 “Minimum Base Salary” shall mean salary at an annual rate equal to Executive’s annual rate of salary on the Termination Date (or, if Executive terminates for Good Reason, within the meaning of Section 1.4(b), immediately prior to the material reduction thereof giving rise to Good Reason).

1.11 “Current Compensation” shall mean one-twelfth (1/12th) of the Minimum Base Salary.

2. Scope of Agreement

2.1 General

This Agreement shall apply with respect to any termination of employment of Executive which occurs during the Contract Period. It shall not apply to any termination of employment of Executive which occurs other than during the Contract Period.

2.2 Termination

This Agreement shall terminate on December 31, 2015, if Executive is still in the employ of the Company and no Contract Period is in process. Except as otherwise provided herein, in respect of payments to beneficiaries, this Agreement shall terminate automatically upon the death of Executive.

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3. Termination of Employment of Executive By the Company During the Contract Period

3.1 General

During the Contract Period, the Company shall have the right to terminate Executive’s employment hereunder for Cause, for Disability or Without Cause upon following the procedures hereinafter specified.

3.2 For Disability

Termination of Executive’s employment for Disability shall become effective on the date that disability benefits, payable to Executive in an amount equal to at least sixty-five (65%) percent of Executive’s then Minimum Base Salary commence under any long-term disability plan maintained by the Company or on such later date as the Company may specify in a written notice to the Executive.

3.3 For Cause

Termination of Executive’s employment for Cause shall become effective five (5) days after a written notice of intent to terminate Executive’s employment, specifying the particulars of the conduct of Executive forming the basis for such termination, is given to Executive by the Board.

3.4 Without Cause

The Company shall have the absolute right to terminate Executive’s employment Without Cause at any time. Termination of Executive’s employment Without Cause shall be effective five (5) business days after the date of the giving to Executive by the Board of a written notice of termination, specifying that such termination is Without Cause.

3.5 Effect of Termination

Upon a termination of Executive’s employment for Cause, or for Disability as provided in Section 3.2 hereof, Executive shall have no right to receive any compensation or benefits hereunder. Upon a termination of Executive’s employment Without Cause, Executive shall be entitled to receive the compensation and benefits provided in Section 5 hereof.

4. Termination of Employment by Executive During Contract Period

During the Contract Period, the Executive shall be entitled to terminate his or her employment with the Company. The Executive shall give the Company written notice of voluntary termination of employment, which notice need specify only Executive’s desire to terminate his or her employment and, if such termination is for Good Reason, set forth in reasonable detail the facts and circumstances claimed by Executive to constitute Good Reason. Any notice by Executive pursuant to this Section shall be effective thirty-one (31) days after receipt by the Company of such notice; provided, that Executive’s termination of employment shall not be for Good Reason, if (a) the Company has, within such thirty (30) days after receiving

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Executive’s notice, corrected the condition that would otherwise result in Good Reason for termination, or (b) Executive fails to give the Company his/her written notice of voluntary termination of employment within ninety (90) days after the initial existence of such condition. If such termination is for Good Reason, Executive shall be entitled to receive the compensation and benefits in Section 5 hereof. If such termination is for other than Good Reason, Executive shall have no right to receive any compensation and benefits hereunder other than Executive’s Minimum Base Salary and accrued vacation through Executive’s termination date.

5. Benefits Upon Termination by the Company Without Cause or by Executive for Good Reason

Upon the termination of the employment of Executive by the Company pursuant to Section 3.4 or by Executive for Good Reason pursuant to Section 4 hereof, and if Executive executes and does not revoke a general release of all claims in a form acceptable to the Company and substantially similar to Exhibit A attached hereto (the “General Release”), which General Release becomes effective (i.e., the Executive has executed the General Release and any revocation period has expired without Executive revoking the General Release) within forty-five (45) days, or such shorter period as is specified in the General Release, after the date of Executive’s termination, Executive shall be entitled to receive the following compensation and benefits:

5.1 The Company shall pay to Executive (a) Minimum Base Salary through the Termination Date, and (b) for the period commencing on the Termination Date and continuing until the first anniversary of the Termination Date, a monthly amount equal to the Current Compensation; provided, however, that the Company’s obligation hereunder shall be reduced by the amount of any compensation Executive receives from another source for services rendered during the period that payments are being made pursuant to this Section 5.1; and provided further that any amount due to Executive under clause (b) during the period from the date of Executive’s termination to the effective date of the General Release shall be paid to Executive on the first regularly-scheduled pay date coinciding with or immediately following the effective date of the General Release. Executive shall provide notice of all compensation referred to in the preceding sentence to the Company within seven (7) days of receipt of such compensation. Notwithstanding the foregoing, to the extent necessary to avoid subjecting Executive to the imposition of any additional tax or interest under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), amounts that would (but for this provision) be payable pursuant to clause (b) of the first sentence of this Section 5.1 during the forty-five (45) day period immediately following the date of Executive’s termination, shall instead be paid in a lump sum on the first regularly-scheduled pay date occurring at least forty-six (46) days after the date of Executive’s termination.

5.2 The Company shall pay any premiums necessary to continue Executive’s health insurance coverage under the Company’s health insurance plan pursuant to Section 4980B(f) of the Internal Revenue Code of 1986, as amended (“COBRA”) (provided that Executive is eligible for, and timely elects, COBRA continuation coverage under the Company’s group health plan) until the earliest of (a) eighteen (18) months after the Termination Date, (b) the first date that Executive is covered under another health insurance plan or program, or (c) the date on which Executive is no longer entitled to COBRA continuation coverage under the Company’s group

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health plan. Notwithstanding the foregoing, the Company may unilaterally amend this Section 5.2 or eliminate the benefit provided hereunder to the extent it deems necessary to avoid the imposition of excise taxes, penalties or similar charges on the Employer, including, without limitation, under Code Section 4980D.

5.3 Notwithstanding any other provision of this Agreement, if the Company receives confirmation from the Company’s independent tax counsel or its certified public accounting firm (the “Tax Advisor”) that any portion of any payment by the Company or a related entity to Executive, or any benefit received by Executive, under this Agreement or otherwise (each a “Payment”) would be considered to be an “excess parachute payment” within the meaning of Code Section 280G, then the Payments (under this Agreement or otherwise) shall be reduced (the “Reduction”) to the highest amount that, in the opinion of the Tax Advisor, may be paid to Executive by the Company without having any portion of any Payment treated as an “excess parachute payment”; provided that the Reduction shall not apply if, in the opinion of the Tax Advisor, the after-tax value to Executive of the total Payments prior to the Reduction is greater than the after-tax value to Executive if the total Payments are determined taking into account the Reduction. For purposes of determining the after-tax value of the Payments, (i) Executive shall be deemed to pay income taxes at the highest rate of federal income tax and the highest rate or rates of state and local income taxes in the state and locality of Executive’s domicile for income tax purposes for the taxable year in which the Total Payments will be made, provided that the state and local income tax rate shall be determined assuming that such taxes are fully deductible for federal income tax purposes, and provided further that any phase-out of itemized deductions or other items shall be ignored; and (ii) Executive shall be deemed to pay employment taxes at the applicable rate under Code Section 3101(b). The Reduction, if any, shall be applied to the Payments by the Company in its reasonable discretion in the following order: (a) reduction of any Payments that are subject to Code Section 409A on a pro-rata basis or such other manner that complies with Code Section 409A, as determined by the Company, and (b) reduction of any Payments that are exempt under Code Section 409A. If the Tax Advisor requests, Executive and the Company shall obtain, at the Company’s expense, and the Tax Advisor may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by Executive. All determinations made by the Tax Advisor shall be binding upon the parties hereto and all fees and expenses of the Tax Advisor shall be borne by the Company.

5.4 Except as specifically provided herein, the amount of any compensation or benefits provided for in this Section 5 shall not be subject to mitigation by Executive being required to seek other employment or otherwise.

5.5 The parties intend that this Agreement and the payments and other benefits provided hereunder be exempt from the requirements of Code Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Code Section 409A is applicable to this Agreement (and such payments and benefits), the parties intend that this Agreement (and such payments and benefits) comply with the deferral, payout and other limitations and restrictions imposed under Code Section 409A. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall be interpreted, operated and

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administered in a manner consistent with such intentions; provided, however that in no event shall the Company or its agents, parents, subsidiaries, affiliates or successors be liable for any additional tax, interest or penalty that may be imposed on Employee pursuant to Code Section 409A or for any damages incurred by Executive as a result of this Agreement (or the payments or benefits hereunder) failing to comply with, or be exempt from, Code Section 409A. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement to the contrary;

(a) to the extent Code Section 409A is applicable to this Agreement, a termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of amounts or benefits upon or following a termination of employment unless such termination is also a “separation from service,” as defined in Treas. Reg. Section 1.409A-1(h), after giving effect to the presumptions contained therein (and without regard to the optional alternative definitions available therein), and, for purposes of any such provision of this Agreement, references to “terminate,” “termination,” “termination of employment” and like terms shall mean separation from service;

(b) if at the time Executive’s employment hereunder terminates, Executive is a “specified employee” within the meaning of Code Section 409A, then to the extent necessary to avoid subjecting Executive to the imposition of any additional tax or interest under Code Section 409A, amounts that would (but for this provision) be payable within six (6) months following the date of Executive’s termination of employment shall not be paid to Employee during such period, but shall instead be paid in a lump sum on the first business day of the seventh month following the date on which Executive’s employment terminates or, if earlier, upon Executive’s death; and

(c) each payment made under this Agreement shall be treated as a separate payment and the right to a series of installment payments under this Agreement, including, without limitation, under Section 5.1 hereof, shall be treated as a right to a series of separate payments

5.6 If Executive does not properly execute the General Release or if Executive revokes or attempts to revoke the General Release or if the General Release is not effective within forty-five (45) days, or within such shorter period specified in the General Release, after Executive’s termination of employment, Executive will not be entitled to any of the benefits provided under this Section 5, except those which may be otherwise required by law.

6. Successors; Binding Agreement

6.1 As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

6.2 This Agreement is personal to Executive and Executive may not assign or transfer any part of his or her rights or duties hereunder, or any compensation due to Executive hereunder, to any other person, except that this Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees or beneficiaries.

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7. Modification; Waiver

No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and by the Chief Executive Officer of the Company or such other director or officer as may be specifically designated by the Board. Waiver by any party of any breach of or failure to comply with any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other breach of, or failure to comply with, any other provision of this Agreement.

8. Arbitration of Disputes

8.1 Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation or validity hereof shall be settled exclusively and finally by arbitration. It is specifically understood and agreed that any disagreement, dispute or controversy which cannot be resolved between the parties, including, without limitation, any matter relating to the interpretation of this Agreement, may be submitted to arbitration irrespective of the magnitude thereof, the amount in controversy or whether such disagreement, dispute or controversy would otherwise be considered justiciable or ripe for resolution by a court or arbitral tribunal.

8.2 The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the “Arbitration Rules”) of the American Arbitration Association (the “AAA”).

8.3 The arbitral tribunal shall consist of one arbitrator. The parties to the arbitration jointly shall directly appoint such arbitrator within thirty (30) days of initiation of the arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules and shall be a person who (a) maintains his or her principal place of business in the State of Oregon; and (b) has had substantial experience in business transactions. The Company shall pay all of the fees, if any, and expenses of such arbitrator.

8.4 The arbitration shall be conducted in Portland, Oregon, or in such other city in the United States of America as the parties to the dispute may designate by mutual written consent.

8.5 At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross-examine the witnesses of any opposing party. No evidence of any witness shall be presented in written form unless the opposing party or parties shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure.

8.6 Any decision or award of the arbitral tribunal shall be final and binding upon the parties to the arbitration proceeding. The parties hereto hereby waive to the extent permitted by law any rights to appeal or to seek review of such award by any court or tribunal. The parties

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hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction.

8.7 Nothing herein contained shall be deemed to give the arbitral tribunal any authority, power, or right to alter, change, amend, modify, add to, or subtract from any of the provisions of this Agreement.

9. Payment Obligations Absolute

The Company’s obligation to pay Executive the amounts provided for hereunder and to make the arrangements provided for hereunder shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Except as expressly provided herein, the Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to terminate, cancel or rescind this Agreement in whole or in part. Subject to the right of the Company to seek arbitration under Section 8 and recover, pursuant to such arbitration, any payment made hereunder, each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from Executive or from whomsoever may be entitled thereto, for any reason whatsoever.

10. Notice

All notices, requests, demands and other communications required or permitted to be given by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice under the Arbitration Rules of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party as follows:

If to the Company, to:

Digimarc Corporation

9405 S.W. Gemini Drive

Beaverton, Oregon 97008

Attn: Chief Legal Officer

If to the Executive, to:

Either party hereto may change its address, for purposes of this Section 10, by giving fifteen (15) days prior notice to the other party hereto.

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11. Severability

If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement 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 Agreement shall be valid and enforceable to the fullest extent permitted by law.

12. Headings

The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of this Agreement.

13. Counterparts

This Agreement may be executed in several counterparts, each of which shall be deemed an original.

14. Governing Law

This Agreement shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Oregon.

15. Payroll and Withholding Taxes

All payments to be made or benefits to be provided hereunder by the Company shall be subject to reduction for any applicable payroll related or withholding taxes.

16. Entire Agreement

This Agreement supersedes any and all other oral or written agreements heretofore made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof; provided, that this Agreement shall not supersede or limit or in any way affect any rights Executive may have under any other Company employee benefit plan, program or arrangement (including, without limitation, any pension, life insurance, medical, dental, health, vacation, accident and disability plans, programs and arrangements).

IN WITNESS WHEREOF, the parties have executed this Change of Control Retention Agreement as of the date first above written.

EXECUTIVE	DIGIMARC CORPORATION
By:	By:
	Name:
	Title:

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EXHIBIT A

SETTLEMENT AGREEMENT AND GENERAL RELEASE

This SETTLEMENT AGREEMENT AND GENERAL RELEASE (this “Agreement”), effective             , 20     by and between                      (“Executive”) and Digimarc Corporation (the “Company”)

RECITAL

A. Executive and Company are parties to, among other things, a Change of Control Retention Agreement dated as of January 1, 2013 (the “Change of Control Retention Agreement”).

B. The Change of Control Retention Agreement provides, among other things, that if (i) Company terminates the employment of Executive Without Cause (as defined in the Change of Control Retention Agreement), or (ii) the Executive resigns his or her employment for Good Reason (as defined in the Change of Control Retention Agreement) (each a “Release Condition”), then Executive shall execute this Agreement in exchange for the right to receive certain payments from Company as set forth more fully in the Change of Control Retention Agreement.

C. Effective             , 200    , a Release Condition has occurred.

AGREEMENT

In consideration of the foregoing premises, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Settlement Amount. Execution of this Agreement by Executive shall satisfy the condition that Executive execute a full release of claims as set forth in Section 5 of the Change of Control Retention Agreement and, upon satisfaction of any other conditions set forth in this Agreement or in the Change of Control Retention Agreement, Executive shall be entitled to receive the compensation set forth in Section 5 of the Change of Control Retention Agreement.

2. Release of Claims. Executive irrevocably and unconditionally releases and forever discharges Company, its affiliates, successors and assigns, and each of their respective officers, directors, members, employees, representatives, insurance carriers, attorneys, subsidiaries, affiliates, representatives, agents, successors, heirs, executors, administrators and assigns, and all persons acting by, through, under or in concert with any of them (collectively “Releasees”), of and from any and all claims, actions, causes of action, suits, debts, charges, complaints, liabilities, obligations, promises, agreements, controversies, damages, and expenses (including attorney’s fees and costs actually incurred), of any nature whatsoever, known or unknown, in law or equity, including, without limitation of the foregoing general terms, any claims against Company and Releasees arising from or related to Executive’s employment with

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Company or the termination thereof, and any claims arising from any alleged violation by Company of any federal, state or local statutes, ordinances or common laws, including, but not limited to, the Age Discrimination in Employment Act.

3. Confidentiality. Executive agrees that the terms, amount and fact of settlement shall be kept strictly confidential and promises that neither Executive nor Executive’s representatives nor agents shall disclose, either directly or indirectly, any information concerning this settlement (or the fact of settlement) to anyone, including but not limited to past, present or future employees of Company, its affiliates, successors or any other company.

4. Disclaimer of Liability. This Agreement does not constitute and shall not be construed as an admission of liability or wrongdoing by Company, its agents, employees or successors, with respect to any claims asserted by Executive, and Company expressly denies that it has done anything wrong or unlawful.

5. Release of Unknown Claims. Executive represents that Executive is not aware of any claims against Company except for those claims that are released by this Agreement. Moreover, the Parties agree and represent that it is within their contemplation that Executive may have claims against Company of which, at the time of the execution of this Agreement, they have no knowledge or suspicion, but that this Agreement extends to claims in any way based upon, connected with, or related to the matters described in Paragraph 2 above, whether or not known, claimed, or suspected by the Parties.

6. Property. As a precondition to any settlement payment in connection with this Agreement, Executive shall return to Company all property of Company in Executive’s possession.

7. ADEA Notification. This Agreement contains a release of claims under the Age Discrimination in Employment Act (the “ADEA”). By executing this Agreement, Executive certifies that Executive has knowingly and voluntarily given up any claims that Executive may have under the ADEA if those claims arose before Executive signed this Agreement. Executive further certifies that the payments described in this Agreement are considerations to which Executive would not otherwise be entitled without signing this Agreement, and that these considerations constitute payment in exchange for Executive’s execution of this Agreement.

