10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

SQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from________________________to________________________.

001-32146

Commission file number

DOCUMENT SECURITY SYSTEMS, INC.

 (Exact name of registrant as specified in its charter)

New York	16-1229730
(State or other Jurisdiction of incorporation- or Organization)	(IRS Employer Identification No.)

28 Main Street East, Suite 1525

Rochester, NY 14614

(Address of principal executive offices)

(585) 325-3610

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant:

(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer (Do not check if a smaller reporting company) ¨
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨ No x

As of August 12, 2012, there were 20,872,316 shares of the registrant’s common stock, $0.02 par value, outstanding.

DOCUMENT SECURITY SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December  31, 2011  (Audited)	3
	Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2012 and 2011  (Unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (Unaudited)	5
	Notes to Interim Consolidated Financial Statements (Unaudited)	6
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4	Controls and Procedures	20
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	22
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3	Defaults upon Senior Securities	22
Item 4	Mine Safety Disclosures	22
Item 5	Other Information	22
Item 6	Exhibits	22
Signatures

2

PART I – FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

DOCUMENT SECURITY SYSTEMS, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets

As of

	June 30, 2012			December 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash	$	1,517,916		$	717,679
Accounts receivable, net of allowance of  $76,000 ($76,000- 2011)		1,647,923			1,595,750
Inventory		752,271			783,442
Prepaid expenses and other current assets		344,331			95,399
Total current assets		4,262,441			3,192,270
Property, plant and equipment, net		3,886,779			4,019,829
Other assets		234,057			244,356
Goodwill		3,322,799			3,322,799
Other intangible assets, net		1,997,935			2,043,212
Total assets	$	13,704,011		$	12,822,466
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,602,897		$	1,666,963
Accrued expenses and other current liabilities		971,343			1,142,629
Revolving lines of credit		767,894			763,736
Short-term loan from related party		-			150,000
Current portion of long-term debt		333,083			460,598
Current portion of capital lease obligations		44,077			88,172
Total current liabilities		3,719,294			4,272,098
Long-term debt, net of unamortized discount of $66,000 ($88,000-2011)		2,203,736			2,819,783
Interest rate swap hedging liabilities		133,180			110,688
Capital lease obligations		-			11,133
Deferred tax liability		118,201			108,727
Commitments and contingencies (see Note 6)
Stockholders' equity
Common stock, $.02 par value;  200,000,000 shares authorized, 20,711,026 shares issued and outstanding (19,513,132 in 2011)		414,220			390,262
Additional paid-in capital		52,492,069			48,395,241
Accumulated other comprehensive loss		(133,180	)		(110,688	)
Accumulated deficit		(45,243,509	)		(43,174,778	)
Total stockholders' equity		7,529,600			5,500,037
Total liabilities and stockholders' equity	$	13,704,011		$	12,822,466

See accompanying notes

3

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2012			2011			2012			2011
Revenue
Printing	$	852,115		$	789,232		$	1,521,743		$	1,510,996
Packaging		1,574,450			1,183,249			3,669,845			2,219,651
Plastic IDs and cards		799,188			636,727			1,479,370			1,329,706
Licensing and digital solutions		433,635			266,319			831,251			500,415
Total revenue		3,659,388			2,875,527			7,502,209			5,560,768
Costs of revenue
Printing		632,512			754,032			1,139,220			1,384,095
Packaging		1,200,617			919,681			2,831,099			1,637,968
Plastic IDs and cards		429,842			374,718			829,713			777,147
Licensing and digital solutions		61,821			19,099			117,012			19,099
Total costs of revenue		2,324,792			2,067,530			4,917,044			3,818,309
Gross profit		1,334,596			807,997			2,585,165			1,742,459
Operating expenses:
Selling, general and administrative		1,959,622			1,720,621			3,757,932			3,235,875
Research and development		223,436			73,818			371,133			125,111
Amortization of intangibles		76,026			62,076			152,052			134,040
Operating expenses		2,259,084			1,856,515			4,281,117			3,495,026
Operating loss		(924,488	)		(1,048,518	)		(1,695,952	)		(1,752,567	)
Other income (expense):
Change in fair value of derivative liability		-			-			-			360,922
Interest expense		(54,673	)		(59,225	)		(125,605	)		(109,179	)
Amortizaton of note discount		(11,058	)		-			(237,700	)		-
Loss before income taxes		(990,219	)		(1,107,743	)		(2,059,257	)		(1,500,824	)
Income tax expense		4,737			4,737			9,474			9,474
Net loss	$	(994,956	)	$	(1,112,480	)	$	(2,068,731	)	$	(1,510,298	)
Other comprehensive loss:
Interest rate swap (loss) gain		(45,134	)		-			(22,492	)		3,678
Comprehensive loss	$	(1,040,090	)	$	(1,112,480	)	$	(2,091,223	)	$	(1,506,620	)
Net loss per share -basic and diluted:	$	(0.05	)	$	(0.06	)	$	(0.10	)	$	(0.08	)
Weighted average common shares outstanding, basic and diluted		20,711,026			19,420,780			20,391,926			19,416,786

See accompanying notes

4

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Six months Ended June 30,

(Unaudited)

	2012			2011
Cash flows from operating activities:
Net loss	$	(2,068,731	)	$	(1,510,298	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		390,884			351,548
Stock based compensation		331,526			201,543
Amortization of note discount		237,700			-
Change in fair value of derivative liability		-			(360,922	)
(Increase) decrease in assets:
Accounts receivable		(52,173	)		773,970
Inventory		31,171			(315,331	)
Prepaid expenses and other assets		(73,469	)		34,760
Decrease in liabilities:
Accounts payable		(64,066	)		(610,130	)
Accrued expenses and other liabilities		(161,812	)		(457,137	)
Net cash (used) provided by operating activities		(1,428,970	)		(1,891,997	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(105,782	)		(4,509	)
Purchase of other intangible assets		(106,775	)		(24,472	)
Acquisition of business		-			61,995
Net cash (used) provided by investing activities		(212,557	)		33,014
Cash flows from financing activities:
Net (payments) borrowings on revolving lines of credit		4,158			(349,911	)
Payment of short-term loan from related party		(150,000	)		-
Payments of long-term debt		(185,835	)		(150,000	)
Payments of capital lease obligations		(55,228	)		(55,204	)
Issuance of common stock, net of issuance costs		2,828,669			(160,315	)
Net cash provided (used) by financing activities		2,441,764			(715,430	)
Net increase (decrease) in cash		800,237			(2,574,413	)
Cash beginning of period		717,679			4,086,574
Cash end of period	$	1,517,916		$	1,512,161

See accompanying notes.

5

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

1.     Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments, consisting only of normal recurring items necessary for their fair presentation in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions have been eliminated in consolidation.

Interim results are not necessarily indicative of results expected for a full year. For further information regarding Document Security Systems, Inc.’s (the “Company”) accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2011.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure.

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss year, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.

As of June 30, 2012 and 2011, there were up to 4,225,691 and 3,281,705, respectively, of shares potentially issuable under convertible debt agreements, options, warrants, restricted stock agreements and employment agreements that could potentially dilute basic earnings per share in the future. These shares were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses in the respective periods.

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits.  The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions. During the six months ended June 30, 2012 and 2011, one customer accounted for 24% and 16%, respectively, of the Company’s consolidated revenue. As of June 30, 2012 and 2011, this customer accounted for 22% and 20%, respectively, of the Company’s trade accounts receivable balance. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, the short duration of our payment terms for the significant majority of our customer contracts and by the diversification of our customer base.

Conventional Convertible Debt -When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF"). Prior to the determination of the BCF, the proceeds from the debt instrument are first allocated between the convertible debt and any detachable free standing instruments that are included, such as common stock warrants. The Company records a BCF as a debt discount pursuant to FASB ASC Topic 470-20. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. We amortize the discount to interest expense over the life of the debt using the effective interest method.

6

Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company has two interest rate swaps that change variable rates into fixed rates on a term loan and promissory note with RBS Citizens, N.A. These swaps qualify as Level 2 fair value financial instruments. These swap agreements are not held for trading purposes and the Company does not intend to sell the derivative swap financial instruments. The Company records the interest swap agreements on the balance sheet at fair value because the agreements qualify as cash flow hedges under accounting principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) (AOCI) to the Consolidated Statement of Operations on the same line item as the underlying transaction. The valuations of the interest rate swaps have been derived from proprietary models of the bank based upon recognized financial principles and reasonable estimates about relevant future market conditions and may reflect certain other financial factors such as anticipated profit or hedging, transactional, and other costs. The notional amounts of the swaps decrease over the life of the agreements. The Company is exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counter parties. The fair value of interest rate swap hedging liabilities as of June 30, 2012 amounted to $133,180 ($110,688 - December 31, 2011) and the net loss attributable to this cash flow hedge recorded during the six months ended June 30, 2012 amounted to $22,492 ($3,678 gain - 2011).

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements - In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  ASU 2011-04 is required to be applied prospectively in interim and annual periods beginning after December 15, 2011.   The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.

In September 2011 the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the consolidated financial statements.

In June 2011 the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the option to report other comprehensive income and its components in the statement of changes in equity. The Company may elect to present items of net income and other comprehensive income in one continuous statement or in two consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts – net income and other comprehensive income – would need to be displayed under either alternative, and the statements would need to be presented with equal prominence as the other primary financial statements. This standard does not change 1) the items that constitute net income and other comprehensive income, 2) when an item of other comprehensive income must be reclassified to net income, or 3) the computation for earnings per share, which will continue to be based on net income. The adoption of ASU 2011-05 did not have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update indefinitely defers the provision of ASU 2011-05, “Presentation of Comprehensive Income,” that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement of operations. The effective date for this update follows the ASU 2011-05, which is fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of adopting ASU 2011-12 will have on the consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This update creates new disclosure requirements about the nature of an entity’s rights of offsetting and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements in this update are effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. The Company is currently evaluating the impact this update will have on its disclosures.

7

2. Inventory

Inventory consisted of the following:

	June 30,		December 31,
	2012		2011
Finished Goods	$	360,269	$	421,965
Work in process		138,332		73,669
Raw Materials		253,670		287,808
	$	752,271	$	783,442

3.     Other Intangible Assets        

Other intangible assets include patent application costs, which consist of costs associated with the application, acquisition and defense of the Company’s patents, contractual rights to patents and trade secrets associated with the Company’s technologies, customer lists and non-compete agreements obtained as a result of acquisitions. The Company’s patents and trade secrets are for document anti-counterfeiting and anti-scanning technologies and processes that form the basis of the Company’s document security business. Patent application costs are capitalized and amortized over the estimated useful life of the patent, which generally approximates its legal life. External legal costs incurred to defend the Company’s patents are capitalized to the extent of an evident increase in the value of the patents and an expected successful outcome. Patent defense costs are expensed at the point when it is determined that the outcome is expected to be unsuccessful. The Company capitalizes the cost of an appeal until it is determined that the appeal will be unsuccessful. The Company’s capitalized patent defense costs expenses are analyzed for impairment based on the expected eventual outcome of the legal action and recoverability of proceeds or added economic value of the patent in excess of the costs. Legal actions related to the same patent defense case are unified into one asset group for the purposes on the impairment analysis. Intangible asset amortization expense is classified as an operating expense. The Company believes that the decision to incur patent costs is discretionary as the associated products or services can be sold prior to or during the application process. The Company accounts for other intangible amortization as an operating expense, unless the underlying asset is directly associated with the production or delivery of a product. Costs incurred to renew or extend the term of recognized intangible assets, including patent annuities and fees, are expensed as incurred. To date, the amount of related amortization expense for other intangible assets directly attributable to revenue recognized is not material.

Other intangible assets are comprised of the following:

			June 30, 2012						December 31, 2011
	Useful Life		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount
Acquired intangibles		5 -10 years	$	2,405,300	$	1,121,813	$	1,283,487	$	2,405,300	$	999,761	$	1,405,539
Patent application costs		Varied (1)		949,920		235,472		714,448		843,145		205,472		637,673
			$	3,355,220	$	1,357,285	$	1,997,935	$	3,248,445	$	1,205,233	$	2,043,212

(1)- patent rights are amortized over their expected useful life which is generally the legal life of the patent. As of June 30, 2012, the weighted average remaining useful life of these assets in service was approximately 12 years.

Amortization expense for the six months ended June 30, 2012 amounted to $152,052 ($134,040 – 2011). Approximate expected amortization for each of the five succeeding fiscal years is as follows:

2013	$	295,000
2014	$	295,000
2015	$	210,000
2016	$	176,000
2017	$	163,000

8

4.    Short-Term and Long-Term Debt

Revolving Credit Lines - The Company entered into a credit facility agreement with RBS Citizens, N.A. (“Citizens Bank”) in connection with the Company’s acquisition of Premier Packaging (“Premier”). As amended on July 26, 2011, the credit facility agreement provides Premier with a revolving credit line of up to $1,000,000.  The revolving line bears interest at one-month LIBOR plus 3.75% (3.99% as of June 30, 2012) and matures on May 31, 2013. As of June 30, 2012, the revolving line had a balance of $696,319 ($669,785 - December 31, 2011).

On May 12, 2011, in conjunction with the Company’s acquisition of ExtraDev, Inc. (“ExtraDev”), the Company assumed revolving credit lines and open credit card accounts totaling approximately $239,000, comprised of a $100,000 revolving line of credit with a bank at 4.75% with an outstanding balance of $63,000, a $100,000 revolving line of credit with a bank at 8.09% with an outstanding balance of $86,000, and various credits cards with an aggregate outstanding balance of approximately $90,000. All of the credit lines are secured by personal guarantees of the former ExtraDev owners. The line of credit with the $86,000 balance was paid in full during the year ended December 31, 2011 and the line of credit was closed. As of June 30, 2012, the balance of the revolving line of credit at 4.5% was $40,593 and outstanding balances on credit cards were $30,982, $71,575 in aggregate ($93,951 - December 31, 2011).

Short-Term Loan from Related Party - The Company issued a promissory note (the “DSS Note”) to Bzdick Properties, LLC (“Bzdick Properties”) in connection with the purchase of the Premier real estate, totaling $150,000. One of the members of Bzdick Properties is Robert Bzdick, who also serves as a director and chief operating officer of the Company. The DSS Note accrued interest at a rate of 9.5% per annum and permitted prepayment of principal without penalty. The DSS Note called for interest only payments during its term with a balloon payment due at the scheduled maturity date of March 31, 2012. The DSS Note was secured by a guaranty agreement running from Premier to Bzdick Properties and was subordinated to the Citizens Bank loan documents. The DSS Note was paid off in full on March 23, 2012 ($150,000 - December 31, 2011). Interest expense on the short-term loan from related party amounted to $3,240 for the six months ended June 30, 2012.

