Bruce Davis - CEO Mike McConnell - CFO

Bill Gibson - Nollenberger Walter Schenker - Titan Capital Andy Hargreaves - Pacific Crest Securities Jeremy Grant - Stanford Group Aaron Edelheit - Sabre Value Management Kevin Hanrahan - KMH Capital Advisors Irwin Silverberg - Burnham Asset Management Adam Fischer - Burnham Asset Management Andrew Wiener - Burnham

Good afternoon. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc third quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Davis, you may begin your conference.

Okay. Thanks very much. Welcome to our conference call today to discuss financial results for the third quarter and to provide an update on the company's strategy and operating plans. Mike McConnell, our CFO is with me on the call. We issued a press release earlier today announcing our Q3 2008 financial results. The objectives of this call are to summarize and comment on these results, review the significant business developments and market conditions and provide an update on our strategy and operations. This webcast will be archived in the Investor Relations section of our website. Before we proceed, please note that during the course of this conference call, we will be making forward-looking statements regarding management's opinions and expectations about Digimarc's business, its markets and financial performance. These statements are subject to assumptions, risks, uncertainties and changes in circumstances. Actual results may vary materially from those expressed or implied by such statements. For more detailed information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC including our Form 10-Q to be filed within the next few days and our earnings release posted on our website. During the course of this conference call, we will also refer to certain non-GAAP financial measures as defined by the SEC and Regulation G. Definitions of these non-GAAP financial measures and reconciliation of these measures to their most directly comparable GAAP financial measures are included in the earnings release for the quarter. The earnings release can be found on the homepage of our website. Keep in mind that any guidance we offer represents a point-in-time estimate. Given the current economic climate, we suggest a very cautious posture toward guidance. We will offer guidance on this call to give you a sense of our planning assumptions and to provide our views to analysts, who want to try to model possible future performance. It is obviously very challenging for anyone to try to forecast the general economy and derivatively its impact on individual businesses like ours. We expressly disclaim any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call. Mike will begin this update call by commenting on the Q3 financial result from the financial outlook for the remainder of 2008 and I will return to provide details on our strategy and operating plans for 2009 and we will close with some preliminary financial guidance for 2009 and subsequent years. Mike?

Thanks Bruce and good afternoon everyone. Let me first begin by addressing the basis of accounting used in presenting our financial results. The Digital Watermarking business forms the basis for new Digimarc was spun out from old Digimarc this past summer, just prior to the sale of old Digimarc to L-1 Identity Solutions. As explained in our Form 10-K registration statement and to be repeated in our current and future 10-K and Q filings for the next couple of years the basis of accounting used for the Digital Watermarking business prior to the spin-off and through August 1st, 2008 was referred to as a carve out of assets, liabilities and results of operations from the old Digimarc business that included our ID Systems operations that were sold to L-1. The old Digimarc enjoyed significant financial leverage from a shared services business model in its cost of delivery, engineering, and SG&A operating functions. We also noted that the financial information in those carve out financials for the period up through August 1st, 2008 does not include all the expenses that would have been incurred, if the watermarking business had been a separate publicly reporting entity. We further indicated that initial operating costs in new Digimarc on a standalone basis would be higher than those allocated to the Digital Watermarking business of old Digimarc, as we transitioned to a new standalone entity. So, in effect, we have a hybrid financial presentation for the three and nine month periods ending September 30, 2008, that combines the carved out financials through August 1, 2008 and the actual financials from August 2 to the end of the quarter, and including some non-recurring transition expenses. As a result, except for the revenue comparisons, it will be difficult to meaningfully compare the old and new financial results due to the different bases of accounting used and the expenses associated with the spin-off transition. With this in mind, I'm moving on to review the results for the quarter, our Q3 hybrid financial results were generally in line with prior guidance, including higher revenues that contributed significant increase in gross margin and higher operating expenses of new Digimarc as a standalone entity, leading to a net profit of $200,000. More specifically, revenues grew nearly 50% year-over-year, benefiting from new services and license revenues from Nielsen. Gross margins came in for both periods at around 70% and operating expenses grew from 2.5 to 3.5 million, reflecting a number of variables with the largest impact resulting from the benefit of the carve-out accounting used in periods prior to August 2, compared to the standard base of accounting now being used. We also accrued employee bonuses for our incentive plan, compared with no accrual in 2007. These expense increases were offset by a few items, the first being the impact of capitalization of patent prosecution cost, meaning the cost of obtaining a patent, but excluding the cost of research of our intellectual property. That was effective August 2, 2008. The second being the benefit of the net transition service reimbursements associated with the segregation of the shared services business model with L-1 in accordance with our merger agreement. We expect these transition service reimbursements to lower in the fourth quarter and first half of next year as we wind down these services. We also had lower stock compensation charges reflecting the absence of outstanding stock options and restricted stock during the period August 2 through September 30. Our cash investment balances of September 30 was between $49 million to $50 million with approximately $2 million yet to be paid for accrued merger-related liabilities. Our revenue backlog at the end of the quarter stood at $59 million with more than $4 million expected to be realized in Q4. For further discussion of the quarterly results, our business and financial models and risks and prospects of our business, please see the Form 10-Q that we expect to file within the next couple of days. Regarding an update for the financial guidance for 2008, we anticipate that revenues for the year will come in greater than $19 million as previously guided, with fourth quarter revenues in the range of $4 million to $4.5 million. Gross margin percent for the year is expected to be roughly the same as last year. GAAP earnings for these hybrid financials for the year should be in the range of $700,000 to $900,000, including a loss in the fourth quarter of approximately $800,000 to $1 million, reflecting the timing of certain royalty payments and levels of services contemplated in our operating plan and a full quarter effective stock option expense from the initial grant of options. We believe our operating expense run rate over the next several quarters will be in the range of $3.6 million to $3.8 million. Our revenue backlog at the end of the year is expected to approximate $57 million and we expect our cash position at the end of the year to be in a range of $45 million to $47 million, reflecting the payment of a large portion of our outstanding liabilities, including a substantial majority of the remaining merger-related liabilities, we'll end the year with an excellent balance sheet position. Bruce, will now provide an overview of our strategy and operating plans for 2009 and some preliminary financial guidance for 2009 and beyond.