Under the ADEA, Executive may take up to twenty-one (21) days to consider the terms of this Agreement. Executive has the right to accept in less time by signing and delivering this Agreement to Company. Executive is urged to use as many of the twenty-one (21) days as necessary to consider this Agreement and to consult with Executive’s attorney about it. Executive acknowledges that Executive has been given at least twenty-one (21) days to consider this Agreement prior to signing it, and Executive’s signature on this Agreement is completely voluntary.

Under the ADEA, Executive may revoke this Agreement within seven (7) days of the date on which Executive signs the Agreement. If Executive revokes, then Executive will not receive any of payments or other considerations set forth in this Agreement. TO BE EFFECTIVE, EXECUTIVE’S REVOCATION MUST BE IN WRITING AND

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RETURNED TO DIGIMARC CORPORATION, ATTENTION: CHIEF LEGAL OFFICER, WITHIN SEVEN (7) DAYS OF THE DATE OF EXECUTIVE’S SIGNING OF THIS AGREEMENT.

8. Governing Law. This Agreement shall be governed by and construed under the laws of the State of Oregon as applied to agreements among Oregon residents, made and to be performed entirely within the State of Oregon, without giving effect to conflicts of laws principles.

PLEASE READ CAREFULLY. THIS IS A RELEASE OF CLAIMS YOU MAY HAVE AGAINST DIGIMARC CORPORATION.

EXECUTIVE	DIGIMARC CORPORATION
By:	By:
	Name:
	Title:
Dated:             , 20	Dated:             , 20

-13-

EX-21.1

Exhibit 21.1

List of Affiliates

Year Ended December 31, 2012

Name of Affiliate or Entity	Place of Incorporation
TVaura LLC (51% ownership)		Delaware
TVaura Mobile LLC (49% ownership)		Delaware

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors:

Digimarc Corporation

We consent to the incorporation by reference in the registration statement (No. 001-34108) on Form 10 and (No. 333-154524) on Form S-8 of Digimarc Corporation and subsidiary (the “Company”) of our reports dated February 22, 2013, with respect to the consolidated balance sheets of the Company as of December 31, 2012 and 2011 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012 annual report on Form 10-K of Digimarc Corporation.

Portland, Oregon

Date: February 22, 2013

EX-31.1

Exhibit 31.1

DIGIMARC CORPORATION

CERTIFICATION

I, Bruce Davis, certify that:

1. I have reviewed this annual report on Form 10-K of Digimarc Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 22, 2013	By:	/S/ BRUCE DAVIS
		Bruce Davis
		Chief Executive Officer

EX-31.2

Exhibit 31.2

DIGIMARC CORPORATION

CERTIFICATION

I, Michael McConnell, certify that:

1. I have reviewed this annual report on Form 10-K of Digimarc Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 22, 2013	By:	/S/ MICHAEL MCCONNELL
		Michael McConnell
		Chief Financial Officer

EX-32.1

Exhibit 32.1

DIGIMARC CORPORATION

CERTIFICATION

In connection with the Annual Report of Digimarc Corporation (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “Report”), I, Bruce Davis, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: February 22, 2013

By:	/S/ BRUCE DAVIS
	Bruce Davis
	Chief Executive Officer

EX-32.2

Exhibit 32.2

DIGIMARC CORPORATION

CERTIFICATION

In connection with the Annual Report of Digimarc Corporation (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “Report”), I, Michael McConnell, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: February 22, 2013

By:	/S/ MICHAEL MCCONNELL
	Michael McConnell
	Chief Financial Officer

XML

Stock Repurchases (Tables)

12 Months Ended

Dec. 31, 2012

Shareholders' Equity/Stock Repurchases [Abstract]

Summary of common stock shares repurchased

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Private transaction		—		552,536		—
Repurchase program		50,900		104,577		—
Exercise of stock options		69,272		48,432		102,077
Tax withholding obligations on stock options		39,005		46,401		81,610
Tax withholding obligations on restricted shares		42,785		24,953		13,506
Total		201,962		766,899		197,193

Value of common stock shares repurchased

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Private transaction	$	—	$	14,927	$	—
Repurchase program		1,201		3,099		—
Exercise of stock options		1,660		1,651		3,037
Tax withholding obligations on stock options		949		1,658		2,435
Tax withholding obligations on restricted shares		950		713		352
Total	$	4,760	$	22,048	$	5,824

XML

Segment Information (Details Textual)	12 Months Ended
	Dec. 31, 2012
Segment Information (Textual) [Abstract]
Revenue from segments	10.00%
Minimum [Member]
Segment Information (Textual) [Abstract]
Revenue from segments	10.00%

XML

Acquisition of Attributor Corporation (Details 3) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Pro-forma financial information presented for informational purposes
Revenue	$ 49,273	$ 39,445
Net income	$ 6,807	$ 2,265
Net income per common share -Basic	$ 0.95	$ 0.33
Net income per common share-Diluted	$ 0.92	$ 0.30

XML

Intangibles (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Estimated future aggregate amortization expense
Year ending December 31,2013	$ 1,061
2014	975
2015	572
2016	477
2017	$ 441

XML

Stock-Based Compensation (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Weighted average assumptions and results for options granted
Expected volatility, minimum	42.00%	52.00%
Expected volatility, maximum	44.00%	55.00%
Risk-free interest rate, minimum	1.00%	2.50%
Risk-free interest rate, maximum	2.00%	3.00%
Expected dividend yield	0.00%	0.00%
Fair value of stock options granted	$ 2,464	$ 1,159
Maximum [Member]
Weighted average assumptions and results for options granted
Expected life (in years)	5 years 9 months	6 years
Minimum [Member]
Weighted average assumptions and results for options granted
Expected life (in years)	5 years 3 months 11 days	5 years 2 months 12 days

XML

Joint Venture and Related Party Transactions (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Net losses on the joint ventures based on the Company's pro-rata share of the net losses
Net Income Loss From Joint Ventures	$ (1,127)	$ (2,714)	$ (2,180)
The Company's gain / (loss) on investment	20
TVaura LLC [Member]
Net losses on the joint ventures based on the Company's pro-rata share of the net losses
Net Income Loss From Joint Ventures	(27)	(1,376)	(1,440)
The Company's gain / (loss) on investment	70
TVaura Mobile LLC [Member]
Net losses on the joint ventures based on the Company's pro-rata share of the net losses
Net Income Loss From Joint Ventures	(1,100)	(1,338)	(740)
The Company's gain / (loss) on investment	$ (50)

XML

Acquisition of Attributor Corporation (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Preliminary allocation of total purchase price
Total purchase price	$ 5,632
Less: Estimated fair value of net tangible assets acquired and liabilities assumed:
Cash and cash equivalents	350
Trade accounts receivable, net	527
Other current assets	18
Property and equipment, net	102
Deferred tax assets	1,225
Accounts payable and other accrued liabilities	(499)
Deferred revenue	(225)
Preliminary goodwill	1,114
Existing technology [Member]
Less: Estimated fair value of net tangible assets acquired and liabilities assumed:
Estimated fair value of identifiable intangible assets acquired	1,560
Customer relationships [Member]
Less: Estimated fair value of net tangible assets acquired and liabilities assumed:
Estimated fair value of identifiable intangible assets acquired	290
Backlog [Member]
Less: Estimated fair value of net tangible assets acquired and liabilities assumed:
Estimated fair value of identifiable intangible assets acquired	760
Tradenames [Member]
Less: Estimated fair value of net tangible assets acquired and liabilities assumed:
Estimated fair value of identifiable intangible assets acquired	290
Non-solicitation agreements [Member]
Less: Estimated fair value of net tangible assets acquired and liabilities assumed:
Estimated fair value of identifiable intangible assets acquired	$ 120

XML

Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2012

Property and Equipment [Abstract]

Depreciation and amortization on property and equipment using the straight-line method

	December 31, 2012			December 31, 2011
Office furniture and fixtures	$	420		$	410
Equipment		1,886			1,872
Leasehold improvements		1,083			1,041
Gross property and equipment		3,389			3,323
Less accumulated depreciation and amortization		(1,936	)		(1,928	)
Property and equipment, net	$	1,453		$	1,395

Future minimum lease payments under non-cancelable operating leases

Year ending December 31:	Operating Leases
2013	$	893
2014		890
2015		920
2016		628
2017		—
Thereafter		—
Total minimum lease payments	$	3,331

Operating leases rent expense

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Rent expense	$	776	$	866	$	832

XML

Joint Ventures and Related Party Transactions (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Related Party Transactions
Capital contributions, net	$ 692	$ 2,100	$ 2,800
Revenue	272	2,640	2,723
TVaura LLC [Member]
Related Party Transactions
Capital contributions, net	(104)	1,200	1,600
Revenue		2,640	2,723
TVaura Mobile LLC [Member]
Related Party Transactions
Capital contributions, net	796	900	1,200
Revenue	$ 272

XML

Shareholders' Equity (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012
Summarizes information about stock options outstanding
Exercise Price, Lower Range Limit	$ 9.64
Exercise Price, Upper Range Limit	$ 30.01
Number Outstanding	855,988
Remaining Contractual Life (Years), Outstanding	6 years 8 months 23 days
Weighted Average Price, Outstanding	$ 15.16
Number Exercisable	693,248
Option Exercisable Remaining Contractual Life (Years)	6 years 4 months 10 days
Weighted Average Price, Exercisable	$ 12.78
Range One [Member]
Summarizes information about stock options outstanding
Exercise Price, Lower Range Limit	$ 9.64
Exercise Price, Upper Range Limit	$ 9.91
Number Outstanding	508,072
Remaining Contractual Life (Years), Outstanding	5 years 10 months 10 days
Weighted Average Price, Outstanding	$ 9.66
Number Exercisable	508,072
Option Exercisable Remaining Contractual Life (Years)	5 years 10 months 10 days
Weighted Average Price, Exercisable	$ 9.66
Range Two [Member]
Summarizes information about stock options outstanding
Exercise Price, Lower Range Limit	$ 14.99
Exercise Price, Upper Range Limit	$ 18.01
Number Outstanding	132,916
Remaining Contractual Life (Years), Outstanding	7 years 29 days
Weighted Average Price, Outstanding	$ 15.67
Number Exercisable	103,126
Option Exercisable Remaining Contractual Life (Years)	7 years 1 month 6 days
Weighted Average Price, Exercisable	$ 15.87
Range Three [Member]
Summarizes information about stock options outstanding
Exercise Price, Lower Range Limit	$ 24.35
Exercise Price, Upper Range Limit	$ 30.01
Number Outstanding	215,000
Remaining Contractual Life (Years), Outstanding	8 years 6 months 26 days
Weighted Average Price, Outstanding	$ 27.84
Number Exercisable	82,050
Option Exercisable Remaining Contractual Life (Years)	8 years 5 months 27 days
Weighted Average Price, Exercisable	$ 28.26

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Stock Repurchases (Details Textual) (USD $)	1 Months Ended			12 Months Ended
	Apr. 30, 2012	Nov. 30, 2011	Jan. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Shares Repurchases [Line Items]
Shares repurchased under the program/Repurchased of common stock	223,851			43,293
Purchased price of common stock				$ 4,760,000	$ 22,048,000	$ 5,824,000
Shares Repurchases (Textual) [Abstract]
Sale of short term marketable securities			10,752,000
Sale of long term marketable securities			2,996,000
Stock repurchase program authorizing additional		5,000,000,000
Extension period for additional stock repurchase program		1 year
Aggregate purchase price	4,858,000			1,002,000
Koninklijke Philips Electronics [Member]
Shares Repurchases [Line Items]
Shares repurchased under the program/Repurchased of common stock			552,536
Purchased price of common stock			$ 14,927,000

XML

Stock-Based Compensation (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Unrecognized compensation cost related to non-vested stock-based awards granted
Unrecognized compensation costs	$ 8,333	$ 9,463	$ 6,212

XML

Defined Contribution Pension Plan (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Statement of company made matching contributions
Matching contributions	$ 366	$ 349	$ 323

XML

Commitments and Contingencies (Details)	12 Months Ended
	Dec. 31, 2012 Case Defendants Patent
Commitments and Contingencies (Textual) [Abstract]
Number of patents	4
Number of defendants	60
Number of case	1

XML

Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Current:
Federal	$ 4,699	$ 1,066
State	570	3
Foreign	1	(20)	42
Sub-total	5,270	1,049	42
Deferred:
Federal	97	(2,470)
State	27	(365)
Foreign
Sub-total	(284)	(3,640)
Total tax (benefit) expense	$ 5,394	$ (1,786)	$ 42

XML

Stock Repurchases (Details)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of common stock shares repurchased
Private transaction		552,536
Repurchase program	50,900	104,577
Exercise of stock options	69,272	48,432	102,077
Tax withholding obligations on stock options	39,005	46,401	81,610
Tax withholding obligations on restricted shares	42,785	24,953	13,506
Total	201,962	766,899	197,193

XML

Defined Contribution Pension Plan (Details Textual)	12 Months Ended
	Dec. 31, 2012
Defined Contribution Pension Plan (Textual) [Abstract]
Employees may contribute their pay to the Plan	75.00%

XML

Intangibles (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Intangibles (Textual) [Abstract]
Aggregate amortization expense	$ 315	$ 124	$ 79
Patents [Member]
Acquired Finite-Lived Intangible Assets [Line Items]
Estimated Useful life	17 years

XML

Quarterly Financial Information-Unaudited

12 Months Ended

Dec. 31, 2012

Quarterly Financial Information-Unaudited [Abstract]

Quarterly Financial Information-Unaudited

(19) Quarterly Financial Information—Unaudited

Quarter ended:	March 31			June 30			September 30			December 31
2012
Service revenue	$	3,048		$	2,609		$	2,616		$	2,519
License and subscription revenue		13,998			6,503			6,287			6,795
Total revenue		17,046			9,112			8,903			9,314
Total cost of revenue		1,810			1,583			1,467			1,648
Gross profit		15,236			7,529			7,436			7,666
Gross profit percent, service revenue		44	%		44	%		48	%		45	%
Gross profit percent, license and subscription revenue		99	%		98	%		98	%		96	%
Gross profit percent, total		89	%		83	%		84	%		82	%
Sales and marketing	$	1,007		$	970		$	937		$	913
Research, development and engineering		1,998			2,146			2,320			2,277
General and administrative		2,758			2,191			2,282			2,226
Intellectual property		319			291			309			329
Operating income		9,154			1,931			1,588			1,921
Net income		4,999			1,216			1,003			1,054
Earnings per common share:
Net income per common share—basic	$	0.74		$	0.17		$	0.14		$	0.15
Net income per common share—diluted	$	0.70		$	0.17		$	0.14		$	0.14
Weighted average common shares outstanding—basic		6,738			6,737			6,761			6,791
Weighted average common shares outstanding—diluted		7,140			6,993			6,984			6,966

Quarter ended:	March 31			June 30			September 30			December 31
2011
Service revenue	$	3,069		$	3,165		$	3,108		$	3,053
License and subscription revenue		6,022			6,308			5,442			5,872
Total revenue		9,091			9,473			8,550			8,925
Total cost of revenue		1,649			1,690			1,742			1,856
Gross profit		7,442			7,783			6,808			7,069
Gross profit percent, service revenue		48	%		49	%		46	%		42	%
Gross profit percent, license and subscription revenue		99	%		99	%		99	%		99	%
Gross profit percent, total		82	%		82	%		80	%		79	%
Sales and marketing	$	1,102		$	1,017		$	1,166		$	1,051
Research, development and engineering		1,775			1,884			1,958			1,710
General and administrative		2,847			2,270			2,000			2,839
Intellectual property		301			266			259			268
Operating income		1,417			2,346			1,425			1,201
Net income		938			3,626			639			453
Earnings per common share:
Net income per common share—basic	$	0.14		$	0.54		$	0.10		$	0.07
Net income per common share—diluted	$	0.12		$	0.50		$	0.09		$	0.06
Weighted average common shares outstanding—basic		6,864			6,696			6,706			6,699
Weighted average common shares outstanding—diluted		7,505			7,245			7,344			7,279

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Acquisition of Attributor Corporation (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012
Acquisition of Attributor Corporation (Textual) [Abstract]
Cash paid by Company under terms of merger agreement	$ 5,632,000
Cash paid by the company after the adjustments	5,442,000
Additional amount received at the closing merger consideration	150,000
Indemnification claims period	17 months
Additional amount receivable by attributor stockholders	900,000
Fair value of contingent consideration	190,000
Contingent cash payment	Mar. 31, 2014
Restricted shares of common stock received by employees of Attributor	1,000,000
Restricted Stock Awards Will Vest	2 years
Transaction related expenses associated with the Attributor acquisition during the year	$ 200,000

XML

Description of Business and Summary of Significant Accounting Policies (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Summary of fair value maturities for financial asset
Maturities, Total	$ 38,068
Maturities, Less than 1 year	31,200
Maturities, 1-5 years	6,868
Maturities, 5-10 years
Maturities, More than 10 year