Long-Term Debt - On December 30, 2011, the Company issued a $575,000 convertible note in order to refinance a traditional note payable that now matures on December 29, 2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note can be converted at any time during the term at Lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion price of $2.21 per share. In conjunction with the issuance of the convertible note, the Company determined a beneficial conversion feature existed amounting to approximately $88,000, which was recorded as a debt discount and will be amortized over the term of the note. The note is secured by all of the assets (excluding assets leased) of Secuprint, Inc., is subject to various events of default, and had a balance of $575,000 as of June 30, 2012 ($575,000 - December 31, 2011).

On February 12, 2010, in conjunction with the credit facility agreement with Citizens Bank, the Company entered into a term loan with Citizens Bank for $1,500,000.    As amended on July 26, 2011, the term loan now requires monthly principal payments of $25,000 through maturity of February 2015. Interest accrues at 1 Month LIBOR plus 3.75% (3.99% at June 30, 2012).  The Company entered into an interest rate swap agreement to lock into a 5.7% effective interest over the remaining life of the amended term loan. As of June 30, 2012, the balance of the term loan was $800,000 ($950,000 - December 31, 2011).

On June 29, 2011, the Company and Plastic Printing Professionals, Inc. (“P3”), a wholly owned subsidiary of the Company, entered into a Commercial Term Note (the “Note”) with Neil Neuman (“Neuman”) whereby the Company borrowed $650,000 from Neuman. The Note called for monthly payments of $13,585, an interest rate of 6.5% per annum, a term of forty-eight months and a final balloon payment of $100,000 on August 1, 2015. The proceeds from the Note were used to pay in full all sums owed by the Company under a Related Party Credit Agreement executed between the Company and Fagenson & Co., Inc., as agent for certain lenders, including Neuman, dated January 4, 2008. Upon such payment the Credit Agreement between the Company and Fagenson & Co., Inc. was terminated in its entirety. As of December 31, 2011, the Note had a balance of $599,462. On February 29, 2012, the Company entered into a Purchase, Amendment and Escrow Agreement (the “Purchase Agreement”) with Barry Honig (“Honig”), Neil Neuman (“Neuman”) and Grushko & Mittman, P.C. The Purchase Agreement provided, among other things, for the sale of the Note to Honig for a purchase price of $578,396, which was the outstanding principal balance on February 29, 2012. In connection with the sale and transfer of the Note to Honig, the Company agreed to amend certain terms of the Note pursuant to an allonge entered into on February 29, 2012 (the “Allonge”). Under the Purchase Agreement any security interest in the Note terminated at the closing of the purchase of the Note; accordingly, Honig did not possess a security interest in any assets of the Company as a result of his purchase of the Note. Pursuant to the Allonge, the maturity date of the Note was extended to July 1, 2013. Honig had the right to convert the principal and any interest due under the Note into shares of the Company’s common stock at a conversion price of $3.30 per share, subject to adjustment upon certain corporate events as set forth in the Allonge. In conjunction with this conversion option, the Company recorded a beneficial conversion feature of approximately $216,000, which was recorded as a discount to the debt.

9

During the first fiscal quarter of 2012, Honing exercised the conversion option on the Note. Pursuant to the conversion, the Company issued an aggregate of 175,710 shares of its common stock to Honig for full payment of Note and accrued interest amounting to $579,843. In conjunction with the conversion, the Company recorded a note discount amortization expense of the entire $216,000 of remaining unamortized debt discount expense during the first fiscal quarter of 2012.

Promissory Note -On August 30, 2011, the Company’s wholly owned subsidiary Premier purchased the packaging plant it occupies in Victor, New York for $1,500,000, which was partially financed with a $1,200,000 promissory note obtained by Premier from Citizens Bank (“Promissory Note”). The Promissory Note calls for monthly payments of principal and interest in the amount of $7,658, which includes interest, calculated as 1 month LIBOR plus 3.15% (3.39% at June 30, 2012). Concurrently with the transaction, the Company entered into an interest rate swap agreement to lock into a 5.865% effective interest rate for the life of the loan.  The Promissory Note matures in August 2021 at which time a balloon payment of the remaining principal balance of $919,677 is due. As of June 30, 2012, the Promissory Note had a balance of $1,182,022 ($1,192,914 - December 31, 2011).

Term Note - On October 8, 2010, the Company amended the Credit Facility Agreement with Citizens Bank to add a Standby Term Loan Note pursuant to which Citizens Bank will provide Premier with up to $450,000 towards the funding of eligible equipment purchases. In October 2011, the Standby Term Loan Note was converted into a Term Note payable in monthly installments of $887 plus interest over 5 years. As of June 30, 2012, the balance under this Term Note was $46,143 ($51,467 - December 31, 2011).

All of the Citizens Bank credit facilities are secured by all of the assets of the Company’s subsidiary, Premier Packaging Corporation, and are also secured through cross guarantees by the Company and two of its other wholly owned subsidiaries, P3 and Secuprint.

Under the Citizens Bank credit facilities, the Company’s subsidiary, Premier Packaging Corporation is subject to various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants. In June 2012, Premier Packaging was notified that it was not in compliance with certain financial covenants as of December 31, 2011 and March 31, 2012, including a failure to maintain the required fixed charge coverage ratio and a disallowance of transfers from Premier Packaging to one of the Company’s subsidiaries. In August 2012, the Company received a waiver as of December 31, 2011 and March 31, 2012 from Citizens Bank, relating to the above-mentioned financial covenants. Premier Packaging was in compliance with the covenants as of June 30, 2012.

5.     Stockholders’ Equity

Stock Issued in Private Placements - On February 13, 2012, the Company completed the sale of $3,000,000 of investment units (the “Units”) in a private placement. A total of 30 Units were sold, at a price of $100,000 per Unit. Each Unit consisted of (i) 32,258 shares of the Company’s common stock, and (ii) a five-year warrant to purchase up to 16,129 shares of the Company’s common stock at an exercise price of $3.10 per share. The private placement resulted in aggregate cash proceeds to the Company of $3,000,000. In connection with the private placement, the Company paid a placement agent fee of $210,000 and issued to the placement agent a five-year warrant to purchase up to an aggregate of 58,064 shares of Common Stock at an exercise price of $3.10. The placement agent warrant had a fair value of $177,000.

Stock Warrants - On February 20, 2012, the Company and ipCapital Group, Inc. (“ipCapital”) entered into an engagement letter (the “ipCapital Engagement Letter”) for the provision of certain IP strategic consulting services by ipCapital for the 2012 calendar year (the “Services”). The managing director and 42% owner of ipCapital, John Cronin, is also a director of the Company. Fees will range from $240,000 to $365,000 for services provided in 2012. In addition the Company issued ipCapital a five-year warrant (the “Warrant”) to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $4.62 per share (the “Warrant Stock”). The Warrant vests and becomes exercisable to the extent of 33 1/3 percent of the Warrant Stock upon each of the first, second and third anniversary dates, respectively, of the Issuance Date. The warrant is valued using the Black Scholes option pricing model at each reporting period through the earlier of the completion of services or the expiration of the service term. The warrant was valued at $178,468 as of June 30, 2012. In addition, on February 20, 2012, the Company entered into a second consulting arrangement with ipCapital (the “ipCapital Consulting Agreement”) for which ipCapital will provide strategic advice to the Company’s senior management team on the development of the Company’s Digital Group infrastructure and cloud computing business strategy. The ipCapital Consulting Agreement has a three year term. As ipCapital’s sole source of compensation under the ipCapital Consulting Agreement, the Company issued ipCapital a five-year warrant (the “Consulting Warrant”) to purchase up to 200,000 shares of the Company’s common stock at an exercise price of $4.50 per share (the “Consulting Warrant Stock”). The Consulting Warrant vests and becomes exercisable to the extent of 33 1/3 percent of the Consulting Warrant Stock upon each of the first, second and third anniversary dates, respectively, of the Consulting Warrant Issuance Date. The warrant is valued using the Black Scholes option pricing model at each reporting period through the requisite service period, in this case the vesting period. The warrant was valued at $362,592 as of June 30, 2012.

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Also, on February 20, 2012, the Company entered into consulting arrangement with Century Media Group for the provision of investor relations services. As compensation Century Media Group will receive a fee of $10,000 per month for the one year term, plus the Company issued Century Media Group a 14-month warrant (the “Century Media Warrant”) to purchase up to 250,000 shares of the Company’s common stock at exercise prices of $4.50, $4.75, $5.00, $5.25 and $6.00 for each 50,000 shares subject to the Century Media Warrant. The Century Media Warrant vested in full on the date of issuance. The Company calculated the fair value of the warrant at approximately $248,000, using the Black Scholes-Merton option pricing model. Expense for consulting services will be recorded over the 12-month service term.

During the six months ended June 30, 2012, a total of 54,444 shares of common stock were issued upon the exercise of warrants in exchange for aggregate proceeds of approximately $109,000.

Restricted Stock - During the six months ended June 30, 2012, the Company granted two restricted stock awards to an employee. The first award grants the employee 30,000 shares of common stock that vest ratably over four years and has a grant date fair value of $101,400. Expense related to the first grant is being recorded on a straight-line basis as shares vest. The second award grants the employee 100,000 shares of common stock that vest in four tranches upon reaching net sales goals. The grant date fair value of the second award amounted to $338,000. As of June 30, 2012, no expense was recorded for the second award as vesting was determined to be remote.

Stock Options - The Company records stock-based payment expense related to these options based on the grant date fair value in accordance with FASB ASC 718. During the six months ended June 30, 2012, the Company issued options to purchase up to an aggregate of 40,000 shares of its common stock to its non-executive board members at an exercise price of $2.55 per share. The fair value of these options amounted to approximately $40,000 determined by utilizing the Black Scholes Merton option pricing model.

Stock-Based Compensation -Stock-based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the six months ended June 30, 2012, the Company had stock compensation expense of approximately $332,000 or $0.02 per share ($202,000; $0.01 per share - 2011).

As of June 30, 2012, there was approximately $992,000 of total unrecognized compensation costs (excluding $932,000 that vest upon the occurrence of certain events) related to options and restricted stock granted under the Company’s stock option plans, which the Company expects to recognize over the weighted average period of one year.

Stock Option Plans - During the second quarter of 2012, a proposal to increase the number of shares under the 2004 Employee Stock Option Plan from 1,700,000 to 3,400,000 and a proposal to increase the number of shares under the 2004 Non-Executive Director Stock Option Plan from 200,000 to 500,000 was approved by the Company’s stockholders.

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6.     Commitments and Contingencies

Legal Matters - On August 1, 2005, the Company commenced a suit in the European Court of First Instance in Luxembourg against the ECB alleging patent infringement by the ECB and claimed unspecified damages (the “ECB Litigation”). The Company brought the suit in the European Court of First Instance in Luxembourg.   The Company alleged that all Euro banknotes in circulation infringe the Company European Patent 0 455 750B1 which covers a method of incorporating an anti-counterfeiting feature into banknotes or similar security documents to protect against forgeries by digital scanning and copying devices.  The Court of First Instance in Luxembourg ruled on September 5, 2007 that it does not have jurisdiction to rule on the patent infringement claim. In 2006, the Company received notices that the ECB had filed separate claims in each of the United Kingdom, The Netherlands, Belgium, Italy, France, Spain, Germany, Austria and Luxembourg courts seeking the invalidation of the Patent.  Proceedings were commenced before each of the national courts seeking revocation and declarations of invalidity of the Patent. On August 20, 2008, the Company entered into an agreement with Trebuchet Capital Partners, LLC (“Trebuchet”) under which Trebuchet agreed to pay substantially all of the litigation costs associated with validity proceedings in eight European countries relating to the Patent. The Company provided Trebuchet with the sole and exclusive right to manage infringement litigation relating to the Patent in Europe, including the right to initiate litigation in the name of the Company, Trebuchet or both and to choose whom and where to sue, subject to certain limitations set forth in the Trebuchet Agreement. In consideration for Trebuchet's funding obligations, the Company assigned and transferred a 49% interest in the Company's rights, title and interest in the Patent to Trebuchet which allows Trebuchet to have a separate and distinct interest in and share of the Patent, along with the right to sue and recover in litigation, settlement or otherwise and to collect royalties or other payments under or on account of the Patent. In addition, the Company and Trebuchet agreed to equally share all proceeds generated from litigation relating to the Patent, including judgments and licenses or other arrangements entered into in settlement of any such litigation. On July 7, 2011, Trebuchet and the Company entered into a series of related agreements wherein Trebuchet effectively ended its ongoing participation in the ECB litigation, except for its continuing involvement in the final settlement of fees that may become payable as a result of the infringement case in The Netherlands described below. The original agreement with Trebuchet, executed in August 2008, will remain in full force and effect, in its entirety, until Trebuchet makes any and all final payments that may become due in The Netherlands infringement case.

On March 26, 2007, the High Court of Justice, Chancery Division, Patents Court in London, England ruled that the Patent was deemed invalid in the United Kingdom, and on March 19, 2008 this decision was upheld on appeal.   On March 27, 2007 the Bundespatentgericht of the Federal Republic of Germany ruled that the German part of the Patent was valid, having considered the English Court’s decision.  However, on July 6, 2010, the Company was notified that the German Court had reversed the ruling on appeal and the Patent was deemed invalid in Germany. On January 9, 2008 the French Court held that the Patent was invalid in France and on March 10, 2010, this decision was upheld on appeal.   On March 12, 2008 the Dutch Court ruled that the Patent was valid in the Netherlands.   However, on December 21, 2010 the Dutch Court reversed the ruling on appeal and the Patent was deemed invalid in the Netherlands. On November 3, 2009, the Belgium Court held that the Patent was invalid in Belgium. On November 17, 2009, the Austrian Court held that the Patent was invalid in Austria.   On March 24, 2010 the Spanish Court ruled that the Patent was valid. The decision is being appealed by the ECB. In July 2010, the Company was notified that the Italian Court deemed the patent invalid. The decision was not appealed.

During the course of the litigation, the losing party in certain jurisdictions was responsible for the other party’s legal fees. As of June 30, 2012, the Company has recorded as accrued liabilities of approximately €132,000 ($165,000) for the Germany case and approximately €175,000 ($218,750) for the Netherlands case for such fees. In addition, the ECB formally requested the Company to pay attorneys and court fees for the Court of First Instance case in Luxembourg in the amount of €93,752 ($117,000) as of June 30, 2012, which, unless the amount is settled will be subject to an assessment procedure that has not been initiated. The Company will accrue the assessed amount, if any, as soon as it is reasonably estimable.

On February 18, 2010, Trebuchet, on behalf of the Company, filed an infringement suit in the Netherlands against the ECB and two security printing entities with manufacturing operations in the Netherlands, Joh. Enschede Banknotes B.V and Koninklijke Joh. Enschede B.V.  Upon determination on December 21, 2010, that the patent was invalid in the Netherlands, the infringement case was terminated by Trebuchet. Trebuchet is responsible for costs reimbursement associated with the case, if any, when determined by the Dutch Court.