Thanks Mike. The current Digimarc was spun-off from a predecessor by the same name in August 2008 in conjunction with the sale of our ID Systems business to L-1. Digimarc begins its post spin-off existence with their experienced stable management team that has delivered three years of consistent significant improvement of financial performance, a track record of excellent performance in our Central Bank relationship, promising new partnership with the Nielsen company, large high quality patent portfolio more than a dozen business partners operating under license to our technology, a strong balance sheet with between $6 and $7 share of cash, no debt, nearly $60 million in backlog and a high quality, stable workforce. In product markets, we believe that the IT and media and entertainment industries are at inflection points in which conditions maybe right for a substantial increase in the adoption of our technology. In financial markets, even without the general turmoil, we are witnessing, we expect that public equity markets will conservatively value our business based on current and near term projected cash flows, while we pursue attractive long term valuations, driven by establishing broader relevance for our technology. Regarding longer term value, the defensive patent aggregator organizations being formed by the IT industry leaders represent a tantalizing opportunity for realization of long term shareholder value. The company's vision anticipated the current views of many technology industry leaders that in the natural evolution of technology, computers will learn to see and hear and understand the surroundings and react to the world around them. This will reduce the dependence on keyboards and mice as means to take advantage of computing power, facilitating broader embedding of computer technology into the fabric of our lives and simplifying the means to gain technological advantages. Digimarc owns what we believe will be key enabling technologies that create digital identities for all forms of media and many everyday objects that are imperceptible to humans, but not to computers. We believe that this new communications attribute can facilitate the progress of computers from the historical posture of virtual blindness and deafness to powerful new sensory capabilities. These newfound capabilities can greatly simplify and enhance everyday life by making computer power and networks more readily available, easily accessible and responsive. Digimarc strategy is a faster, large scale adoption of solutions based on our technology through licensing of IP and provision related development services. General posture of the company is to license perspective supplier of goodness services employing our technology, assist these licensees in technology and market development and vandalize the potential customers, educate and influence policymakers and monitor and influence various industry standard bodies. The company's financial goals represent a balance of growth and current income and investments in long term asset value. Management believes that our values play a key role in growing profits and building long term asset value. The company's top objectives during 2009 are to successfully reposition post spin-off Digimarc in product and financial markets, exceed our financial goals, provide excellent quality of service to the Central Banks and Nielsen services contracts, help our other business partners to deal with market challenges and grow their businesses, and to enter into additional significant business relationships. Our 2009 operating plan and budget are based on expected values built from foreseeable opportunities and risks associated with organic growth. Our forecast have been built from the bottom up and conceptually tested from the top down in the context of various risk and opportunities that we can foresee. Various ad hoc growth initiatives are expected to be overlaid during the year. Given our attractive assets and financial position we expect unsolicited (inaudible) partnership and that there will be numerous opportunities to consider attractive acquisitions. Our current focus is on organic growth. We believe that the global economy is in the early stages of unprecedented challenges, the effects of which are difficult for anyone to predict. Our 2009 plan is designed with a conservative perspective, given these general global economic conditions. Expense budgets and compensation plans are designed to match expenses slightly above the lower end of our growth expectations, subject to adjustments during the year, as we achieve greater clarity on the probabilities, scale and timing of various opportunities and risks. Please keep in mind that the current environment of general global economic malaise and financial uncertainty makes projecting financial performance difficult and fraught with unquantifiable risks. With these caveats in mind, we are sharing this preliminary estimate that forms the basis for our 2009 resource planning. We have $17.5 million of revenues expected to be realized in 2009 already in our backlog. The amount of additional revenues beyond that, if any, is too difficult to forecast, given the volatile state of the economy. Operating expenses are budgeted at $15 million unless circumstances emerge that indicate we should cut our run rate. As some further significant degradation of the economy, we anticipate that GAAP earnings could be positive or negative, but due to the significant effect of earnings, on earnings of non-cash earnings for stock option expense, we believe we are likely to have positive EBITDA and free cash flow in either case and CapEx outside of capitalized patent cost should be nominal. Our financial projections and operating plans represent expected values based on our assessment of the most likely unfolding of events over the course of 2009. The principal risk to our plan revolves around the global recession and its possible effects on the adoption of our technology and on the well-being of our commercial business partners and the ways in which the massive restructuring of media and entertainment industries that we contemplate unfold. There are numerous upside opportunities, including less effects of general economic conditions on our business than anticipated, greater than anticipated success of business partners, and the prospects of entering into new significant business relationships, including numerous identified prospective partners. We believe in the value of our technology and in our strategy, we expect 2009 to be a year of continuing extraordinary challenges for the economy. Subject to resolution of the general economic uncertainties by the end of 2009, without enduring damage to the economy, we believe there is a reasonable chance we can continue delivering revenue growth with significant earnings and cash flow benefits from operating leverage during 2010 and 2011. With the successful sale of our ID Systems business behind us, we are focusing all our energies on further realization of our vision for Digital Watermarking and delivering significant appreciation in shareholder value. We have a clear and thoughtful, well articulated operating plan. Despite the uncertainties posed by turmoil in the financial markets, and global recession, we see great promise ahead. We will move forward cautiously, with substantial assets and with a clear sense of direction and purpose. This concludes our prepared remarks. Thank you very much for your interest and support and we'll now take questions.

