Technologies

We have developed or acquired over 30 technologies that provide to our customers a wide spectrum of solutions.

According to a March 2010 report by the MDB Capital Group LLC, an institutional research and investment banking firm, located in Santa Monica, California that focuses exclusively on companies that possess market changing, disruptive intellectual property, has DSS ranked among the top companies in intellectual property leadership based on several proprietary intellectual property indexes.

DSS ranks in the 90th percentile from over 4,000 companies for IP leadership as defined by a high patent citation (Companies citing the Company’s Patents in their patent applications) number of 2.12 which is two times higher than its peer group. The Company also has a 40.38 PV Ratio which indicates that the Company’s stock market value is lower than its patent value according to the MDB’s PatentVest evaluation methodology.

The ~~company’s~~Company’s primary anti-counterfeiting products and technologies are marketed under the following trade names:

AuthentiGuard™ DX™ is a networked appliance that allows the author of any Microsoft Office document (Outlook, Word, Excel, or PowerPoint) to secure nearly any of its alphanumeric content when it is printed or digitally stored. AuthentiGuard® DX prints selected content using the company’s patented technology so that it cannot be read by the naked eye. Reading the hidden content, or authenticating the document is performed with a proprietary viewing device or software.

~~Like AuthentiGuard® DX™, AuthentiGuard® On -Demand™~~ ~~is a customized software or a web-based application that incorporates the verification feature of AuthentiGuard~~® ~~Prism™ and the anti-copy anti-scan features of AuthentiGuard~~® Pantograph 4000™ in a manner that makes those technologies printable from desktop printers and digital presses worldwide. On-Demand™ provides the ability to produce highly secure documents virtually “any-time, anywhere”, and is highly effective in variable data applications.

AuthentiGuard® Laser Moiré™, a counterfeit deterrent technology, prevents counterfeit reproductions by creating gross distortions and unmistakable moiré interference patterns throughout the image. Verification of original documents or images is fast and easy with The Authenticator – our proprietary lens that reveals the moiré pattern. The technology is embedded into an image that requires protection from duplication and theft, such as photographs, portraits, currency, driver’s licenses, postage stamps, tickets, labels, brand packaging, or documents.

AuthentiGuard® Prism™, a verification technology, embeds hidden words, images, or logos using 2-color or 4-color processes that are only visible using a special, non-public proprietary Prism™ lens that reveals hidden Prism™ images. We believe that the hidden words, images or logos embedding with the Prism™ technology cannot be reproduced with even the most sophisticated digital copiers or scanners. As a result, the absence of the hidden words, images or logos alerts the end-user that the document is counterfeit. The AuthentiGuard® Prism technology protects verification forms such as spare parts, packing slips, checks, currency, licenses, travelers’ checks, postage stamps, legal documents, tickets, labels, and brand packaging.

AuthentiGuard® Pantograph 4000™, a counterfeit deterrent technology, provides what we believe is the most powerful, patented pantograph technology ever created. Hidden words such as “VOID” or “COPY”, company logos, or designs appear when a document utilizing the technology is photocopied or scanned, preventing unauthorized duplication. Although there are other versions of this technology being sold by competitors, we believe that no version other than our Pantograph 4000™ defeats high and low resolution scanners and produces crisp clear and readable warning words. We believe that virtually any printable surface can utilize the technology, including paper, Teslin, PVC, Tyvek and cardboard packaging. This technology has been used for gift certificates, school transcripts, coupons, tickets, checks, packing slips, receipts, schematic drawings, plans, music, scripts, training manuals, business plans, internal memos, letterhead, legal forms and prescription pads.

AuthentiGuard® Phantom™, a verification technology, uses “tilt-to-reveal” hidden images or words that can be easily viewed without special equipment. Viewed straight on, the hidden images are virtually invisible to the naked eye, but when the package or document is viewed at an angle, the hidden images are clearly revealed. For added security, we believe that our patented AuthentiGuard® Phantom™ technology cannot be reproduced with even the best copiers or scanners. We also feel that this technology is much more effective and eye catching then color shifting ink.

