Bruce Davis - CEO Mike McConnell - CFO

Bill Gibson Walter Schenker - Titan Capital Paul Sons - Sons Partner Paul Sonz - Paul D Sonz Kevin Capital Advisors

Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc Second Quarter 2010 Earnings Conference 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) I would now like to turn today’s call over to Mr. Bruce Davis, CEO of Digimarc. Please go ahead, sir.

Thanks, Celeste. Good morning, everyone. Welcome to our earnings conference call. Mike McConnell, our CFO, is with me. We are pleased to discuss our second quarter 2010 results, which were issued in a press release this morning. The objectives of this call are to summarize and comment on these results, review significant business developments and market conditions and provide an update on strategy and operations. This webcast will be archived in the “Investor Relations” section of our website. We expect to file our 10-Q with the SEC later today, providing more details on the financial results. Please note that during the course of this call, we’ll be making certain forward-looking statements. These statements are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we offer about future performance represent a point-in-time estimate. Actual results may vary materially from those expressed or implied by such statements. We expressly disclaim any obligation to revise or update any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call. 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 the Form 10-Q we’ll file later today and our earnings release posted on our website this morning. Mike will summarize and comment on the financial results for the quarter. Following Mike’s presentation, I’ll return to discuss some of the important events and achievements during the quarter and provide an update on strategy execution. Then we’ll open our call to questions. Mike?

Thanks, Bruce, and good morning, everyone. Thanks for joining us to discuss our second quarter results. Our revenues for the quarter increased 21% to $5.2 million, up from 4.3 million for the same period last year. This increase reflects higher royalties from some of our licensees as well as higher service revenues from both Nielsen and the central banks. Our gross margin grew to 71% compared to 65% in Q2 of 2009. The increase reflects a mix of higher license revenues to the total as well as benefits realized from improved operating leverage in providing our services. Operating expenses increased 13% to $4.1 million, up from 3.6 million in the second quarter of 2009, and the increase reflects investments - primarily reflects investments in our product development and our IP marketing initiatives. Our operating loss totaled $400,000, a 50% improvement over the $800,000 loss in Q2 of 2009, and this improvement reflects the benefits of both higher revenues and associated operating leverage. Our net loss was $900,000, or $0.13 per diluted share, compared to a net loss of $700,000, or $0.09 per diluted share, in Q2 of 2009. $600,000 of the current year loss reflects our share of operating results from our joint venture investments with The Nielsen Company. Operating cash flow was $500,000 and improved $1 million compared to the second quarter of 2009 due to improved operating results and continued good balance sheet management. We entered the quarter with nearly $47 million in cash and investments, up about $3.8 million from the end of the year. We continue to prudently invest in our growth strategy, including $700,000 of equity contribution in our early-stage joint ventures with Nielsen and incremental spending on IP marketing initiatives to expand our licensing program. For a further discussion of these results, our business and financial models, and risks and prospects of our business, I refer you to the Form 10-Q that we will file a little bit later today. Bruce will now provide his comments on our outlook and execution of strategy. Bruce?

Thanks, Mike. Our financial and operational accomplishments during the second quarter are a great start to the year. The 20% plus growth in revenues in Q2 was encouraging. In the quarter, we focused our R&D on improving the discovery capabilities of mobile devices, particularly invisible search. We dismissed our infringement claim against mobile music discovery leader Shazam to provide them more time to see if a negotiated resolution can be attained. AlpVision was announced as our business partners early in the quarter. So we continue to invest in our current ventures with Nielsen. Our patents base grew by over 20 issued patents, bringing the total portfolio count to over 600 at quarter-end. We also filed more than 30 more applications during the quarter, maintaining a pipeline of pending applications of more than 420. Opportunities to scale the revenue growth are within reach. We are exploring means to facilitate our skilled licensing over IP and in some ways early adoption of our technology in various product markets. Well, the timing and probability to close are not easy to predict. We believe that the financial impact from these opportunities could be significant. We would dedicate significant resources to those initiatives. We are executing on key elements of our strategy, which includes broadening the relevance of our patents and licensable technologies to continuing innovation, prospering the success of our business partners, developing additional business relationships and partnering ventures with Nielsen to maximizing shareholder value by balancing profitable growth and building long-term assets. Our growth strategy has many facets, all organized around a coherent vision. To teach computers to see, hear and understand the world around them, simplifying access to computer technology and contributing to a future of more ubiquitous and intuitive computing. In closing, I’d like to thank our partners, clients and employees for their continued support and commitment to Digimarc’s progress to our vision -- for making this vision a reality. Now, we’ll open the call to questions. (Inaudible)

