8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

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

Date of Report (Date of earliest event reported): November 11, 2008

DOCUMENT SECURITY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

New York	1-32146		16-1229730
(State or other jurisdiction of incorporation)	(Commission File Number)		(IRS Employer Identification No.)
First Federal Plaza, Suite 1525 28 East Main Street Rochester, NY		14614
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (585) 325-3610

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 On November 11, 2008, the Registrant issued a press release announcing its results of operations for its fiscal quarter ended September 30, 2008. A copy of the press release issued by the Registrant concerning the foregoing results is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.

 The information contained herein and in the accompanying exhibit shall not be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing, unless expressly incorporated by specific reference to such filing. The information in this report, including the exhibit hereto, is furnished pursuant to Item 2.02 and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended.

Item 9.01 EXHIBITS

Exhibit 99.1 Press Release, dated November 11, 2008, reporting the results of operations for Document Security Systems, Inc.’s fiscal quarter ended September 30, 2008.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	DOCUMENT SECURITY SYSTEMS, INC.
Dated: November 11, 2008	By:	/S/ Patrick White
		Patrick White
		Chief Executive Officer

EXHIBIT INDEX

Exhibit Number	Description
99.1	Press Release, dated November 11, 2008, reporting the results of operations for the Registrant’s fiscal quarter ended September 30, 2008.

EX-99.1

	News Release
Document Security Systems, Inc. 585.325.3610

For Immediate Release

Document Security Systems Reports Third Quarter 2008 Financial Results

-- Revenue increases 19% in the quarter.

-- Gross margin improves to 57% from 49% year-over-year in the third quarter

-- Gross Profit of $947,000 up 38% year-over-year in the third quarter

-- Adjusted EBITDA loss improves 66%, excluding one-time charges

ROCHESTER, NY, November 11, 2008— Document Security Systems, Inc. (NYSE/Alternext US LLC: DMC; "DSS"), a leader in patented protection against counterfeiting and unauthorized copying, scanning and photo imaging, reported results for the third quarter ended September 30, 2008.

Revenue from continuing operations for the third quarter of 2008 was $1.7 million, an increase of 19% from the $1.4 million reported in the third quarter of 2007. The increase in revenue included a 41% increase in sales of the company’s printed products, which was offset by decreases in royalty revenue and legal supplies sales.

Gross profit from continuing operations for the third quarter increased 38% to $947,000 compared with gross profit of $687,000 in the third quarter of 2007. Gross profit margin was 57% compared with 49% in the third quarter of 2007. Gross profit margins were positively impacted by improvements in material and labor costs efficiencies at the Company’s plastic printing division as the result of its recent move to a larger facility and equipment upgrades.

Operating expenses for continuing operations for the third quarter of 2008 were $2.4 million compared with $2.6 million in 2007, a decrease of 6%. The decrease reflected declines in professional fees of 41%, sales and marketing costs of 56%, and research and development of 34%, as the result of the Company’s cost cutting initiatives it initiated in March of 2008. The cost reductions were offset by increase in non-cash stock based compensation expense of 42%, and an increase in amortization of intangibles of 13%.

On August 20, 2008, the Company entered into an Agreement with Trebuchet Capital Partners, LLC Pursuant to the Agreement, Trebuchet has agreed to pay substantially all of the litigation costs associated with pending validity proceedings initiated by the European Central Bank in eight European countries relating to the Company’s European Patent 0 455 750B1 that the Company has claimed the ECB infringed in printing of the Euros currency, as well as infringement lawsuits related to the Patent. Under the terms of the Agreement, and in consideration for Trebuchet’s funding obligations, the Company assigned and transferred a 49% interest of the Company’s rights, title and interest in the Patent to Trebuchet which allows Trebuchet to have as a separate and exclusive interest including a separate and distinct right to exploit the Patent. Pursuant to this transaction, the Company received $500,000 for its assignment and transfer of 49% of its ownership rights in the Patent, which had a net book value of approximately $1,670,000. As a result, the Company recognized a one-time, non-recurring loss on sale of patent assets of $1,170,000.

- MORE -

Adjusted EBITDA loss, excluding the $1,170,000 one-time non-recurring loss on sale of patent assets during the third quarter of 2008, was $348,000, a 66% improvement compared to Adjusted EBITDA loss of $1,027,000 in the third quarter of 2007. (See Reconciliation of GAAP to Non-GAAP Financial Measures table below). The decline in Adjusted EBITDA loss reflects the company’s ability to maintain revenue growth while significantly reducing its cash based operating expenses.