AuthentiGuard® VeriGlow™, a verification technology, is a two-tiered, customized document security systems that utilizes unique photosensitive inks and incorporates embedded hidden messages or images that are only viewable with a special light source and our special non-public proprietary Veri-Glow reading device. This patent pending technology can be applied during the printing process or it can be applied to pre-printed items and is useful in the protection of vital records such as passports, documents, brand protection, packaging and currency.

AuthentiGuard® Survivor 21®, a counterfeit deterrent technology, protects printed checks from duplication via digital copiers and scanners while providing a patent-pending security feature that survives the background dropout that results from bank’s archival scan. Survivor 21™ was created to meet new government banking regulations that require documents to be archive-scan friendly, without compromising security.

AuthentiGuard® Block-Out™, a counterfeit deterrent technology, also called the “anti-color reproduction system”, makes it very difficult to reproduce protected documents on digital color copiers. Certain copiers recognize Block-Out’s embedded graphics on the original document, and print out solid black sheets or highly distorted images. AuthentiGuard® Block-Out™ is our own unique proprietary graphic design that is recognized and triggers a mechanism developed by Omron Corporation in some copiers. We developed it to prevent color copiers and photo processors from replicating any image or document that contains our custom Block-Out™ graphics. This technology can be integrated into highly sensitive government documents such as currency, car titles, passports and licenses as well as checks, travelers’ checks, postage stamps, photographs, original art and brand packaging.

AuthentiGuard® MicroPerf™, ~~a verification technology~~, creates a verifier mark that is invisible to the naked eye when viewed under normal circumstances and unnoticeable to the touch, but can be viewed by simply holding the document up to a normal light for fast and easy authentication. MicroPerf™ uses a laser to insert fine perforations into the document, and can be placed on vital records, documents, packaging or currency and is a micro-sized perforation in the shape of a word or image that cannot be removed or altered in any way.

Products and Services

Generic Security Paper: Our primary product for the retail end-user market is AuthentiGuard® Security Paper. AuthentiGuard® Security Paper is blank paper that contains our Pantograph 4000TM technology. The paper reveals hidden warning words, logos or images using The Authenticator- our proprietary viewing lens – or when the paper is faxed, copied or scanned. The hidden words appear on the duplicate or the computer digital file and essentially prevent documents, including forms, coupons and tickets, from being counterfeited. ~~We market and sell our AuthentiGuard~~® ~~Security Paper primarily through several major paper distributors such as Boise Cascade and Blanks USA. Since 2005, Boise has marketed our AuthentiGuard~~® Security Paper under its Boise Beware brand name in North America, primarily through its commercial paper sales group. Blanks USA sells and manufactures the technology under the “Kant Kopy” brand name. The company also sells its security paper on the internet utilizing a ecommerce website, www.protectedpaper.com. We retain the rights to sell the AuthentiGuard® Security Paper directly to end-users anywhere in the world. The company also had a version of its security paper tested and certified for use on Hewlett Packard (“HP”) Indigo Digital presses by the Rochester Institute of Technology’s Printing Applications Laboratory. This certification allows the Company’s security paper to be marketed to HP Indigo users worldwide.

Security and non-security printing: ~~Our~~We believe our technology portfolio allows us to create unique custom secure paper, plastic, packaging and Internet-based and software enterprise solutions. We market and sell to end-users that require anti-counterfeiting and authentication features in a wide range of printed materials such as documents, vital records, prescription paper, driver’s licenses, birth certificates, receipts, manuals, identification materials, entertainment tickets, secure coupons, parts tracking forms, as well as product packaging including pharmaceutical and a wide range of consumer goods. In addition, we provide a full range of digital and large offset commercial printing capabilities to our customers.

~~Since~~In our ~~inception,~~early stages, we ~~have~~had primarily outsourced the production ~~of the majority~~ of our custom security print orders to strategic printing vendors. In December 2008, we acquired a commercial printer with ~~long-run~~long run offset and short run digital printing capabilities that will allow us to produce the majority of our security print orders ~~in-house.~~in house. We produce our plastic printed documents such as ID cards, event badges, and driver licenses at our manufacturing facility in Brisbane, California under the name ~~Plastic Printing Professionals.~~P3. In late 2007, we moved our P3 manufacturing facility to a 25,000 square foot facility in order to increase our plastic manufacturing capacity, and during 2008, we upgraded their production capabilities by adding equipment that will improve its productivity, along with equipment for high speed data encoding and equipment ~~that~~ for ~~productions~~production of high-volume precision RFID cards.