(Operator Instructions) Our first question comes from the line of Bill Gibson with Nollenberger. Your line is open. Bill Gibson - Nollenberger: I've got a couple of housekeeping questions then I'll get back in the queue for some other ones. First, Mike was that the $3.6 to $3.8 million of stock comp was that an annual number?

The $3.6 to $3.8 was a quarterly run rate range for operating expenses. Bill Gibson - Nollenberger: For operating expenses?

OpEx, right. Bill Gibson - Nollenberger: I got that wrong. Could you explain to me what's going on with the preferred stock?

Preferred stock was a transaction related to the merger and dropdown of the subsidiary of the old Digimarc to new Digimarc and it was a transaction to create some tax benefits for new Digimarc. I think, we've indicated that we'll realize a tax basis of assets. It’s higher than our book basis and that will result in lower effective tax rates in future years. The transaction was quite complex. The preferred stock was part of that. Bill Gibson - Nollenberger: So as a follow-on should we assume just nominal taxes in '09?

That's correct. The only taxes that we would project at this point would probably be some foreign withholding taxes. We think with the step up basis of tax assets that we'll not produce any tax liability at all for the next year. I would for modeling less than 50,000 of taxes. It's really based upon the foreign withholding. Bill Gibson - Nollenberger: Thanks Mike.

Mike, the projected stock compensation expense for 2009 in total year?

Right. The total projection for 2009 is currently right at $2.3 million, that's where you get the positive EBITDA of cash flow compared to the projection of net operating results.

Our next question comes from the line of Walter Schenker with Titan Capital. Your line is open. Walter Schenker - Titan Capital: Thank you. I also have some minor questions and then a big question. The minor question is realizing current short term risk free rates of return on cash are fairly nominal the operating income includes interest income contribution or is that not considered part of operating income, but a non-operating event?

The presentation in our external financials, it's below the operating income line and that is obviously with the lower rates is expected to be say, lower than you've seen trends over the last several quarters. Walter Schenker - Titan Capital: So that the revenue, less operating expenses before interest income?

That would be operating income, correct. Walter Schenker - Titan Capital: Next question, which is sort of a bigger question, the revenues next year are projected to be lower than the revenues this year by about 10%, I guess about $2 million?

No that's not correct, Walter. The number we gave you was the amount of next year's revenues that are in the backlog already. Walter Schenker - Titan Capital: Okay.

That's not our forecast. That's the amount of revenues in the backlog expected to be realized during 2009. Walter Schenker - Titan Capital: Therefore, well the way you phrased it, and I always commend you for the way you phrase things, Bruce it seemed to say there's the possibility of business beyond that, but we're not projecting it. Maybe I'm mis-phrasing. You would expect some business, but an unquantifiable at this time, amount of business beyond what's already in the backlog?

Yes. The way that you just phrased it right, Walter. What I said literally was it's too difficult to forecast, given the volatile state of the economy. It doesn't mean I think there's going to be zero it means literally what it said. I don't know how to give you a reliable estimate, given the strength, nature of the general economy right now. Walter Schenker - Titan Capital: You would not expect any of your major markets, though, which produce significant revenue in '08 to materially decline in '09? That's a question.

I don't know. Walter Schenker - Titan Capital: Okay.

That's the problem. This economic turmoil is unprecedented in my history here, so I'm trying my best, like everyone else, to understand what it's implications are and what the likely outcomes are, and so at this point in time, we seem to be in relatively good shape because we have lots of cash, no debt, a conservative business plan, a large backlog, a lot of good things. What we don't have is what anyone has, which is visibility on how this all plays out in the general economy and then the implications of how it plays out then for individual opportunities. Walter Schenker - Titan Capital: My last question and I'll get off, too, you talk about potential numerous upside opportunities in '09. Without quantifying them, can you just give us some sense as to what markets or what type of applications those might include?

Without identifying specific targets, we have identified numerous prospective partners we think could benefit from a business relationship with us and we will be pursuing them as we move forward and the range of prospective partners actually runs across all our business, so there are some who are involved in government work and some in commercial work and the entertainment industry and so forth, and so we feel like we're likely to get some new partners. Again, that's all subject to the world returning to normal at some point, whatever the new normative level will be, but the great volatility that we're seeing here, I suspect would make it difficult for any company to do normal business relations. Walter Schenker - Titan Capital: Thank you.

Our next question comes from the line of Andy Hargreaves from Pacific Crest Securities. Your line is open. Andy Hargreaves - Pacific Crest Securities: Just a couple quick ones, is there any seasonality to the backlog?

This is Mike, Andy. We generally don't have much seasonality. It really depends upon the level and timing of services. We have an annual plan and some may be in an earlier quarter or later quarter, depends upon how we work the plan with our customers, but it's traditionally not been too lumpy unless we have a large thought from a new customer, but it's pretty linear.