XML

Shareholders' Equity (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Shareholders' Equity (Textual) [Abstract]
Preferred stock, shares authorized	2,500,000	2,500,000
Preferred stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, par value	$ 0.001	$ 0.001
Options with exercise prices less than per share	$ 15.16	$ 14.23	$ 10.47	$ 9.65
Restricted Stock Awards Will Vest	2 years
Series A Preferred Stock [Member]
Shareholders' Equity (Textual) [Abstract]
Authorized shares of series A Redeemable Nonvoting Preferred stock	10,000
Preferred stock [Member]
Shareholders' Equity (Textual) [Abstract]
Preferred stock, shares authorized	2,500,000
Preferred stock, par value	$ 0.001
Series A Preferred redeemable stated fair value	$ 5.00
Common stock [Member]
Shareholders' Equity (Textual) [Abstract]
Common stock, shares authorized	50,000,000
Common stock, par value	$ 0.001
Stock Options [Member]
Shareholders' Equity (Textual) [Abstract]
Stock Based Compensation Plans Equity Awards	799,415
Intrinsic value is based on closing price of per share of Digimarc common stock	$ 20.70
Options with exercise prices less than per share	$ 20.70
Restricted Stock [Member]
Shareholders' Equity (Textual) [Abstract]
Restricted Stock Awards Will Vest	4 years
Stock Incentive Plan [Member] | Common stock [Member]
Shareholders' Equity (Textual) [Abstract]
Authorized shares of series A Redeemable Nonvoting Preferred stock	2,500,000

XML

Joint Ventures and Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2012

Joint Ventures and Related Party Transactions [Abstract]

Net losses on the joint ventures based on the Company's pro-rata share of the net losses

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
The Company’s pro-rata share—net loss
TVaura LLC	$	(27	)	$	(1,376	)	$	(1,440	)
TVaura Mobile LLC	$	(1,100	)	$	(1,338	)	$	(740	)
Total	$	(1,127	)	$	(2,714	)	$	(2,180	)
The Company’s gain / (loss) on investment
TVaura LLC	$	70
TVaura Mobile LLC	$	(50	)
Total	$	20

Related Party Transactions

	Year Ended December 31, 2012			Year Ended December 31, 2011		Year Ended December 31, 2010
TVaura LLC:
Capital contributions (return of capital)	$	(104	)	$	1,200	$	1,600
Revenue (1)	$	—		$	2,640	$	2,723
TVaura Mobile LLC:
Capital contributions	$	796		$	900	$	1,200
Revenue (1)	$	272		$	—	$	—
Total:
Capital contributions, net	$	692		$	2,100	$	2,800
Revenue (1)	$	272		$	2,640	$	2,723

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Geographical segment revenue
Total	$ 9,314	$ 8,903	$ 9,112	$ 17,046	$ 8,925	$ 8,550	$ 9,473	$ 9,091	$ 44,375	$ 36,039	$ 31,150
Domestic [Member]
Geographical segment revenue
Total									30,736	22,660	19,034
International [Member]
Geographical segment revenue
Total									$ 13,639	$ 13,379	$ 12,116

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Property and Equipment (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Operating leases rent expense
Rent expense	$ 776	$ 866	$ 832

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Net Income Per Common Share (Details 1) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Basic EPS
Income available to common shareholders	$ 1,054	$ 1,003	$ 1,216	$ 4,999	$ 453	$ 639	$ 3,626	$ 938	$ 8,272	$ 5,656	$ 4,174
Income available to common shareholders, Shares	6,791	6,761	6,737	6,738	6,699	6,706	6,696	6,864	6,757	6,741	7,120
Income available to common shareholders, Per Share										$ 0.84	$ 0.59
Diluted EPS
Income available to common shareholders	$ 1,054	$ 1,003	$ 1,216	$ 4,999	$ 453	$ 639	$ 3,626	$ 938	$ 8,272	$ 5,656	$ 4,174
Income available to common shareholders, Shares	6,966	6,984	6,993	7,140	7,279	7,344	7,245	7,505	6,989	7,430	7,623
Income available to common shareholders, Per Share										$ 0.76	$ 0.55
Stock Options [Member]
Effect of Dilutive Securities
Effect of Dilutive Securities										393	440
Restricted Stock [Member]
Effect of Dilutive Securities
Effect of Dilutive Securities										296	63

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Acquisition of Attributor Corporation (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Summary of intangible assets acquired in connection with the acquisition
Fair Value	$ 3,020
Amortization Expense	79
Existing technology [Member]
Summary of intangible assets acquired in connection with the acquisition
Fair Value	1,560
Estimated Life	5 years
Amortization Expense	26
Customer relationships [Member]
Summary of intangible assets acquired in connection with the acquisition
Fair Value	290
Estimated Life	7 years
Amortization Expense	3
Backlog [Member]
Summary of intangible assets acquired in connection with the acquisition
Fair Value	760
Estimated Life	2 years
Amortization Expense	32
Tradenames [Member]
Summary of intangible assets acquired in connection with the acquisition
Fair Value	290
Estimated Life	3 years
Amortization Expense	8
Non-solicitation agreements [Member]
Summary of intangible assets acquired in connection with the acquisition
Fair Value	120
Estimated Life	1 year
Amortization Expense	$ 10

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Revenue Recognition

12 Months Ended

Dec. 31, 2012

Revenue Recognition [Abstract]

Revenue Recognition

(3) Revenue Recognition

The Company derives its revenue primarily from development services and licensing of its patent portfolio:

• Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements and fixed price consulting agreements.

• License revenue, including royalty revenue, originates primarily from licensing the Company’s technology and patents where the Company receives royalties as its income stream. Subscription revenue, which consists of products and services, are more recurring in nature.

Revenue is recognized in accordance with ASC 605 “Revenue Recognition” and ASC 985 “Software” when the following four criteria are met:

(i) persuasive evidence of an arrangement exists,

(ii) delivery has occurred,

(iii) the fee is fixed or determinable, and

(iv) collection is reasonably assured.

Some customer arrangements encompass multiple deliverables, such as patent license, professional services, software subscriptions, and maintenance fees. For arrangements that include multiple deliverables, the Company identifies separate units of accounting at inception based on the consensus reached under ASC 605-25 “Multiple-Element Arrangements,” which provides that revenue arrangements with multiple deliverables should be divided into separate units of accounting if certain criteria are met. The consideration for the arrangement is allocated to the separate units of accounting using the relative selling price method.

The relative selling price method allocates the consideration based on the Company’s specific assumptions rather than assumptions of a marketplace participant, and any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.

Applicable revenue recognition criteria is considered separately for each separate unit of accounting as follows:

• Revenue from professional service arrangements is generally determined based on time and materials. Revenue for professional services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

• License revenue is recognized when amounts owed to the Company have been earned, are fixed or determinable (within the Company’s normal 30 to 60 day payment terms), and collection is reasonably assured. If the payment terms extend beyond the normal 30 to 60 days, the fee may not be considered to be fixed or determinable, and the revenue would then be recognized when installments are due.

• The Company records revenue from certain license agreements upon cash receipt as a result of collectability not being reasonably assured.

• The Company’s standard payment terms for license arrangements are 30 to 60 days. Extended payment terms increase the likelihood the Company will grant a customer a concession, such as reduced license payments or additional rights, rather than hold firm on minimum commitments in an agreement to the point of losing a potential advocate and licensee of patented technology in the marketplace. Extended payment terms on patent license arrangements are not considered to be fixed or determinable if payments are due beyond the Company’s standard payment terms, primarily because of the risk of substantial modification present in the Company’s patent licensing business. As such, revenue on license arrangements with extended payment terms are recognized as fees become fixed or determinable.

• Subscription revenue, which includes subscriptions for products and services, is generally paid in advance and s recognized over the term of the license or service period, which is generally one month to twenty-four months.

Deferred revenue consists of billings in advance for professional services, licenses and subscriptions for which revenue has not been earned.

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Net Income Per Common Share (Details Textual)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Net Income Per Common Share (Textual) [Abstract]
Common stock equivalents related to stock options that were anti-dilutive and excluded from diluted net income per share	215,000	136,957	0

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Description of Business and Summary of Significant Accounting Policies (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Description of Business and Summary of Significant Accounting Policies (Textual) [Abstract]
Highly liquid marketable securities with original maturities	90 days
Cash equivalents include money market funds, certificates of deposit, commercial paper, and investments in pre-refunded municipal bonds	$ 5,878	$ 2,992
Short term marketable securities maturity description	Over 90 days that mature in less than one year
Credit exposure to any one financial institution or type of financial instrument	5% of its cash equivalents and marketable securities or $1,000, whichever is greater
Percentage of credit exposure to any one financial institution or type of financial instrument	5.00%
Maximum amount of Credit exposure to any one financial institution or type of financial instrument	1,000
Credit exposure limits of cash and cash equivalents and marketable securities	40% of its cash and cash equivalents and marketable securities, or $15,000, whichever is greater
Percentage of credit exposure limits based on cash and cash equivalents and marketable securities	40.00%
Credit exposure limits of cash and cash equivalents and marketable securities under option two	$ 15,000
Term of patent	17 years
Purchase price adjustment date	1 year

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Segment Information (Tables)

12 Months Ended

Dec. 31, 2012

Segment Information [Abstract]

Geographical segment revenue

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Domestic	$	30,736	$	22,660	$	19,034
International		13,639		13,379		12,116
Total	$	44,375	$	36,039	$	31,150

Customers who accounted for more than 10% of the Company's revenues

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
IV		30	%		33	%		18	%
Verance Corporation (“Verance”)		27	%		*			*
Central Banks		23	%		27	%		30	%
The Nielsen Company (“Nielsen”)		*			11	%		12	%
Arbitron		—			—			14	%

* Less than 10%

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Acquisition of Attributor Corporation (Tables)

12 Months Ended

Dec. 31, 2012

Acquisition of Attributor Corporation [Abstract]

Total preliminary acquisition consideration

Closing merger consideration	$	5,442
Fair value of contingent consideration		190
Total purchase price	$	5,632

Preliminary allocation of total purchase price

Total purchase price				$	5,632
Less: Estimated fair value of net tangible assets acquired and (liabilities assumed):
Cash and cash equivalents	$	350
Trade accounts receivable, net		527
Other current assets		18
Property and equipment, net		102
Deferred tax assets		1,225
Accounts payable and other accrued liabilities		(499	)
Deferred revenue		(225	)
Less: Estimated fair value of identifiable intangible assets acquired:
Existing technology		1,560
Customer relationships		290
Backlog		760
Tradenames		290
Non-solicitation agreements		120
Preliminary goodwill				$	1,114

Summary of intangible assets acquired in connection with the acquisition

	Fair Value		Estimated Life (years)		Amortization Expense
Amortization expense:
Cost of revenue:
Existing technology	$	1,560		5	$	26
Sales and marketing:
Customer relationships		290		7		3
Backlog		760		2		32
Tradenames		290		3		8
General and administrative:
Non-solicitation agreements		120		1		10
Total	$	3,020				79

Pro-forma financial information presented for informational purposes

	Pro-Forma		Pro-Forma
	Year Ended December 31, 2012		Year Ended December 31, 2011
	(unaudited)		(unaudited)
Revenue	$	49,273	$	39,445
Net income	$	6,807	$	2,265
Net income per common share—basic	$	0.95	$	0.33
Net income per common share—diluted	$	0.92	$	0.30

Pro forma adjustments that effected net income

	Year Ended December 31, 2012			Year Ended December 31, 2011
	(unaudited)			(unaudited)
Revenue adjustment	$	145		$	(233	)
Amortization expense		(830	)		(950	)
Stock-based compensation expense		(505	)		(505	)
Direct transaction costs		190			(190	)
Income tax benefit		834			1,747
Total impact to net income of pro forma adjustments	$	(166	)	$	(131	)

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Stock-Based Compensation (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Allocation of stock-based compensation
Stock-based compensation expense	$ 5,256	$ 4,216	$ 3,068
Capitalized to patent costs	108	65	37
Total stock-based compensation	5,364	4,281	3,105
Cost of revenue [Member]
Allocation of stock-based compensation
Stock-based compensation expense	603	593	373
Sales and marketing [Member]
Allocation of stock-based compensation
Stock-based compensation expense	409	302	192
Research, development and engineering [Member]
Allocation of stock-based compensation
Stock-based compensation expense	840	560	314
General and administrative [Member]
Allocation of stock-based compensation
Stock-based compensation expense	3,148	2,568	2,083
Intellectual property [Member]
Allocation of stock-based compensation
Stock-based compensation expense	$ 256	$ 193	$ 106

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Revenue Recognition (Details)	12 Months Ended
	Dec. 31, 2012
Revenue Recognition (Textual) [Abstract]
License revenue recognized payment terms, maximum	60 days
License revenue recognized payment terms, minimum	30 days
Licenses revenue term minimum	1 month
Licenses revenue term maximum	24 months

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Stock-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2012

Stock-Based Compensation [Abstract]

Weighted average assumptions and results for options granted

	Year Ended December 31, 2012	Year Ended December 31, 2011	Year Ended December 31, 2010
Expected life (in years)	N/A	5.28 – 5.75	5.2 – 6.0
Expected volatility	N/A	42% – 44%	52% – 55%
Risk-free interest rate	N/A	1.0% – 2%	2.5% – 3.0%
Expected dividend yield	N/A	0%	0%

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December  31, 2010
Fair value of stock options granted	$	—	$	2,464	$	1,159

Allocation of stock-based compensation

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Stock-based compensation:
Cost of revenue	$	603	$	593	$	373
Sales and marketing		409		302		192
Research, development and engineering		840		560		314
General and administrative		3,148		2,568		2,083
Intellectual property		256		193		106
Stock compensation expense		5,256		4,216		3,068
Capitalized to patent costs		108		65		37
Total stock-based compensation	$	5,364	$	4,281	$	3,105

Unrecognized compensation cost related to non-vested stock-based awards granted

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Unrecognized compensation costs	$	8,333	$	9,463	$	6,212

Expects to recognize the unrecognized compensation cost for stock options and restricted stock over weighted average period

	Stock Options		Restricted Stock
Weighted average period		1.13 years		1.46 years

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Net Income Per Common Share (Tables)

12 Months Ended

Dec. 31, 2012

Net Income Per Common Share [Abstract]

Summary of reconciliation of earnings per common share

	Year Ended December 31, 2012
Basic EPS:
Net income	$	8,272
Less: Net income allocable to participating securities		(426	)
Net income allocable to common shares	$	7,846
Weighted average common shares outstanding – basic (in thousands)		6,757
Basic earnings per common share	$	1.16
	Year Ended December 31, 2012
Diluted EPS:
Net income	$	8,272
Less: Net income allocable to participating securities		(426	)
Net income allocable to common shares	$	7,846
Weighted average common shares outstanding – basic (in thousands)		6,757
Dilutive effect of non-participating securities (in thousands)		232
Weighted average common shares outstanding – dilutive (in thousands)		6,989
Diluted earnings per common share	$	1.12

Reconciliation of Basic and Diluted Earnings Per Share

	Year Ended December 31, 2011						Year Ended December 31, 2010
	Income (Numerator)		Shares (in thousands) (Denominator)		Per Share Amount		Income (Numerator)		Shares (in thousands) (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	5,656		6,741	$	0.84	$	4,174		7,120	$	0.59
Effect of Dilutive Securities
Options				393						440
Restricted stock				296						63
Diluted EPS
Income available to common shareholders	$	5,656		7,430	$	0.76	$	4,174		7,623	$	0.55

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Recent Accounting Pronouncements

12 Months Ended

Dec. 31, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

(2) Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment,” to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. ASU No. 2012-2 is effective for impairment tests for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company has adopted the provisions of this standard and noted no material impact on the financial condition or results of operations of the Company.

