Digimarc Corporation Reports Record Revenues and Improved Cash Flow

Digimarc Corporation (NASDAQ:DMRC) today reported itsfinancial results for the third quarter ended Sept. 30, 2005. Thirdquarter revenue totaled $26.8 million, the Company's highest quarterlyrevenues ever and 14% higher than revenues of $23.5 million in thecomparable period of 2004. Third quarter net loss was $4.2 million, ornet loss of $0.21 per diluted share, compared with net loss of $2.5million, or net loss of $0.12 per diluted share, for the same periodlast year. Third quarter operating expenses totaled $14.6 million, upfrom operating expenses of $12.5 million for the third quarter of2004. Earnings Before Interest, Taxes, Depreciation and Amortization("EBITDA") improved to $1.1 million for the third quarter of 2005 froma negative ($1.2) million in the second quarter of 2005. EBITDA iscalculated by adjusting net income for the effects of interest, taxes,depreciation, and amortization.

Cash flow continued its sequential quarterly improvement. Cashflow from operations in the third quarter was positive atapproximately $0.3 million, up from negative ($0.6) million in thepreceding quarter. The overall reduction in aggregated cash was $3.5million, down from a $5.4 million decrease in the prior quarter. Thecash used included $3.7 million of capital investments in newprograms. See Reconciliation of Non-GAAP Financial Measures to GAAPincluded with the financial statement information included in thisearnings release for further discussion of EBITDA and overallreduction in aggregated cash and a reconciliation of each of these tothe comparable GAAP financial measures.

According to Digimarc Chairman and CEO Bruce Davis, "We are makinggood progress in all areas of the business, focusing on serving ourcustomers' needs and aligning our resources to improve productivity,as we restructure operations in support of our efforts to return toprofitability."

Davis continued, "There is great promise in our markets, asevidenced by significant driver license contract awards inMassachusetts last quarter and Texas this quarter, and by indicationsof growing appreciation for our digital watermarking technology inmedia and entertainment. We are very excited about the $40 million infederal funding from the Federal government for grants to the Statesin the 2006 federal fiscal year to help them to improve the securityof driver licenses in accordance with the REAL ID mandate passedearlier this year."

Third quarter business highlights:

-- A multi-year patent licensing agreement with Dolby Laboratories, including Dolby's wholly owned subsidiary Cinea, Inc., to support the comprehensive set of forensic watermarking products and services that Cinea provides to the media and entertainment industry.

-- The announcement by the Digital Cinema Initiative (DCI) that digital watermarking technology has been incorporated as part of the Digital Cinema System Specification to help deter piracy of digital movies shown at theaters around the world. DCI is a joint venture of Disney, Fox, MGM, Paramount, Sony Pictures Entertainment, Universal and Warner Bros. Studios.

-- Two new contracts with the Massachusetts Registry of Motor Vehicles for the implementation of facial recognition biometrics and sophisticated identity document authentication elements of the Digimarc Identity Validation Suite (IDVS) to reduce driver license fraud, a key concern of recently passed REAL ID federal legislation.

-- A contract with an estimated value of $1.5 million to supply the Provisional Electoral Council (CEP) of Haiti with approximately four million secure citizens' ID cards in support of the country's upcoming elections.

-- The grant of the Company's 200th U.S. patent, enhancing Digimarc's position as a leader in digital watermarking innovation and supporting the Company's patent licensing business and secure ID and media management offerings in a variety of markets.

Early fourth quarter highlights:

-- A new five-year agreement by the Texas Department of Public Safety valued at nearly $30 million to provide a new centrally issued driver license. The contract award is built on Digimarc's highly secure and durable Exian Evident card structure, Digimarc's newest innovation in high security driver license card products, as well as large scale implementations of fingerprint matching and facial recognition to screen for attempted driver license fraud.

-- A two-year contract extension with the California Department of Motor Vehicles, a long-time customer and the largest issuer of driver licenses in the U.S. Under this contract, Digimarc will continue to operate the nation's highest volume central issue driver license system, which includes a world-class card production factory and more than 170 enrollment locations.

Conference Call

Digimarc will hold its third quarter 2005 earnings conference callTuesday, Nov. 8, 2005, at 8 a.m. PT / 11 a.m. ET. The call will beopen to the general public and the media and will be broadcast live byWeb cast at www.digimarc.com and www.earnings.com. At Digimarc's Webaddress, the call will be available by clicking on the "Q3 EarningsRelease Conference Call" icon on the "Investor Relations Events" page.This Web cast will also be available for later listening atwww.digimarc.com/investor/events.asp and www.earnings.com for twoweeks following the live call. Thereafter, the Web cast will bearchived and available at http://www.digimarc.com/investor/events.aspunder the subcategory "Company Presentations."