Packaging: We produce our secure and non-secure packaging products such as boxes, mailers, and point of sale displays, utilizing a CAD/CAM design system that allows for early stage prototyping at our manufacturing facility in Victor, New York. Our packaging division offers automated die cutting, high speed folding, gluing, window and paper patching, automated in-line inserting, pick and place and tip-on systems. We can incorporate our security technologies into printed packaging to help companies prevent or deter brand and product counterfeiting. In addition, our technologies and services can be integrated into various supply chain anti-diversion programs such as track and trace that deter product diversion throughout the supply chain.

Digital Security Solutions: Using software that we have developed, we can electronically render several of our technologies digitally to extend the use of optical security to the end-user of sensitive information. With our AuthentiGuard® DX™ we market a networked appliance that allows the author of any Microsoft Office document (Outlook, Word, Excel, or PowerPoint) to secure nearly any of its alphanumeric content when it is printed or digitally stored. AuthentiGuard® DX prints selected content using ~~DMC’S~~our patented technology so that it cannot be read by the naked eye. Reading the hidden content, or authenticating the document is performed with a proprietary viewing device or software.

The ~~company~~Company has developed an internet delivered technology called AuthentiGuard® – On Demand™ where information is hidden and then verified utilizing aan inexpensive viewing glass. This technology is currently being utilized by a Central American country for travel visas.

The ~~company~~Company has also developed digital versions of its AuthentiGuard® – Prism™ and AuthentiGuard® – Pantograph 4000™ technologies which are produced on HP Indigo Presses, Canon Color Copiers, Ricoh Color Copiers and Konica Desktop Printers. The ~~company~~Company sells the digital products directly through its internal sales force and it has also entered into a contract to sell its digital solutions through a third party who specializes in hardware software engineering solutions.

Technology Licensing: We license our anti-counterfeiting technology and trade secrets to security printers through licensing arrangements. We seek licensees that have a broad customer base that can benefit from our technologies or have unique and strategic capabilities that expand the capabilities that we can offer our potential ~~customers~~customers. Licenses can be for a single technology or for a package of technologies. We offer licensees a variety of pricing models, including:

Pay us one price per year;

Pay us a percentage of gross sales price of the product containing the technology during the term; or

Joint venture or profit sharing ~~arrangement~~arrangements; and

Pay Per Finished ~~Piece~~Piece.

Legal Products: We also owned and operated, ~~Legalstore.com,~~through our wholly-owned subsidiary, Legalstore, an Internet company which ~~sells~~sold legal supplies and documents, including security paper and products for the users of legal documents and supplies in the legal, medical and educational fields. On October 8, 2009 we sold the assets and liabilities associated with ~~our Legalstore.com business~~Legalstore to Internet Media Services, Inc. (“Internet Media Services”) in exchange for 7,500,000 shares of its common stock ~~of Internet Media Services, Inc.,~~ representing approximately 37% of the outstanding shares of Internet Media Services. In October 2010, we distributed our shares of Internet Media Services in the ~~newly formed company.~~form of a dividend to our shareholders.

Intellectual Property

Patents

Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our technology, products and manufacturing processes. We principally rely upon patent, trademark, trade secrets and contract law to establish and protect our proprietary rights. During our development, we have expended a significant percentage of our resources on ~~the~~ research and development to ensure that we are a market leader with the ability to provide our customers effective solutions against a never changing array of counterfeit risks. Our position in the security print market is based on our technologies and products. We dedicate 2 staff members to research and development of print technologies, digital graphic files, and printing techniques that allow us to expand our ability to combat a wide variety of counterfeiting and brand protection issues. In 2010 and 2009, we spent approximately $265,000 and $291,000 respectively, on research and development which is comprised mainly of compensation costs, materials and third-party services.