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Trade Accounts Receivable and Allowance for Doubtful Accounts (Tables)

12 Months Ended

Dec. 31, 2012

Trade Accounts Receivable and Allowance for Doubtful Accounts [Abstract]

Trade accounts receivable are recorded at the invoiced amount

	December 31, 2012		December 31, 2011
Trade accounts receivable	$	4,216	$	3,502
Allowance for doubtful accounts		—		—
Trade accounts receivable, net	$	4,216	$	3,502
Unpaid deferred revenue included in accounts receivable	$	1,589	$	2,084

Customers who accounted for more than 10% of accounts receivable

	December 31, 2012			December 31, 2011
Central Banks		30	%		45	%
Nielsen		24	%		29	%
Civolution		14	%		14	%

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Income Taxes (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets:
Stock based compensation	$ 2,636	$ 1,976
Federal and state net operating losses	1,900
Goodwill	1,146	1,254
Accrued compensation	50
Deferred rent	170	190
Federal and state research and experimentation credits		458
Other		21
Total gross deferred tax assets	5,902	3,899
Less valuation allowance	(184)	0
Net deferred tax assets	5,718	3,899
Deferred tax liabilities:
Patent expenditures	(1,385)	(1,051)
Fixed asset differences	(167)	(13)
Intangible asset differences	(506)	(13)
Other	(18)	(13)
Total deferred tax liabilities	(2,076)	(1,064)
Net deferred tax asset	$ 3,642	$ 2,835

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Quarterly Financial Information-Unaudited (Tables)

12 Months Ended

Dec. 31, 2012

Quarterly Financial Information-Unaudited [Abstract]

Quarterly Financial Information (Unaudited)

Quarter ended:	March 31			June 30			September 30			December 31
2012
Service revenue	$	3,048		$	2,609		$	2,616		$	2,519
License and subscription revenue		13,998			6,503			6,287			6,795
Total revenue		17,046			9,112			8,903			9,314
Total cost of revenue		1,810			1,583			1,467			1,648
Gross profit		15,236			7,529			7,436			7,666
Gross profit percent, service revenue		44	%		44	%		48	%		45	%
Gross profit percent, license and subscription revenue		99	%		98	%		98	%		96	%
Gross profit percent, total		89	%		83	%		84	%		82	%
Sales and marketing	$	1,007		$	970		$	937		$	913
Research, development and engineering		1,998			2,146			2,320			2,277
General and administrative		2,758			2,191			2,282			2,226
Intellectual property		319			291			309			329
Operating income		9,154			1,931			1,588			1,921
Net income		4,999			1,216			1,003			1,054
Earnings per common share:
Net income per common share—basic	$	0.74		$	0.17		$	0.14		$	0.15
Net income per common share—diluted	$	0.70		$	0.17		$	0.14		$	0.14
Weighted average common shares outstanding—basic		6,738			6,737			6,761			6,791
Weighted average common shares outstanding—diluted		7,140			6,993			6,984			6,966

Quarter ended:	March 31			June 30			September 30			December 31
2011
Service revenue	$	3,069		$	3,165		$	3,108		$	3,053
License and subscription revenue		6,022			6,308			5,442			5,872
Total revenue		9,091			9,473			8,550			8,925
Total cost of revenue		1,649			1,690			1,742			1,856
Gross profit		7,442			7,783			6,808			7,069
Gross profit percent, service revenue		48	%		49	%		46	%		42	%
Gross profit percent, license and subscription revenue		99	%		99	%		99	%		99	%
Gross profit percent, total		82	%		82	%		80	%		79	%
Sales and marketing	$	1,102		$	1,017		$	1,166		$	1,051
Research, development and engineering		1,775			1,884			1,958			1,710
General and administrative		2,847			2,270			2,000			2,839
Intellectual property		301			266			259			268
Operating income		1,417			2,346			1,425			1,201
Net income		938			3,626			639			453
Earnings per common share:
Net income per common share—basic	$	0.14		$	0.54		$	0.10		$	0.07
Net income per common share—diluted	$	0.12		$	0.50		$	0.09		$	0.06
Weighted average common shares outstanding—basic		6,864			6,696			6,706			6,699
Weighted average common shares outstanding—diluted		7,505			7,245			7,344			7,279

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Segment Information (Details 1)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
IV [Member]
Customers who accounted for more than 10% of the Company's revenues
Entity wide revenue major customer percentage	30.00%	33.00%	18.00%
Verance Corporation ("Verance") [Member]
Customers who accounted for more than 10% of the Company's revenues
Entity wide revenue major customer percentage	27.00%
Central Banks [Member]
Customers who accounted for more than 10% of the Company's revenues
Entity wide revenue major customer percentage	23.00%	27.00%	30.00%
The Nielsen Company (Nielsen) [Member]
Customers who accounted for more than 10% of the Company's revenues
Entity wide revenue major customer percentage		11.00%	12.00%
Arbitron [Member]
Customers who accounted for more than 10% of the Company's revenues
Entity wide revenue major customer percentage			14.00%

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Shareholders' Equity (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of options granted, exercised, canceled and expired
Outstanding at beginning	1,028,238	993,491	1,167,323
Options, granted		215,000	140,000
Options, exercised	(172,250)	(169,420)	(313,832)
Options canceled	0	(10,833)
Outstanding at ending	855,988	1,028,238	993,491
Exercisable at ending	693,248
Unvested at ending	162,740
Weighted Average Exercise Price at beginning	$ 14.23	$ 10.47	$ 9.65
Weighted Average Exercise Price Options, granted		$ 27.84	$ 15.64
Weighted Average Exercise Price Options, exercised	$ 9.64	$ 9.75	$ 9.70
Weighted Average Exercise Price Options canceled	$ 0.00	$ 9.64
Weighted Average Exercise Price at ending	$ 15.16	$ 14.23	$ 10.47
Weighted Average Exercise Exercisable at ending	$ 12.78
Weighted Average Exercise Unvested at ending	$ 25.28
Weighted Average Grant Date Fair Value at beginning	$ 7.61	$ 6.55	$ 6.28
Weighted Average Grant Date Fair Value Options, granted		$ 11.46	$ 8.28
Weighted Average Grant Date Fair Value Options, exercised	$ 6.29	$ 6.33	$ 6.32
Weighted Average Grant Date Fair Value Options canceled	$ 0.00	$ 6.28
Weighted Average Grant Date Fair Value at ending	$ 7.88	$ 7.61	$ 6.55
Aggregate Intrinsic Value Outstanding at ending	$ 6,280
Aggregate Intrinsic Value Exercisable at ending	6,110
Aggregate Intrinsic Value Unvested at ending	$ 170

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 6,866	$ 3,419
Marketable securities	25,403	22,244
Trade accounts receivable, net	4,216	3,502
Other current assets	1,016	1,306
Total current assets	37,501	30,471
Marketable securities	6,787	7,715
Property and equipment, net	1,453	1,395
Intangibles, net	6,721	2,808
Goodwill	1,114
Investments in joint ventures	0	415
Deferred tax assets, net	3,589	2,634
Other assets	166	355
Total assets	57,331	45,793
Current liabilities:
Accounts payable and other accrued liabilities	1,143	952
Deferred revenue	2,512	2,660
Total current liabilities	3,655	3,612
Deferred rent and other long-term liabilities	673	464
Total liabilities	4,328	4,076
Commitments and contingencies (Note 16)
Shareholders' equity:
Preferred stock (par value $0.001 per share, 2,500,000 authorized, 10,000 shares issued and outstanding at December 31, 2012 and 2011)	50	50
Common stock (par value $0.001 per share, 50,000,000 authorized, 7,168,359 and 7,008,031 shares issued and outstanding at December 31, 2012 and 2011, respectively)	7	7
Additional paid-in capital	39,869	34,511
Retained earnings	13,077	7,149
Total shareholders' equity	53,003	41,717
Total liabilities and shareholders' equity	$ 57,331	$ 45,793

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Acquisition of Attributor Corporation (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Total preliminary acquisition consideration
Closing merger consideration	$ 5,442
Fair value of contingent consideration	190
Total preliminary purchase price	$ 5,632

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities:
Net income/loss	$ 8,272	$ 5,656	$ 4,174
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	600	613	565
Amortization and write-off of intangibles	385	143	79
Stock-based compensation	5,256	4,216	3,068
Net loss from joint ventures	1,107	2,714	2,180
Deferred income taxes	(284)	(3,640)
Tax benefit from stock-based awards	3,688	1,873
Excess tax benefit from stock-based awards	(3,044)	(1,068)
Changes in operating assets and liabilities:
Trade accounts receivable, net	(187)	(21)	89
Other current assets	219	240	(473)
Other assets	201	107	(32)
Accounts payable and other liabilities	(228)	(668)	507
Deferred revenue	(384)	88	275
Net cash provided by operating activities	15,601	10,253	10,432
Cash flows from investing activities:
Purchase of property and equipment	(570)	(678)	(781)
Capitalized patent costs and purchased intellectual property	(1,170)	(712)	(914)
Investments in joint ventures, net	(692)	(2,100)	(2,800)
Business acquisitions, net of cash acquired	(5,092)
Sale or maturity of marketable securities	144,214	74,689	122,176
Purchase of marketable securities	(146,444)	(65,044)	(127,878)
Net cash provided by (used in) investing activities	(9,754)	6,155	(10,197)
Cash flows from financing activities:
Issuance of common stock	1,660	1,651	3,045
Purchase of common stock	(4,760)	(22,048)	(5,824)
Cash dividends paid	(2,344)
Excess tax benefit from stock-based awards	3,044	1,068
Net cash used in financing activities	(2,400)	(19,329)	(2,779)
Net increase (decrease) in cash and cash equivalents	3,447	(2,921)	(2,544)
Cash and cash equivalents at beginning of period	3,419	6,340	8,884
Cash and cash equivalents at end of period	6,866	3,419	6,340
Supplemental disclosure of cash flow information:
Cash paid for income taxes	1,819	13	42
Supplemental disclosure of non-cash investing activities:
Stock-based compensation capitalized to patent costs	108	65	37
Supplemental schedule of non-cash financing activities:
Exercise of stock options	$ 1,660	$ 1,651	$ 3,045

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Stock-Based Compensation (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	2 years
Contractual terms	10 years
Percentage of initial option grants vested	50.00%
Series A Preferred Stock [Member]
Stock-Based Compensation (Textual) [Abstract]
Authorized shares of series A Redeemable Nonvoting Preferred stock	10,000
Series A Preferred redeemable stated fair value	5.00
Restricted Stock [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	4 years
Director [Member]
Stock-Based Compensation (Textual) [Abstract]
Forfeiture Stock options granted to employee and directors	0
Employee [Member]
Stock-Based Compensation (Textual) [Abstract]
Forfeiture Stock options granted to employee and directors	0
Maximum [Member] | Director [Member] | Stock Options [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	2 years
Maximum [Member] | Employee [Member] | Restricted Stock [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	4 years
Maximum [Member] | Employee [Member] | Stock Options [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	4 years
Minimum [Member] | Director [Member] | Restricted Stock [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	1 year
Minimum [Member] | Director [Member] | Stock Options [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	1 year
Minimum [Member] | Employee [Member] | Restricted Stock [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	3 years
Minimum [Member] | Employee [Member] | Stock Options [Member]
Stock-Based Compensation (Textual) [Abstract]
Stock options granted for employee and director vesting period	3 years

XML

Shareholders' Equity (Tables)

12 Months Ended

Dec. 31, 2012

Shareholders' Equity/Stock Repurchases [Abstract]

Summary of options granted, exercised, canceled and expired

	Number of Shares			Weighted Average Exercise Price		Weighted Average Grant  Date Fair Value		Aggregate Intrinsic Value
Options outstanding, December 31, 2009		1,167,323		$	9.65	$	6.28
Granted		140,000		$	15.64	$	8.28
Exercised		(313,832	)	$	9.70	$	6.32
Canceled		—			—		—
Options outstanding, December 31, 2010		993,491		$	10.47	$	6.55
Granted		215,000		$	27.84	$	11.46
Exercised		(169,420	)	$	9.75	$	6.33
Canceled		(10,833	)	$	9.64	$	6.28
Options outstanding, December 31, 2011		1,028,238		$	14.23	$	7.61
Granted		—			—		—
Exercised		(172,250	)	$	9.64	$	6.29
Canceled		—			—		—
Options outstanding, December 31, 2012		855,988		$	15.16	$	7.88	$	6,280
Options exercisable, December 31, 2012		693,248		$	12.78			$	6,110
Options unvested, December 31, 2012		162,740		$	25.28			$	170

Summarizes information about stock options outstanding

	Options Outstanding						Options Exercisable
Exercise Price	Number Outstanding		Remaining Contractual Life (Years)		Weighted Average Price		Number Exercisable		Remaining Contractual Life (Years)		Weighted Average Price
$9.64 – $9.91		508,072		5.86	$	9.66		508,072		5.86	$	9.66
$14.99 – $18.01		132,916		7.08	$	15.67		103,126		7.10	$	15.87
$24.35 – $30.01		215,000		8.57	$	27.84		82,050		8.49	$	28.26
$9.64 – $30.01		855,988		6.73	$	15.16		693,248		6.36	$	12.78

Reconciliation of unvested balance of restricted stock

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2009		111,000		$	10.02
Granted		124,560		$	16.77
Vested		(34,350	)	$	9.89
Canceled		(3,450	)	$	13.05
Unvested balance, December 31, 2010		197,760		$	14.25
Granted		190,180		$	29.12
Vested		(73,110	)	$	20.82
Canceled		(18,120	)	$	19.24
Unvested balance, December 31, 2011		296,710		$	21.51
Granted		202,340		$	22.51
Vested		(117,667	)	$	22.52
Canceled		(12,300	)	$	22.05
Unvested balance, December 31, 2012		369,083		$	21.72

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Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Depreciation and amortization on property and equipment using the straight-line method
Office furniture and fixtures	$ 420	$ 410
Equipment	1,886	1,872
Leasehold improvements	1,083	1,041
Gross property and equipment	3,389	3,323
Less accumulated depreciation and amortization	(1,936)	(1,928)
Property and equipment, net	$ 1,453	$ 1,395

XML

Commitments and Contingencies

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

(16) Commitments and Contingencies

Certain of the Company’s product license and services agreements include an indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.

Our newly acquired subsidiary, Attributor, is a defendant in a patent infringement lawsuit brought by Blue Spike, LLC (E.D. Texas, Civil Action No: 6:12-cv-540). The case was brought against Attributor in August 2012, and was consolidated with other lawsuits brought by Blue Spike into Civil Action No. 6:12-cv-00499.

Blue Spike asserted infringement by Attributor of four patents. Attributor filed an answer denying that it has infringed any valid claim of the patents in suit, and asserting specified defenses, including non-infringement and invalidity.

The court is consolidating cases that Blue Spike brought against over sixty defendants into one case. After that process is complete, a schedule should be set.

Blue Spike has not alleged a specific amount of monetary damages in its Complaint.

The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business.

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Defined Contribution Pension Plan (Tables)

12 Months Ended

Dec. 31, 2012

Defined Benefit Plan, Assets for Plan Benefits [Abstract]

Statement of company made matching contributions

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Matching contributions	$	366	$	349	$	323

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Subsequent Events

12 Months Ended

Dec. 31, 2012

Subsequent Events [Abstract]

Subsequent Events

(18) Subsequent Events

On February 20, 2013, the Board of Directors declared a quarterly dividend of $0.11 per share, payable on March 11, 2013 to shareholders of record on March 4, 2013.

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Property and Equipment (Details Textual)	12 Months Ended
	Dec. 31, 2012
Maximum [Member]
Property Equipment (Textual) [Abstract]
Estimated useful lives of the assets	7 years
Minimum [Member]
Property Equipment (Textual) [Abstract]
Estimated useful lives of the assets	2 years

XML

Description of Business and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Description of Business and Summary of Significant Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

(1) Description of Business and Summary of Significant Accounting Policies

Description of Business

Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. The Company’s inventions provide the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. The Company’s technology permits computers and digital devices to quickly and reliably identify relevant data from vast amounts of media content.

Principles of Consolidation

The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires Digimarc to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term license and service contracts, goodwill, impairments and estimation of useful lives of long-lived assets, contingencies and litigation, patent costs, stock-based compensation and income taxes. Digimarc bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Reclassifications

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

Cash Equivalents

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds, certificates of deposit, commercial paper, and pre-refunded municipal bonds totaling $5,878 and $2,992 at December 31, 2012 and 2011, respectively. Cash equivalents are carried at cost or amortized cost, which approximates market.

Marketable Securities

The Company considers all investments with original maturities over 90 days that mature in less than one year from the balance sheet date to be short-term marketable securities. Both short- and long-term marketable securities primarily include U.S. federal agency notes, U.S. treasuries, corporate notes, pre-refunded municipal bonds, and commercial paper. The Company’s marketable securities are classified as held-to-maturity and are reported at amortized cost, which approximates market.

A decline in the market value of any security below amortized cost that is deemed to be other-than-temporary results in a reduction in the carrying amount. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by the Company.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using a method that approximates the effective interest method. Under this method, dividend and interest income are recognized when earned.

Fair Value of Financial Instruments

Accounting Standards Certification (“ASC”) 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S., and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

• Level 1—Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date.

• Level 2—Pricing inputs are quoted for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

• Level 3—Pricing inputs are unobservable for the investment; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

The estimated fair values of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying values due to the short-term nature of these instruments. The Company records marketable securities at amortized cost, which approximates fair value.

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of December 31, 2012 and 2011, respectively, was as follows:

December 31, 2012	Level 1		Level 2		Level 3		Total
Money market securities	$	901	$	—	$	—	$	901
Certificates of deposits		—		491		—		491
U.S. treasuries		—		289		—		289
U.S. federal agency notes		—		1,637		—		1,637
Pre-refunded and other municipals		—		22,036		—		22,036
Corporate notes		—		10,100		—		10,100
Commercial paper		—		2,614		—		2,614
Total	$	901	$	37,167	$	—	$	38,068

December 31, 2011	Level 1		Level 2		Level 3		Total
Money market securities	$	896	$	—	$	—	$	896
Certificates of deposits		—		736		—		736
U.S. treasuries		—		718		—		718
U.S. federal agency notes		—		7,942		—		7,942
Pre-refunded and other municipals		—		2,800		—		2,800
Corporate notes		—		16,459		—		16,459
Commercial paper		—		3,400		—		3,400
Total	$	896	$	32,055	$	—	$	32,951

The fair value maturities of the Company’s cash equivalents and marketable securities as of December 31, 2012 are as follows:

	Maturities by Period
	Total		Less than 1 year		1-5 years		5-10 years		More than 10 years
Maturities	$	38,068	$	31,200	$	6,868	$	—	$	—

Concentrations of Business and Credit Risk

A significant portion of the Company’s business depends on a limited number of large contracts. The loss of any large contract may result in loss of revenue and margin on a prospective basis. Financial instruments that potentially subject Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. Digimarc places its cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs, which may include short-term marketable securities with the Company’s principal banks, Digimarc’s investment policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of its cash equivalents and marketable securities or $1,000, whichever is greater, to be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. The Company’s investment policy also limits its credit exposure by limiting the maximum of 40% of its cash and cash equivalents and marketable securities, or $15,000, whichever is greater, to be invested in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result, Digimarc’s credit risk associated with cash and cash equivalents and marketable securities is believed to be minimal.