On October 24, 2011 the Company initiated a law suit against Coupons.com Incorporated (“Coupons.com”). The suit was filed in the United States District Court, Western District of New York, located in Rochester, New York. Coupons.com is a Delaware corporation having its principal place of business located in Mountain View, California. In the Coupons.com suit, the Company alleges breach of contract, misappropriation of trade secrets, unfair competition and unjust enrichment, and is seeking in excess of $10 million in money damages from Coupons.com for those claims.

In addition to the foregoing, we are subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, in the opinion of management, none of the legal proceedings to which we are a party, whether discussed herein or otherwise, will have a material adverse effect on our results of operations, cash flows or our financial condition.

Contingent Litigation Payments – Pursuant to an agreement made in December 2004, the Company is required to share the economic benefit derived from settlements, licenses or subsequent business arrangements that the Company obtains from any infringer of patents formerly owned by the Wicker Family.  For infringement matters involving certain U.S. patents, the Company will be required to disburse 30% of the settlement proceeds.  For infringement matters involving certain foreign patents, the Company will be required to disburse 14% of the settlement proceeds.  These payments do not apply to licenses or royalties to patents that the Company has developed or obtained from persons other than the Wicker Family. In addition, in May 2005, the Company made an agreement with its legal counsel in charge of the Company’s litigation with the European Central Bank which called for a $150,000 contingent payment to the legal counsel upon a successful ruling or settlement on the Company’s behalf in that litigation. As of June 30, 2012, there has been no settlement amounts related to these agreements.

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On October 21, 2011, the Company entered into a contingency legal fee agreement with Nixon Peabody LLP (the “Contingency Agreement”), in connection with its law suit against Coupons.com. Under the Contingency Agreement, the Company would pay Nixon Peabody LLP 33 1/3% of any settlements or damages awards collected from Coupons.com in connection with the suit. Under the Contingency Agreement, the Company is responsible for payment of out-of-pocket charges and disbursements of Nixon Peabody LLP necessarily accrued during the prosecution of the suit.

Contingent Purchase Price -In December, 2008, the Company acquired substantially all of the assets of DPI of Rochester, LLC in which the Company guaranteed up to $50,000 to certain parties depending on whether certain conditions occurred within five years of the acquisition.   As of June 30, 2012, the Company considers the likelihood that the payment will be required as remote.

7. Supplemental Cash Flow Information

Supplemental cash flow information for the six months ended June 30, 2012 and 2011 is approximately as follows:

	2012		2011
Cash paid for interest	$	126,000	$	228,000
Non-cash investing and financing activities:
Beneficial conversion feature issued with convertible debt	$	216,000	$	-
Conversion of debt and accrued interest to equity	$	580,000	$	-
Warrant issued for prepaid consulting services	$	248,000	$	-
Loss from change in fair value of interest rate swap derivative	$	22,000	$	-
Equity issued for acquisition	$	-	$	274,000
Refinance of related party revolving line of credit and accrued interest	$	-	$	650,000
Retirement of derivative warrant liability	$	-	$	3,506,000

8.     Segment Information

The Company's businesses are organized, managed and internally reported as four operating segments.   In the second quarter of 2011, the Company acquired ExtraDev for its DSS Digital Group and the Company launched a new corporate identity and logo, along with a new website that grouped the Company under four distinct divisions. In conjunction with this, the Company determined that an expansion of its segment reporting to align with the new internal structure was appropriate. A summary of the four reportable segments follows:

DSS Printing	Licenses security printing technologies and manufactures and sells secure documents such as vital records, transcripts, safety paper, secure coupons, voter ballots, event tickets, among others.   In addition, sells general commercial printing services utilizing digital and offset printing capabilities.
DSS Plastics	Manufactures and sells secure and non-secure plastic printed products such as ID cards, event badges and passes, and loyalty and gift cards, among others.    Plastic cards include RFID chips, magnetic strips with variable data, and high quality graphics with overt and covert security features.
DSS Packaging	Manufactures and sells secure and non-secure custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others.
DSS Digital	Develops, installs, hosts and services IT services including remote server and application hosting, cloud computing, secure document systems, back-up and disaster recovery services and customer program development services.

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Approximate information concerning the Company’s operations by reportable segment for the three and six months ended June 30, 2012 and 2011 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:

Three months ended June 30, 2012	DSS Printing			DSS Plastics		DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	1,056,000		$	799,000	$	1,574,000		$	230,000		$	-		$	3,659,000
Revenue from other operating segments		135,000			-		79,000			-			-			214,000
Depreciation and amortization		37,000			44,000		97,000			19,000			1,000			198,000
Net income (loss)		(72,000	)		43,000		(35,000	)		(74,000	)		(857,000	)		(995,000	)

Three months ended June 30, 2011	DSS Printing			DSS Plastics			DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	960,000		$	637,000		$	1,183,000		$	96,000		$	-		$	2,876,000
Revenue from other operating segments		119,000			-			-			-			-			119,000
Depreciation and amortization		35,000			44,000			86,000			5,000			1,000			171,000
Net loss		(576,000	)		(6,000	)		(99,000	)		(23,000	)		(408,000	)		(1,112,000	)

Six months ended June 30, 2012	DSS Printing			DSS Plastics		DSS Packaging		DSS Digital			Corporate			Total
Revenues from external customers	$	1,873,000		$	1,479,000	$	3,670,000	$	480,000		$	-		$	7,502,000
Revenue from other operating segments		278,000			-		79,000		-			-			357,000
Depreciation and amortization		74,000			88,000		194,000		33,000			2,000			391,000
Net income (loss)		(252,000	)		9,000		33,000		(107,000	)		(1,752,000	)		(2,069,000	)
Identifiable assets		2,274,000			2,092,000		7,225,000		935,000			1,178,000			13,704,000

Six months ended June 30, 2011	DSS Printing			DSS Plastics		DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	1,915,000		$	1,330,000	$	2,220,000		$	96,000		$	-		$	5,561,000
Revenue from other operating segments		389,000			-		-			-			-			389,000
Depreciation and amortization		74,000			99,000		173,000			5,000			1,000			352,000
Net income (loss)		(864,000	)		21,000		(171,000	)		(23,000	)		(473,000	)		(1,510,000	)
Identifiable assets		2,124,000			2,122,000		5,766,000			761,000			1,350,000			12,123,000

9.     Subsequent Events

Facility Operating Lease - In July 2012, the Company entered into an amended facility lease at its current location that will accommodate the Company corporate offices as well as the Digital division. The commencement date of the amended lease will be October 1, 2012, until such time, the Company will continue to lease space for its corporate offices and Digital division on a month to month basis. The amended facility lease will expire September 30, 2015, and future lease payments are expected to be approximately $39,000 in 2012, $157,000 in 2013, $169,000 in 2014 and $133,000 in 2015.

Warrant Exercise -In July 2012, the Company received $500,000 as the result of the exercise of warrants by certain holders that resulted in the issuance of an aggregate of 161,290 shares of the Company’s common stock.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Reform Act”). Document Security Systems, Inc. desires to avail itself of certain “safe harbor” provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for the historical information contained herein, this report contains forward-looking statements (identified by the words "estimate," "project," "anticipate," "plan," "expect," "intend," "believe," "hope," "strategy" and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements, including, without limitation, those contained in our Annual Report on Form 10-K for the year ended December 31, 2011, and as follows:

· Our limited operating history with our business model.

· The inability to adequately protect our intellectual property.

· Intellectual property infringement or other claims presently unknown to us, which could be filed against us, or against our customers or our intellectual property, which could be costly to defend and result in our loss of significant rights.

· The failure of our products and services to achieve market acceptance.

· Changes in document security technology and standards could render our applications and services obsolete.

· The inability to compete in our market, especially against established industry competitors with greater market presence and financial resources.

· The inability to meet our growth strategy of acquiring complementary businesses and assets and expanding our existing operations to include manufacturing capabilities.

Overview

Document Security Systems, Inc. (referred to in this report as “Document Security Systems”, “Document Security,” “DSS,” “we,” “us,” “our” or “Company”) was formed in New York in 1984 and, in 2002, chose to strategically focus on becoming a developer and marketer of secure technologies. We specialize in fraud and counterfeit protection for all forms of printed documents and digital information. The Company holds numerous patents for optical deterrent technologies that provide protection of printed information from unauthorized scanning and copying. We operate three production facilities including a security and commercial printing facility, a packaging facility and a plastic card facility where we produce secure and non-secure documents for our customers. We license our anti-counterfeiting technologies to printers and brand-owners. In addition, we have a digital division which provides cloud computing services for its customers, including disaster recovery, back-up and data security services.

Prior to 2006, the Company’s primary revenue source in its document security division was derived from the licensing of its technology. In 2006, the Company began a series of acquisitions designed to expand its ability to produce its products for end-user customers. In 2006, we acquired Plastic Printing Professionals, Inc., a privately held plastic cards manufacturer located in the San Francisco, California area, referred to herein as the DSS Plastics Group. In 2008, we acquired substantially all of the assets of DPI of Rochester, LLC, a privately held commercial printer located in Rochester, New York, referred to herein as Secuprint or DSS Printing Group. In 2010, the Company acquired Premier Packaging Corporation (“Premier Packaging”), a privately held packaging company located in the Rochester, New York area. Premier Packaging is also referred to herein as the DSS Packaging Group.

In May 2011, we acquired all of the capital stock of ExtraDev, Inc. (“ExtraDev”), a privately held information technology and cloud computing company located in the Rochester, New York area. ExtraDev is also referred to herein as the DSS Digital Group.

In 2011, we rebranded as “DSS” and now do business in four operating segments as follows:

DSS Printing Group -Provides secure and commercial printing services for end-user customers along with technical support for the Company’s technology licensees. The division produces a wide array of printed materials such as security paper, vital records, prescription paper, birth certificates, receipts, manuals, identification materials, entertainment tickets, secure coupons, parts tracking forms, brochures, direct mailing pieces, catalogs, and business cards. The division also provides the basis of research and development for the Company’s security printing technologies.

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DSS Plastics Group -Manufactures laminated and surface printed cards which can include magnetic stripes, bar codes, holograms, signature panels, invisible ink, micro fine printing, guilloche patterns, Biometric, Radio Frequency Identification (RFID) and watermarks for printed plastic documents such as ID cards, event badges, and driver’s licenses.

DSS Packaging Group -Produces custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others. The division incorporates our security technologies into printed packaging to help companies prevent or deter brand and product counterfeiting.

DSS Digital Group -Provides data center centric solutions to businesses and governments delivered via the “cloud”. This division is also developing proprietary digital data security technologies based on the Company’s optical deterrent technologies.  

Approximate Results of Operations for the Three Months and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

The discussion should be read in conjunction with the financial statements and footnotes in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue

	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		% change			Six Months Ended June 30, 2012		Six Months Ended June 30, 2011		% change
Revenue
Printing	$	852,000	$	789,000		8	%	$	1,522,000	$	1,511,000		1	%
Packaging		1,574,000		1,183,000		33	%		3,670,000		2,220,000		65	%
Plastic IDs and cards		799,000		637,000		25	%		1,479,000		1,330,000		11	%
Licensing and digital solutions		434,000		266,000		63	%		831,000		500,000		66	%
Total Revenue	$	3,659,000	$	2,875,000		27	%	$	7,502,000	$	5,561,000		35	%

For the three months ended June 30, 2012, revenue was $3.7 million which was 27% greater than revenue for the three months ended June 30, 2011. The revenue increase was primarily due to increases in packaging and plastics revenues. The Company’s packaging group saw increased order activity from its two largest customers during the quarter while the Company’s plastics group benefited from a general increase in orders from its overall customer base along with increase orders for its newer products for RFID and smart card applications. In addition, the Company’s technology license and digital solutions sales increased 63% due to a full quarter of revenues in 2012 from the Company’s ExtraDev cloud computing subsidiary, which was acquired in May of 2011.

For the first six months of 2012, revenue has increased 35% over the same period in 2011, primarily due to the 65% increase in the Company’s packaging group’s sales along with a 66% increase in revenue from the Company’s technology licensing and digital solutions groups, which was primarily the result of the Company’s acquisition of its ExtraDev cloud computing subsidiary in May of 2011.

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Cost of Revenue and Gross Profit

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011			% change			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011			% change
Costs of revenue
Printing	$	632,000		$	754,000			-16	%	$	1,139,000		$	1,384,000			-18	%
Packaging		1,201,000			920,000			31	%		2,831,000			1,638,000			73	%
Plastic IDs and cards		430,000			375,000			15	%		830,000			777,000			7	%
Licensing and digital solutions		62,000			19,000			226	%		117,000			19,000			516	%
Total cost of revenue		2,325,000			2,068,000			12	%		4,917,000			3,818,000			29	%
Gross profit
Printing		220,000			35,000			526	%		383,000			127,000			202	%
Packaging		373,000			263,000			42	%		839,000			582,000			44	%
Plastic IDs and cards		369,000			262,000			41	%		649,000			553,000			17	%
Licensing and digital solutions		372,000			247,000			51	%		714,000			481,000			48	%
Total gross profit	$	1,334,000		$	807,000			65	%	$	2,585,000		$	1,743,000			48	%
Gross profit percentage		36	%		28	%		30	%		34	%		31	%		10	%

For the three months ended June 30, 2012, gross profit increased 65% to $1,334,000 as compared to the three months ended June 30, 2011. The increase in gross profit was primarily due to the significant increases in gross profits in the Company’s printing group, which benefited from a favorable product sales mix as the Company focused on higher margin projects. Gross profits from licensing and digital solutions sales increased 51% primarily due to the addition of a full quarter of gross profits in 2012 from the Company’s acquisition of ExtraDev in May 2011.

For the first six months of 2012, the Company’s gross profit has increased 48% over the same period in 2011. The Company saw a significant increase in gross profits from its printing groups as it has benefited from a lower cost structure and a more favorable product mix. In addition, each of the Company’s packaging and plastics groups realized gross profit gains as a result of their revenue gains. Finally, gross profits from licensing and digital solutions sales increased 48% primarily due to the addition of gross profits from the Company’s acquisition of ExtraDev in May 2011.

Operating Expenses

	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		% change			Six Months Ended June 30, 2012		Six Months Ended June 30, 2011		% change
Operating Expenses
Sales, general and administrative compensation	$	1,046,000	$	845,000		24	%	$	2,111,000	$	1,604,000		32	%
Professional Fees		187,000		163,000		15	%		375,000		364,000		3	%
Sales and marketing		83,000		162,000		-49	%		165,000		286,000		-42	%
Rent and utilities		147,000		188,000		-22	%		298,000		354,000		-16	%
Other		311,000		231,000		35	%		492,000		364,000		35	%
		1,774,000		1,589,000		12	%		3,441,000		2,972,000		16	%
Other Operating Expenses
Non-production depreciation and amortization		32,000		31,000		3	%		64,000		63,000		2	%
Research and development, including research and development costs paid by equity instruments		223,000		74,000		201	%		371,000		125,000		197	%
Stock based compensation		154,000		101,000		52	%		253,000		202,000		25	%
Amortization of intangibles		76,000		62,000		23	%		152,000		134,000		13	%
		485,000		268,000		81	%		840,000		524,000		60	%
Total Operating Expenses	$	2,259,000	$	1,857,000		22	%	$	4,281,000	$	3,496,000		22	%

Sales, general and administrative compensation costs, excluding stock base compensation, increased in 2012 as compared to 2011 primarily due to the addition of employees as a result of the Company’s acquisition of its cloud computing division in May 2011, offset by reductions of personnel in the Company’s printing and packaging divisions.