Andy, I would add to that that seasonality would be the wrong expression. There would be variability, however, as we see in fourth quarter. The fourth quarter revenues are lower than the prior quarters. That's not because business is trending down. It's just because of the timing of certain things that we're doing, which we contemplated as we gave the 19 million of guidance early in the year. That’s why we don't focus very much in our analytics with you on quarter-to-quarter variations because they are really not meaningful. If they are meaningful, we'll let you know. Generally speaking, it's just variability in the amount of work that we're doing, in our service agreements and the timing of various royalty streams, which are generally affected by a number of different factors depending on what sector the source of the royalty income operates. Again, it's not seasonal in the classic sense of a Christmas season or anything like that. Andy Hargreaves - Pacific Crest Securities: As you're thinking about the macros impact on you, is there anything specific? Is there a direct connection or is it just general slowdown that causes the businesses to slow everywhere?

It's hard to assess, Andy. I find the continuing volatility fascinating and as a matter of representing our company's interest well to try to foresee where things will go. Our government business, which is involved in the protection of the integrity of currency and national defense, would seem to be strengthened at a time like this. I feel quite good about that. The commercial businesses, it's hard to say. I just don't know, how this all plays out yet, and we have, as I said, more than a dozen business partners and so it depends on how each of them does and again, because there are a lot of them, they all contributed to our revenues. Some may have ups and some may have downs, and it's just with the volatility kind of an exercise and futility to try to be too granular in predicting how things will turnout. As I said, we're adopting quite a conservative plan and posture here in terms of resource planning. We actually scaled back before the problems became obvious to most companies because we had the opportunity with the transaction closing on the first of August to scale back to the minimum level necessary to support our business objectives. We laid people off, we downsized the business before others got around to thinking about the need to do it. We’re quite lean and efficient right now. We're very comfortable that we've done a nice job in creating a lean business model. It's quite flexible business model too in that we don't have large capital investments to make. We don't carry any inventory at all. And so, we think, we can be flexible and respond to changes in the environment both positive and negative. We believe that we're operating at kind of the low end of efficiency in terms of scale, $20 million, as a public company and that we can enjoy significant financial leverage as our business grows, financial and operating leverage. That's why I said with respect to '09, it looks like it's going to be a tough year for everybody, tough year for the world, but once a new stasis is defined we think, we can gain a lot of leverage financially moving forward as the revenue grow we don’t expect to have to grow the costs proportionate to the growth in revenue, so margin should expand nicely over the course of next several years. Andy Hargreaves - Pacific Crest Securities: Which is a perfect say, we are actually into my last question. As we are thinking about the different expenses line items, I was assuming, we should be thinking of those primarily on just a run rate basis rather than percentage of revenue or anything like that?

That’s right. Andy Hargreaves - Pacific Crest Securities: Thank you.

Okay.

Your next question comes from the line of Jeremy Grant with the Stanford Group. Your line is open. Jeremy Grant - Stanford Group: Thanks. Hey, Bruce. Hey Mike.

Hi. Jeremy Grant - Stanford Group: Yeah. Few questions. One just to see if we can talk a little bit more about the economy, not that everybody else hasn't asked it, to ask you if you can share a little bit anecdotally about the conversations you're having, the kind of conversation you're having really customers saying, wow, we don't even know what's happening tomorrow, so it's really just to talk about things, or are there specific deals that had been talked about that are potentially being getting a bit of a slowdown?

There haven’t been any specific conversation relating to specific deals yet with anybody, more just general anxiety. I think you see expressed by everyone who is conscious. There's just a lot of anxiety around and uncertainty. And I think that everyone is looking for signs of stability at any level. It's not so much for level but the reduction of volatility that I think people are looking for right now. Given the nature of our technology and its broad application, as I said, the volatility and the uncertainty and the financial risk actually are quite supportive of our work with central banks. Obviously, it would be a very bad thing for people to feel insecure about the currency on top of all the other insecurities they feel and we're doing national defense work, which I would expect the democratic administration to be quite supportive of as they take power in Washington, because that's due largely the agenda that they have been describing, which is more money spent on Homeland Security and less money spent on foreign wars. And in the commercial sphere the leakage, the problems of not understanding what is happening to media content in the new distribution is perhaps going to be viewed as a more serious problem than it was because the media companies are going to be looking really intensely on how to not lose any revenue opportunities they should otherwise have. The general industry trends that we've been observing are all very exciting to us. They are very consistent with our vision. We anticipated that the media and entertainment industry would end up being in the circumstances that they are in, in terms of the changes in distribution and consumption patterns. We’re really very optimistic about the product markets. The problem is when you correlate that with the volatility and negativity in the financial market. I don't know how to give you a coherent answer out the other side of the algorithm, so we're just saying here, we're going to run conservatively and cautiously and we're going to wait until we have better visibility in order to try to be more predictive, but we are, even in these circumstances, balancing, as we say as an explicit part of our strategy, current income production and long-term asset value investment and so we are making investments in 2009 that we believe are important to the long-term value that we expect to deliver to our shareholders. We’re not cutting all our costs to try to shave out small amount, more profit. We have a pretty modest cost structure as it is. We're just going to balance them and make sure that we're delivering the best results we can while making the investments we feel are appropriate given the uncertainty which is, translates into a conservative investment model. Jeremy Grant - Stanford Group: Okay

But not zero. Jeremy Grant - Stanford Group: As a follow-up talking about the one group that seems to have money or at least everybody keeps coming to Washington and asking for it with the government I know you guys had some work in past years working with DOD on some geospatial projects. I was just wondering, if you can give an update as to, is that work continuing and what's the status of that?