Based largely on these efforts, we currently ~~fourteen~~hold numerous patents and have 57numerous patent applications in process, including provisional and PCT patent applications and applications that have entered the National Phase in various countries including the United States, Canada, Europe, Japan, Brazil, Israel, Mexico, Indonesia and South Africa. These applications cover our technologies, including our AuthentiGuard® On-Demand and ADX, AuthentiGuard® Prism™, AuthentiGuard® Phantom™, AuthentiGuard® ObscuraScan™, AuthentiGuard® Survivor 21™, AuthentiGuard® VeriGlow™ products, and several other anti-counterfeiting and authentication technologies in development.

We also jointly have the rights to Patent No. 5,707,083 with R.R. Donnelly. Under the terms of our agreement with R.R. Donnelly, it has no rights in any revenue generated by us through the technology represented by the patent. R.R. Donnelly may license the technology but is required to split any revenue with us after costs associated with any licensing.

In addition to our current patent activities, we own several patents that we acquired in 2002 when we acquired companies owned by various members of the Wicker Family and The Estate of Ralph Wicker, including US Patents 5,018,767, European Patent 0455750, Canadian Patent 2,045,580, and a 50% ownership of US Patent No 5,735,547 (collectively, the “Wicker Patents”). However, due to previous contractual agreements associated with the Wicker Patents, we did not obtain certain economic rights to these patents, including certain economic rights to benefits derived from settlements, licenses or other subsequent business arrangements from any person or entity that had been proven to infringe these patents. Therefore, to consolidate our ownership and economic rights to the Wicker Patents, we entered into the following transactions.

In 2004, we entered into an agreement with The Estate of Ralph Wicker and its assigns to purchase from them the right to 70% of the future economic benefit derived from settlements, licenses or subsequent business arrangements from any infringer of the Wicker Patents that we choose to pursue, with The Estate of Ralph Wicker receiving the remaining 30% of such economic benefit.

In February 2005, we further consolidated our ownership of the Wicker Patents by purchasing the economic interests and ownership from 45 persons and entities that had purchased various rights in Wicker Family technologies, including the Wicker Patents. As a result of this transaction, we increased our ownership of US Patent 5,735,547 to 100%, and increased to our right to future economic benefits relating to the Wicker Patents to approximately 86% of all settlements or license royalties derived from, among other things, infringement suits related to the foreign Wicker Patents, including European Patent 0455750. Pursuant to these transactions, we issued an aggregate of 541,460 shares to of our ~~Common Stock,~~common stock, valued at approximately $3.9 ~~million.~~million to these 45 persons and entities.

OnIn August ~~20,~~2005, the Company commenced a suit against the European Central Bank (“ECB”) alleging patent infringement by the ECB and claimed unspecified damages. We brought the suit in the European Court of First Instance in Luxembourg. We alleged that all Euro banknotes in circulation infringe the Company European Patent 0 455 750B1 (the “Patent”), 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. Commencing in March 2006, the ECB countersued in eight national courts alleging that the Patent was invalid. Through August 2008, the Company spent approximately $4.2 million dollars on legal, expert and consulting fees for its case. In August 2008, the Company decided to reduce its cost burden associated with the case and entered into an agreement with Trebuchet Capital Partners, LLC (“Trebuchet”) under which Trebuchet ~~has~~ agreed to pay substantially all of the litigation costs associated with pending validity proceedings initiated by the European Central Bank (“ECB”) in eight European countries relating to the Company’s European Patent 0 455 750B1 that the Company has claimed the ECB infringed in printing of the Euro currency (the “Patent”). Trebuchet also agreed to pay substantially all of the litigation costs associated withand future validity ~~challenges filed by the ECB or other parties, provided that Trebuchet elects to assume the defense of any such challenges, in its sole discretion,~~ and future patent infringement suits filed against the ECB and certain other alleged infringers of the Patent ~~all~~in exchange for 50% of ~~which suits may~~any future proceeds or settlements associated with the litigation. The Patent has been confirmed to be ~~brought at~~valid and enforceable in one jurisdiction (Spain) that used the ~~sole discretion of Trebuchet and may be in the name of~~Euro as its national currency allowing the Company or Trebuchet, ~~or both. The Company provided Trebuchet~~on the Company’s behalf, to proceed with ~~the sole and exclusive right~~infringement cases in Spain if we choose 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 agreement. Under the terms of the Agreement, the Company and Trebuchet have 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. Trebuchet is also entitled to recoup any litigation expenses specifically awarded to the Company in such actions.do so.