Professional fees during the three and six months ended June 30, 2012 increased from the corresponding 2011 periods due to an increase in intellectual property consulting and investor relations costs, offset by decreases in legal and accounting fees.

17

Sales and marketing costs during the three and six months ended June 30, 2012 decreased from the corresponding periods of 2011, as the Company significantly decreased its marketing costs, including costs incurred during 2011 to redesign the Company’s logo, websites, sales collateral and trade-show booths, which did not re-occur in 2012.

Rent and utilities expenses in 2012 have decreased due to the elimination of rent at the Company’s packaging division as a result of that division’s purchase of its facility in August 2011, offset by an increase in rent due to the Company’s acquisition of ExtraDev in May 2011.

Other operating expenses consists primarily of equipment maintenance and repairs, office supplies, IT support, bad debt expense and insurance costs. Other expenses in the second quarter of 2012 increased primarily due to the addition of costs at the Company’s digital division, and a placement agent fee related to the placement of a convertible note and subsequent conversion in March 2012. Other expenses increased in the first six months of 2012 due to a one-time settling of certain accrued liabilities for $56,000 less than originally estimated, which occurred during the first quarter of 2011, and did not re-occur in 2012. Absent this item, other expenses would have only increased by 20% during the first six months of 2012 compared to the first six months of 2011.

Research and development costs consist primarily of compensation costs for research personnel, third-party research costs, and consulting costs. During the first six months of 2012, the Company research and development costs, which include stock based compensation costs allocated to research and development costs as a result of warrants issued to ipCapital in February 2012, reflect a plan that the Company initiated in early 2012 to significantly increase its research and development efforts with the goal of increasing its intellectual property portfolio of patents and trade secrets in the security field. The Company expects to continue to see a significant increase in research and develop costs over the next 12 to 18 months which the Company hopes will result in an increase in security product and licensing sales, and an increase in the value of its patent asset portfolio.

Stock based compensation includes expense charges for all stock based awards to employees, directors and consultants, except for stock based compensation allocated to research and development. Such awards include option grants, warrant grants, and restricted stock awards. Stock based compensation in the for the three months ended June 30, 2012 increased 52% from the three months ended June 30, 2011, primarily due to the estimated value of warrants issued to the Company’s investor relations provider in February 2012.

Amortization of intangibles expense increases in 2012 compared to 2011 are due to the increase in the Company’s other intangible asset basis due to the acquisition of ExtraDev in May 2011.

Other Income and Expenses

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011			% change			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011			% change
Other income (expense):
Change in fair value of derivative liability	$	-		$	-			-		$	-		$	361,000			-100	%
Interest expense		(55,000	)		(59,000	)		-7	%		(126,000	)		(109,000	)		16	%
Amortizaton of note discount		(11,000	)		-			100	%		(238,000	)		-			100	%
Other income (expense), net	$	(66,000	)	$	(59,000	)		12	%	$	(364,000	)	$	252,000			-244	%

Interest expense During the three months ended June 30, 2012, interest expense decreased due to a decrease in debt as the result of the reduction of debt caused by the conversion of approximately $580,000 of debt in March 2012, offset by an increase in interest as a result of the increased debt carried by the Company due to its use of a promissory note to help fund the Company’s acquisition of its packaging facility in August 2011. This increase in interest expense offset a reduction in rent expense included in operating expenses as a result of the building purchase for both three and six month periods ending June 30, 2012 compared to the same periods of 2011.

Amortization of note discount On February 29, 2012, the Company entered into a convertible note. The holder of the note had the right to convert the principal and any interest due under the note into shares of the Company’s common stock at a conversion price of $3.30 per share. In conjunction with this conversion option, the Company recorded a beneficial conversion feature of $216,000 which the Company will expense over the term of the note. In March 2012, the holder exercised the conversion option on the note. Pursuant to the conversion, the Company issued an aggregate of 175,710 shares of its common stock to the holder for full payment of note and accrued interest. In conjunction with the conversion, the Company recorded a note discount amortization expense of the entire $216,000 of remaining unamortized debt discount expense during the first quarter of 2012.

18

Change in fair value of derivative liability In late 2010, the Company issued various financial instruments to an investor in connection with a stock purchase agreement, which contained certain provisions that resulted in a derivative liability. On February 18, 2011 the Company entered into certain amendments with the investor for the purpose of modifying the terms of the financial instruments that among other things eliminated the provisions of the warrants that had created the derivative liabilities. As a result, the Company determined the fair value of the derivative liability as of the modification date of February 18, 2011 and recorded the change in fair value of the derivative liability since December 31, 2010 of $360,922 in the statement of operations.

Net Loss and Loss per Share

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011			% change			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011			% change
Net loss	$	(995,000	)	$	(1,112,000	)		-11	%	$	(2,069,000	)	$	(1,510,000	)		37	%
Net loss per share, basic and diluted	$	(0.05	)	$	(0.06	)		-17	%	$	(0.10	)	$	(0.08	)		25	%
Weighted average common shares outstanding, basic and diluted		20,711,026			19,420,780			7	%		20,391,926			19,416,786			5	%

During the three months ended June 30, 2012, the Company had a net loss of $995,000, representing an 11% decrease from the net loss during the three months ended June 30, 2011. The decrease in net loss was primarily due to the 65% increase in gross profit, offset by a 22% increase in operating expenses, which was significantly impacted by a significant increase in research and development costs, including stock based compensation costs.

During the six months ended June 30, 2012, the Company had a net loss of $2,069,000 representing a 37% increase from the net loss during the six months ended June 30, 2011. The increase in net loss was primarily due to two items: 1) $227,000 amortization of note discount expense recorded in the first quarter of 2012, and 2) the $361,000 one-time other income recorded in the first quarter of 2011 due to a change in the fair value of a derivative liability. These two items in aggregate amounted to $588,000. Absent these items, net loss during the first six months of 2012 would have decreased approximately 2%.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically met its liquidity and capital requirements primarily through the private placement of equity securities and debt financings. As of June 30, 2012, the Company had cash of approximately $1.5 million. In addition, the Company had approximately $304,000 available to its Packaging division and approximately $59,000 available to its Digital division under a revolving credit line.

During the first six months of 2012, the Company increased its cash position and reduced its debt by selling shares of its common stock and issuing shares of its common stock pursuant to debt conversions. On February 13, 2012, the Company sold 967,740 shares of common stock for net proceeds of approximately $2,700,000 in a private placement of equity. On February 29, 2012, the Company entered into an agreement whereby an existing commercial term note in the original principal amount of $650,000 was sold and transferred to an investor for a purchase price of $578,396, the outstanding principal at the time of the sale. In connection with the sale and transfer of the commercial term note, the Company agreed to structure the note as a convertible note at a conversion price of $3.30 per share. In March 2012, the holder converted the full amount of the remaining indebtedness under the note, in exchange for 175,710 shares of the Company’s common stock, and the note was retired. In addition, in July 2012, the Company received approximately $500,000 from the exercise of warrants.

Operating Cash Flow – During the first six months of 2012, the Company used approximately $1,400,000 of cash for operations, a 26% decrease from our use of cash for operations during the first six months of 2011, which generally reflected the improved condition of the Company’s working capital position entering 2012 as compared to the working capital position of the Company as it entered 2011, along with the impact of non-cash income and expense items on the income statement.

19

Investing Cash Flow -During the first six months of 2012, the Company spent approximately $106,000 on equipment additions at its packaging and plastic divisions, and paid approximately $107,000 of legal and consulting costs which were capitalized as patent assets.

Financing Cash Flows - During the first six months of 2012, the Company raised approximately $2.8 million from the sale of equity in a private placement, as described above, and from the exercise of warrants made by certain holders. In addition, the Company made scheduled debt and capitalized lease payments during the first six months of 2012 of approximately $391,000.

Future Capital Needs - As of June 30, 2012, the Company had cash of approximately $1.5 million and in July 2012, the Company received approximately $500,000 from the exercise of warrants. In addition, the Company had approximately $304,000 available to its Packaging division and approximately $59,000 available to its Digital division under revolving credit lines. The Company believes that its current cash, working capital and availability of funds under its credit line resources provide it sufficient resources in order to fund its operations and meet its obligations for at least the next twelve months. However, if expected revenues in the second half of 2012 do not materialize and if the Company cannot generate sufficient cash from its operations in the future, the Company may need to raise additional funds in order to fund its working capital needs and pursue its growth strategy. However, there is no guarantee we will be able to raise such funds if necessary.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.

Critical Accounting Policies and Estimates

As of June 30, 2012, our critical accounting policies and estimates have not changed materially from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2012. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, based on the material weaknesses discussed below, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within time periods specified in the Securities and Exchange Act Commission’s rules and forms and that our disclosure controls are not effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In connection with management’s assessment of our internal control over financial reporting described above, management has identified the following material weaknesses in the Company’s internal control over financial reporting as of June 30, 2012.

We did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties. We have two people on staff that perform nearly all aspects of our external financial reporting process, including but not limited to access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the external financial statements. This creates certain incompatible duties and a lack of review over the financial reporting process that would likely fail to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the Securities and Exchange Commission. Specifically, we determined that our controls over the preparation, review and monitoring of the financial statements were ineffective to provide reasonable assurance that financial disclosures agree with appropriate supporting detail, calculations or other documentation. These control deficiencies could potentially result in a material misstatement to our interim consolidated financial statements that may not be prevented or readily detected.

20

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Plan for Remediation of Material Weaknesses

In response to the identified material weaknesses, management, with oversight from the Company’s audit committee, plans to continue to monitor and review our control environment and to evaluate whether cost effective solutions are available to remedy the identified material weaknesses by expanding the resources available to the financial reporting process.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over the financial reporting during our fiscal quarter ending June 30, 2012 that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.

21

PART II
OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

None

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of unregistered equity securities which were not previously reported.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

None

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS

Exhibit Number	Exhibit Description
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*
32.2	Certification of Chief Financial Officer as required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.*

101 **    The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text.

*Filed herewith.

**Furnished herewith.

22

SIGNATURES

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 thereunto duly authorized.

		DOCUMENT SECURITY SYSTEMS, INC.
August 14, 2012	By:	/s/ Patrick White
		Patrick White Chief Executive Officer
August 14, 2012	By:	/s/ Philip Jones
		Philip Jones Chief Financial Officer

23

EX-31.1

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Patrick White, certify that:

1.          I have reviewed this report on Form 10-Q of Document Security Systems, Inc. for the quarter ended June 30, 2012;

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)), for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the registrant’s audit committee of the board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 14, 2012

/s/Patrick White

Patrick White

Chief Executive Officer

EX-31.2

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Philip Jones, certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Document Security Systems, Inc. for the quarter ended June 30, 2012;

2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)), for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the registrant’s audit committee of the board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 14, 2012

/s/ Philip Jones

Philip Jones,

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. 1350

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Document Security Systems, Inc. (the “Company”) on Form 10-Q for the quarter ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick White, as Chief Executive Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: August 14, 2012

/s/Patrick White

Patrick White

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. 1350

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Document Security Systems, inc. (the “Company”) on Form 10-Q for the quarter ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip Jones, as Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: August 14, 2012

/s/Philip Jones

Philip Jones

Chief Financial Officer

XML

Expected Future Amortization of Intangible Assets (Detail) (USD $)	Jun. 30, 2012
Finite Lived Intangible Assets Future Amortization Expense [Line Items]
2013	$ 295,000
2014	295,000
2015	210,000
2016	176,000
2017	$ 163,000

XML

Short-Term and Long-Term Debt

6 Months Ended

Jun. 30, 2012

Short-Term and Long-Term Debt

4.    Short-Term and Long-Term Debt

Revolving Credit Lines - The Company entered into a credit facility agreement with RBS Citizens, N.A. (“Citizens Bank”) in connection with the Company’s acquisition of Premier Packaging (“Premier”). As amended on July 26, 2011, the credit facility agreement provides Premier with a revolving credit line of up to $1,000,000.  The revolving line bears interest at one-month LIBOR plus 3.75% (3.99% as of June 30, 2012) and matures on May 31, 2013. As of June 30, 2012, the revolving line had a balance of $696,319 ($669,785 - December 31, 2011).

On May 12, 2011, in conjunction with the Company’s acquisition of ExtraDev, Inc. (“ExtraDev”), the Company assumed revolving credit lines and open credit card accounts totaling approximately $239,000, comprised of a $100,000 revolving line of credit with a bank at 4.75% with an outstanding balance of $63,000, a $100,000 revolving line of credit with a bank at 8.09% with an outstanding balance of $86,000, and various credits cards with an aggregate outstanding balance of approximately $90,000. All of the credit lines are secured by personal guarantees of the former ExtraDev owners. The line of credit with the $86,000 balance was paid in full during the year ended December 31, 2011 and the line of credit was closed. As of June 30, 2012, the balance of the revolving line of credit at 4.5% was $40,593 and outstanding balances on credit cards were $30,982, $71,575 in aggregate ($93,951 - December 31, 2011).

Short-Term Loan from Related Party - The Company issued a promissory note (the “DSS Note”) to Bzdick Properties, LLC (“Bzdick Properties”) in connection with the purchase of the Premier real estate, totaling $150,000. One of the members of Bzdick Properties is Robert Bzdick, who also serves as a director and chief operating officer of the Company. The DSS Note accrued interest at a rate of 9.5% per annum and permitted prepayment of principal without penalty. The DSS Note called for interest only payments during its term with a balloon payment due at the scheduled maturity date of March 31, 2012. The DSS Note was secured by a guaranty agreement running from Premier to Bzdick Properties and was subordinated to the Citizens Bank loan documents. The DSS Note was paid off in full on March 23, 2012 ($150,000 - December 31, 2011). Interest expense on the short-term loan from related party amounted to $3,240 for the six months ended June 30, 2012.

Long-Term Debt - On December 30, 2011, the Company issued a $575,000 convertible note in order to refinance a traditional note payable that now matures on December 29, 2013, and carries an interest rate of 10% per annum. Interest is payable quarterly, in arrears. The convertible note can be converted at any time during the term at Lender’s option into a total of 260,180 shares of the Company’s common stock at a conversion price of $2.21 per share. In conjunction with the issuance of the convertible note, the Company determined a beneficial conversion feature existed amounting to approximately $88,000, which was recorded as a debt discount and will be amortized over the term of the note. The note is secured by all of the assets (excluding assets leased) of Secuprint, Inc., is subject to various events of default, and had a balance of $575,000 as of June 30, 2012 ($575,000 - December 31, 2011).