(Operator Instructions) And our first question comes from the line o Bill Gibson.

Just a housekeeping question. Mike, you said some $100,000 contribution, is that going to be steady every quarter or does that - is that going to swing around in the future?

There is a fixed amount according to our contract. So that will be consistent quarter-to-quarter.

And in fact pretty split between the two joint ventures or…

It's variable, so it's something that we can manage with Nielsen…

Yeah, Bruce I know one last question here. On the Nielsen joint ventures could you give us just may be a little more sense, where they stand right now and are you pleased with the progression on them?

I think we’re done, Bill. We are still really stable for over a year-end to this start-ups and that can bring some good progress in interesting market opportunities. We should be able to talk more about thousands of what we are doing later in the year that’s a pretty consistent. We’re trying for me on our releases of (inaudible) at this point. And as those businesses grow our investment may grow. On the other hand we have deals and are open to adding financial strategic partners if it makes sense so it could be now too. So yes its a little hard to predict but as Mike said for the near term here we would expect the investment prices to stay at pretty similar towards spend. And we’ll see how things develop from there.

(Operator Instructions). Your next question comes from the line of Walter Schenker with Titan Capital Paul Sons - Sons Partner. Walter Schenker - Titan Capital Paul Sons - Sons Partner: It would appear as if you only bought a normal amount of stock in the quarter.

We didn’t buy any. Walter Schenker - Titan Capital Paul Sons - Sons Partner: Let's put less phenomenal.

Less phenomenal yeah, we didn’t have enough opportunities Walter to due to a number of considerations. (Inaudible) Walter Schenker - Titan Capital Paul Sons - Sons Partner: So I shouldn’t interpret as a function of the price of the stock throughout the quarter.

(Inaudible) Walter Schenker - Titan Capital Paul Sons - Sons Partner: And secondly I wrote it down therefore just to make sure for many years now we've been looking toward a significant change in the actual operating dynamics of the company in which revenues would really start to accelerate not that we didn’t get some acceleration. I am trying to - you are always very articulate. You made a comment I believe which I may have written down incorrectly about revenue enhancement. Being (inaudible) paraphrase somewhat closer finally than it might have been in the past, will you basically trying to say we are finally getting reasonably close to seeing some of the - some or many things we've been working out for many years actually turned into revenue, if I misinterpreted you?

You are interpreting me fine. I guess the only -- (inaudible) little credit for some progress and that last years revenues were 19 million plus and we’re running at 25 million, 12 months rates right now. So we’re growing significantly. I am working on time to make it more significantly. But yeah, we’re making good progress on that. I am not looking at the 20% growth right now in Q2 only year-end and reasonably people can different, but only account for the various income statements that we received, but we also have $10 million in first quarter. So it’s quite a year so far and we intend to building on that. Walter Schenker - Titan Capital Paul Sons - Sons Partner: Again I am being redundant making you repeat yourself, as you look at your world, many of these things are getting close to actually - and there is a broad range of things we’re working on, just trying to generate revenues that may not have generated meaningful revenues at this point?