That work is continuing and we are at the phase of market hardening, market testing with the associated agencies and we're proud of the work that we've done thus far. We think it's a good application and it's going to prove worthy of operational deployment, so, that 2009 is really determining the readiness of the application for deployment. We have some other business, which was announced by our Senators in appropriation for some work on security for high value military installations and we're not quite sure yet how much we'll be able to say on an ongoing basis but that probably not very much. What’s been announced is probably about all that we'll say, but it's a nice piece of business that we'll begin working on in 2009. Jeremy Grant - Stanford Group: When you say your, Senators does that mean the Oregon delegation?

Yes. Jeremy Grant - Stanford Group: Okay.

We can actually point you at the public announcement that they made. I don't have any problem doing that. We just probably can't say a whole lot more than what they said. Jeremy Grant - Stanford Group: Yeah that's fine. If you could point us that way, that would be great. The other question I had was just a little more housekeeping as we're trying to figure out since this is really a brand new cost structure and what assumptions we should be putting in for modeling going forward. I know, Mike gave sort of a high level OpEx number, as I'm looking at today's press release there are sort of successor, predecessor and total. As I'm looking say at G&A is the total G&A for the last few months really what we should be modeling in 13.74?

We really haven't gotten that granular in the projection. It's probably not too far off at this point in time. But we'll have a full fourth quarter with all three months with the expenses, whereas in the third quarter, we didn't have stock comp then we had two months of the new cost, it will probably trend up a little bit. Jeremy Grant - Stanford Group: I guess excluding cost of goods sold then if you can bundle sales, R&D, G&A and IP into a bucket about how much should that be quarter per year?

That's about $3.6 million to $3.8 million per quarter when you bundle all of those together. Jeremy Grant - Stanford Group: That’s not including cost of goods sold?

Not including cost of goods sold. Jeremy Grant - Stanford Group: Can you just go over transitional services again?

Within our merger agreement we and L1 had done a book although the areas, we were working on and they needed us and we needed them to do some of that. In theory, we're billing them for out of pocket costs, high materials, space rent, etcetera and there's some cross charges, where we need some of their help as we uncoupled the systems, and heavily into things like IT and finance and HR that the systems were fully, fully ingrained, but we also had marketing, engineering, and legal expenses as well. Jeremy Grant - Stanford Group: We expect multiple speakers.

So the situation to them and that one winds down over the next day or few quarters. Jeremy Grant - Stanford Group: That's easy to get. All right. I appreciate it. Thanks guys.

Our next question comes from the line of Marissa Boyle from Sabre Value Management. Your line is open. Aaron Edelheit - Sabre Value Management: Yes. This is Aaron Edelheit. I wanted to ask about cash balance just so I understand. At the end of this quarter, you had cash and short-term investments of 49.5. You mentioned that at the end of December, you expect cash to be 45 to 47. Does that include the short-term investments or no?

Yes. Aaron Edelheit - Sabre Value Management: It does.

Yes. Aaron Edelheit - Sabre Value Management: I saw that you have about $2 million left of merger-related liabilities.

Right. Aaron Edelheit - Sabre Value Management: I understand how that could get you to 47. How would it go down to 45?

Well, there is some other liabilities that will, we indicated we'll probably be paying down and there is other capital expenditures and so forth that we'll have in the fourth quarter to finish up our segregation, so we'll get it-- Aaron Edelheit - Sabre Value Management: Those are just one-time things that won't continue?

Sure. Aaron Edelheit - Sabre Value Management: Another question, how many employees will the new Digimarc have going forward?

We've got about 82 right now. We're projecting it to be about 89 by the end of '09 and all of the hires are engineers. Aaron Edelheit - Sabre Value Management: How many engineers at your firm?

I think there are 50 about 53, 55 in engineering. We're primarily an engineering firm. Aaron Edelheit - Sabre Value Management: Got you.

We're modest to non-engineering resources. Aaron Edelheit - Sabre Value Management: Now, you have a great balance sheet and a great cash balance. How do you see when things normalize? What is the strategy in terms just of how you would utilize it? It sounds like you're going to be at least break-even, cash flow positive, this business take a lot in CapEx. In a normal environment, how do you see you're using your cash?

It depends on what normal ends up being frankly, and at the point about the unpredictability of the future is, if normal means that those who have cash get tremendous bargains from buying things from those that don't have cash, we might buy something. If we find a large prospective partner who resists partnership, we might litigate. Those have been probably the two most likely uses of cash, neither of which we plan to do right now, but alternatively, we would continue to maintain that balance, keeping an eye open to opportunities to create additional financial leverage for our shareholders, but I expect that there are going to be some interesting acquisition opportunities that will emerge from the financial difficulties that this environment will create for some companies that might otherwise be able to do pretty well or be too expensive for us to contemplate buying. Aaron Edelheit - Sabre Value Management: Thank you very much.

You're welcome.

Our next question is a follow-up question from Bill Gibson with Nollenberger. Your line is open. Bill Gibson - Nollenberger: What's the current status Bruce on the Blue-ray and AACSLA litigation?

The best way to provide an update on that would be to direct it to the Verance website. They have updated a website, I mean; they have listed there a number of licensees for Blue-ray. I think that is the best source of publicly available information I can point you toward. I don't know whether this economic calamity that the world is going through has an effect or not on Blue-ray. It's again hard to-- Bill Gibson - Nollenberger: No, I understand. Well for giving the end market affect, if I go by a Blue-ray recorder from a Verance licensee, I mean, are they compensated there in the fourth quarter?