On February 12, 2010, in conjunction with the credit facility agreement with Citizens Bank, the Company entered into a term loan with Citizens Bank for $1,500,000.    As amended on July 26, 2011, the term loan now requires monthly principal payments of $25,000 through maturity of February 2015. Interest accrues at 1 Month LIBOR plus 3.75% (3.99% at June 30, 2012).  The Company entered into an interest rate swap agreement to lock into a 5.7% effective interest over the remaining life of the amended term loan. As of June 30, 2012, the balance of the term loan was $800,000 ($950,000 - December 31, 2011).

On June 29, 2011, the Company and Plastic Printing Professionals, Inc. (“P3”), a wholly owned subsidiary of the Company, entered into a Commercial Term Note (the “Note”) with Neil Neuman (“Neuman”) whereby the Company borrowed $650,000 from Neuman. The Note called for monthly payments of $13,585, an interest rate of 6.5% per annum, a term of forty-eight months and a final balloon payment of $100,000 on August 1, 2015. The proceeds from the Note were used to pay in full all sums owed by the Company under a Related Party Credit Agreement executed between the Company and Fagenson & Co., Inc., as agent for certain lenders, including Neuman, dated January 4, 2008. Upon such payment the Credit Agreement between the Company and Fagenson & Co., Inc. was terminated in its entirety. As of December 31, 2011, the Note had a balance of $599,462. On February 29, 2012, the Company entered into a Purchase, Amendment and Escrow Agreement (the “Purchase Agreement”) with Barry Honig (“Honig”), Neil Neuman (“Neuman”) and Grushko & Mittman, P.C. The Purchase Agreement provided, among other things, for the sale of the Note to Honig for a purchase price of $578,396, which was the outstanding principal balance on February 29, 2012. In connection with the sale and transfer of the Note to Honig, the Company agreed to amend certain terms of the Note pursuant to an allonge entered into on February 29, 2012 (the “Allonge”). Under the Purchase Agreement any security interest in the Note terminated at the closing of the purchase of the Note; accordingly, Honig did not possess a security interest in any assets of the Company as a result of his purchase of the Note. Pursuant to the Allonge, the maturity date of the Note was extended to July 1, 2013. Honig had the right to convert the principal and any interest due under the Note into shares of the Company’s common stock at a conversion price of $3.30 per share, subject to adjustment upon certain corporate events as set forth in the Allonge. In conjunction with this conversion option, the Company recorded a beneficial conversion feature of approximately $216,000, which was recorded as a discount to the debt.

During the first fiscal quarter of 2012, Honing exercised the conversion option on the Note. Pursuant to the conversion, the Company issued an aggregate of 175,710 shares of its common stock to Honig for full payment of Note and accrued interest amounting to $579,843. In conjunction with the conversion, the Company recorded a note discount amortization expense of the entire $216,000 of remaining unamortized debt discount expense during the first fiscal quarter of 2012.

Promissory Note - On August 30, 2011, the Company’s wholly owned subsidiary Premier purchased the packaging plant it occupies in Victor, New York for $1,500,000, which was partially financed with a $1,200,000 promissory note obtained by Premier from Citizens Bank (“Promissory Note”). The Promissory Note calls for monthly payments of principal and interest in the amount of $7,658, which includes interest, calculated as 1 month LIBOR plus 3.15% (3.39% at June 30, 2012). Concurrently with the transaction, the Company entered into an interest rate swap agreement to lock into a 5.865% effective interest rate for the life of the loan.  The Promissory Note matures in August 2021 at which time a balloon payment of the remaining principal balance of $919,677 is due. As of June 30, 2012, the Promissory Note had a balance of $1,182,022 ($1,192,914 - December 31, 2011).

Term Note- On October 8, 2010, the Company amended the Credit Facility Agreement with Citizens Bank to add a Standby Term Loan Note pursuant to which Citizens Bank will provide Premier with up to $450,000 towards the funding of eligible equipment purchases. In October 2011, the Standby Term Loan Note was converted into a Term Note payable in monthly installments of $887 plus interest over 5 years. As of June 30, 2012, the balance under this Term Note was $46,143 ($51,467 - December 31, 2011).

Allof the Citizens Bank credit facilities are secured by all of the assets of the Company’s subsidiary, Premier Packaging Corporation, and are also secured through cross guarantees by the Company and two of its other wholly owned subsidiaries, P3 and Secuprint.

Under the Citizens Bank credit facilities, the Company’s subsidiary, Premier Packaging Corporation is subject to various covenants including fixed charge coverage ratio, tangible net worth and current ratio covenants. In June 2012, Premier Packaging was notified that it was not in compliance with certain financial covenants as of December 31, 2011 and March 31, 2012, including a failure to maintain the required fixed charge coverage ratio and a disallowance of transfers from Premier Packaging to one of the Company’s subsidiaries. In August 2012, the Company received a waiver as of December 31, 2011 and March 31, 2012 from Citizens Bank, relating to the above-mentioned financial covenants. Premier Packaging was in compliance with the covenants as of June 30, 2012.

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Supplemental Cash Flow Information (Detail) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Schedule of Cash Flow, Supplemental [Line Items]
Cash paid for interest	$ 126,000	$ 228,000
Non-cash investing and financing activities:
Beneficial conversion feature issued with convertible debt	216,000
Conversion of debt and accrued interest to equity	580,000
Warrant issued for prepaid consulting services	248,000
Loss from change in fair value of interest rate swap derivative	22,000
Refinance of related party revolving line of credit and accrued interest		650,000
Retirement of derivative warrant liability		3,506,000
Business Combinations
Non-cash investing and financing activities:
Equity issued for acquisition		$ 274,000

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Commitments and Contingencies - Additional Information (Detail)	1 Months Ended							6 Months Ended
	Oct. 30, 2011	Oct. 30, 2011 Minimum USD ($)	Feb. 28, 2010 NETHERLANDS Patent Infringements Entity	Dec. 31, 2004 Patent UNITED STATES	Dec. 31, 2004 Patent Foreign	Aug. 31, 2005 Trebuchet Capital Partners Limited Liability Company Patent	May 31, 2005 European Central Bank Contingent payment upon a successful ruling or settlement USD ($)	Jun. 30, 2012 European Central Bank GERMANY USD ($)	Jun. 30, 2012 European Central Bank GERMANY EUR (€)	Jun. 30, 2012 European Central Bank NETHERLANDS USD ($)	Jun. 30, 2012 European Central Bank NETHERLANDS EUR (€)	Jun. 30, 2012 European Central Bank LUXEMBOURG USD ($)	Jun. 30, 2012 European Central Bank LUXEMBOURG EUR (€)	Dec. 31, 2008 Dpi of Rochester Limited Liability Company USD ($)
Commitments and Contingencies Disclosure [Line Items]
Transfer of patent rights, title and interest						49.00%
Attorneys and court fees								$ 165,000	€ 132,000	$ 218,750	€ 175,000	$ 117,000	€ 93,752
Number of security printing entities sued			2
Money damages sought from Coupons.com		10,000,000
Percentage of settlement proceeds required by the company to be disbursed				30.00%	14.00%
Litigation reserve							150,000
Percentage of settlement or damages awards to be paid to Nixon Peabody LLP as legal fee in connection with law suit against Coupons.com	33.30%
Assets acquisition, contingency														$ 50,000
Assets acquisition, contingency period														5 years

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Segment Information - Additional Information (Detail)	6 Months Ended
	Jun. 30, 2012 Segment
Segment Reporting Information [Line Items]
Number of operating segments	4

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Information Concerning Operations by Reportable Segment (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Segment Reporting Information [Line Items]
Revenues from external customers	$ 3,659,388	$ 2,875,527	$ 7,502,209	$ 5,560,768
Revenue from other operating segments	214,000	119,000	357,000	389,000
Depreciation and amortization	198,000	171,000	390,884	351,548
Net income (loss)	(994,956)	(1,112,480)	(2,068,731)	(1,510,298)
Identifiable assets	13,704,011	12,123,000	13,704,011	12,123,000	12,822,466
DSS Printing
Segment Reporting Information [Line Items]
Revenues from external customers	1,056,000	960,000	1,873,000	1,915,000
Revenue from other operating segments	135,000	119,000	278,000	389,000
Depreciation and amortization	37,000	35,000	74,000	74,000
Net income (loss)	(72,000)	(576,000)	(252,000)	(864,000)
Identifiable assets	2,274,000	2,124,000	2,274,000	2,124,000
DSS Plastics
Segment Reporting Information [Line Items]
Revenues from external customers	799,000	637,000	1,479,000	1,330,000
Depreciation and amortization	44,000	44,000	88,000	99,000
Net income (loss)	43,000	(6,000)	9,000	21,000
Identifiable assets	2,092,000	2,122,000	2,092,000	2,122,000
DSS Packaging
Segment Reporting Information [Line Items]
Revenues from external customers	1,574,000	1,183,000	3,670,000	2,220,000
Revenue from other operating segments	79,000		79,000
Depreciation and amortization	97,000	86,000	194,000	173,000
Net income (loss)	(35,000)	(99,000)	33,000	(171,000)
Identifiable assets	7,225,000	5,766,000	7,225,000	5,766,000
DSS Digital
Segment Reporting Information [Line Items]
Revenues from external customers	230,000	96,000	480,000	96,000
Depreciation and amortization	19,000	5,000	33,000	5,000
Net income (loss)	(74,000)	(23,000)	(107,000)	(23,000)
Identifiable assets	935,000	761,000	935,000	761,000
Corporate
Segment Reporting Information [Line Items]
Depreciation and amortization	1,000	1,000	2,000	1,000
Net income (loss)	(857,000)	(408,000)	(1,752,000)	(473,000)
Identifiable assets	$ 1,178,000	$ 1,350,000	$ 1,178,000	$ 1,350,000

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Other Intangible Assets

6 Months Ended

Jun. 30, 2012

Other Intangible Assets

3.     Other Intangible Assets        

Other intangible assets include patent application costs, which consist of costs associated with the application, acquisition and defense of the Company’s patents, contractual rights to patents and trade secrets associated with the Company’s technologies, customer lists and non-compete agreements obtained as a result of acquisitions. The Company’s patents and trade secrets are for document anti-counterfeiting and anti-scanning technologies and processes that form the basis of the Company’s document security business. Patent application costs are capitalized and amortized over the estimated useful life of the patent, which generally approximates its legal life. External legal costs incurred to defend the Company’s patents are capitalized to the extent of an evident increase in the value of the patents and an expected successful outcome. Patent defense costs are expensed at the point when it is determined that the outcome is expected to be unsuccessful. The Company capitalizes the cost of an appeal until it is determined that the appeal will be unsuccessful. The Company’s capitalized patent defense costs expenses are analyzed for impairment based on the expected eventual outcome of the legal action and recoverability of proceeds or added economic value of the patent in excess of the costs. Legal actions related to the same patent defense case are unified into one asset group for the purposes on the impairment analysis. Intangible asset amortization expense is classified as an operating expense. The Company believes that the decision to incur patent costs is discretionary as the associated products or services can be sold prior to or during the application process. The Company accounts for other intangible amortization as an operating expense, unless the underlying asset is directly associated with the production or delivery of a product. Costs incurred to renew or extend the term of recognized intangible assets, including patent annuities and fees, are expensed as incurred. To date, the amount of related amortization expense for other intangible assets directly attributable to revenue recognized is not material.

Other intangible assets are comprised of the following:

			June 30, 2012						December 31, 2011
	Useful Life		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount
Acquired intangibles		5 -10 years	$	2,405,300	$	1,121,813	$	1,283,487	$	2,405,300	$	999,761	$	1,405,539
Patent application costs		Varied (1)		949,920		235,472		714,448		843,145		205,472		637,673
			$	3,355,220	$	1,357,285	$	1,997,935	$	3,248,445	$	1,205,233	$	2,043,212

(1)- patent rights are amortized over their expected useful life which is generally the legal life of the patent. As of June 30, 2012, the weighted average remaining useful life of these assets in service was approximately 12 years.

Amortization expense for the six months ended June 30, 2012 amounted to $152,052 ($134,040 – 2011). Approximate expected amortization for each of the five succeeding fiscal years is as follows:

2013	$	295,000
2014	$	295,000
2015	$	210,000
2016	$	176,000
2017	$	163,000

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Subsequent Events - Additional Information (Detail) (USD $)	1 Months Ended
	Jul. 31, 2012
Facility Leases
Subsequent Event [Line Items]
Facility operating lease, commencement date	Oct. 01, 2012
Facility operating lease, expire date	Sep. 30, 2015
Future lease payments in 2012	$ 39,000
Future lease payments in 2013	157,000
Future lease payments in 2014	169,000
Future lease payments in 2015	133,000
Exercise of Warrants
Subsequent Event [Line Items]
Proceeds from exercise of warrants	$ 500,000
Exercise of warrants to purchase common stock	161,290

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Consolidated Balance Sheets (USD $)	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash	$ 1,517,916	$ 717,679
Accounts receivable, net of allowance of $76,000 ($76,000- 2011)	1,647,923	1,595,750
Inventory	752,271	783,442
Prepaid expenses and other current assets	344,331	95,399
Total current assets	4,262,441	3,192,270
Property, plant and equipment, net	3,886,779	4,019,829
Other assets	234,057	244,356
Goodwill	3,322,799	3,322,799
Other intangible assets, net	1,997,935	2,043,212
Total assets	13,704,011	12,822,466
Current liabilities:
Accounts payable	1,602,897	1,666,963
Accrued expenses and other current liabilities	971,343	1,142,629
Revolving lines of credit	767,894	763,736
Short-term loan from related party		150,000
Current portion of long-term debt	333,083	460,598
Current portion of capital lease obligations	44,077	88,172
Total current liabilities	3,719,294	4,272,098
Long-term debt, net of unamortized discount of $66,000 ($88,000-2011)	2,203,736	2,819,783
Interest rate swap hedging liabilities	133,180	110,688
Capital lease obligations		11,133
Deferred tax liability	118,201	108,727
Commitments and contingencies (see Note 6)
Stockholders' equity
Common stock, $.02 par value; 200,000,000 shares authorized, 20,711,026 shares issued and outstanding (19,513,132 in 2011)	414,220	390,262
Additional paid-in capital	52,492,069	48,395,241
Accumulated other comprehensive loss	(133,180)	(110,688)
Accumulated deficit	(45,243,509)	(43,174,778)
Total stockholders' equity	7,529,600	5,500,037
Total liabilities and stockholders' equity	$ 13,704,011	$ 12,822,466

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Basis of Presentation and Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

Basis of Presentation and Significant Accounting Policies

1.     Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8.03 of Regulation S-X for smaller reporting companies. Accordingly, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying balance sheets and related interim statements of operations and comprehensive loss and cash flows include all adjustments, consisting only of normal recurring items necessary for their fair presentation in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions have been eliminated in consolidation.