Equity Method Investments

The Company accounts for its joint ventures under the equity method of accounting pursuant to ASC 323 “Investments – Equity Method and Joint Ventures.” Under the equity method, investments are carried at cost, plus or minus the Company’s proportionate share, based on present ownership interests, of: (a) the investee’s profit or loss after the date of acquisition; (b) changes in the Company’s equity that have not been recognized in the investee’s profit or loss; and (c) certain other adjustments. Distributions received from the investee (such as dividends) reduce the carrying amount of the investment.

Goodwill

The Company accounts for business combinations under the acquisition method of account in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates.

Contingent consideration is recorded at the acquisition date based upon the estimated fair value of the contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any adjustments in fair value being recognized in earnings from operations.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

The Company reviews goodwill in June of each year, or on an interim basis if required, for impairment to determine if events or changes in business conditions indicate that the carrying value of the goodwill may not be recoverable. Such reviews assess the fair value of the assets compared to the carrying values.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC 360 “Property, Plant and Equipment.” This statement requires that long-lived assets, including definite-lived intangible assets, 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 undiscounted cash flows expected to be generated by the asset over its remaining useful life. 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. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Through December 31, 2012, there have been no such impairment losses.

Research and Development

Research and development costs are expensed as incurred in accordance with ASC 730 “Research and Development.”

Software Development Costs

Under ASC 985 “Software,” 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.

Patent Costs

Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs, also referred to as patent prosecution costs, include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company’s patent portfolio.

Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the shorter of the maintenance period or remaining life of the related patent.

Revenue Recognition

See Note 3 for detail disclosures of the Company’s revenue recognition policy.

Stock-Based Compensation

ASC 718 “Compensation – Stock Compensation” requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock based on estimated fair values.

For stock option awards the Company uses the Black-Scholes option pricing model as its method of valuation. The Company’s determination of the fair value on the date of grant is affected by its stock price as well as assumptions regarding a number of highly subjective variables. These variables include, but are not limited to, the expected life of the award, the Company’s expected stock price volatility over the term of the award, the risk-free interest rate and the expected dividend yield. Although the fair value of stock-based awards is determined in accordance with ASC 718 and SAB No. 107 “Shared-Based Payment,” the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

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 basis of assets and liabilities and their financial reporting amounts. 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 deferred tax assets to the amount that is more likely than not expected to be realized.

The Company is subject to federal and state income taxes within the U.S. and in the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. The Company is also subject to withholding taxes in various foreign jurisdictions. The withholding taxes are computed by the customers and paid to foreign jurisdictions on our behalf. The Company reports a liability (or contra asset) for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.

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Consolidated Balance Sheets (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	2,500,000	2,500,000
Preferred stock, shares issued	10,000	10,000
Preferred stock, shares outstanding	10,000	10,000
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	7,168,359	7,008,031
Common stock, shares outstanding	7,168,359	7,008,031

XML

Intangibles

12 Months Ended

Dec. 31, 2012

Intangibles [Abstract]

Intangibles

(11) Intangibles

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Amortization of capitalized patent costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years.

Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.

	Estimated  Life (years)		December 31, 2012			December 31, 2011
Capitalized patent costs		17-20	$	3,973		$	3,035
Intangible assets acquired:							—
Purchased patents and intellectual property		3-10		250			13
Existing technology		5		1,560			—
Customer relationships		7		290			—
Backlog		2		760			—
Tradenames		3		290			—
Non-solicitation agreements		1		120			—
Gross intangible assets				7,243			3,048
Accumulated amortization				(522	)		(240	)
Intangible assets, net			$	6,721		$	2,808

The aggregate amortization expense recorded in 2012, 2011 and 2010 was $315, $124 and $79, respectively. For intangible assets recorded at December 31, 2012, the estimated future aggregate amortization expense for the years ending December 31, 2012 through 2017 is approximately:

Year ending December 31:	Amortization Expense
2013	$	1,061
2014		975
2015		572
2016		477
2017		441

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Quarterly Financial Information-Unaudited (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Quarterly Financial Information-Unaudited
Service revenue	$ 2,519	$ 2,616	$ 2,609	$ 3,048	$ 3,053	$ 3,108	$ 3,165	$ 3,069	$ 10,792	$ 12,395	$ 12,324
License and subscription revenue	6,795	6,287	6,503	13,998	5,872	5,442	6,308	6,022	33,583	23,644	18,826
Total revenue	9,314	8,903	9,112	17,046	8,925	8,550	9,473	9,091	44,375	36,039	31,150
Total cost of revenue	1,648	1,467	1,583	1,810	1,856	1,742	1,690	1,649	6,508	6,937	6,700
Gross profit	7,666	7,436	7,529	15,236	7,069	6,808	7,783	7,442	37,867	29,102	24,450
Gross profit percent, service revenue	46.00%	48.00%	44.00%	44.00%	42.00%	46.00%	49.00%	48.00%
Gross profit percent, license and subscription revenue	96.00%	98.00%	98.00%	99.00%	99.00%	99.00%	99.00%	99.00%
Gross profit percent, total	82.00%	84.00%	83.00%	89.00%	79.00%	80.00%	82.00%	82.00%
Sales and marketing	913	937	970	1,007	1,051	1,166	1,017	1,102	3,827	4,336	3,545
Research, development and engineering	2,277	2,320	2,146	1,998	1,710	1,958	1,884	1,775	8,741	7,327	5,687
General and administrative	2,226	2,282	2,191	2,758	2,839	2,000	2,270	2,847	9,457	9,956	7,864
Intellectual property	329	309	291	319	268	259	266	301	1,248	1,094	1,203
Operating income	1,921	1,588	1,931	9,154	1,201	1,425	2,346	1,417	14,594	6,389	6,151
Net income/loss	$ 1,054	$ 1,003	$ 1,216	$ 4,999	$ 453	$ 639	$ 3,626	$ 938	$ 8,272	$ 5,656	$ 4,174
Earnings per common share:
Net income per common share-basic	$ 0.15	$ 0.14	$ 0.17	$ 0.74	$ 0.07	$ 0.10	$ 0.54	$ 0.14	$ 1.16	$ 0.84	$ 0.59
Net income per common share-diluted	$ 0.14	$ 0.14	$ 0.17	$ 0.70	$ 0.06	$ 0.09	$ 0.50	$ 0.12	$ 1.12	$ 0.76	$ 0.55
Weighted average common shares outstanding-basic	6,791	6,761	6,737	6,738	6,699	6,706	6,696	6,864	6,757	6,741	7,120
Weighted average common shares outstanding-diluted	6,966	6,984	6,993	7,140	7,279	7,344	7,245	7,505	6,989	7,430	7,623

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Document and Entity Information (USD $) In Millions, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Feb. 15, 2013	Jun. 29, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	Digimarc CORP
Entity Central Index Key	0001438231
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 174
Entity Common Stock, Shares Outstanding		7,281,983

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Shareholders' Equity

12 Months Ended

Dec. 31, 2012

Shareholders' Equity/Stock Repurchases [Abstract]

Shareholders' Equity

(12) Shareholders’ Equity

Preferred Stock

In June 2008, the Board of Directors authorized 2,500,000 shares of preferred stock, par value $0.001 per share. The 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 shareholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company without further action by shareholders and may adversely affect the voting and other rights of the holders of common stock.

The Board of Directors authorized 10,000 shares of Series A Redeemable Nonvoting Preferred stock (“Series A Preferred”) that were issued to certain executive officers at the time of formation. The Series A Preferred has no voting rights, except as required by law, and may be redeemed at the option of the Company’s Board of Directors at any time on or after June 18, 2013.

The Series A Preferred is redeemable based on the stated fair value of $5.00 per share. The Series A Preferred has no dividend rights and no rights to the undistributed earnings of the Company.

Common Stock

In June 2008, the Board of Directors authorized 50,000,000 shares of common stock, par value $0.001 per share. The holders of Digimarc common stock are entitled to one vote for each share held of record on all matters submitted to a vote of our shareholders, 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 Company’s shareholders. The Series A Preferred does not have any dividend preferences. In the event of the Company’s liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of the Company’s 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.

Stock Incentive Plan

On July 31, 2008 the Company’s Board of Directors initially adopted the 2008 Incentive Plan, or the 2008 Plan. The 2008 Plan provides for the grant of stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance shares, performance units, and cash-based awards, which may be granted to officers, directors, employees, consultants, agents, advisors and independent contractors who provide services to the Company and its affiliated companies.

The 2008 Plan authorizes the issuance of up to 2,500,000 shares of common stock. The shares authorized under the 2008 Plan are subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar event. Shares issued under the 2008 Plan will consist of authorized and unissued shares or shares held by the Company as treasury shares. If an award granted under the 2008 Plan lapses, expires, terminates or is forfeited or surrendered without having been fully exercised or without the issuance of all the shares subject to the award, the shares covered by that award will again be available for use under the 2008 Plan. Shares that are (i) tendered by a participant or retained by the Company as payment for the purchase price of an award or to satisfy tax withholding obligations or (ii) covered by an award that is settled in cash, or in some manner that some or all of the shares covered by the award are not issued, will be available for issuance under the 2008 Plan. In addition, awards granted as substitute awards in connection with acquisition transactions will not reduce the number of shares authorized for issuance under the 2008 Plan.

Stock Options

As of December 31, 2012, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 799,415 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.

Options granted, exercised, canceled and expired under the stock incentive plan are summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Grant  Date Fair Value		Aggregate Intrinsic Value
Options outstanding, December 31, 2009		1,167,323		$	9.65	$	6.28
Granted		140,000		$	15.64	$	8.28
Exercised		(313,832	)	$	9.70	$	6.32
Canceled		—			—		—
Options outstanding, December 31, 2010		993,491		$	10.47	$	6.55
Granted		215,000		$	27.84	$	11.46
Exercised		(169,420	)	$	9.75	$	6.33
Canceled		(10,833	)	$	9.64	$	6.28
Options outstanding, December 31, 2011		1,028,238		$	14.23	$	7.61
Granted		—			—		—
Exercised		(172,250	)	$	9.64	$	6.29
Canceled		—			—		—
Options outstanding, December 31, 2012		855,988		$	15.16	$	7.88	$	6,280
Options exercisable, December 31, 2012		693,248		$	12.78			$	6,110
Options unvested, December 31, 2012		162,740		$	25.28			$	170

The aggregate intrinsic value is based on the closing price of $20.70 per share of Digimarc common stock on December 31, 2012, which would have been received by the optionees had all of the options with exercise prices less than $20.70 per share been exercised on that date.

The following table summarizes information about stock options outstanding at December 31, 2012:

	Options Outstanding						Options Exercisable
Exercise Price	Number Outstanding		Remaining Contractual Life (Years)		Weighted Average Price		Number Exercisable		Remaining Contractual Life (Years)		Weighted Average Price
$9.64 – $9.91		508,072		5.86	$	9.66		508,072		5.86	$	9.66
$14.99 – $18.01		132,916		7.08	$	15.67		103,126		7.10	$	15.87
$24.35 – $30.01		215,000		8.57	$	27.84		82,050		8.49	$	28.26
$9.64 – $30.01		855,988		6.73	$	15.16		693,248		6.36	$	12.78

Restricted Stock

The Compensation Committee of the Board of Directors awarded restricted stock shares under the Company’s 2008 Plan to certain employees. The shares subject to the restricted stock awards will vest over a certain period, usually four years, following the date of the grant. Specific terms of the restricted stock awards are governed by Restricted Stock Agreements between the Company and the award recipients.

The following table reconciles the unvested balance of restricted stock:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2009		111,000		$	10.02
Granted		124,560		$	16.77
Vested		(34,350	)	$	9.89
Canceled		(3,450	)	$	13.05
Unvested balance, December 31, 2010		197,760		$	14.25
Granted		190,180		$	29.12
Vested		(73,110	)	$	20.82
Canceled		(18,120	)	$	19.24
Unvested balance, December 31, 2011		296,710		$	21.51
Granted		202,340		$	22.51
Vested		(117,667	)	$	22.52
Canceled		(12,300	)	$	22.05
Unvested balance, December 31, 2012		369,083		$	21.72

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Joint Ventures and Related Party Transactions (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended	48 Months Ended		1 Months Ended	36 Months Ended	1 Months Ended	36 Months Ended
	Mar. 31, 2012	Dec. 31, 2012	Dec. 31, 2011	Apr. 30, 2012 TVaura LLC [Member]	Dec. 31, 2011 TVaura LLC [Member]	Apr. 30, 2012 TVaura Mobile LLC [Member]	Dec. 31, 2011 TVaura Mobile LLC [Member]
Joint Ventures and Related Party Transactions (Textual) [Abstract]
One-time severance and suspension costs	$ 500
Net payment of operating expenses and suspension related costs						796
Operating expenses and suspension related costs returned				104
Investments in joint ventures		0	415
Nielsen agreed to License agreement pay		18,750
Technical and development services to the joint ventures		6,848
Initial cash contributions aggregating					$ 3,500		$ 2,500

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Subsequent Events (Details) (USD $)	12 Months Ended
	Dec. 31, 2012
Subsequent Events (Textual) [Abstract]
Declared quarterly dividend	$ 0.11
Dividend declared date	Feb. 20, 2013
Dividend date of record	Mar. 04, 2013
Dividend date to be paid	Mar. 11, 2013

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Revenue:
Service	$ 10,792	$ 12,395	$ 12,324
License and subscription	33,583	23,644	18,826
Total revenue	44,375	36,039	31,150
Cost of revenue:
Service	5,917	6,638	6,464
License and subscription	591	299	236
Total cost of revenue	6,508	6,937	6,700
Gross profit	37,867	29,102	24,450
Operating expenses:
Sales and marketing	3,827	4,336	3,545
Research, development and engineering	8,741	7,327	5,687
General and administrative	9,457	9,956	7,864
Intellectual property	1,248	1,094	1,203
Total operating expenses	23,273	22,713	18,299
Operating income	14,594	6,389	6,151
Net loss from joint ventures	(1,107)	(2,714)	(2,180)
Interest income, net	179	195	245
Income before income taxes	13,666	3,870	4,216
(Provision) benefit for income taxes	(5,394)	1,786	(42)
Net income	$ 8,272	$ 5,656	$ 4,174
Earnings per common share:
Net income per common share-basic	$ 1.16	$ 0.84	$ 0.59
Net income per common share-diluted	$ 1.12	$ 0.76	$ 0.55
Weighted average common shares outstanding-basic	6,757	6,741	7,120
Weighted average common shares outstanding-diluted	6,989	7,430	7,623
Cash dividends declared per common share	$ 0.33

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Segment Information

12 Months Ended

Dec. 31, 2012

Segment Information [Abstract]

Segment Information

(6) Segment Information

Geographic Information

The Company derives its revenue from a single reporting segment: media management solutions. Revenue is generated in this segment through licensing of intellectual property, subscriptions to various products and services, and the delivery of services pursuant to contracts with various customers. The Company markets its products in the U.S. and in non-U.S. countries through its sales and licensing personnel.

Revenue, based upon the “bill-to” location, by geographic area is as follows:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Domestic	$	30,736	$	22,660	$	19,034
International		13,639		13,379		12,116
Total	$	44,375	$	36,039	$	31,150

Major Customers

Customers who accounted for more than 10% of the Company’s revenues are as follows:

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
IV		30	%		33	%		18	%
Verance Corporation (“Verance”)		27	%		*			*
Central Banks		23	%		27	%		30	%
The Nielsen Company (“Nielsen”)		*			11	%		12	%
Arbitron		—			—			14	%

* Less than 10%

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Patent Licensing Arrangement with Intellectual Ventures

12 Months Ended

Dec. 31, 2012

Patent Licensing Arrangement with Intellectual Ventures [Abstract]

Patent Licensing Arrangement with Intellectual Ventures

(5) Patent Licensing Arrangement with Intellectual Ventures

On October 5, 2010, the Company entered into a patent licensing arrangement with IV Digital Multimedia Inventions, LLC, a Delaware limited liability company affiliated with Intellectual Ventures (“IV”), pursuant to which the Company granted an exclusive license to sublicense, subject to pre-existing encumbrances and a grant-back license, 597 patents and 288 patent applications held by the Company.

The Company also assigned to IV the related causes of action and other enforcement rights and IV has the sole right, but not the obligation, to prepare, file, prosecute, maintain, defend and enforce the licensed patents at its expense. IV may at any time abandon its license or other rights to all or any of the licensed patents, in which case, certain licensed patents that IV opts to release revert back to the Company.

The Company also entered into a patent rights agreement pursuant to which the Company granted IV an exclusive call option to purchase all or any number of the licensed patents and/or patent applications. The agreement further provides for the grant by IV to the Company the right to put all or any number of patents within the licensed patents to IV if IV threatens or commences an action or proceeding with respect to infringement of a licensed patent.