Digimarc Corporation
Income Statement Information
(in thousands, except per share amounts)
(Unaudited)

Three Months Ended Nine Months Ended
-------------------------------- -------------------
September June September September September
30, 30, 30, 30, 30,
2005 2005 2004 2005 2004
--------- -------- ---------- -------- --------
Revenue:
Service $ 22,372 $ 21,616 $ 20,001 $ 63,584 $ 55,524
Product and
subscription 4,409 3,137 3,519 12,329 15,128
--------- -------- ---------- -------- --------
Total revenue 26,781 24,753 23,520 75,913 70,652

Cost of Revenue:
Service 14,704 14,878 11,942 42,722 33,199
Product and
subscription 1,790 1,089 1,788 5,232 10,139
--------- -------- ---------- -------- --------
Total cost of
revenue 16,494 15,967 13,730 47,954 43,338

Gross Profit:
Service 7,668 6,738 8,059 20,862 22,325
Product and
subscription 2,619 2,048 1,731 7,097 4,989
--------- -------- ---------- -------- --------
Total gross
profit 10,287 8,786 9,790 27,959 27,314

Percentage of
gross profit to
revenues:
Service 34% 31% 40% 33% 40%
Product and
subscription 59% 65% 49% 58% 33%
Percentage of
total gross
profit to
total
revenues 38% 35% 42% 37% 39%

Operating
expenses:
Sales and
marketing 4,291 3,898 3,090 12,004 8,493
Research,
development
and
engineering 2,898 3,001 1,931 8,382 5,203
General and
administrative 6,234 6,999 6,748 20,187 16,603
Amortization of
intangibles 1,147 1,339 688 3,297 1,877
--------- -------- ---------- -------- --------
Total
operating
expenses 14,570 15,237 12,457 43,870 32,176
--------- -------- ---------- -------- --------

Operating income
(loss) (4,283) (6,451) (2,667) (15,911) (4,862)

Other income
(expense), net 214 297 194 645 566
--------- -------- ---------- -------- --------
Income (loss)
before provision
for income taxes (4,069) (6,154) (2,473) (15,266) (4,296)
Provision for
income taxes (159) (63) 6 (299) (228)
--------- -------- ---------- -------- --------
Net income (loss) $ (4,228) $ (6,217) $ (2,467) $(15,565) $ (4,524)
========= ======== ========== ======== ========

Net income (loss)
per share -
basic $ (0.21) $ (0.30) $ (0.12) $ (0.76) $ (0.22)
Net income (loss)
per share -
diluted $ (0.21) $ (0.30) $ (0.12) $ (0.76) $ (0.22)

Weighted average
shares - basic 20,497 20,468 20,371 20,473 20,287
Weighted average
shares - diluted 20,497 20,468 20,371 20,473 20,287




Digimarc Corporation
Balance Sheet Information
(in thousands)
(Unaudited)

September 30, December 31,
2005 2004
------------ -----------
Assets
Current assets:
Cash and cash equivalents $ 19,842 $ 18,489
Short-term investments 6,305 25,068
------------ -----------
Total cash, cash equivalents and
investments 26,147 43,557
Accounts receivable, net 15,836 14,674
Inventory, net 8,539 8,858
Other current assets 2,609 1,779
------------ -----------
Total current assets 53,131 68,868

Restricted cash 7,286 8,279
Property and equipment, net 66,068 63,975
Intangibles, net 17,939 21,162
Other assets, net 921 1,003
------------ -----------
Total assets $ 145,345 $ 163,287
============ ===========


Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,568 $ 11,424
Accrued payroll and related costs 4,007 2,161
Deferred revenue 4,597 4,854
Other current liabilities 1,878 1,492
------------ -----------
Total current liabilities 17,050 19,931

Other long-term liabilities 1,007 1,112

Stockholders' equity 127,288 142,244
------------ -----------
Total liabilities and stockholders' equity $ 145,345 $ 163,287
============ ===========



Digimarc Corporation
Cash Flow Information
(in thousands)
(Unaudited)