Interim results are not necessarily indicative of results expected for a full year. For further information regarding Document Security Systems, Inc.’s (the “Company”) accounting policies, refer to the audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2011.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure.

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss year, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.

As of June 30, 2012 and 2011, there were up to 4,225,691 and 3,281,705, respectively, of shares potentially issuable under convertible debt agreements, options, warrants, restricted stock agreements and employment agreements that could potentially dilute basic earnings per share in the future. These shares were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses in the respective periods.

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits.  The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions. During the six months ended June 30, 2012 and 2011, one customer accounted for 24% and 16%, respectively, of the Company’s consolidated revenue. As of June 30, 2012 and 2011, this customer accounted for 22% and 20%, respectively, of the Company’s trade accounts receivable balance. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, the short duration of our payment terms for the significant majority of our customer contracts and by the diversification of our customer base.

Conventional Convertible Debt -When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF"). Prior to the determination of the BCF, the proceeds from the debt instrument are first allocated between the convertible debt and any detachable free standing instruments that are included, such as common stock warrants. The Company records a BCF as a debt discount pursuant to FASB ASC Topic 470-20. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. We amortize the discount to interest expense over the life of the debt using the effective interest method.

Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company has two interest rate swaps that change variable rates into fixed rates on a term loan and promissory note with RBS Citizens, N.A. These swaps qualify as Level 2 fair value financial instruments. These swap agreements are not held for trading purposes and the Company does not intend to sell the derivative swap financial instruments. The Company records the interest swap agreements on the balance sheet at fair value because the agreements qualify as cash flow hedges under accounting principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) (AOCI) to the Consolidated Statement of Operations on the same line item as the underlying transaction. The valuations of the interest rate swaps have been derived from proprietary models of the bank based upon recognized financial principles and reasonable estimates about relevant future market conditions and may reflect certain other financial factors such as anticipated profit or hedging, transactional, and other costs. The notional amounts of the swaps decrease over the life of the agreements. The Company is exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counter parties. The fair value of interest rate swap hedging liabilities as of June 30, 2012 amounted to $133,180 ($110,688 - December 31, 2011) and the net loss attributable to this cash flow hedge recorded during the six months ended June 30, 2012 amounted to $22,492 ($3,678 gain - 2011).

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements - In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  ASU 2011-04 is required to be applied prospectively in interim and annual periods beginning after December 15, 2011.   The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.

In September 2011 the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the consolidated financial statements.

In June 2011 the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the option to report other comprehensive income and its components in the statement of changes in equity. The Company may elect to present items of net income and other comprehensive income in one continuous statement or in two consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts – net income and other comprehensive income – would need to be displayed under either alternative, and the statements would need to be presented with equal prominence as the other primary financial statements. This standard does not change 1) the items that constitute net income and other comprehensive income, 2) when an item of other comprehensive income must be reclassified to net income, or 3) the computation for earnings per share, which will continue to be based on net income. The adoption of ASU 2011-05 did not have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update indefinitely defers the provision of ASU 2011-05, “Presentation of Comprehensive Income,” that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement of operations. The effective date for this update follows the ASU 2011-05, which is fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of adopting ASU 2011-12 will have on the consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This update creates new disclosure requirements about the nature of an entity’s rights of offsetting and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements in this update are effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. The Company is currently evaluating the impact this update will have on its disclosures.

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Other Intangible Assets (Detail) (USD $)	6 Months Ended		12 Months Ended
	Jun. 30, 2012		Dec. 31, 2011
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	3,355,220		3,248,445
Accumulated Amortization	1,357,285		1,205,233
Net Carrying Amount	1,997,935		2,043,212
Acquired intangibles
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	2,405,300		2,405,300
Accumulated Amortization	1,121,813		999,761
Net Carrying Amount	1,283,487		1,405,539
Acquired intangibles | Minimum
Finite-Lived Intangible Assets [Line Items]
Useful Life	5 years		5 years
Acquired intangibles | Maximum
Finite-Lived Intangible Assets [Line Items]
Useful Life	10 years		10 years
Patent
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	949,920		843,145
Accumulated Amortization	235,472		205,472
Net Carrying Amount	714,448		637,673
Useful Life	12 years
Useful Life	Varied	[1]	Varied	[1]

[1] patent rights are amortized over their expected useful life which is generally the legal life of the patent. As of June 30, 2012, the weighted average remaining useful life of these assets in service was approximately 12 years.

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Other Intangible Assets - Additional Information (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Finite-Lived Intangible Assets [Line Items]
Amortization expense	$ 76,026	$ 62,076	$ 152,052	$ 134,040

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Inventory

6 Months Ended

Jun. 30, 2012

Inventory

2. Inventory

Inventory consisted of the following:

	June 30,		December 31,
	2012		2011
Finished Goods	$	360,269	$	421,965
Work in process		138,332		73,669
Raw Materials		253,670		287,808
	$	752,271	$	783,442

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Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Accounts receivable, allowance	$ 76,000	$ 76,000
Long-term debt, unamortized discount	$ 66,000	$ 88,000
Common stock, par value	$ 0.02	$ 0.02
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	20,711,026	19,513,132
Common stock, shares outstanding	20,711,026	19,513,132

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Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2012

Other Intangible Assets

Other intangible assets are comprised of the following:

			June 30, 2012						December 31, 2011
	Useful Life		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount
Acquired intangibles		5 -10 years	$	2,405,300	$	1,121,813	$	1,283,487	$	2,405,300	$	999,761	$	1,405,539
Patent application costs		Varied (1)		949,920		235,472		714,448		843,145		205,472		637,673
			$	3,355,220	$	1,357,285	$	1,997,935	$	3,248,445	$	1,205,233	$	2,043,212

(1)- patent rights are amortized over their expected useful life which is generally the legal life of the patent. As of June 30, 2012, the weighted average remaining useful life of these assets in service was approximately 12 years.

Expected Future Amortization of Intangible Assets

Approximate expected amortization for each of the five succeeding fiscal years is as follows:

2013	$	295,000
2014	$	295,000
2015	$	210,000
2016	$	176,000
2017	$	163,000

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 12, 2012
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Trading Symbol	DSS
Entity Registrant Name	DOCUMENT SECURITY SYSTEMS INC
Entity Central Index Key	0000771999
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		20,872,316

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Supplemental Cash Flow Information (Tables)

6 Months Ended

Jun. 30, 2012

Supplemental Cash Flow Information

Supplemental cash flow information for the six months ended June 30, 2012 and 2011 is approximately as follows:

	2012		2011
Cash paid for interest	$	126,000	$	228,000
Non-cash investing and financing activities:
Beneficial conversion feature issued with convertible debt	$	216,000	$	-
Conversion of debt and accrued interest to equity	$	580,000	$	-
Warrant issued for prepaid consulting services	$	248,000	$	-
Loss from change in fair value of interest rate swap derivative	$	22,000	$	-
Equity issued for acquisition	$	-	$	274,000
Refinance of related party revolving line of credit and accrued interest	$	-	$	650,000
Retirement of derivative warrant liability	$	-	$	3,506,000

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Consolidated Statements of Operations and Comprehensive Loss (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenue
Printing	$ 852,115	$ 789,232	$ 1,521,743	$ 1,510,996
Packaging	1,574,450	1,183,249	3,669,845	2,219,651
Plastic IDs and cards	799,188	636,727	1,479,370	1,329,706
Licensing and digital solutions	433,635	266,319	831,251	500,415
Total revenue	3,659,388	2,875,527	7,502,209	5,560,768
Costs of revenue
Printing	632,512	754,032	1,139,220	1,384,095
Packaging	1,200,617	919,681	2,831,099	1,637,968
Plastic IDs and cards	429,842	374,718	829,713	777,147
Licensing and digital solutions	61,821	19,099	117,012	19,099
Total costs of revenue	2,324,792	2,067,530	4,917,044	3,818,309
Gross profit	1,334,596	807,997	2,585,165	1,742,459
Operating expenses:
Selling, general and administrative	1,959,622	1,720,621	3,757,932	3,235,875
Research and development	223,436	73,818	371,133	125,111
Amortization of intangibles	76,026	62,076	152,052	134,040
Operating expenses	2,259,084	1,856,515	4,281,117	3,495,026
Operating loss	(924,488)	(1,048,518)	(1,695,952)	(1,752,567)
Other income (expense):
Change in fair value of derivative liability				360,922
Interest expense	(54,673)	(59,225)	(125,605)	(109,179)
Amortizaton of note discount	(11,058)		(237,700)
Loss before income taxes	(990,219)	(1,107,743)	(2,059,257)	(1,500,824)
Income tax expense	4,737	4,737	9,474	9,474
Net loss	(994,956)	(1,112,480)	(2,068,731)	(1,510,298)
Other comprehensive loss:
Interest rate swap (loss) gain	(45,134)		(22,492)	3,678
Comprehensive loss	$ (1,040,090)	$ (1,112,480)	$ (2,091,223)	$ (1,506,620)
Net loss per share -basic and diluted:	$ (0.05)	$ (0.06)	$ (0.10)	$ (0.08)
Weighted average common shares outstanding, basic and diluted	20,711,026	19,420,780	20,391,926	19,416,786

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Supplemental Cash Flow Information

6 Months Ended

Jun. 30, 2012

Supplemental Cash Flow Information

7. Supplemental Cash Flow Information

Supplemental cash flow information for the six months ended June 30, 2012 and 2011 is approximately as follows:

	2012		2011
Cash paid for interest	$	126,000	$	228,000
Non-cash investing and financing activities:
Beneficial conversion feature issued with convertible debt	$	216,000	$	-
Conversion of debt and accrued interest to equity	$	580,000	$	-
Warrant issued for prepaid consulting services	$	248,000	$	-
Loss from change in fair value of interest rate swap derivative	$	22,000	$	-
Equity issued for acquisition	$	-	$	274,000
Refinance of related party revolving line of credit and accrued interest	$	-	$	650,000
Retirement of derivative warrant liability	$	-	$	3,506,000

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2012

Commitments and Contingencies

6.     Commitments and Contingencies

Legal Matters- On August 1, 2005, the Company commenced a suit in the European Court of First Instance in Luxembourg against the ECB alleging patent infringement by the ECB and claimed unspecified damages (the “ECB Litigation”). The Company brought the suit in the European Court of First Instance in Luxembourg.   The Company alleged that all Euro banknotes in circulation infringe the Company European Patent 0 455 750B1 which covers a method of incorporating an anti-counterfeiting feature into banknotes or similar security documents to protect against forgeries by digital scanning and copying devices.  The Court of First Instance in Luxembourg ruled on September 5, 2007 that it does not have jurisdiction to rule on the patent infringement claim. In 2006, the Company received notices that the ECB had filed separate claims in each of the United Kingdom, The Netherlands, Belgium, Italy, France, Spain, Germany, Austria and Luxembourg courts seeking the invalidation of the Patent.  Proceedings were commenced before each of the national courts seeking revocation and declarations of invalidity of the Patent. On August 20, 2008, the Company entered into an agreement with Trebuchet Capital Partners, LLC (“Trebuchet”) under which Trebuchet agreed to pay substantially all of the litigation costs associated with validity proceedings in eight European countries relating to the Patent. The Company provided Trebuchet with the sole and exclusive right to manage infringement litigation relating to the Patent in Europe, including the right to initiate litigation in the name of the Company, Trebuchet or both and to choose whom and where to sue, subject to certain limitations set forth in the Trebuchet Agreement. In consideration for Trebuchet's funding obligations, the Company assigned and transferred a 49% interest in the Company's rights, title and interest in the Patent to Trebuchet which allows Trebuchet to have a separate and distinct interest in and share of the Patent, along with the right to sue and recover in litigation, settlement or otherwise and to collect royalties or other payments under or on account of the Patent. In addition, the Company and Trebuchet agreed to equally share all proceeds generated from litigation relating to the Patent, including judgments and licenses or other arrangements entered into in settlement of any such litigation. On July 7, 2011, Trebuchet and the Company entered into a series of related agreements wherein Trebuchet effectively ended its ongoing participation in the ECB litigation, except for its continuing involvement in the final settlement of fees that may become payable as a result of the infringement case in The Netherlands described below. The original agreement with Trebuchet, executed in August 2008, will remain in full force and effect, in its entirety, until Trebuchet makes any and all final payments that may become due in The Netherlands infringement case.

On March 26, 2007, the High Court of Justice, Chancery Division, Patents Court in London, England ruled that the Patent was deemed invalid in the United Kingdom, and on March 19, 2008 this decision was upheld on appeal.   On March 27, 2007 the Bundespatentgericht of the Federal Republic of Germany ruled that the German part of the Patent was valid, having considered the English Court’s decision.  However, on July 6, 2010, the Company was notified that the German Court had reversed the ruling on appeal and the Patent was deemed invalid in Germany. On January 9, 2008 the French Court held that the Patent was invalid in France and on March 10, 2010, this decision was upheld on appeal.   On March 12, 2008 the Dutch Court ruled that the Patent was valid in the Netherlands.   However, on December 21, 2010 the Dutch Court reversed the ruling on appeal and the Patent was deemed invalid in the Netherlands. On November 3, 2009, the Belgium Court held that the Patent was invalid in Belgium. On November 17, 2009, the Austrian Court held that the Patent was invalid in Austria.   On March 24, 2010 the Spanish Court ruled that the Patent was valid. The decision is being appealed by the ECB. In July 2010, the Company was notified that the Italian Court deemed the patent invalid. The decision was not appealed.

During the course of the litigation, the losing party in certain jurisdictions was responsible for the other party’s legal fees. As of June 30, 2012, the Company has recorded as accrued liabilities of approximately €132,000 ($165,000) for the Germany case and approximately €175,000 ($218,750) for the Netherlands case for such fees. In addition, the ECB formally requested the Company to pay attorneys and court fees for the Court of First Instance case in Luxembourg in the amount of €93,752 ($117,000) as of June 30, 2012, which, unless the amount is settled will be subject to an assessment procedure that has not been initiated. The Company will accrue the assessed amount, if any, as soon as it is reasonably estimable.

On February 18, 2010, Trebuchet, on behalf of the Company, filed an infringement suit in the Netherlands against the ECB and two security printing entities with manufacturing operations in the Netherlands, Joh. Enschede Banknotes B.V and Koninklijke Joh. Enschede B.V.  Upon determination on December 21, 2010, that the patent was invalid in the Netherlands, the infringement case was terminated by Trebuchet. Trebuchet is responsible for costs reimbursement associated with the case, if any, when determined by the Dutch Court.

On October 24, 2011 the Company initiated a law suit against Coupons.com Incorporated (“Coupons.com”). The suit was filed in the United States District Court, Western District of New York, located in Rochester, New York. Coupons.com is a Delaware corporation having its principal place of business located in Mountain View, California. In the Coupons.com suit, the Company alleges breach of contract, misappropriation of trade secrets, unfair competition and unjust enrichment, and is seeking in excess of $10 million in money damages from Coupons.com for those claims.