The financial aspects of the IV agreement for the Company include:

• a license issue fee of $36 million, paid to the Company in increasing quarterly installments over three years ($11,400 in 2011, $12,550 in 2012 and $6,775 in 2013);

• 20% of the profits generated from the IV licensing program, which profits consist of sublicensing and other monetization revenue less specified expenses, including the license issue fee;

• IV assumes responsibility for approximately $1 million per year in prosecution and maintenance costs previously borne by the Company;

• a minimum of $4 million of paid support services over five years from the Company to assist IV in maximizing the value of the licensed assets; and

• a royalty-free grant-back license to the licensed patents to continue the Company’s existing business related to those assets, including maintaining and renewing existing patent licenses, and providing software and services.

The payment terms extend beyond the Company’s normal 30 to 60 day payment terms, thus the license revenue is being recognized when the installments are due, and the support services will be recognized as the services are performed.

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Stock Repurchases

12 Months Ended

Dec. 31, 2012

Shareholders' Equity/Stock Repurchases [Abstract]

Stock Repurchases

(17) Stock Repurchases

Summary of common stock shares repurchased:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Private transaction		—		552,536		—
Repurchase program		50,900		104,577		—
Exercise of stock options		69,272		48,432		102,077
Tax withholding obligations on stock options		39,005		46,401		81,610
Tax withholding obligations on restricted shares		42,785		24,953		13,506
Total		201,962		766,899		197,193

Value of common stock shares repurchased:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Private transaction	$	—	$	14,927	$	—
Repurchase program		1,201		3,099		—
Exercise of stock options		1,660		1,651		3,037
Tax withholding obligations on stock options		949		1,658		2,435
Tax withholding obligations on restricted shares		950		713		352
Total	$	4,760	$	22,048	$	5,824

On January 26, 2011, the Company repurchased 552,536 shares of its common stock from Koninklijke Philips Electronics, N.V., in a privately negotiated transaction. The shares were purchased for an aggregate price of approximately $14,927, including transaction fees. To facilitate the repurchase, the Company sold $10,752 and $2,996 of short- and long-term marketable securities, respectively, prior to their maturity date at an immaterial gain.

In each of April 2009 and November 2011, the Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of shares of the Company’s common stock through either periodic open-market or private transactions at then-prevailing market prices. Under the April 2009 program that expired in April 2012, the Company repurchased 223,851 shares at an aggregate purchase price of $4,858. Under the November 2011 program, the Board of Directors approved an additional $5,000. In December 2012, the program was extended through December 31, 2013. As of December 31, 2012, the Company had repurchased 43,293 shares under this program at an aggregate purchase price of $1,002.

As part of the Company’s 2008 Stock Incentive Plan, stock options are granted and restricted stock shares are awarded to certain employees and directors.

Pursuant to the terms of the stock option grants, the Company purchases a number of whole shares of common stock having a fair market value (as determined as of the date of exercise) equal to the amount of the total value of the aggregate exercise price of the options exercised. In addition, the Company withholds (purchases) from shares issued upon exercise of the stock options a number of whole shares of common stock having a fair market value (as determined by the Company as of the date of vesting) equal to the amount of tax required to be withheld by law, in order to satisfy the tax withholding obligations of the Company in connection with the exercise of such options.

Pursuant to the terms of the restricted stock award agreement, the Company withholds (purchases) from fully vested shares of common stock otherwise deliverable to the employee, a number of whole shares of common stock having a fair market value (as determined as of the date of vesting) equal to the amount of tax required to be withheld by law, in order to satisfy the tax withholding obligations of the Company in connection with the vesting of such shares.

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Defined Contribution Pension Plan

12 Months Ended

Dec. 31, 2012

Defined Benefit Plan, Assets for Plan Benefits [Abstract]

Defined Contribution Pension Plan

(13) 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. The Plan combines both an employee savings plan and company matching plan into one plan under Section 401(k), including a 401(k) Roth option. Employees become eligible to participate in the Plan at the beginning of the month following the employee’s hire date. Employees may contribute up to 75% of their pay to the Plan, subject to the limitations of the Internal Revenue Code. Company matching contributions are mandatory. The previous Plan was terminated as of December 31, 2008.

The Company made matching contributions in the aggregate amount as follows:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Matching contributions	$	366	$	349	$	323

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Income Taxes (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Summary reconciliation of the Company's uncertain tax positions
Beginning balance	$ 102
Addition for current year tax positions	6	30
Addition for prior year tax positions		72
Settlements with taxing authorities
Lapsing of statutes of limitations
Ending balance	$ 108	$ 102

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Trade Accounts Receivable and Allowance for Doubtful Accounts

12 Months Ended

Dec. 31, 2012

Trade Accounts Receivable and Allowance for Doubtful Accounts [Abstract]

Trade Accounts Receivable and Allowance for Doubtful Accounts

(9) Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount.

	December 31, 2012		December 31, 2011
Trade accounts receivable	$	4,216	$	3,502
Allowance for doubtful accounts		—		—
Trade accounts receivable, net	$	4,216	$	3,502
Unpaid deferred revenue included in accounts receivable	$	1,589	$	2,084

Allowance for doubtful accounts

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Unpaid deferred revenue

The unpaid deferred revenue that are included in trade accounts receivable are billed in accordance with the provisions of the contracts with the Company’s customers. Unpaid deferred revenue from the Company’s cash-basis customers are not included in trade accounts receivable nor deferred revenue accounts.

Major customers

Customers who accounted for more than 10% of trade accounts receivable, are as follows:

	December 31, 2012			December 31, 2011
Central Banks		30	%		45	%
Nielsen		24	%		29	%
Civolution		14	%		14	%

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Net Income Per Common Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Basic EPS:
Net income/loss	$ 1,054	$ 1,003	$ 1,216	$ 4,999	$ 453	$ 639	$ 3,626	$ 938	$ 8,272	$ 5,656	$ 4,174
Less: Net income allocable to participating securities									(426)
Net income allocable to common shares									7,846
Weighted average common shares outstanding-basic	6,791	6,761	6,737	6,738	6,699	6,706	6,696	6,864	6,757	6,741	7,120
Basic earnings per common share	$ 0.15	$ 0.14	$ 0.17	$ 0.74	$ 0.07	$ 0.10	$ 0.54	$ 0.14	$ 1.16	$ 0.84	$ 0.59
Diluted EPS:
Net income/loss	1,054	1,003	1,216	4,999	453	639	3,626	938	8,272	5,656	4,174
Less: Net income allocable to participating securities									(426)
Net income allocable to common shares									$ 7,846
Weighted average common shares outstanding-basic	6,791	6,761	6,737	6,738	6,699	6,706	6,696	6,864	6,757	6,741	7,120
Dilutive effect of non-participating securities									232
Weighted average common shares outstanding - dilutive	6,966	6,984	6,993	7,140	7,279	7,344	7,245	7,505	6,989	7,430	7,623
Diluted earnings per common share	$ 0.14	$ 0.14	$ 0.17	$ 0.70	$ 0.06	$ 0.09	$ 0.50	$ 0.12	$ 1.12	$ 0.76	$ 0.55

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Stock-Based Compensation

12 Months Ended

Dec. 31, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

(7) Stock-Based Compensation

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include option grants, restricted stock awards and preferred stock.

Stock-based compensation expense related to internal legal labor is capitalized to patent costs based on direct labor hours charged to capitalized patent costs.

Determining Fair Value

Preferred Stock

The Board of Directors authorized 10,000 shares of Series A Redeemable Nonvoting Preferred stock (Series A Preferred) that were issued to certain executive officers at the time of formation. The Series A Preferred has no voting rights, except as required by law, and may be redeemed at the option of the Company’s Board of Directors at any time on or after June 18, 2013.

The Series A Preferred is redeemable based on the stated fair value of $5.00 per share. The Series A Preferred has no dividend rights and no rights to the undistributed earnings of the Company.

Stock Options

Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. Stock options granted generally vest over three to four years for employee grants and one to two years for director grants, and have contractual terms of ten years.

Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the expected life of the award.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the expected life of the award.

Expected Dividend Yield. The expected dividend yield used is derived using a formula which uses the Company’s expected annual dividend rate over the expected term divided by the fair value of the Company’s common stock at the grant date.

A summary of the weighted average assumptions and results for options granted are as follows:

	Year Ended December 31, 2012	Year Ended December 31, 2011	Year Ended December 31, 2010
Expected life (in years)	N/A	5.28 – 5.75	5.2 – 6.0
Expected volatility	N/A	42% – 44%	52% – 55%
Risk-free interest rate	N/A	1.0% – 2%	2.5% – 3.0%
Expected dividend yield	N/A	0%	0%

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December  31, 2010
Fair value of stock options granted	$	—	$	2,464	$	1,159

Expected Forfeitures. The Company uses a zero forfeiture for both the stock options granted to employees, which vest monthly, and the stock options granted to the Company’s directors. Initial option grants, for new directors, vest 50% on the first anniversary of the date of grant and then monthly thereafter, and annual option grants, for continuing directors, vest monthly. The Company records stock-based compensation expense only for those awards that are expected to vest, including awards made to directors who are expected to continue with the Company through the year following the date of grant.

Restricted Stock

The Compensation Committee of the Board of Directors has awarded restricted stock shares under the Company’s 2008 Stock Incentive Plan to certain employees and directors. The shares subject to the restricted stock awards vest over a certain period, usually three to four years for employees and one year for directors, following the date of the grant. Specific terms of the restricted stock awards are governed by Restricted Stock Agreements between the Company and the award recipients. Restricted stock awards are treated as outstanding when granted.

The fair value of restricted stock awarded is based on the fair market value of the Company’s common stock on the date of the grant (measurement date), and is recognized over the vesting period using the straight-line method.

The Company records stock-based compensation expense for restricted stock awards only for those awards that are expected to vest, including awards made to directors who are expected to continue with the Company through the year following the date of grant.

Stock-based Compensation

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Stock-based compensation:
Cost of revenue	$	603	$	593	$	373
Sales and marketing		409		302		192
Research, development and engineering		840		560		314
General and administrative		3,148		2,568		2,083
Intellectual property		256		193		106
Stock compensation expense		5,256		4,216		3,068
Capitalized to patent costs		108		65		37
Total stock-based compensation	$	5,364	$	4,281	$	3,105

The following table sets forth total unrecognized compensation cost related to non-vested stock-based awards granted under all equity compensation plans, including preferred stock, stock options and restricted stock:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Unrecognized compensation costs	$	8,333	$	9,463	$	6,212

Total unrecognized compensation costs will be adjusted for any future changes in estimated forfeitures.

The Company expects to recognize the unrecognized compensation costs as of December 31, 2012 for stock options and restricted stock over a weighted average periods through December 2016 as follows:

	Stock Options		Restricted Stock
Weighted average period		1.13 years		1.46 years

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Net Income Per Common Share

12 Months Ended

Dec. 31, 2012

Net Income Per Common Share [Abstract]

Net Income Per Common Share

(8) Net Income Per Common Share

The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method as the Company’s unvested restricted stock is a participating security given these awards contain non-forfeitable rights to receive dividends. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed.

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance sheet date, as adjusted for the potential dilutive effect of non-participating securities. The following table reconciles earnings per common share for the year ended December 31, 2012:

	Year Ended December 31, 2012
Basic EPS:
Net income	$	8,272
Less: Net income allocable to participating securities		(426	)
Net income allocable to common shares	$	7,846
Weighted average common shares outstanding – basic (in thousands)		6,757
Basic earnings per common share	$	1.16
	Year Ended December 31, 2012
Diluted EPS:
Net income	$	8,272
Less: Net income allocable to participating securities		(426	)
Net income allocable to common shares	$	7,846
Weighted average common shares outstanding – basic (in thousands)		6,757
Dilutive effect of non-participating securities (in thousands)		232
Weighted average common shares outstanding – dilutive (in thousands)		6,989
Diluted earnings per common share	$	1.12

There were 215,000 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted net income per share calculations for the year ended December 31, 2012 as their exercise prices were higher than the average market price of the underlying common stock for the period.

Net income per common share was calculated under the treasury stock method in prior periods because the impact of applying the two-class method for computing basic and diluted earnings per common share was not material. Basic and diluted net income per share were 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.

	Year Ended December 31, 2011						Year Ended December 31, 2010
	Income (Numerator)		Shares (in thousands) (Denominator)		Per Share Amount		Income (Numerator)		Shares (in thousands) (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	5,656		6,741	$	0.84	$	4,174		7,120	$	0.59
Effect of Dilutive Securities
Options				393						440
Restricted stock				296						63
Diluted EPS
Income available to common shareholders	$	5,656		7,430	$	0.76	$	4,174		7,623	$	0.55

There were 136,957 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted net income per share calculations for 2011 as their exercise prices were higher than the average market price of the underlying common stock for the period.

There were no common stock equivalents related to stock options that were anti-dilutive for 2010 because their exercise prices were lower than the average market price of the underlying common stock for the period.

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Property and Equipment

12 Months Ended

Dec. 31, 2012

Property and Equipment [Abstract]

Property and Equipment

(10) Property and Equipment

Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.

Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally two to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.

	December 31, 2012			December 31, 2011
Office furniture and fixtures	$	420		$	410
Equipment		1,886			1,872
Leasehold improvements		1,083			1,041
Gross property and equipment		3,389			3,323
Less accumulated depreciation and amortization		(1,936	)		(1,928	)
Property and equipment, net	$	1,453		$	1,395

Leases

Future minimum lease payments under non-cancelable operating leases are as follows:

Year ending December 31:	Operating Leases
2013	$	893
2014		890
2015		920
2016		628
2017		—
Thereafter		—
Total minimum lease payments	$	3,331

Rent expense on the operating leases are as follows:

	Year Ended December 31, 2012		Year Ended December 31, 2011		Year Ended December 31, 2010
Rent expense	$	776	$	866	$	832

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Trade Accounts Receivable and Allowance for Doubtful Accounts (Details 1)	Dec. 31, 2012	Dec. 31, 2011
Central Banks [Member]
Customers who accounted for more than 10% of accounts receivable
Percentage of accounts receivable of major customers	30.00%	45.00%
Nielsen [Member]
Customers who accounted for more than 10% of accounts receivable
Percentage of accounts receivable of major customers	24.00%	29.00%
Civolution [Member]
Customers who accounted for more than 10% of accounts receivable
Percentage of accounts receivable of major customers	14.00%	14.00%

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Income Taxes (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Income Taxes (Textual) [Abstract]
Effective tax rate	39.00%	(46.00%)	7.00%
State deferred tax assets, valuation allowance	$ 184	$ 0
Deferred tax benefit	27	(365)
Deferred tax benefit on release of valuation allowance		2,581
State net operating loss carry-forwards, Domestic	4,873
Deferred net operating loss carry-forwards, State and Local	4,873
Minimum maturity period for federal net operating loss carry-forwards	8 years
Maximum maturity period for federal net operating loss carry-forwards	20 years
Minimum maturity period for state net operating loss carry-forwards	8 years
Maximum maturity period for state net operating loss carry-forwards	20 years
Federal research and experimental tax credit	49
Minimum maturity period for federal research and experimental tax credit carryovers	5 years
Maximum maturity period for federal research and experimental tax credit carryovers	19 years
State research and experimental tax credit	12
Minimum maturity period for state research and experimental tax credit carryovers	5 years
Maximum maturity period for state research and experimental tax credit carryovers	19 years
Foreign tax credits	$ 56
Minimum maturity period for foreign tax credit carryovers	7 years
Maximum maturity period for foreign tax credit carryovers	9 years
Acquisition of outstanding stock of Attributor Corporation	100.00%

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Property and Equipment (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Future minimum lease payments under non-cancelable operating leases
2013	$ 893
2014	890
2015	920
2016	628
2017
Thereafter
Total minimum lease payments	$ 3,331

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Trade Accounts Receivable and Allowance for Doubtful Accounts (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Trade accounts receivable are recorded at the invoiced amount
Trade accounts receivable	$ 4,216	$ 3,502
Allowance for doubtful accounts
Trade accounts receivable, net	4,216	3,502
Unpaid deferred revenues included in accounts receivable	$ 1,589	$ 2,084

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Intangibles (Tables)

12 Months Ended

Dec. 31, 2012

Intangibles [Abstract]

Amortization of intangible assets acquired

	Estimated  Life (years)		December 31, 2012			December 31, 2011
Capitalized patent costs		17-20	$	3,973		$	3,035
Intangible assets acquired:							—
Purchased patents and intellectual property		3-10		250			13
Existing technology		5		1,560			—
Customer relationships		7		290			—
Backlog		2		760			—
Tradenames		3		290			—
Non-solicitation agreements		1		120			—
Gross intangible assets				7,243			3,048
Accumulated amortization				(522	)		(240	)
Intangible assets, net			$	6,721		$	2,808

Estimated future aggregate amortization expense

Year ending December 31:	Amortization Expense
2013	$	1,061
2014		975
2015		572
2016		477
2017		441

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Patent Licensing Arrangement with Intellectual Ventures (Details) (USD $)	12 Months Ended
	Dec. 31, 2012 PatentApplication Patent InstallmentsIncreaseFee	Dec. 31, 2013	Dec. 31, 2011
Patent Licensing Arrangement with Intellectual Ventures (Textual) [Abstract]
Number of patents held by the company	597
Number of patent applications held by the company	288
License issue fee	$ 36,000,000
Number of installments in which license fee is increasing	4
License issue fee installments period	3 years
Increase in installments	12,550	6,775	11,400
Percentage of profits including license issue fee	20.00%
Responsibility in prosecution and maintenance costs per year	1,000,000
Minimum value of paid support for maximizing the value of licensed assets	$ 4,000,000
Period for maximising value of licensed assets	5 years
Maximum [Member]
Patent Licensing Arrangement with Intellectual Ventures [Line Items]
Company's normal payment term	60 days
Minimum [Member]
Patent Licensing Arrangement with Intellectual Ventures [Line Items]
Company's normal payment term	30 days

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Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

(15) Income Taxes

For the year ended December 31, 2012, the provision for income taxes reflects current tax expense, deferred tax expense and withholding tax expense in various foreign jurisdictions. The withholding taxes are computed by the Company’s customers and paid to foreign jurisdictions on the Company’s behalf. The effective tax rate for the year ended December 31, 2012 was 39%. Excess tax benefits associated with stock compensation are being utilized in the current year to offset tax payable and credit additional paid-in capital.