I don't know. I don't have visibility on the very near term here. Bill Gibson - Nollenberger: On a different topic you talked about that, a potential tech aggregator and I'm just trying to get a better understanding of what's going. Is that a group of companies that have gotten together the license, the necessary technology to protect media? Is that what you're referring to?

There are several of them and it actually appears to be an emerging category of new business and so let me list them for you and you can go and you can see what you can learn from the various public sources about them. I begin my characterization of such firms with InterTrust that you're familiar with where Sony and Philips have bought in and then they convinced Microsoft to buy in. Sony, Philips and Microsoft own that with one financial partner that has a very small financial interest and that's focused on DRM technologies. After that, Microsoft got the idea that it would be handy to have a firm that aggregated patents, that is their businesses, just aggregating patents. They were involved in the formation of Intellectual Ventures headed up by Nathan Myhrvold, the former CTO of Microsoft conveniently located in Bellevue, Washington. It’s a private company and it's not very forthcoming about ownership or business models. We have reason to believe that it is currently owned by a substantial number of IT companies, who contributed capital and license fees in return for a freedom to operate with respect to patents owned by Intellectual Ventures. After Intellectual Ventures was formed several years ago, there was a bit of a lapse in time until about four months ago, when there was an announcement of the Security Alliance Trust, which was formed by twelve leading IT companies, six of whom allowed their names to be published and six of whom wanted to remain anonymous. The six named owners included Google and Verizon and Hewlett-Packard. Their business plan is the same as Intellectual Ventures acquire patents. A third business emerged after that called RPX, X as in X ray, R as in Robert, P as in Paul. And that is a venture-backed firm, backed by Kleiner Perkins and Charles River, and the business plan again, is the same. Why do these businesses exist? What are they trying to do? They are trying to solve a problem that the IT industry recognized and particularly Microsoft recognized being sued a lot on patents. They had the theory that if they could put together a patent acquisition firms owned by several of them, then the firms could negotiate with patent holders and buy the relevant patents and then there would be one negotiation instead of N number of negotiations and perhaps a better price for each individual companies although the aggregate price could be greater than any individual company could afford to spend or want to spend. They call themselves patent aggregators. That's not something I made up. That's actually what they call themselves, and that's their job. I'm the guy that they want to buy stuff from, I hope, so I'm actually delighted about their existence and see it as a clear potential exit strategy for our business and one that you can assure is integral to our strategy. We can end up licensing individual IT companies as they find our technology is relevant to their expanding businesses, or they can sick one of their dogs on us. It's fine with me, any way they want to do it. These firms don't do small deals, and so if we do something with one or more of these guys, again, under the Obama’s administration, I assume that there will be a little more regulatory oversight here. I don't know whether each of them needs to do a deal or one of them does a deal and whether there's common ownership across the various entities or not, that's all unknown to me here, but I see the potential for one-stop shopping for big players who want a big license or our big portfolio. That’s what those guys are and how they play into our strategy. It's a very exciting development in my mind. Bill Gibson - Nollenberger: Good. I appreciate that. Thanks, Bruce.

Our next question comes from Kevin Hanrahan with KMH Capital Advisors. Your line is open. Kevin Hanrahan - KMH Capital Advisors: Hello, Mike. Hello, Bruce. Congratulations on the sale to ID or L-1.

Thanks, Kevin. Kevin Hanrahan - KMH Capital Advisors: I was going to ask you also about those trusts or, that you just talked about, so I'll skip that question. I had a question about the Digital Cinema. I saw a press release, which was not related to Digimarc that the Motion Picture Studios were going to put up a significant amount of money to help speed up the rollout of Digital Cinemas across the country, which I thought would be good for Digimarc. Can you comment on that, Bruce?

Yes, it should be good for us and digital cinemas are turning out to be a very, very nicely executed source of royalties for us here. We spent several years nurturing the opportunity. Now it's beginning to pay back. What I don't know, Kevin, is how the, these capital markets and debt market issues are going to affect the rollout on Digital Cinema. We have licensed all the suppliers. Most recently, we entered into a license. It's a small license in terms of field of use limited to Digital Cinema with the Sony Corporation. And so with Sony, we don’t believe we have all of the supply chain under license. When those theaters rollout, we're going to get paid. Kevin Hanrahan - KMH capital advisors: Good.

We don't have a good sense of what the pace of the rollout will be, but we have established agreements with all of the suppliers. Kevin Hanrahan - KMH capital advisors: Can you talk a little bit about a different topic, Philips. Apparently, Philips, it looks like their name has changed or they spun-off a division. Can you talk about who your licensee is and who is in the digital watermarking alliance and is Philips still a large shareholder? In other words, did they tender or did they sell, if you can tell us that?

I can answer all your questions, I think. Philips has been undergoing a massive restructuring for the last six years or so. In that restructuring, they have been defining a business in which our technology has become less relevant. They have largely gotten out of the media businesses and they are more into healthcare and lighting now. And so in conjunction with that restructuring, they spun-off five young businesses to venture capital funding source about a month or two ago and one of those business is called Civolution like-- Kevin Hanrahan - KMH capital advisors: Yeah CID.

CID and Civolution is the watermarking interest of Philips. Kevin Hanrahan - KMH capital advisors: Okay.

Civolution will be our partner going forward. With that said, Philip still owns about 8% of our shares, which they now hold as an investment. So we no longer have a strategic alignment with Philips. We have a financial relationship with Philips. Kevin Hanrahan - KMH capital advisors: Philips doesn't have board seats like they used to a long time ago?