Three Months Ended Nine Months Ended
---------------------------- ---------------------
September June September September September
30, 30, 30, 30, 30,
2005 2005 2004 2005 2004
--------- -------- ------- ----------- ---------
Cash flows from
operating
activities:
Net loss $ (4,228) $ (6,217) $ (2,467) $ (15,565) $ (4,524)
Adjustments to
reconcile net
loss to net
cash provided
by (used in)
operating
activities:
Depreciation
and
amortization 5,424 5,124 3,917 13,978 9,701
Stock-based
compensation
expense 153 151 - 355 -
Impairment of
investments - - 300 - 300
Issuance of
common stock
for
litigation
settlement - - 348 - 348
Change in
allowance for
doubtful
accounts (82) 105 (88) (10) -
Other non-cash
charges (3) (25) 581 (11) 574
Changes in
operating
assets and
liabilities:
Restricted
cash 1 1,084 1,745 993 1,741
Trade and
unbilled
accounts
receivable,
net (723) 1,116 573 (1,152) (2,342)
Inventory,
net (125) 591 196 319 451
Other
current
assets 349 (1,401) 467 (830) 606
Other
assets, net (50) 30 (332) 82 (257)
Accounts
payable (875) (1,762) (3,393) (4,856) 99
Accrued
payroll and
related
costs 510 71 616 1,846 1,164
Deferred
revenue (223) 199 (637) (257) 414
Other
liabilities 173 323 1,077 497 974
-------- -------- -------- --------- ---------
Net cash
provided
by (used
in) operat-
ing activi-
ties 301 (611) 2,903 (4,611) 9,249
Cash flows from
investing
activities:
Purchase of
property and
equipment (2,046) (1,812) (6,528) (6,070) (22,309)
Capitalization
of labor costs (1,634) (1,952) (3,247) (6,589) (9,679)
Sale or
maturity of
short-term
investments 41,709 48,794 89,383 133,247 173,389
Purchase of
short-term
investments (39,639) (42,378) (80,641) (114,484) (154,342)
-------- -------- -------- --------- ---------
Net cash
provided
by (used
in) invest-
ing activi-
ties (1,610) 2,652 (1,033) 6,104 (12,941)
Cash flows from
financing
activities:
Net proceeds
from issuance
of common
stock 36 175 77 211 1,927
Principal
payments
under capital
lease
obligations (117) (117) (45) (351) (135)
-------- -------- -------- --------- ---------
Net cash
provided
by (used
in) financ-
ing activi-
ties (81) 58 32 (140) 1,792
-------- -------- -------- --------- ---------
Net
increase
(decrease)
in cash
and cash
equiva-
lents (1,390) 2,099 1,902 1,353 (1,900)
======== ======== ======== ========= =========





Reconciliation of Non-GAAP Financial Measures to GAAP

Digimarc Corporation
Earnings Before Interest, Taxes, Depreciation, and
Amortization (EBITDA) Information
(in thousands)
(Unaudited)

Three Months Ended Nine Months Ended
--------------------------- -------------------
September June September September September
30, 30, 30, 30, 30,
2005 2005 2004 2005 2004
--------- ------- --------- --------- ---------

Net loss (4,228) (6,217) (2,467) (15,565) (4,524)
Adjustments to
calculate EBITDA:
Provision for taxes 159 63 (6) 299 228
Interest income, net (247) (215) (202) (664) (578)
Depreciation and
amortization 5,424 5,124 3,917 13,978 9,701
--------- ------- --------- --------- ---------
EBITDA 1,108 (1,245) 1,242 (1,952) 4,827
========= ======= ========= ========= =========

About EBITDA

EBITDA does not represent cash flows from operations as defined bygenerally accepted accounting principles ("GAAP"), is not a measurederived in accordance with GAAP and should not be considered by thereader as an alternative to net income (the most comparable GAAPfinancial measure to EBITDA). The reconciliation of GAAP and Non-GAAPFinancial Measures for the three and nine months ended September 30,2005 and 2004 and the three months ended June 30, 2005 is included inthe above tables. Management of the Company believes that EBITDA ishelpful to investors as an indicator of the current financialperformance of the Company and its capacity to fund capitalexpenditures and working capital requirements. EBITDA is commonly usedas a measure of performance and it is used by securities analysts,investors and other parties in evaluating the Company. Due to thenature of the Company's government programs business and revenuerecognition policies, the Company incurs significant non-cash chargesfor depreciation and amortization that it does not incur inassociation with revenues generated in the media and entertainmentsolutions area of the business. Therefore, the Company believes thatby providing the calculation of EBITDA it will help investors betterunderstand Digimarc's underlying financial performance and ability togenerate cash flow from operations.