In addition to the foregoing, we are subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, in the opinion of management, none of the legal proceedings to which we are a party, whether discussed herein or otherwise, will have a material adverse effect on our results of operations, cash flows or our financial condition.

Contingent Litigation Payments – Pursuant to an agreement made in December 2004, the Company is required to share the economic benefit derived from settlements, licenses or subsequent business arrangements that the Company obtains from any infringer of patents formerly owned by the Wicker Family.  For infringement matters involving certain U.S. patents, the Company will be required to disburse 30% of the settlement proceeds.  For infringement matters involving certain foreign patents, the Company will be required to disburse 14% of the settlement proceeds.  These payments do not apply to licenses or royalties to patents that the Company has developed or obtained from persons other than the Wicker Family. In addition, in May 2005, the Company made an agreement with its legal counsel in charge of the Company’s litigation with the European Central Bank which called for a $150,000 contingent payment to the legal counsel upon a successful ruling or settlement on the Company’s behalf in that litigation. As of June 30, 2012, there has been no settlement amounts related to these agreements.

On October 21, 2011, the Company entered into a contingency legal fee agreement with Nixon Peabody LLP (the “Contingency Agreement”), in connection with its law suit against Coupons.com. Under the Contingency Agreement, the Company would pay Nixon Peabody LLP 33 1/3% of any settlements or damages awards collected from Coupons.com in connection with the suit. Under the Contingency Agreement, the Company is responsible for payment of out-of-pocket charges and disbursements of Nixon Peabody LLP necessarily accrued during the prosecution of the suit.

Contingent Purchase Price -In December, 2008, the Company acquired substantially all of the assets of DPI of Rochester, LLC in which the Company guaranteed up to $50,000 to certain parties depending on whether certain conditions occurred within five years of the acquisition.   As of June 30, 2012, the Company considers the likelihood that the payment will be required as remote.

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Other Intangible Assets (Parenthetical) (Detail) (Patent)	6 Months Ended
	Jun. 30, 2012
Patent
Finite-Lived Intangible Assets [Line Items]
Finite lived intangible asset, weighted average remaining useful life	12 years

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Segment Information (Tables)

6 Months Ended

Jun. 30, 2012

Information Concerning Operations by Reportable Segment

Approximate information concerning the Company’s operations by reportable segment for the three and six months ended June 30, 2012 and 2011 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:

Three months ended June 30, 2012	DSS Printing			DSS Plastics		DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	1,056,000		$	799,000	$	1,574,000		$	230,000		$	-		$	3,659,000
Revenue from other operating segments		135,000			-		79,000			-			-			214,000
Depreciation and amortization		37,000			44,000		97,000			19,000			1,000			198,000
Net income (loss)		(72,000	)		43,000		(35,000	)		(74,000	)		(857,000	)		(995,000	)

Three months ended June 30, 2011	DSS Printing			DSS Plastics			DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	960,000		$	637,000		$	1,183,000		$	96,000		$	-		$	2,876,000
Revenue from other operating segments		119,000			-			-			-			-			119,000
Depreciation and amortization		35,000			44,000			86,000			5,000			1,000			171,000
Net loss		(576,000	)		(6,000	)		(99,000	)		(23,000	)		(408,000	)		(1,112,000	)

Six months ended June 30, 2012	DSS Printing			DSS Plastics		DSS Packaging		DSS Digital			Corporate			Total
Revenues from external customers	$	1,873,000		$	1,479,000	$	3,670,000	$	480,000		$	-		$	7,502,000
Revenue from other operating segments		278,000			-		79,000		-			-			357,000
Depreciation and amortization		74,000			88,000		194,000		33,000			2,000			391,000
Net income (loss)		(252,000	)		9,000		33,000		(107,000	)		(1,752,000	)		(2,069,000	)
Identifiable assets		2,274,000			2,092,000		7,225,000		935,000			1,178,000			13,704,000

Six months ended June 30, 2011	DSS Printing			DSS Plastics		DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	1,915,000		$	1,330,000	$	2,220,000		$	96,000		$	-		$	5,561,000
Revenue from other operating segments		389,000			-		-			-			-			389,000
Depreciation and amortization		74,000			99,000		173,000			5,000			1,000			352,000
Net income (loss)		(864,000	)		21,000		(171,000	)		(23,000	)		(473,000	)		(1,510,000	)
Identifiable assets		2,124,000			2,122,000		5,766,000			761,000			1,350,000			12,123,000

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Basis of Presentation and Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Earnings Per Common Share

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss year, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.

As of June 30, 2012 and 2011, there were up to 4,225,691 and 3,281,705, respectively, of shares potentially issuable under convertible debt agreements, options, warrants, restricted stock agreements and employment agreements that could potentially dilute basic earnings per share in the future. These shares were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses in the respective periods.

Concentration of Credit Risk

Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits.  The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions. During the six months ended June 30, 2012 and 2011, one customer accounted for 24% and 16%, respectively, of the Company’s consolidated revenue. As of June 30, 2012 and 2011, this customer accounted for 22% and 20%, respectively, of the Company’s trade accounts receivable balance. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, the short duration of our payment terms for the significant majority of our customer contracts and by the diversification of our customer base.

Conventional Convertible Debt

Conventional Convertible Debt -When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF"). Prior to the determination of the BCF, the proceeds from the debt instrument are first allocated between the convertible debt and any detachable free standing instruments that are included, such as common stock warrants. The Company records a BCF as a debt discount pursuant to FASB ASC Topic 470-20. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. We amortize the discount to interest expense over the life of the debt using the effective interest method.

Derivative Instruments

Derivative Instruments - The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate swap contracts to minimize significant fluctuations in earnings that are caused by interest rate volatility. The Company has two interest rate swaps that change variable rates into fixed rates on a term loan and promissory note with RBS Citizens, N.A. These swaps qualify as Level 2 fair value financial instruments. These swap agreements are not held for trading purposes and the Company does not intend to sell the derivative swap financial instruments. The Company records the interest swap agreements on the balance sheet at fair value because the agreements qualify as cash flow hedges under accounting principles generally accepted in the United States of America. Gains and losses on these instruments are recorded in other comprehensive income (loss) until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income (loss) (AOCI) to the Consolidated Statement of Operations on the same line item as the underlying transaction. The valuations of the interest rate swaps have been derived from proprietary models of the bank based upon recognized financial principles and reasonable estimates about relevant future market conditions and may reflect certain other financial factors such as anticipated profit or hedging, transactional, and other costs. The notional amounts of the swaps decrease over the life of the agreements. The Company is exposed to a credit loss in the event of nonperformance by the counter parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counter parties. The fair value of interest rate swap hedging liabilities as of June 30, 2012 amounted to $133,180 ($110,688 - December 31, 2011) and the net loss attributable to this cash flow hedge recorded during the six months ended June 30, 2012 amounted to $22,492 ($3,678 gain - 2011).

Reclassifications

Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

Recent Accounting Pronouncements - In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  ASU 2011-04 is required to be applied prospectively in interim and annual periods beginning after December 15, 2011.   The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.

In September 2011 the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not have a material impact on the consolidated financial statements.

In June 2011 the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the option to report other comprehensive income and its components in the statement of changes in equity. The Company may elect to present items of net income and other comprehensive income in one continuous statement or in two consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts – net income and other comprehensive income – would need to be displayed under either alternative, and the statements would need to be presented with equal prominence as the other primary financial statements. This standard does not change 1) the items that constitute net income and other comprehensive income, 2) when an item of other comprehensive income must be reclassified to net income, or 3) the computation for earnings per share, which will continue to be based on net income. The adoption of ASU 2011-05 did not have a material impact on the consolidated financial statements. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update indefinitely defers the provision of ASU 2011-05, “Presentation of Comprehensive Income,” that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement of operations. The effective date for this update follows the ASU 2011-05, which is fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of adopting ASU 2011-12 will have on the consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This update creates new disclosure requirements about the nature of an entity’s rights of offsetting and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements in this update are effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. The Company is currently evaluating the impact this update will have on its disclosures.

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Segment Information

6 Months Ended

Jun. 30, 2012

Segment Information

8.     Segment Information

The Company's businesses are organized, managed and internally reported as four operating segments.   In the second quarter of 2011, the Company acquired ExtraDev for its DSS Digital Group and the Company launched a new corporate identity and logo, along with a new website that grouped the Company under four distinct divisions. In conjunction with this, the Company determined that an expansion of its segment reporting to align with the new internal structure was appropriate. A summary of the four reportable segments follows:

DSS Printing	Licenses security printing technologies and manufactures and sells secure documents such as vital records, transcripts, safety paper, secure coupons, voter ballots, event tickets, among others.   In addition, sells general commercial printing services utilizing digital and offset printing capabilities.
DSS Plastics	Manufactures and sells secure and non-secure plastic printed products such as ID cards, event badges and passes, and loyalty and gift cards, among others.    Plastic cards include RFID chips, magnetic strips with variable data, and high quality graphics with overt and covert security features.
DSS Packaging	Manufactures and sells secure and non-secure custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others.
DSS Digital	Develops, installs, hosts and services IT services including remote server and application hosting, cloud computing, secure document systems, back-up and disaster recovery services and customer program development services.

Approximate information concerning the Company’s operations by reportable segment for the three and six months ended June 30, 2012 and 2011 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:

Three months ended June 30, 2012	DSS Printing			DSS Plastics		DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	1,056,000		$	799,000	$	1,574,000		$	230,000		$	-		$	3,659,000
Revenue from other operating segments		135,000			-		79,000			-			-			214,000
Depreciation and amortization		37,000			44,000		97,000			19,000			1,000			198,000
Net income (loss)		(72,000	)		43,000		(35,000	)		(74,000	)		(857,000	)		(995,000	)

Three months ended June 30, 2011	DSS Printing			DSS Plastics			DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	960,000		$	637,000		$	1,183,000		$	96,000		$	-		$	2,876,000
Revenue from other operating segments		119,000			-			-			-			-			119,000
Depreciation and amortization		35,000			44,000			86,000			5,000			1,000			171,000
Net loss		(576,000	)		(6,000	)		(99,000	)		(23,000	)		(408,000	)		(1,112,000	)

Six months ended June 30, 2012	DSS Printing			DSS Plastics		DSS Packaging		DSS Digital			Corporate			Total
Revenues from external customers	$	1,873,000		$	1,479,000	$	3,670,000	$	480,000		$	-		$	7,502,000
Revenue from other operating segments		278,000			-		79,000		-			-			357,000
Depreciation and amortization		74,000			88,000		194,000		33,000			2,000			391,000
Net income (loss)		(252,000	)		9,000		33,000		(107,000	)		(1,752,000	)		(2,069,000	)
Identifiable assets		2,274,000			2,092,000		7,225,000		935,000			1,178,000			13,704,000

Six months ended June 30, 2011	DSS Printing			DSS Plastics		DSS Packaging			DSS Digital			Corporate			Total
Revenues from external customers	$	1,915,000		$	1,330,000	$	2,220,000		$	96,000		$	-		$	5,561,000
Revenue from other operating segments		389,000			-		-			-			-			389,000
Depreciation and amortization		74,000			99,000		173,000			5,000			1,000			352,000
Net income (loss)		(864,000	)		21,000		(171,000	)		(23,000	)		(473,000	)		(1,510,000	)
Identifiable assets		2,124,000			2,122,000		5,766,000			761,000			1,350,000			12,123,000

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Subsequent Events

6 Months Ended

Jun. 30, 2012

Subsequent Events

9.     Subsequent Events

Facility Operating Lease - In July 2012, the Company entered into an amended facility lease at its current location that will accommodate the Company corporate offices as well as the Digital division. The commencement date of the amended lease will be October 1, 2012, until such time, the Company will continue to lease space for its corporate offices and Digital division on a month to month basis. The amended facility lease will expire September 30, 2015, and future lease payments are expected to be approximately $39,000 in 2012, $157,000 in 2013, $169,000 in 2014 and $133,000 in 2015.

Warrant Exercise -In July 2012, the Company received $500,000 as the result of the exercise of warrants by certain holders that resulted in the issuance of an aggregate of 161,290 shares of the Company’s common stock.

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Inventory (Tables)

6 Months Ended

Jun. 30, 2012

Inventory

Inventory consisted of the following:

	June 30,		December 31,
	2012		2011
Finished Goods	$	360,269	$	421,965
Work in process		138,332		73,669
Raw Materials		253,670		287,808
	$	752,271	$	783,442

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Inventory (Detail) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Schedule of Inventory [Line Items]
Finished Goods	$ 360,269	$ 421,965
Work in process	138,332	73,669
Raw Materials	253,670	287,808
Inventory	$ 752,271	$ 783,442