No. I don't expect to have any ongoing business relationship with Philips N.V. but we do expect to have a continuing business relationship with Civolution. Kevin Hanrahan - KMH capital advisors: Civolution or Philips, a member of the digital watermarking alliance?

Philips was. Now Civolution takes their place. Kevin Hanrahan - KMH capital advisors: I see, that's helpful, if you can tell us, do you know if the Clark family estate is still a large shareholder?

I believe so. Unfortunately for us given the reporting regimen for you guys, we're not quite sure, who owns us right now. Kevin Hanrahan - KMH capital advisors: Right. This is interesting. Do you know and this will probably be in the proxy next spring I assume, but what percentage of the company is owned by insiders roughly if you have it?

It’s a little bit complicated so bear with me, as I sort of make my spiel here. In senior management, Bob, Mike and I entered into our understandings about compensation for the new company by foregoing bonus opportunity. Our compensation plans mines available on our site, I guess with the SEC as well. We took stock options and a salary, as our pay structures and we did that because we believe in the company and in its future. In doing that, then you could think of it, we sort of traded bonus opportunity for option opportunity. We are able to get a little more generous option grant than we might have gotten under a more conventional compensation structure. The sum of all of the options held by the board and management and then restricted stock grants, which we gave to non-management employees translated into option equivalents roughly speaking, sums up to around 18% or 19% of the total shares outstanding. Given that there are options as you know, its kind of have some that we won't get to that percentage dilution unless the business gets more valuable by many times over. Kevin Hanrahan - KMH capital advisors: Right.

As was true in our ID Systems sale, the dilution cost was about 8% or 9%, which we thought was fairly reasonable and I believe most investors thought it was as well. Here, we're hoping that we have a very large appreciation in value that management can share in, but if the company doesn't appreciating value, your leadership will be paid significantly less than the peers that we measure against. That’s the perspective that we've embraced here. That’s why the stock compensation charge is as high as it is. It's because of Black-Scholes completely mischaracterizing in my view the cost of this particular element of compensation. The Black-Scholes factor is roughly around 0.6 so quite an expensive hit to the income statement, but obviously it's a non-cash charge and, again it's one that you understand and other sophisticated investors understand only becomes a true cost in the event of very significant appreciation in value. Kevin Hanrahan - KMH capital advisors: I was asking more in line of back on August 1st, did some of your executives exercise their options and then tender some of yourself and Mr. Monego and some of the other board members, which had pretty significant stake in old Digimarc, do you now still have a stake in the new Digimarc?

We actually didn't, Kevin. I guess sadly for me, because many of our options were granted during the internet bubble, a lot of options that I held were not cashed out in the transaction. All options were cashed out. So, I carry forward about a 1% interest Kevin Hanrahan - KMH capital advisors: Okay.

In common stock, on the largest of the insiders, it's quite a small amount of actual ownership, and a sizable amount of potential ownership. That’s why I wanted to litany with you of answering the question because the answer really resides in how much incremental value we can create here. Kevin Hanrahan - KMH capital advisors: Okay.

If we don't create any value, management will have no stake, is what I'm saying. If we create value, then we will have whatever stake we can get depending on how much value we create. Kevin Hanrahan - KMH capital advisors: Sure, sure.

Am I answering your question, Kevin? I hope, I am. Kevin Hanrahan - KMH capital advisors: That's fine. That's fine. I appreciate all your comments, Bruce. Good luck to Digimarc.

Thanks, Kevin.

Our next question comes from the line of Irwin Silverberg with Burnham Asset Management. Your line is open. Irwin Silverberg - Burnham Asset Management: Bruce, Mike, hello.

Hi, Irwin. Irwin Silverberg - Burnham Asset Management: I was going to ask about the Philips, but the other guy did. Of the revenues this year, what number of our business partners are generating revenues for us? I'm not talking about amount, but just number. And then what number of those partners would be in the backlog number? Because I'm just assuming that they are not all in the backlog.

I can't be completely confident in the answer I'm about to give you, but I would say probably in terms of '08 revenues Irwin Silverberg - Burnham Asset Management: Right.

Just about everybody. I think there might be one or two, and then '09 revenues, I don't know yet, but the backlog would be confined to the larger players, might be, you know, four, five, six of them. Irwin Silverberg - Burnham Asset Management: Right

That’s just the way, again, we, in terms of the relationships that we strike with these players, the smaller guys, we are a bit more tentative about. Irwin Silverberg - Burnham Asset Management: I'm just assuming, maybe I'm wrong that, there are some guys where, you know, we participate to the extent that they grow their revenues, but that there wouldn't be a backlog number unless they were subject to minimums.

That's what I'm getting at, yeah, if, say, for some of our smaller licensees who are privately funded, we may just have a pay-as-you-go. Irwin Silverberg - Burnham Asset Management: Okay, thank you.

Yes.

Our next question comes from the line of Adam Fischer with Burnham. Your line is open. Adam Fischer - Burnham Asset Management: Hi, how are you?

Hi, Adam. Adam Fischer - Burnham Asset Management: I'll go on Irwin's question just for a minute, what was the kind of backlog coming into '08? So if it's 17 into '09, what was the same number in '08?

This is Mike, Adam. Coming into '08, we would have booked the Nielsen and –

I think it's around the same, wasn't it? Adam Fischer - Burnham Asset Management: It's around the same.

You could have look it up, I don't recall off him, I think that 00was around 60.