During the third quarter of 2008, the Company experienced a net loss of $2.7 million, a 42% increase from the net loss of the third quarter of 2007. The increase in net loss during the quarter was primarily the result of the Company’s recognition of a one-time loss on the sale of patent assets of $1.2 million. Otherwise, net loss for the 2008 quarter without the impact of this one-time loss would have been approximately $1.5 million, a decrease of approximately 21% from the third quarter of 2007. The improvement in net loss, excluding the effect of the one-time loss on sale of patent, was due the Company’s ability to increase its sales and gross profits while reducing its operating expenses.

As of September 30, 2008, the Company had approximately $443,000 in cash and an aggregate of $1.7 million available to it under two revolving credit facilities. During the third quarter of 2008, the Company used $500,000 proceeds from the sale and assignment of certain of its patent rights to Trebuchet to pay down one of its credit facilities. In addition, the Company has $1,300,000 in subscriptions receivable which it expects to receive in six-month installments over the next two years.

Robert Fagenson, Chairman of the Board of Document Security Systems, stated “During the quarter and nine months ended September 30, 2008, we have concentrated on sales stabilization and cost reduction. The success of these efforts is evident in the 66% reduction, excluding one-time charges, that we achieved in our negative Adjusted EBITDA numbers during the third quarter compared to the third quarter a year ago. This is the primary way we measure our financial performance. With the execution of our agreement with Trebuchet Partners, we have effectively transferred to them a 49% interest in our European Patent. We believe it is appropriate to reflect this in our financial statements by taking a non-cash charge for 49% of the unamortized value of the patent still reflected on our balance sheet. While this non cash charge negatively impacts our per share earnings for this period, it will significantly reduce amortization costs in future periods. I continue to be encouraged by our progress and congratulate our team on the strides we have made towards our 2008 goals.”

Document Security System’s CEO Patrick White said, “The increased capacity at our P-3 Plastic Card division as a result of our significant capital investments has begun to show dividends in the way of new and larger sales opportunities. In addition, our sales staff has begun the marketing of our new, one-of-a-kind information security software appliance product called ‘AuthentiGuard DX’. This cutting edge software appliance provides visual information protection on screens or printed documents and it more importantly prevents hackers from accessing and reading alpha/numeric information contained on saved Microsoft documents created on the various Microsoft platforms (Word, Outlook, Excel, and Power Point). With our newly announced agreement to acquire the assets of DPI Rochester, a commercial printing company with $7.6 million in revenue in 2007, we feel confident that we are turning the corner and moving in the right direction. In the months ahead we will continue our focus on closing the DPI acquisition, increasing sales, and improving operating efficiency and our financial performance.”

About Document Security Systems, Inc.

A rapidly growing security technology company, Document Security Systems is a world leader in the development of optical deterrent technologies that help prevent counterfeiting and brand fraud from the use of the most advanced scanners, copiers and imaging systems in the market. The company’s patented and patent-pending technologies protect valuable documents and printed products from counterfeiters and identity thieves. Document Security Systems’ customers, which include international governments, major corporations and world financial institutions, use its covert and overt technologies to protect a number of applications including, but not limited to, currency, vital records, brand protection, ID Cards, internet commerce, passports and gift certificates. Document Security Systems’ strategy is to become the world’s leading producer of cutting-edge security technologies for paper, plastic and electronically generated printed assets. More information about Document Security Systems can be found at its websites: www.documentsecurity.com and www.plasticprintingprofessionals.com.

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Safe Harbor Statement

This release contains forward-looking statements regarding expectations for future financial performance, which involve uncertainty and risk. It is possible the company's future financial performance may differ from expectations due to a variety of factors including, but not limited to, changes in economic and business conditions in the world, increased competitive activity, achieving sales levels to fulfill revenue expectations, consolidation among its competitors and customers, technology advancements, unexpected costs and charges, adequate funding for plans, changes in interest and foreign exchange rates, regulatory and other approvals and failure to implement all plans, for whatever reason. It is not possible to foresee or identify all such factors. Any forward-looking statements in this report are based on current conditions; expected future developments and other factors it believes are appropriate in the circumstances. Prospective investors are cautioned that such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected. The company makes no commitment to update any forward-looking statement included herein, or disclose any facts, events or circumstances that may affect the accuracy of any forward-looking statement.

TABLES FOLLOW.