Digimarc Corporation
Aggregated Cash Reconciliation to Cash and Cash Equivalents
(in thousands)
(Unaudited)

September 30, June 30, March 31,
2005 2005 2005
------------ --------- ----------

Aggregated Cash:
Cash and cash equivalents $ 19,842 $ 21,232 $ 19,133
Short-term investments 6,305 8,375 14,791
Restricted cash, current and
long-term 7,286 7,287 8,371
------------ --------- ----------
Total aggregated cash $ 33,433 $ 36,894 $ 42,295
Less: prior quarter ending
aggregated cash $ (36,894) $ (42,295)
------------ ---------
Change in aggregated cash $ (3,461) $ (5,401)
============ =========

About Overall Reduction in Aggregated Cash

Overall reduction in aggregated cash does not represent cash andcash equivalents as defined by generally accepted accountingprinciples ("GAAP"), is not a measure derived in accordance with GAAPand should not be considered by the reader as an alternative todisclosure regarding changes in cash and cash equivalents (the mostcomparable GAAP financial measure to aggregated cash as used in thisrelease, which includes cash and cash equivalents, short-terminvestments and restricted cash). The reconciliation of GAAP andNon-GAAP Financial Measures as of September 30, 2005, June 30, 2005and March 31, 2005 is included in the above tables. Management of theCompany believes that overall reduction in aggregated cash is helpfulto investors as an indicator of the liquidity and cash position of theCompany and its capacity to fund capital expenditures and workingcapital requirements. Overall reduction in aggregated cash is commonlyused as a measure of performance and it is used by securitiesanalysts, investors and other parties in evaluating the Company. TheCompany believes that providing overall reduction in aggregated cashwill help investors better understand Digimarc's liquidity and cashposition.

About Digimarc

Digimarc Corporation (NASDAQ:DMRC), based in Beaverton, Oregon, isa leading supplier of secure identity and media management solutions.Digimarc provides products and services that enable the annualproduction of more than 60 million personal identification documents,including two-thirds of U.S. driver licenses and IDs for more than 20countries. Digimarc's digital watermarking technology provides apersistent digital identity for various media content and is used toenhance the security of financial documents, identity documents anddigital images, and support other media rights managementapplications.

Digimarc has an extensive intellectual property portfolio, withmore than 200 issued U.S. patents with more than 4,000 claims, andmore than 400 pending patent applications in digital watermarking,personal identification and related technologies. The Company isheadquartered in Beaverton, Oregon, with other U.S. offices inBurlington, Massachusetts; Fort Wayne, Indiana; and the Washington DCarea; and international offices in London and Mexico. Please go towww.digimarc.com for more company information.

Securities Safe Harbor

With the exception of historical information contained in thisrelease, the matters described herein contain certain "forward-lookingstatements" that are made pursuant to the "safe harbor" provisions ofthe Private Securities Litigation Reform Act of 1995. Suchforward-looking statements include statements relating to anticipateddevelopments in the market for driver licenses and other ID cards,statements relating to growing appreciation for digital watermarkingtechnology in media and entertainment, statements relating toanticipated revenue, performance and benefits under customeragreements, statements regarding revenues, operating expenses, cashflow and productivity, and other statements containing the words"believes," "expects," "estimates," "anticipates," "will" or words ofsimilar import or statements of management's opinion. These statementsare subject to certain assumptions, risks, uncertainties and changesin circumstances. Actual results may vary materially from thoseexpressed or implied from the statements herein or from historicalresults, due to changes in economic, business, competitive,technological and/or regulatory factors. More detailed informationabout risk factors that may affect actual results is set forth infilings by Digimarc with the Securities and Exchange Commission onForms 10-K, 10-Q and 8-K, including but not limited to those describedin the Company's Form 10-Q for the quarterly period ended June 30,2005, in Part I, Item 2 thereof ("Management's Discussion and Analysisof Financial Condition and Results of Operations") under the captions"Liquidity and Capital Resources," and "Risk Factors," and in Part I,Item 4 thereof ("Controls and Procedures"). Readers are cautioned notto place undue reliance on these forward-looking statements, whichreflect management's opinions only as of the date of this release. Weundertake no obligation to revise or publicly release the results ofany revision to these forward-looking statements.