I think it was a little north of 60 as we came into the year; we burned it off a little bit. Adam Fischer - Burnham Asset Management: Sorry. I meant kind of for '08, for just '08. So--

How much was in the '07 year end backlog was expected to be realized in '08? Adam Fischer - Burnham Asset Management: Exactly.

That one, I don't remember, but I actually think it was lower than the projection for '09. I'm thinking $14 million, $15 million. But again, don't hold me to that.

I think we have that in the filings, at '07.

We had less than the backlog than we have here. Adam Fischer - Burnham Asset Management: I'm thinking about it correctly, let's call it 14 or 15.

Okay. Adam Fischer - Burnham Asset Management: We're going to, let's say we do 19 for the year. $4 million to $5 million of revenue this year came from licensees who do not pay us, who pay us kind of a percentage of the revenue or something like that?

No, it came from business generally. I mean, our revenues are, as you know, are about 50/50 royalties and services, and we have product sales, a little bit of product sales. It was kind of a bunch of stuff, you know. I wouldn't say it was just what you said, but that would be part of it. Adam Fischer - Burnham Asset Management: Has Nielsen launched their product that's based on the watermarking, on our watermarking technology? Adam Fischer - Burnham Asset Management: No. Adam Fischer - Burnham Asset Management: Do you have a timeline as to when you expect them to launch it?

I leave public announcements about timeline to them, out of respect for the relationship. I have some sense of it, but I consider it to be their domain to say, not mine. Adam Fischer - Burnham Asset Management: When I look at that 17 million backlog for next year, that doesn't include a percentage of revenue that we could potentially get from Nielsen actually selling the product?

I think, that's correct. Adam Fischer - Burnham Asset Management: That's it from me. Thank you.

Okay.

Our next question comes from the line of Andy Hargreaves with Pacific Crest Securities. Andy Hargreaves - Pacific Crest Securities: Hey, just a quick follow-up on the backlog and maybe you just answered it. Is the split between services and licenses about 50/50 in there?

You know, I haven't got the figures in front of me. It's probably pretty close, maybe a little bit more services than licenses. Andy Hargreaves - Pacific Crest Securities: Okay.

Weighted. Andy Hargreaves - Pacific Crest Securities: Thank you.

Our last question comes from the line of Andrew Wiener with Burnham. Your line is open. Andrew Wiener - Burnham: Good afternoon, guys.

Hey, Andrew. Andrew Wiener - Burnham: Hi. A lot of questions about the backlog. When you look at the 17.5 million you referred to for '09, does that include the minimum commitments from the digital cinema technology providers or are they subject to sort of a pay-as-you-go contracts with no minimums and thus the extent, there was the rollout of digital cinema would represent one of the sources of non-backlog upside to that number?

Your question sort of had some assumptions that I may or may not have understood correctly. Let me tell you what the answer is I believe to your question. We have four suppliers licensed for digital cinema and some of them are licensed for a broader range of field of use than others. Minimums apply to the relationships in all of those cases, but may not apply specifically to digital cinema, and all of them have upside. Digital cinema rolls out at sufficient pace. Does that answer your question? Andrew Wiener - Burnham: Sure. Basically in a general point I was trying to get at is that digital cinema rolls out at what appears to be sort of a more aggressive pace in '09, if the financing comes through from the studios that would likely one obvious source of incremental revenues above the 17.5 of backlog that you expect to realize?

What’s nice about our operating model, Andrew is that we can get that upside without having to put more cost structure in place. In other words, the cost structure that we have m place is adequate to support that higher level of revenues. I wouldn't anticipate any change in headcount to absorb more royalty income from digital cinema. That’s why it's not important to me in trying to provide guidance here to take a lot of risk in very uncertain times of saying how much I think we might get out of it, but whatever we get will be great. Andrew Wiener - Burnham: Can you also perhaps update us a little bit on some of the initiatives around, I guess, it was Media Bridge? You know, there's been some, I guess, publicity around, I guess, like Apple and with their iPhone, where sort of hold it up and be able to identify a song and download it and I think couple other different vendors are doing some things with bar-coding with mobile phones. I was wondering how some of the partners we are working with are faring.

There's a ton of activity in the space, which we consider to be good and lots of different approaches to object recognition, audio objects and imprint objects. We’re establishing our position within that environment amidst of those other players and exploring the best way to bring income and long-term value to our shareholders. We can operate at a number of different levels in terms of supplying basic technology or more of the stack ourselves or in exclusive relationships or non-exclusive relationships. Our most visible partner in that area is aquaMobile in Spain and they have their own website and anyone who is interested is welcome to go check them out. They are working on print-to-web activity. Our ambition is to transcendent. We want to teach mobile devices to see and hear, which means to recognize print materials, video, and audio. We're exploring all of those opportunities and we're examining the relative advances and disadvantages of different object recognition technologies and we believe we have IT that plays not only in the signal processing of Digital Watermarking, but also in the environment of such applications, including fingerprinting. We are not yet ready to talk specifically about the size of the footprint that we think we may be able to establish in IT in that area, but we do think we're going to have a role to play and that role may be larger than the old media bridge concept. Andrew Wiener - Burnham: Okay, great. Thank you.

(Operator Instructions) We have no further questions at this time.

Well, all right. Thanks very much to everyone. We are, as I pointed out in the prepared remarks, we're very attentive to all these circumstances. They are obviously quite volatile and we're being very careful in our business and we have confidence in our business plan and we think we have great assets and that we're going to deliver the long-term value that I have described to all of you. Thanks for your support and we look forward to talking to you again in another quarter or so. Bye.

This concludes our conference call for today. You may now disconnect your lines.