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DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets

 As of

	September 30,			December 31,
	2008			2007
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	442,803		$	742,468
Restricted cash		157,500			-
Accounts receivable, net of allowance of $65,000 ($82,000 as of December 31, 2007)		784,668			617,320
Inventory		230,272			259,442
Loans to employees		67,781			120,732
Prepaid expenses and other current assets		87,906			487,715
Total current assets		1,770,930			2,227,677
Restricted cash		-			177,345
Fixed assets, net		1,349,230			1,494,540
Other assets		258,085			147,958
Goodwill		1,396,734			1,396,734
Other intangible assets, net		3,580,285			6,149,530
Total assets	$	8,355,264		$	11,593,784
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,353,926		$	1,795,085
Accrued expenses & other current liabilities		1,112,404			818,606
Deferred revenue & customer deposits		56,580			732,355
Current portion of capital lease obligations		84,129			79,948
Total current liabilities		2,607,039			3,425,994
Revolving notes from related parties		1,858,000			300,000
Capital lease obligations		215,229			294,821
Deferred revenue		-			15,938
Deferred tax liability		203,397			200,000
Commitments and contingencies
Stockholders' equity
Common stock, $.02 par value;
200,000,000 shares authorized, 14,359,756 shares issued and outstanding (13,654,364 in 2007) (325,000 subscribed in 2008)		287,195			273,087
Additional paid-in capital		34,881,064			31,298,571
Subscriptions receivable		(1,300,000	)		-
Accumulated deficit		(30,396,660	)		(24,214,627	)
Total stockholders' equity		3,471,599			7,357,031
Total liabilities and stockholders' equity	$	8,355,264		$	11,593,784

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DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007			% change vs. 2007			Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007			% change vs. 2007
Revenue
Security printing & products	$	1,334,000		$	946,000			41	%	$	3,421,000		$	2,765,000			24	%
Royalties		181,000			278,000			-35	%		1,402,000			871,000			61	%
Digital solutions		8,000			9,000			-11	%		25,000			184,000			-86	%
Legal products		150,000			176,000			-15	%		483,000			513,000			-6	%
Total Revenue		1,673,000			1,409,000			19	%		5,331,000			4,333,000			23	%
Costs of revenue
Security printing & products	$	636,000		$	636,000			0	%	$	2,028,000		$	1,691,000			20	%
Digital solutions		4,000			3,000			33	%		11,000			41,000			-73	%
Legal products		86,000			83,000			4	%		258,000			276,000			-7	%
Total cost of revenue		726,000			722,000			1	%		2,297,000			2,008,000			14	%
Gross profit
Security printing & products		698,000			310,000			125	%		1,393,000			1,074,000			30	%
Royalties		181,000			278,000			-35	%		1,402,000			871,000			61	%
Digital solutions		4,000			6,000			-33	%		14,000			143,000			-90	%
Legal products		64,000			93,000			-31	%		225,000			237,000			-5	%
Total gross profit		947,000			687,000			38	%		3,034,000			2,325,000			30	%
Selling, general and administrative
General and administrative compensation	$	539,000		$	514,000			5	%	$	1,622,000		$	1,310,000			24	%
Professional Fees		206,000			352,000			-41	%		780,000			1,036,000			-25	%
Sales and marketing		204,000			466,000			-56	%		892,000			1,525,000			-42	%
Depreciation and amortization		42,000			20,000			110	%		126,000			61,000			107	%
Other		319,000			289,000			10	%		902,000			685,000			32	%
Research and development		73,000			111,000			-34	%		322,000			314,000			3	%
Stock based payments		480,000			338,000			42	%		1,506,000			971,000			55	%
Impairment of patent defense costs		-			-						292,000			-
Amortization of intangibles		541,000			480,000			13	%		1,605,000			1,259,000			27	%
Total Operating Expenses		2,404,000			2,570,000			-6	%		8,047,000			7,161,000			12	%
Operating loss		(1,457,000	)		(1,883,000	)		-23	%		(5,013,000	)		(4,836,000	)		4	%
Other income (expense):
Interest income		-			15,000			-100	%		1,000			90,000			-99	%
Gain/(Loss) on foreign currency adjustments		9,000			-6,000			-250	%		(16,000	)		-11,000			45	%
Interest expense		(41,000	)		-1,000			4000	%		(95,000	)		-4,000			2275	%
Loss on sale of patent assets		(1,170,000	)								(1,170,000	)
Other income		-			-						126,000			-
Other income (expense), net		(1,202,000	)		8,000			-15125	%		(1,154,000	)		75,000			-1639	%
Loss from continuing operations before income taxes		(2,659,000	)		(1,875,000	)		42	%		(6,167,000	)		(4,761,000	)		30	%
Income taxes		5,000			5,000			-			14,000			14,000			-
Loss from continuing operations		(2,664,000	)		(1,880,000	)		42	%		(6,181,000	)		(4,775,000	)		29	%
Loss from discontinued operations:
Gain on sale of discontinued assets		-			43,000						-			43,000
Loss from discontinued operations		-			(44,000	)		-100	%		-			(59,000	)		-100	%
Loss on discontinued operations		-			(1,000	)		-100	%		-			(16,000	)		-100	%
Net loss		(2,664,000	)		(1,881,000	)		42	%		(6,182,000	)		(4,792,000	)		29	%
Net loss per share, basic and diluted	$	(0.19	)	$	(0.14	)		36	%	$	(0.45	)	$	(0.35	)		27	%
Weighted average common shares outstanding, basic and diluted		14,286,192			13,676,030			4	%		13,879,891			13,629,241			2	%