For the year ended December 31, 2011, the provision for income taxes reflects current tax expense, deferred tax benefit and withholding tax expense in various foreign jurisdictions. The effective tax rate for the year ended December 31, 2011 was a tax benefit of 46%. Excess tax benefits associated with stock compensation were being utilized in 2011 to offset tax payable and credit additional paid-in capital. The Company recognized a deferred tax benefit of $2,581 during the year ended December 31, 2011 as a result of releasing the valuation allowance on deferred tax assets. The Company concluded, based on an analysis of all the facts, including projections of future income, that it was more likely than not that all of its deferred tax assets will be realized.

Components of tax expense (benefit) allocated to continuing operations include the following:

	Year Ended December 31, 2012		Year Ended December 31, 2011			Year Ended December 31, 2010
Current:
Federal	$	4,699	$	1,066		$	—
State		570		3			—
Foreign		1		(20	)		42
Sub-total		5,270		1,049			42
Deferred:
Federal		97		(2,470	)		—
State		27		(365	)		—
Foreign		—		—			—
Sub-total		124		(2,835	)		—
Total tax (benefit) expense	$	5,394	$	(1,786	)	$	42

The reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31, 2012			%			Year Ended December 31, 2011			%			Year Ended December 31, 2010			%
Income taxes computed at statutory rates	$	4,647			34	%	$	1,316			34	%	$	1,434			34	%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit		705			5	%		194			5	%		220			5	%
Federal and state research and experimentation credits		(122	)		(1	)%		(784	)		(20	)%		(353	)		—
Change in valuation allowance		12			—			(2,581	)		(67	)%		(1,275	)		(32	)%
Transaction costs		65			1	%		—			—			—			—
Impact of federal graduated rates		39			—			—			—			—			—
Other		48			—			69			2	%		16			—
Total	$	5,394			39	%	$	(1,786	)		(46	)%	$	42			7	%

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 are as follows:

	December 31, 2012			December 31, 2011
Deferred tax assets:
Stock based compensation	$	2,636		$	1,976
Federal and state net operating losses		1,900			—
Goodwill		1,146			1,254
Accrued compensation		50			—
Deferred rent		170			190
Federal and state research and experimentation credits		—			458
Other		—			21
Total gross deferred tax assets		5,902			3,899
Less valuation allowance		(184	)		—
Net deferred tax assets	$	5,718		$	3,899
Deferred tax liabilities:
Patent expenditures	$	(1,385	)	$	(1,051	)
Fixed asset differences		(167	)		(13	)
Intangible asset differences		(506	)		(13	)
Other		(18	)		(13	)
Total deferred tax liabilities	$	(2,076	)	$	(1,064	)
Net deferred tax assets	$	3,642		$	2,835

For the year ended December 31, 2012, the Company acquired 100% of the outstanding stock of Attributor Corporation in a non-taxable transaction. Due to Attributor’s history of losses and the inability to utilize Attributor losses to offset the Company’s income for state tax purposes, the Company concluded that it is not more likely than not that the Attributor state deferred tax assets will be realized and a full valuation allowance has been recorded on the state deferred tax assets of Attributor. The valuation allowance recorded as of December 31, 2012 and 2011 is $184 and $0, respectively, and relates to state deferred tax assets acquired as part of the Attributor acquisition.

For the year ended December 31, 2011, the Company determined that it was more likely than not that the net deferred tax assets would be realized and the entire valuation allowance in the amount of $2,581 was released.

As of December 31, 2012, the Company has federal and state net operating loss carry-forwards of $4,873 and $4,873, respectively, which have a carry-forward of 8 – 20 years depending on the jurisdiction. The deferred tax assets, before valuation allowance, for federal and state net operating loss carryforwards acquired in the Attributor acquisition have been reduced to the amount of losses allowed to be utilized in the post-acquisition period before expiration after considering the applicable limitations of IRC Sec. 382. As of December 31, 2012, the Company has federal and state research and experimental tax credits of $49 and $12, respectively, which have a carry-forward of 5 – 19 years depending on the jurisdiction and for which the benefits upon usage will be recorded in additional paid-in capital from the effects of stock options. As of December 31, 2012, the Company has foreign tax credits of $56 which have a carry-forward of 7 – 9 years and for which the benefits upon usage will be recorded in additional paid-in capital from the effects of stock options.

The Company records accrued interest and penalties associated with uncertain tax positions in income tax expense in the consolidated statements of operations. On initial adoption of ASC 740 and through December 31, 2010, the Company recognized no uncertain tax positions nor accrued interest and penalties associated with uncertain tax positions. For the years ended December 31, 2012 and 2011, the Company recognized uncertain tax positions and no accrued interest and penalties associated with uncertain tax positions. The Company does not anticipate any unrecognized benefits that will significantly increase or decrease within the next 12 months.

A summary reconciliation of the Company’s uncertain tax positions is as follows:

	December 31, 2012		December 31, 2011
Beginning balance	$	102	$	—
Addition for current year tax positions		6		30
Addition for prior year tax positions		—		72
Settlements with taxing authorities		—		—
Lapsing of statutes of limitations		—		—
Ending balance	$	108	$	102

The balance for uncertain tax positions is classified as a long-term liability on the consolidated balance sheet. All uncertain tax positions if reversed would affect the effective tax rate.

The Company is subject to examination in the federal jurisdiction for the tax years ending December 31, 2012, 2011 and 2010 and other state jurisdictions for the tax years ending December 31, 2012, 2011, 2010, 2009 and 2008.

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Description of Business and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Description of Business and Summary of Significant Accounting Policies [Abstract]

Description of Business

Description of Business

Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. The Company’s inventions provide the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. The Company’s technology permits computers and digital devices to quickly and reliably identify relevant data from vast amounts of media content.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated.

Use of Estimates

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires Digimarc to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term license and service contracts, goodwill, impairments and estimation of useful lives of long-lived assets, contingencies and litigation, patent costs, stock-based compensation and income taxes. Digimarc bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Reclassifications

Reclassifications

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

Cash Equivalents

Cash Equivalents

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds, certificates of deposit, commercial paper, and pre-refunded municipal bonds totaling $5,878 and $2,992 at December 31, 2012 and 2011, respectively. Cash equivalents are carried at cost or amortized cost, which approximates market.

Marketable Securities

Marketable Securities

The Company considers all investments with original maturities over 90 days that mature in less than one year from the balance sheet date to be short-term marketable securities. Both short- and long-term marketable securities primarily include U.S. federal agency notes, U.S. treasuries, corporate notes, pre-refunded municipal bonds, and commercial paper. The Company’s marketable securities are classified as held-to-maturity and are reported at amortized cost, which approximates market.

A decline in the market value of any security below amortized cost that is deemed to be other-than-temporary results in a reduction in the carrying amount. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by the Company.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using a method that approximates the effective interest method. Under this method, dividend and interest income are recognized when earned.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Accounting Standards Certification (“ASC”) 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S., and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

• Level 1—Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date.

• Level 2—Pricing inputs are quoted for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

• Level 3—Pricing inputs are unobservable for the investment; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

The estimated fair values of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying values due to the short-term nature of these instruments. The Company records marketable securities at amortized cost, which approximates fair value.

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of December 31, 2012 and 2011, respectively, was as follows:

December 31, 2012	Level 1		Level 2		Level 3		Total
Money market securities	$	901	$	—	$	—	$	901
Certificates of deposits		—		491		—		491
U.S. treasuries		—		289		—		289
U.S. federal agency notes		—		1,637		—		1,637
Pre-refunded and other municipals		—		22,036		—		22,036
Corporate notes		—		10,100		—		10,100
Commercial paper		—		2,614		—		2,614
Total	$	901	$	37,167	$	—	$	38,068

December 31, 2011	Level 1		Level 2		Level 3		Total
Money market securities	$	896	$	—	$	—	$	896
Certificates of deposits		—		736		—		736
U.S. treasuries		—		718		—		718
U.S. federal agency notes		—		7,942		—		7,942
Pre-refunded and other municipals		—		2,800		—		2,800
Corporate notes		—		16,459		—		16,459
Commercial paper		—		3,400		—		3,400
Total	$	896	$	32,055	$	—	$	32,951

The fair value maturities of the Company’s cash equivalents and marketable securities as of December 31, 2012 are as follows:

	Maturities by Period
	Total		Less than 1 year		1-5 years		5-10 years		More than 10 years
Maturities	$	38,068	$	31,200	$	6,868	$	—	$	—

Concentrations of Business and Credit Risk

Concentrations of Business and Credit Risk

A significant portion of the Company’s business depends on a limited number of large contracts. The loss of any large contract may result in loss of revenue and margin on a prospective basis. Financial instruments that potentially subject Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. Digimarc places its cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs, which may include short-term marketable securities with the Company’s principal banks, Digimarc’s investment policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of its cash equivalents and marketable securities or $1,000, whichever is greater, to be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. The Company’s investment policy also limits its credit exposure by limiting the maximum of 40% of its cash and cash equivalents and marketable securities, or $15,000, whichever is greater, to be invested in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result, Digimarc’s credit risk associated with cash and cash equivalents and marketable securities is believed to be minimal.

Equity Method Investments

Equity Method Investments

The Company accounts for its joint ventures under the equity method of accounting pursuant to ASC 323 “Investments – Equity Method and Joint Ventures.” Under the equity method, investments are carried at cost, plus or minus the Company’s proportionate share, based on present ownership interests, of: (a) the investee’s profit or loss after the date of acquisition; (b) changes in the Company’s equity that have not been recognized in the investee’s profit or loss; and (c) certain other adjustments. Distributions received from the investee (such as dividends) reduce the carrying amount of the investment.

Goodwill

Goodwill

The Company accounts for business combinations under the acquisition method of account in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates.

Contingent consideration is recorded at the acquisition date based upon the estimated fair value of the contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any adjustments in fair value being recognized in earnings from operations.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

The Company reviews goodwill in June of each year, or on an interim basis if required, for impairment to determine if events or changes in business conditions indicate that the carrying value of the goodwill may not be recoverable. Such reviews assess the fair value of the assets compared to the carrying values.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC 360 “Property, Plant and Equipment.” This statement requires that long-lived assets, including definite-lived intangible assets, 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 undiscounted cash flows expected to be generated by the asset over its remaining useful life. 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. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Through December 31, 2012, there have been no such impairment losses.

Research and Development

Research and Development

Research and development costs are expensed as incurred in accordance with ASC 730 “Research and Development.”

Software Development Costs

Software Development Costs

Under ASC 985 “Software,” 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.

Patent Costs

Patent Costs

Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs, also referred to as patent prosecution costs, include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company’s patent portfolio.

Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the shorter of the maintenance period or remaining life of the related patent.

Revenue Recognition

Revenue Recognition

See Note 3 for detail disclosures of the Company’s revenue recognition policy.

Stock-Based Compensation

Stock-Based Compensation

ASC 718 “Compensation – Stock Compensation” requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock based on estimated fair values.

For stock option awards the Company uses the Black-Scholes option pricing model as its method of valuation. The Company’s determination of the fair value on the date of grant is affected by its stock price as well as assumptions regarding a number of highly subjective variables. These variables include, but are not limited to, the expected life of the award, the Company’s expected stock price volatility over the term of the award, the risk-free interest rate and the expected dividend yield. Although the fair value of stock-based awards is determined in accordance with ASC 718 and SAB No. 107 “Shared-Based Payment,” the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

Income Taxes

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 basis of assets and liabilities and their financial reporting amounts. 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 deferred tax assets to the amount that is more likely than not expected to be realized.

The Company is subject to federal and state income taxes within the U.S. and in the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. The Company is also subject to withholding taxes in various foreign jurisdictions. The withholding taxes are computed by the customers and paid to foreign jurisdictions on our behalf. The Company reports a liability (or contra asset) for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.

Intangibles - Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment,” to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. ASU No. 2012-2 is effective for impairment tests for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company has adopted the provisions of this standard and noted no material impact on the financial condition or results of operations of the Company.

Earnings Per Share

The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method as the Company’s unvested restricted stock is a participating security given these awards contain non-forfeitable rights to receive dividends. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed.

Contingencies

Certain of the Company’s product license and services agreements include an indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.

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Acquisition of Attributor Corporation (Details 4) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Pro forma adjustments that effected net income
Revenue adjustment	$ 145	$ (233)
Amortization expense	(830)	(950)
Stock-based compensation expense	(505)	(505)
Direct transaction costs	190	(190)
Income tax benefit	834	1,747
Total impact to net income of pro forma adjustments	$ (166)	$ (131)

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Description of Business and Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of fair value hierarchy for financial assets
Total	$ 38,068
Fair Value, Measurements, Recurring [Member]
Summary of fair value hierarchy for financial assets
Total	38,068	32,951
Fair Value, Measurements, Recurring [Member] | Level 1 [Member]
Summary of fair value hierarchy for financial assets
Total	901	896
Fair Value, Measurements, Recurring [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	37,167	32,055
Fair Value, Measurements, Recurring [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | Money market securities [Member]
Summary of fair value hierarchy for financial assets
Total	901	896
Fair Value, Measurements, Recurring [Member] | Money market securities [Member] | Level 1 [Member]
Summary of fair value hierarchy for financial assets
Total	901	896
Fair Value, Measurements, Recurring [Member] | Money market securities [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | Certificates of deposits [Member]
Summary of fair value hierarchy for financial assets
Total	491	736
Fair Value, Measurements, Recurring [Member] | Certificates of deposits [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	491	736
Fair Value, Measurements, Recurring [Member] | Certificates of deposits [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | U.S. treasuries [Member]
Summary of fair value hierarchy for financial assets
Total	289	718
Fair Value, Measurements, Recurring [Member] | U.S. treasuries [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	289	718
Fair Value, Measurements, Recurring [Member] | U.S. treasuries [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | U.S. Federal agency notes [Member]
Summary of fair value hierarchy for financial assets
Total	1,637	7,942
Fair Value, Measurements, Recurring [Member] | U.S. Federal agency notes [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	1,637	7,942
Fair Value, Measurements, Recurring [Member] | U.S. Federal agency notes [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | Pre-refunded and other municipals [Member]
Summary of fair value hierarchy for financial assets
Total	22,036	2,800
Fair Value, Measurements, Recurring [Member] | Pre-refunded and other municipals [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	22,036	2,800
Fair Value, Measurements, Recurring [Member] | Pre-refunded and other municipals [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | Corporate notes [Member]
Summary of fair value hierarchy for financial assets
Total	10,100	16,459
Fair Value, Measurements, Recurring [Member] | Corporate notes [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	10,100	16,459
Fair Value, Measurements, Recurring [Member] | Corporate notes [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total
Fair Value, Measurements, Recurring [Member] | Commercial paper [Member]
Summary of fair value hierarchy for financial assets
Total	2,614	3,400
Fair Value, Measurements, Recurring [Member] | Commercial paper [Member] | Level 2 [Member]
Summary of fair value hierarchy for financial assets
Total	2,614	3,400
Fair Value, Measurements, Recurring [Member] | Commercial paper [Member] | Level 3 [Member]
Summary of fair value hierarchy for financial assets
Total

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Consolidated Statements of Shareholders' Equity (USD $) In Thousands, except Share data	Total	Preferred Stock	Common Stock	Additional Paid-in Capital	Retained Earnings (Accumulated Deficit)
BEGINNING BALANCE at Dec. 31, 2009	$ 46,659	$ 50	$ 7	$ 49,283	$ (2,681)
BEGINNING BALANCE, shares at Dec. 31, 2009		10,000	7,205,701
Exercise of stock options	3,045			3,045
Exercise of stock options, shares	313,832		313,832
Issuance of restricted common stock			124,560
Forfeiture of restricted common stock, shares			(3,450)
Purchase and retirement of common stock	(5,824)			(5,824)
Purchase and retirement of common stock, shares			(197,193)
Stock-based compensation	3,105			3,105
Net income/loss	4,174				4,174
ENDING BALANCE at Dec. 31, 2010	51,159	50	7	49,609	1,493
ENDING BALANCE, shares at Dec. 31, 2010		10,000	7,443,450
Exercise of stock options	1,651			1,651
Exercise of stock options, shares	169,420		169,420
Issuance of restricted common stock			190,180
Forfeiture of restricted common stock, shares			(18,120)
Purchase and retirement of common stock	(22,048)			(22,048)
Purchase and retirement of common stock, shares			(776,899)
Stock-based compensation	4,231			4,231
Tax benefit from stock-based awards	1,068			1,068
Net income/loss	5,656				5,656
ENDING BALANCE at Dec. 31, 2011	41,717	50	7	34,511	7,149
ENDING BALANCE, shares at Dec. 31, 2011		10,000	7,008,031
Exercise of stock options	1,660			1,660
Exercise of stock options, shares	172,250		172,250
Issuance of restricted common stock			202,340
Forfeiture of restricted common stock, shares			(12,300)
Purchase and retirement of common stock	(4,760)			(4,760)
Purchase and retirement of common stock, shares			(201,962)
Stock-based compensation	5,414			5,414
Tax benefit from stock-based awards	3,044			3,044
Net income/loss	8,272				8,272
Cash dividends declared	(2,344)				(2,344)
ENDING BALANCE at Dec. 31, 2012	$ 53,003	$ 50	$ 7	$ 39,869	$ 13,077
ENDING BALANCE, shares at Dec. 31, 2012		10,000	7,168,359

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Stock Repurchases (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Value of common stock shares repurchased
Private transaction		$ 14,927
Repurchase program	1,201	3,099
Exercise of stock options	1,660	1,651	3,037
Total	4,760	22,048	5,824
Stock Options [Member]
Value of common stock shares repurchased
Tax withholding obligations	949	1,658	2,435
Restricted Shares [Member]
Value of common stock shares repurchased
Tax withholding obligations	$ 950	$ 713	$ 352

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Acquisition of Attributor Corporation

12 Months Ended

Dec. 31, 2012

Acquisition of Attributor Corporation [Abstract]

Acquisition of Attributor Corporation

(4) Acquisition of Attributor Corporation

On December 3, 2012, Digimarc acquired Attributor pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among Digimarc, DA Sub Inc., a wholly owned subsidiary of Digimarc (“Merger Sub”), Attributor, and Fortis Advisors LLC, as the representative for Attributor’s security holders. In accordance with the terms of the Merger Agreement, Merger Sub merged with and into Attributor (the “Merger”), with Attributor surviving the Merger as a wholly owned subsidiary of Digimarc.