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Short Term and Long Term Debt - Additional Information (Detail) (USD $)	3 Months Ended		6 Months Ended									1 Months Ended					12 Months Ended				1 Months Ended	6 Months Ended	1 Months Ended		1 Months Ended	3 Months Ended	1 Months Ended						1 Months Ended			1 Months Ended						1 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Jun. 30, 2012 ExtraDev Incorporated Bank Loan Interest at 4.5%	Dec. 31, 2011 ExtraDev Incorporated Bank Loan Interest at 4.5%	Aug. 30, 2011 Bzdick Properties Limited Liability Company	Jul. 26, 2011 Revolving Credit Facility Rbs Citizens	Jun. 30, 2012 Revolving Credit Facility Rbs Citizens One Month LIBOR	Jul. 26, 2011 Revolving Credit Facility Rbs Citizens One Month LIBOR	Jun. 30, 2012 Revolving Credit Facility Rbs Citizens Second Amended And Restated Credit Agreement	Dec. 31, 2011 Revolving Credit Facility Rbs Citizens Second Amended And Restated Credit Agreement	May 12, 2011 Revolving Credit Facility ExtraDev Incorporated	Jun. 30, 2012 Revolving Credit Facility ExtraDev Incorporated Bank Loan Interest at 4.5%	May 12, 2011 Revolving Credit Facility ExtraDev Incorporated Bank Loan Interest at 4.5%	Dec. 31, 2011 Revolving Credit Facility ExtraDev Incorporated Bank Loan Interest at 8.09%	May 12, 2011 Revolving Credit Facility ExtraDev Incorporated Bank Loan Interest at 8.09%	May 12, 2011 Credit card ExtraDev Incorporated	Jun. 30, 2012 Credit card ExtraDev Incorporated Bank Loan Interest at 4.5%	Mar. 31, 2012 Short-term Debt Bzdick Properties Limited Liability Company Related Party	Jun. 30, 2012 Short-term Debt Bzdick Properties Limited Liability Company Related Party	Dec. 31, 2011 Convertible Notes Payable	Jun. 30, 2012 Convertible Notes Payable	Feb. 29, 2012 Convertible Notes Payable Related Party	Mar. 31, 2012 Convertible Notes Payable Related Party	Feb. 28, 2010 Term Loan Rbs Citizens	Jun. 30, 2012 Term Loan Rbs Citizens	Dec. 31, 2011 Term Loan Rbs Citizens	Feb. 12, 2010 Term Loan Rbs Citizens	Jun. 30, 2012 Term Loan Rbs Citizens One Month LIBOR	Feb. 12, 2010 Term Loan Rbs Citizens One Month LIBOR	Jun. 30, 2011 Commercial Term Note Related Party	Dec. 31, 2011 Commercial Term Note Related Party	Jun. 29, 2011 Commercial Term Note Related Party	Aug. 31, 2011 Promissory Notes Rbs Citizens	Jun. 30, 2012 Promissory Notes Rbs Citizens	Dec. 31, 2011 Promissory Notes Rbs Citizens	Aug. 30, 2011 Promissory Notes Rbs Citizens	Jun. 30, 2012 Promissory Notes Rbs Citizens One Month LIBOR	Aug. 30, 2011 Promissory Notes Rbs Citizens One Month LIBOR	Oct. 31, 2011 Stand-By Term Note Rbs Citizens	Jun. 30, 2012 Stand-By Term Note Rbs Citizens	Dec. 31, 2011 Stand-By Term Note Rbs Citizens	Oct. 08, 2010 Stand-By Term Note Rbs Citizens
Debt Instrument [Line Items]
Credit facility agreement, maximum borrowing capacity									$ 1,000,000					$ 239,000		$ 100,000		$ 100,000												$ 1,500,000															$ 450,000
Debt, annual interest rate above LIBOR										3.99%	3.75%																				3.99%	3.75%								3.39%	3.15%
Credit facility agreement, maturity date												May 31, 2013
Credit facility agreement, outstanding balance						71,575	93,951					696,319	669,785		40,593	63,000		86,000	90,000	30,982								800,000	950,000														46,143	51,467
Debt, interest rate															4.50%	4.75%		8.09%				9.50%	10.00%												6.50%
Repayment of credit facility																	86,000
DSS Note issued					150,000																	150,000
Debt instrument, maturity date																						Mar. 31, 2012	Dec. 29, 2013		Jul. 01, 2013								Aug. 01, 2015
DSS Note, repayment amount			150,000																		150,000
Interest expense	54,673	59,225	125,605	109,179																		3,240
Debt instrument issued																							575,000
Debt instrument, interest payment frequency																							Quarterly in arrears
Shares to be issued upon conversion of convertible note, share																							260,180			175,710
Shares to be issued upon conversion of convertible note, exercise price																							$ 2.21		$ 3.30
Beneficial conversion feature recorded as a debt discount																							88,000		216,000
Debt instrument amount																							575,000	575,000		579,843								599,462	650,000		1,182,022	1,192,914
Credit facility agreement, amendment																											Jul. 26, 2011
Credit facility agreement, Interest payment frequency																											Monthly
Credit facility agreement, monthly principal payment																											25,000
Credit facility agreement, effective interest rate over life of term loan																														5.70%									5.865%
Debt instrument, payment frequency																																	Monthly			Monthly						Monthly
Debt instrument, term																																	48 months
Debt monthly payments																																	13,585			7,658
Debt instrument, final balloon payment																																			100,000				919,677
Agreed selling price of notes payable to be sold to Barry Hoing																									578,396
Discount amortization expense	11,058		237,700																							216,000
Purchase price for Real Estate acquired								1,500,000
Purchase price for Real Estate acquired, loan obtained								1,200,000
Debt, monthly installment payment																																										$ 887
Debt instrument, maturity date																																										5 years

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Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net loss	$ (2,068,731)	$ (1,510,298)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	390,884	351,548
Stock based compensation	331,526	201,543
Amortization of note discount	237,700
Change in fair value of derivative liability		(360,922)
(Increase) decrease in assets:
Accounts receivable	(52,173)	773,970
Inventory	31,171	(315,331)
Prepaid expenses and other assets	(73,469)	34,760
Decrease in liabilities:
Accounts payable	(64,066)	(610,130)
Accrued expenses and other liabilities	(161,812)	(457,137)
Net cash (used) provided by operating activities	(1,428,970)	(1,891,997)
Cash flows from investing activities:
Purchase of property, plant and equipment	(105,782)	(4,509)
Purchase of other intangible assets	(106,775)	(24,472)
Acquisition of business		61,995
Net cash (used) provided by investing activities	(212,557)	33,014
Cash flows from financing activities:
Net (payments) borrowings on revolving lines of credit	4,158	(349,911)
Payment of short-term loan from related party	(150,000)
Payments of long-term debt	(185,835)	(150,000)
Payments of capital lease obligations	(55,228)	(55,204)
Issuance of common stock, net of issuance costs	2,828,669	(160,315)
Net cash provided (used) by financing activities	2,441,764	(715,430)
Net increase (decrease) in cash	800,237	(2,574,413)
Cash beginning of period	717,679	4,086,574
Cash end of period	$ 1,517,916	$ 1,512,161

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Stockholders' Equity

6 Months Ended

Jun. 30, 2012

Stockholders' Equity

5.     Stockholders’ Equity

Stock Issued in Private Placements - On February 13, 2012, the Company completed the sale of $3,000,000 of investment units (the “Units”) in a private placement. A total of 30 Units were sold, at a price of $100,000 per Unit. Each Unit consisted of (i) 32,258 shares of the Company’s common stock, and (ii) a five-year warrant to purchase up to 16,129 shares of the Company’s common stock at an exercise price of $3.10 per share. The private placement resulted in aggregate cash proceeds to the Company of $3,000,000. In connection with the private placement, the Company paid a placement agent fee of $210,000 and issued to the placement agent a five-year warrant to purchase up to an aggregate of 58,064 shares of Common Stock at an exercise price of $3.10. The placement agent warrant had a fair value of $177,000.

Stock Warrants - On February 20, 2012, the Company and ipCapital Group, Inc. (“ipCapital”) entered into an engagement letter (the “ipCapital Engagement Letter”) for the provision of certain IP strategic consulting services by ipCapital for the 2012 calendar year (the “Services”). The managing director and 42% owner of ipCapital, John Cronin, is also a director of the Company. Fees will range from $240,000 to $365,000 for services provided in 2012. In addition the Company issued ipCapital a five-year warrant (the “Warrant”) to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $4.62 per share (the “Warrant Stock”). The Warrant vests and becomes exercisable to the extent of 33 1/3 percent of the Warrant Stock upon each of the first, second and third anniversary dates, respectively, of the Issuance Date. The warrant is valued using the Black Scholes option pricing model at each reporting period through the earlier of the completion of services or the expiration of the service term. The warrant was valued at $178,468 as of June 30, 2012. In addition, on February 20, 2012, the Company entered into a second consulting arrangement with ipCapital (the “ipCapital Consulting Agreement”) for which ipCapital will provide strategic advice to the Company’s senior management team on the development of the Company’s Digital Group infrastructure and cloud computing business strategy. The ipCapital Consulting Agreement has a three year term. As ipCapital’s sole source of compensation under the ipCapital Consulting Agreement, the Company issued ipCapital a five-year warrant (the “Consulting Warrant”) to purchase up to 200,000 shares of the Company’s common stock at an exercise price of $4.50 per share (the “Consulting Warrant Stock”). The Consulting Warrant vests and becomes exercisable to the extent of 33 1/3 percent of the Consulting Warrant Stock upon each of the first, second and third anniversary dates, respectively, of the Consulting Warrant Issuance Date. The warrant is valued using the Black Scholes option pricing model at each reporting period through the requisite service period, in this case the vesting period. The warrant was valued at $362,592 as of June 30, 2012.

Also, on February 20, 2012, the Company entered into consulting arrangement with Century Media Group for the provision of investor relations services. As compensation Century Media Group will receive a fee of $10,000 per month for the one year term, plus the Company issued Century Media Group a 14-month warrant (the “Century Media Warrant”) to purchase up to 250,000 shares of the Company’s common stock at exercise prices of $4.50, $4.75, $5.00, $5.25 and $6.00 for each 50,000 shares subject to the Century Media Warrant. The Century Media Warrant vested in full on the date of issuance. The Company calculated the fair value of the warrant at approximately $248,000, using the Black Scholes-Merton option pricing model. Expense for consulting services will be recorded over the 12-month service term.

During the six months ended June 30, 2012, a total of 54,444 shares of common stock were issued upon the exercise of warrants in exchange for aggregate proceeds of approximately $109,000.

Restricted Stock - During the six months ended June 30, 2012, the Company granted two restricted stock awards to an employee. The first award grants the employee 30,000 shares of common stock that vest ratably over four years and has a grant date fair value of $101,400. Expense related to the first grant is being recorded on a straight-line basis as shares vest. The second award grants the employee 100,000 shares of common stock that vest in four tranches upon reaching net sales goals. The grant date fair value of the second award amounted to $338,000. As of June 30, 2012, no expense was recorded for the second award as vesting was determined to be remote.

Stock Options - The Company records stock-based payment expense related to these options based on the grant date fair value in accordance with FASB ASC 718. During the six months ended June 30, 2012, the Company issued options to purchase up to an aggregate of 40,000 shares of its common stock to its non-executive board members at an exercise price of $2.55 per share. The fair value of these options amounted to approximately $40,000 determined by utilizing the Black Scholes Merton option pricing model.

Stock-Based Compensation -Stock-based compensation includes expense charges for all stock-based awards to employees, directors and consultants. Such awards include option grants, warrant grants, and restricted stock awards. During the six months ended June 30, 2012, the Company had stock compensation expense of approximately $332,000 or $0.02 per share ($202,000; $0.01 per share - 2011).

As of June 30, 2012, there was approximately $992,000 of total unrecognized compensation costs (excluding $932,000 that vest upon the occurrence of certain events) related to options and restricted stock granted under the Company’s stock option plans, which the Company expects to recognize over the weighted average period of one year.

Stock Option Plans - During the second quarter of 2012, a proposal to increase the number of shares under the 2004 Employee Stock Option Plan from 1,700,000 to 3,400,000 and a proposal to increase the number of shares under the 2004 Non-Executive Director Stock Option Plan from 200,000 to 500,000 was approved by the Company’s stockholders.

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Stockholders Equity - Additional Information (Detail) (USD $)	6 Months Ended						6 Months Ended							1 Months Ended							1 Months Ended		1 Months Ended		6 Months Ended	1 Months Ended				1 Months Ended		1 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 Stock Option Plan Twenty Zero Four Non-executive board members Previously	Jun. 30, 2012 Stock Option Plan Twenty Zero Four Non-executive board members Current	Jun. 30, 2012 Stock Option Plan Twenty Zero Four Employee Stock Option Previously	Jun. 30, 2012 Stock Option Plan Twenty Zero Four Employee Stock Option Current	Jun. 30, 2012 Warrant	Jun. 30, 2012 Restricted Stock Period 1	Jun. 30, 2012 Restricted Stock Period 2	Jun. 30, 2012 Stock Option Non-executive board members	Jun. 30, 2012 Warrant	Jun. 30, 2012 Consulting Warrant	Jun. 30, 2012 Vest upon the occurrence of certain events	Feb. 29, 2012 Century Media Group	Feb. 29, 2012 Century Media Group Century Media Warrant	Feb. 29, 2012 Century Media Group Century Media Warrant Exercise Price 1	Feb. 29, 2012 Century Media Group Century Media Warrant Exercise Price 2	Feb. 29, 2012 Century Media Group Century Media Warrant Exercise Price 3	Feb. 29, 2012 Century Media Group Century Media Warrant Exercise Price 4	Feb. 29, 2012 Century Media Group Century Media Warrant Exercise Price 5	Feb. 29, 2012 Ip Capital Group Incorporated Warrant ipCapital Engagement Letter	Feb. 20, 2012 Ip Capital Group Incorporated Warrant ipCapital Engagement Letter	Feb. 29, 2012 Ip Capital Group Incorporated Consulting Warrant ipCapital Consulting Agreement	Feb. 20, 2012 Ip Capital Group Incorporated Consulting Warrant ipCapital Consulting Agreement	Jun. 30, 2012 Maximum	Feb. 29, 2012 Maximum Ip Capital Group Incorporated ipCapital Engagement Letter	Feb. 29, 2012 Minimum Ip Capital Group Incorporated ipCapital Engagement Letter	Feb. 28, 2012 Private Placement Palladium Capital Advisors Limited Liability Company	Feb. 13, 2012 Private Placement Palladium Capital Advisors Limited Liability Company	Feb. 28, 2012 Private Placement Investor Unit	Feb. 13, 2012 Private Placement Investor Unit	Feb. 28, 2012 Private Placement Common Stock	Feb. 28, 2012 Private Placement Initial warrant
Stockholders Equity Note [Line Items]
Sale of investment units, aggregate cash proceeds							$ 109,000																							$ 3,000,000
Sale of investment units, units																														30
Sale of investment units, price per unit																														$ 100,000
Stock issued , shares							54,444				54,444																					32,258
Warrant term																						5 years									5 years
Sale of investment units, shares issuable per warrant																														16,129
Sale of investment units, price per share																																	$ 3.10
Sale of investment units, placement agent fee paid																												210,000
Warrants to purchase common stock, shares															250,000						100,000		200,000					58,064
Warrants to purchase common stock, exercise price																4.50	4.75	5.00	5.25	6.00		4.62		4.50					3.10
Sale of investment units, warrant issued value																												177,000
Fee for consulting services																										365,000	240,000
Percentage of consulting warrant stock vests and becomes exercisable																					33.30%		33.30%
Value of Warrant											178,468	362,592
Consulting fee per month														10,000
Consulting agreement period														1 year
Warrants to purchase common stock, warrants exercised														50,000
Fair value of warrants														248,000
Restricted stock, common stock issued								30,000	100,000
Stock, vesting period								4 years
Restricted stock, fair value								101,400	338,000
Stock options issued										40,000
Stock options issued, exercise price										$ 2.55
Stock options issued, fair value										40,000
Stock compensation expense	331,526	201,543
Stock compensation expense, per share	$ 0.02	$ 0.01
Unrecognized compensation costs	$ 992,000												$ 932,000
Unrecognized compensation costs, period of recognition																									1 year
Stock option plan, number of shares approved			200,000	500,000	1,700,000	3,400,000

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Basis of Presentation and Significant Accounting Policies - Additional Information (Detail) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Significant Accounting Policies [Line Items]
Fair value of interest rate swap hedging liabilities	$ 133,180		$ 110,688
Net gain (loss) attributable to cash flow hedge	$ (22,492)	$ 3,678
Customer Concentration Risk
Significant Accounting Policies [Line Items]
Number of customers with greater than 10% of the consolidated revenue	1	1
Concentration of credit risk, percentage	24.00%	16.00%
Accounts Receivable
Significant Accounting Policies [Line Items]
Concentration of credit risk, percentage	22.00%	20.00%
Maximum
Significant Accounting Policies [Line Items]
Shares issuable, excluded from calculation of diluted earnings per share	4,225,691	3,281,705