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DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30,

(unaudited)

	2008			2007
Cash flows from operating activities:
Net loss	$	(6,182,033	)	$	(4,791,684	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		1,841,975			1,396,262
Stock based compensation		1,536,403			970,829
Impairment of patent defense costs		291,581			-
Net gain on disposal of discontinued operations		-			(42,905	)
Loss on sale of patent assets		1,169,947			-
Decrease in restricted cash		19,845			-
(Increase) decrease in assets:
Accounts receivable		(167,348	)		(112,870	)
Inventory		29,170			4,762
Prepaid expenses and other assets		(43,049	)		(171,526	)
Increase (decrease) in liabilities:
Accounts payable		(65,053	)		445,334
Accrued expenses and other liabilities		143,914			(25,635	)
Deferred revenue		(691,713	)		(234,464	)
Net cash used by operating activities		(2,116,361	)		(2,561,897	)
Cash flows from investing activities:
Purchase of fixed assets		(226,716	)		(423,918	)
Proceeds from the sale of discontinued operations		-			80,000
Proceeds from the sale of patent assets		500,000			-
Purchase of other intangible assets		(1,144,351	)		(1,150,977	)
Net cash used by investing activities		(871,067	)		(1,494,895	)
Cash flows from financing activities:
Borrowing on short-term credit facility		500,000			-
Repayment on short-term credit facility		(500,000	)		-
Borrowing on revolving note- related parties		1,558,000			-
Repayments of capital lease obligations		(75,411	)		(27,140	)
Increase in restricted cash		-			(177,345	)
Payment of stock issuance costs		-			(519,619	)
Issuance of common stock		1,205,174			355,225
Net cash provided (used) by financing activities		2,687,763			(368,879	)
Net increase (decrease) in cash and cash equivalents		(299,665	)		(4,425,671	)
Cash and cash equivalents beginning of period		742,468			5,802,615
Cash and cash equivalents end of period	$	442,803		$	1,376,944

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Adjusted EBITDA: Non-GAAP Financial Performance Measure

	Three Months Ended September 30,									Nine Months Ended September 30,
	2008			2007			% change vs. 2007			2008			2007			% change vs. 2007
	(unaudited)			(unaudited)						(unaudited)			(unaudited)
Net Loss	$	(2,664,000	)	$	(1,881,000	)		42	%	$	(6,182,000	)	$	(4,792,000	)		29	%
Add back:
Depreciation		79,000			45,000			76	%		237,000			137,000			73	%
Amortization of Intangibles		541,000			480,000			13	%		1,605,000			1,259,000			27	%
Stock based payments		480,000			338,000			42	%		1,536,000			971,000			58	%
Loss on sale of patent assets		1,170,000			-						1,170,000			-			0	%
Interest Income		-			(15,000	)		-100	%		(1,000	)		(90,000	)		-99	%
Interest Expense		41,000			1,000			4000	%		95,000			4,000			2275	%
Income Taxes		5,000			5,000			-			14,000			14,000			-
Adjusted EBITDA		(348,000	)		(1,027,000	)		-66	%		(1,526,000	)		(2,497,000	)		-39	%

The Company uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adding back to net income (loss) interest, income taxes, depreciation, amortization, stock-based compensation expense, and non-recurring items. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes Adjusted EBITDA is useful to help investors analyze the operating trends of the business before and after the adoption of SFAS 123(R) and to assess the relative underlying performance of businesses with different capital and tax structures. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing its financial results with other companies in the industry, many of which also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and income taxes, investors can evaluate the Company's operations and its ability to generate cash flows from operations and can compare its results on a more consistent basis to the results of other companies in the industry. Management also uses Adjusted EBITDA to evaluate potential acquisitions, establish internal budgets and goals, and evaluate performance of its business units and management.

Document Security Systems considers Adjusted EBITDA to be an important indicator of the Company's operational strength and performance of its business and a useful measure of the Company's historical and prospective operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes interest income and expense and income taxes, all of which impact the Company's profitability and operating cash flows, as well as depreciation, amortization and stock based compensation. Document Security Systems believes that these limitations are compensated by clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) presented in accordance with GAAP. Adjusted EBITDA as defined by the Company may not be comparable with similarly named measures provided by other entities.

Investor Contact

Lippert /Heilshorn & Associates

212-838-3777

Amy Gibbons

agibbons@lhai.com

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