Under the terms of the Merger Agreement, the closing merger consideration to be paid was $5,632 in cash less certain adjustments. The amount of cash paid by Digimarc after adjustments was $5,442. Additionally, $150 of the closing merger consideration was placed into an escrow account and subject to indemnification claims for a period up to 17 months. The Attributor stockholders may also receive up to an additional $900 of cash consideration that is contingent upon meeting certain performance objectives for the fiscal years ending December 31, 2012 and 2013, as set forth in the Merger Agreement. The contingent cash payment, if earned, will be made in March 2014. In addition, certain key employees of Attributor received $1,000 of restricted shares of common stock of Digimarc, issued pursuant to Digimarc’s 2008 Incentive Plan, which vest over a two-year period and are contingent upon continued employment.

The total purchase price is as follows:

Closing merger consideration	$	5,442
Fair value of contingent consideration		190
Total purchase price	$	5,632

The estimated fair value of the contingent consideration of $190 at December 31, 2012 is included in other long-term liabilities on the Consolidated Balance Sheet.

The Company incurred $0.2 million of transaction related expenses associated with the Attributor acquisition during the year ended December 31, 2012, which are reflected in general and administrative expense in the Consolidated Statements of Operations.

Preliminary Purchase Price Allocation

The Company accounted for the transaction using the acquisition method. Under the acquisition method of accounting, total purchase price as shown in the table above is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information currently available, and Digimarc may adjust the preliminary purchase price allocation after obtaining more information. The final purchase price allocation is pending the completion of our review of the acquired tax assets and liabilities, which is expected to be completed by mid-2013.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The preliminary allocation of the purchase price estimated at the December 3, 2012 acquisition date is as follows:

Total purchase price				$	5,632
Less: Estimated fair value of net tangible assets acquired and (liabilities assumed):
Cash and cash equivalents	$	350
Trade accounts receivable, net		527
Other current assets		18
Property and equipment, net		102
Deferred tax assets		1,225
Accounts payable and other accrued liabilities		(499	)
Deferred revenue		(225	)
Less: Estimated fair value of identifiable intangible assets acquired:
Existing technology		1,560
Customer relationships		290
Backlog		760
Tradenames		290
Non-solicitation agreements		120
Preliminary goodwill				$	1,114

The goodwill is not deductible for tax purposes. Key factors that make up the goodwill created by the transaction include knowledge and experience of the acquired workforce and infrastructure and expected synergies from the combination of operations.

Fair Value of Intangible Assets Acquired

The following table summarizes the estimated fair value of intangible assets acquired, their estimated useful lives and the amortization in the Consolidated Statements of Operations for the year ended December 31, 2012:

	Fair Value		Estimated Life (years)		Amortization Expense
Amortization expense:
Cost of revenue:
Existing technology	$	1,560		5	$	26
Sales and marketing:
Customer relationships		290		7		3
Backlog		760		2		32
Tradenames		290		3		8
General and administrative:
Non-solicitation agreements		120		1		10
Total	$	3,020				79

The fair value of the acquired intangible assets was determined using a discounted cash flow valuation methodology using Level 3 inputs.

The operating results of Attributor are included in the Company’s results of operations since the date of acquisition.

Unaudited Actual and Pro Forma Information

Our consolidated revenues for the year ended December 31, 2012 included $0.2 million from Attributor and our consolidated net income for the year ended December 31, 2012 included a $0.2 million net loss from Attributor subsequent to the acquisition date and without any intercompany allocations. Both revenues and the net loss from Attributor for the year ended December 31, 2012 were negatively impacted by a $0.2 million purchase accounting adjustment.

The following table presents the unaudited pro forma results for the periods set forth below. The unaudited pro forma financial information combines the results of operations as though the acquisition had occurred on January 1, 2011. No pro forma adjustments have been made for our incremental transaction or integration-related costs. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had occurred on January 1, 2011: (in thousands):

	Pro-Forma		Pro-Forma
	Year Ended December 31, 2012		Year Ended December 31, 2011
	(unaudited)		(unaudited)
Revenue	$	49,273	$	39,445
Net income	$	6,807	$	2,265
Net income per common share—basic	$	0.95	$	0.33
Net income per common share—diluted	$	0.92	$	0.30

The pro forma information above includes the following pro forma adjustments that effected net income (in thousands):

	Year Ended December 31, 2012			Year Ended December 31, 2011
	(unaudited)			(unaudited)
Revenue adjustment	$	145		$	(233	)
Amortization expense		(830	)		(950	)
Stock-based compensation expense		(505	)		(505	)
Direct transaction costs		190			(190	)
Income tax benefit		834			1,747
Total impact to net income of pro forma adjustments	$	(166	)	$	(131	)

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Stock-Based Compensation (Details 3)	12 Months Ended
	Dec. 31, 2012
Stock Options [Member]
Expects recognize compensation costs for stock options and restricted stock over weighted average period
Weighted average period	1 year 1 month 17 days
Restricted Stock [Member]
Expects recognize compensation costs for stock options and restricted stock over weighted average period
Weighted average period	1 year 5 months 16 days

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Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Reconciliation of the statutory federal income tax rate to the Company's effective income tax rate
Income taxes computed at statutory rates	$ 4,647	$ 1,316	$ 1,434
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit	705	194	220
Federal and state research and experimentation credits	(122)	(784)	(353)
Change in valuation allowance	12	(2,581)	(1,275)
Transaction costs	65
Impact of federal graduated rates	39
Other	48	69	16
Total tax (benefit) expense	$ 5,394	$ (1,786)	$ 42
Income taxes computed at statutory rates, Percentage	34.00%	34.00%	34.00%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit, Percentage	5.00%	5.00%	5.00%
Federal and state research and experimentation credits, Percentage	(1.00%)	(20.00%)
Change in valuation allowance, Percentage		(67.00%)	(32.00%)
Transaction costs, Percentage	1.00%
Other, Percentage		2.00%
Total, Percentage	39.00%	(46.00%)	7.00%

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Intangibles (Details) (USD $) In Thousands, unless otherwise specified					12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Purchased patents and intellectual property [Member]	Dec. 31, 2011 Purchased patents and intellectual property [Member]	Dec. 31, 2012 Purchased patents and intellectual property [Member] Maximum [Member]	Dec. 31, 2012 Purchased patents and intellectual property [Member] Minimum [Member]	Dec. 31, 2012 Existing technology [Member]	Dec. 31, 2012 Customer relationships [Member]	Dec. 31, 2012 Backlog [Member]	Dec. 31, 2012 Tradenames [Member]	Dec. 31, 2012 Non-solicitation agreements [Member]
Amortization of intangible assets acquired
Capitalized patent costs	$ 3,973	$ 3,035
Intangible assets acquired
Estimated Useful life					10 years	3 years	5 years	7 years	2 years	3 years	1 year
Intangible assets amount	3,020		250	13			1,560	290	760	290	120
Gross intangible assets	7,243	3,048
Accumulated amortization	(522)	(240)
Intangible assets, net	$ 6,721	$ 2,808

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Description of Business and Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2012

Description of Business and Summary of Significant Accounting Policies [Abstract]

Summary of fair value hierarchy for financial assets

December 31, 2012	Level 1		Level 2		Level 3		Total
Money market securities	$	901	$	—	$	—	$	901
Certificates of deposits		—		491		—		491
U.S. treasuries		—		289		—		289
U.S. federal agency notes		—		1,637		—		1,637
Pre-refunded and other municipals		—		22,036		—		22,036
Corporate notes		—		10,100		—		10,100
Commercial paper		—		2,614		—		2,614
Total	$	901	$	37,167	$	—	$	38,068

December 31, 2011	Level 1		Level 2		Level 3		Total
Money market securities	$	896	$	—	$	—	$	896
Certificates of deposits		—		736		—		736
U.S. treasuries		—		718		—		718
U.S. federal agency notes		—		7,942		—		7,942
Pre-refunded and other municipals		—		2,800		—		2,800
Corporate notes		—		16,459		—		16,459
Commercial paper		—		3,400		—		3,400
Total	$	896	$	32,055	$	—	$	32,951

Summary of fair value maturities for financial asset

	Maturities by Period
	Total		Less than 1 year		1-5 years		5-10 years		More than 10 years
Maturities	$	38,068	$	31,200	$	6,868	$	—	$	—

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Shareholders' Equity (Details 2) (Restricted stock activity [Member], USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Restricted stock activity [Member]
Number of Shares
Unvested, beginning balance	296,710	197,760	111,000
Granted	202,340	190,180	124,560
Vested	(117,667)	(73,110)	(34,350)
Canceled	(12,300)	(18,120)	(3,450)
Unvested, ending balance	369,083	296,710	197,760
Weighted Average Grant Date Fair Value
Weighted average grant date fair value unvested, Beginning balance	$ 21.51	$ 14.25	$ 10.02
Weighted average grant date fair value unvested, Granted	$ 22.51	$ 29.12	$ 16.77
Weighted average grant date fair value unvested, Vested	$ 22.52	$ 20.82	$ 9.89
Weighted average grant date fair value unvested, Canceled	$ 22.05	$ 19.24	$ 13.05
Weighted average grant date fair value unvested, Ending balance	$ 21.72	$ 21.51	$ 14.25

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Components of tax expense (benefit) allocated to continuing operations

	Year Ended December 31, 2012		Year Ended December 31, 2011			Year Ended December 31, 2010
Current:
Federal	$	4,699	$	1,066		$	—
State		570		3			—
Foreign		1		(20	)		42
Sub-total		5,270		1,049			42
Deferred:
Federal		97		(2,470	)		—
State		27		(365	)		—
Foreign		—		—			—
Sub-total		124		(2,835	)		—
Total tax (benefit) expense	$	5,394	$	(1,786	)	$	42

Reconciliation of the statutory federal income tax rate to the Company's effective income tax rate

	Year Ended December 31, 2012			%			Year Ended December 31, 2011			%			Year Ended December 31, 2010			%
Income taxes computed at statutory rates	$	4,647			34	%	$	1,316			34	%	$	1,434			34	%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit		705			5	%		194			5	%		220			5	%
Federal and state research and experimentation credits		(122	)		(1	)%		(784	)		(20	)%		(353	)		—
Change in valuation allowance		12			—			(2,581	)		(67	)%		(1,275	)		(32	)%
Transaction costs		65			1	%		—			—			—			—
Impact of federal graduated rates		39			—			—			—			—			—
Other		48			—			69			2	%		16			—
Total	$	5,394			39	%	$	(1,786	)		(46	)%	$	42			7	%

Tax effects of significant items comprising the Company's deferred tax assets and deferred tax liabilities

	December 31, 2012			December 31, 2011
Deferred tax assets:
Stock based compensation	$	2,636		$	1,976
Federal and state net operating losses		1,900			—
Goodwill		1,146			1,254
Accrued compensation		50			—
Deferred rent		170			190
Federal and state research and experimentation credits		—			458
Other		—			21
Total gross deferred tax assets		5,902			3,899
Less valuation allowance		(184	)		—
Net deferred tax assets	$	5,718		$	3,899
Deferred tax liabilities:
Patent expenditures	$	(1,385	)	$	(1,051	)
Fixed asset differences		(167	)		(13	)
Intangible asset differences		(506	)		(13	)
Other		(18	)		(13	)
Total deferred tax liabilities	$	(2,076	)	$	(1,064	)
Net deferred tax assets	$	3,642		$	2,835

Summary of reconciliation of the Company's uncertain tax positions

	December 31, 2012		December 31, 2011
Beginning balance	$	102	$	—
Addition for current year tax positions		6		30
Addition for prior year tax positions		—		72
Settlements with taxing authorities		—		—
Lapsing of statutes of limitations		—		—
Ending balance	$	108	$	102

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Joint Ventures and Related Party Transactions

12 Months Ended

Dec. 31, 2012

Joint Ventures and Related Party Transactions [Abstract]

Joint Ventures and Related Party Transactions

(14) Joint Venture and Related Party Transactions

In June 2009, the Company entered into two joint venture agreements with Nielsen to launch two new companies; TVaura LLC and TVaura Mobile LLC. The two joint venture agreements and a revised patent license agreement expanded and replaced the previous license and services agreement between the Company and Nielsen that had been in operation since late 2007. Under the new agreements, the Company and Nielsen agreed to work together to develop new products and services, including the expansion and deployment of those products and services that were in development under the prior agreement.

Under the terms of the patent license agreement, Nielsen agreed to pay Digimarc $18,750 during the period from July 2009 through January 2014, and Digimarc granted to Nielsen a non-exclusive license to Digimarc’s patents for use within Nielsen’s business. Unless earlier terminated in accordance with the agreement, the license will continue until the expiration of the last to expire of the licensed patents. The payment terms extend beyond the Company’s normal 30 to 60 day payment terms, thus the license revenue is being recognized when the installments are due.

The Company provided technical and development services to the joint ventures totaling $6,848 during the period 2009 through 2012. Service revenue was recognized as the services are performed.

The Company and Nielsen each made initial cash contributions aggregating $3,500 payable quarterly from July 2009 through July 2011 to fund TVaura LLC and initial cash contributions aggregating $2,500 payable quarterly from July 2009 through July 2011 to fund TVaura Mobile LLC.

In March 2012, Digimarc and Nielsen decided to reduce the investments in their two joint ventures to minimal levels while assessing alternative approaches to achieving each of their goals in the emerging market opportunity of synchronized second screen television. In connection with this plan for the suspension of operations, the joint ventures accrued estimated expenses for the first quarter’s operations and severance costs for joint venture employees. Digimarc’s share of the one-time severance and suspension costs was approximately $500. Pursuant to the plan of suspending operations of the joint ventures with Nielsen, in April 2012 the Company received $104 of remaining cash from TVaura LLC and contributed $796 to TVaura Mobile LLC to fund both the first quarter’s operating expenses as well as the suspension related costs. Payment of all expenses incurred after the suspension of operations of each joint venture is the responsibility of the majority member.

Pursuant to the terms of the agreements and ASC 810 “Consolidation,” the joint ventures are not consolidated with the Company because the minority member has substantive participating rights, or veto rights, such that no member has majority control.

The Company recorded the following net losses on the joint ventures based on the Company’s pro-rata share of the net losses incurred by TVaura LLC and TVaura Mobile LLC:

	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
The Company’s pro-rata share—net loss
TVaura LLC	$	(27	)	$	(1,376	)	$	(1,440	)
TVaura Mobile LLC	$	(1,100	)	$	(1,338	)	$	(740	)
Total	$	(1,127	)	$	(2,714	)	$	(2,180	)
The Company’s gain / (loss) on investment
TVaura LLC	$	70
TVaura Mobile LLC	$	(50	)
Total	$	20

Summarized financial information for the joint ventures has not been provided as the disclosures are immaterial to the Company’s filing given the operations of the joint ventures have been suspended and the Company’s investment in each joint venture is $0 as of December 31, 2012.

Related Party Transactions

	Year Ended December 31, 2012			Year Ended December 31, 2011		Year Ended December 31, 2010
TVaura LLC:
Capital contributions (return of capital)	$	(104	)	$	1,200	$	1,600
Revenue (1)	$	—		$	2,640	$	2,723
TVaura Mobile LLC:
Capital contributions	$	796		$	900	$	1,200
Revenue (1)	$	272		$	—	$	—
Total:
Capital contributions, net	$	692		$	2,100	$	2,800
Revenue (1)	$	272		$	2,640	$	2,723

(1) Technical and development services