So there’s number of good things, the profit in the last couple of years in the market that are very good for us. So the Digital Cinema requirement of watermarking and the Blu-Ray requirement of watermarking are already growing income for us. So it’s not massive right now, but we’ll see good growth in our license range from those movements by the movie industry. We believe movie industry has seeing substantial value on our technology, but it’s hopefully to continue to expand their use of the technology. Then as we talked about many times the introduction of the smartphone say I don’t know only one pick is starting point, but it's expansion growth and it's absorption into the culture in last couple of years is the tipping point of our business in my view as well. We are waiting for, if you go back to 1999, we were trying to just lens cameras as our interface, they never really called on, well, you now have imaging sensors and audio sensors in everybody's pocket and purse. It can also change in the market place that we intend to get manage-up. So that's -- those are the things that make me enthusiastic about our ability to increase the distribution of our technology and adoption and with of course the income constraint.

Your next question comes from the line of Paul Sonz with Paul D Sonz Partners. Paul Sonz - Paul D Sonz: I have two questions. The first is could you give us the split on in terms of the increase revenue between what was service revenue and what was royalty?

Are you talking about Q2? Paul Sonz - Paul D Sonz: Yes.

The service revenue was a little over 300,000 almost higher in the license revenue was about $600,000 higher. Paul Sonz - Paul D Sonz: Great. Second question is could you give us in terms of numbers the -- the opportunities that you're working on now and another what I'm saying, are you working on a few very large opportunities or you working on 10 various different opportunities of various sizes. Is there anything you can just conserve in a put a quantities note the opportunities that you see in front of you?

Well, I kind of put a qualitative -- quantitative note on there. We're not working on 10 obviously there is what we tend to work on handful or so I mean, given important time you are aware of some probably that's goes on there, it would not publicly disclose some orders. And the range of opportunities is from sort of size that we've been accustomed to up to a very large size. And what we've been trying to do here is, look we've now with number quite large companies, software technology, and they seem to like it, and we're trying to figure out, how is the faster adoption. And to step the company up another level from where we've what we've achieved so far. And that’s speculative, may or may not happen in the time frame it might happen, but there is a full range of opportunity from when they might call. So the size of that would have a nice incremental effect on our business the size that would have quite a major effect on our business. Paul Sonz - Paul D Sonz: Because I think you are using the speaker phone it was a little muddy and I had a little trouble to understand you. I think that what you said is that you are looking at a handful of opportunities, it’s something less then 10 and that they range an opportunity from incrementally positive to things that could very substantially positive?

Yeah that’s pretty clever.

(Operator Instructions). And your next question comes from the line of Kevin [ph] Capital Advisors.

I think I heard you say $25 million which that’s right in the middle of my guesstimate of your revenues for 2010. Would it be fair to say that you at least think that 2010 will higher than last year 19 million?

Yeah. I am quite confident about that. What I said just to make sure those on the phone or clearly I wasn’t changing my view about giving guidance, I was talking about our 12 months….

Revenue.

Run rate. Thank you Rob. Yes. It’s around 25. But in answer to your question, yes, I am very confident we are going to grow significantly over 2009.

So the 25 million imagine, you are talking about trailing 12 months, is that what you….

Early 12 months, it run them out.

Last quarter was a big quarter 10 million plus?

Right.

And can you tell us if any of the royalty increase you saw this quarter was due to the digital cinema?

Yes. It was. And we expect that it continue in the foreseeable future. But again because we are a license we are back of this on the front line. So for the nice confusion the capital and again we can change Cameron for results handling our statistic vision. And rest of the capital and those are - that’s our royalties.

So would the 3D helps you all around?

Absolutely, because it convinces the analog Peter because of digital.

(Operator Instructions). And we have no questions at this time.

All right. Thank you very much everyone. We’ll carry on again, we remain quite optimistic about the near term prospects here. And we will try to bring some more business and get the business to another level of growth. Thanks a lot.

Ladies and gentlemen, this concludes today’s Digimarc second quarter 2010 earnings conference call. You may now disconnect.