A digital watermarking method and apparatus allows for the watermarking of a digital video signal in a compressed form, thereby allowing watermarking of a pre-compressed video sequence without requiring the decoding and re-coding of the signal. The watermark signal is a sequence of information bits which has been modulated by a pseudo-random noise sequence to spread it in the frequency domain. The video signal is transform coded, preferably with a discrete cosine transform, and a watermark signal, which has been transform coded using the same type of transform, is added to the coded video signal. The system also includes bitstream control to prevent an increase in the bit rate of the video signal. This allows the system to be used with transmission channels having strict bit rate constraints. For each transform coefficient of the video signal, the number of bits necessary to encode the watermarked coefficient is compared to the number of bits necessary to encode the unwatermarked coefficient. If more bits are required to transmit a watermarked coefficient than to transmit the corresponding unwatermarked coefficient, the watermarked coefficient is not output, and the unwatermarked coefficient is output in its place. When watermarking interframe coded data, a drift compensation signal may be used to compensate for the accumulating variations in the decoded video signal stored at the receiver. The system may also include an encryption/decryption capability, with the watermarking apparatus located at either the transmitting or receiving end of the transmission channel.