By aggressively defending our intellectual property rights, we believe that we may be able to secure a potentially significant amount of additional and ongoing revenue by securing proceeds from lawsuits, settlements, or licensing agreements with those persons, companies or governments that we believe are infringing our patents. We intend to use the appropriate legal means that are economically feasible to protect our ownership of these technologies. We cannot be assured, however, that our efforts to prevent the misappropriation of the intellectual property used in our business will be successful, or that we will be successful in obtaining monetary proceeds from entities that we believe are infringing our patents. Further, we cannot be assured that any patents will be issued for our U.S. or foreign applications or that, if issued, they will provide protection against competitive technologies or will be held valid and enforceable if challenged. We also cannot be assured that competitors would not be able to design around any such proprietary right or obtain rights that we would need to license or design around in order to practice under these patents.

Trademarks

We have registered our “AuthentiGuard” mark, as well as our “Survivor 21” electronic check icon with the U.S. Patent and Trademark Office. A trademark application is pending in Canada for “AuthentiGuard.” AuthentiGuard® is registered in several European countries including the United Kingdom.

~~Research and Development~~

~~Our research and development costs~~ consist primarily of compensation costs for research personnel and direct costs for the use of third-party printers’ facilities to test and develop our technologies on equipment that we do not have access to internally. We focus our research efforts on creating anti-counterfeiting solutions and products for current and anticipated customer needs. Furthermore, we often seek patent or trademark protection on our developments.

Major Customers

During 2010, two customers accounted for 25% and 10% of the Company’s total revenue from continuing operations. As of December 31, 2010, these customers accounted for 37% and 7% of the Company’s trade accounts receivable balance, respectively. During 2009, two customers accounted for 19% and 12% of the Company’s total revenue ~~respectively.~~from continuing operations. As of December 31, 2009, two ~~customer~~customers’ account receivable ~~balances~~balance accounted for 21% and 17% of the Company’s trade accounts receivable ~~balance, respectively. During 2008, two~~balance. We believe that the risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, ~~accounted~~the short duration of our payment terms for ~~11%~~the significant majority of our customer contracts and ~~10%~~by the diversification of ~~the Company’s total revenue from continuing operations, respectively. As of December 31, 2008, one~~our customer account receivable balance that was acquired as part of the Company’s acquisition of the assets of a commercial printer in December 2008, accounted for 42% of the Company’s trade accounts receivable balance.base.

Websites

We maintain the website, www.documentsecurity.com, which describes our patented document security solutions, our targeted vertical markets, company history, and offers our security consulting services. We also maintain www.plasticprintingprofessionals.com, which describes our ID card and other plastic and vinyl printing services. In addition, we maintain the website www.protectedpaper.com, an e-commerce site that markets and sells our patented security papers hand-held security verifiers and custom security documents to end users worldwide. We also utilize www.authenticate-360.com, a website which is hosted and owned by our licensee, The Ergonomic Group; this website is a source for counterfeiting information and promotion of our On-Demand™ products. In addition, we market digital and large offset commercial printing at our ~~subsidiaries~~subsidiary website: www.dpirochester.com. In addition, in February 2010, we acquired Premier ~~Packaing Corp,~~Packaging, which maintains the website ~~www.premiercustompkg.com.~~www.premiercustompkg.com. In addition to the active websites, the company owns over 40 domain names for future use or for strategic competitive reasons.

Markets and Competition

Currently, the security print market is comprised of a few very large companies and an increasing number of small companies with specific technology niches. The expansion of this market is the result of increasing requirements for national security, as well as the proliferation of brand and identity theft. Counterfeiting has expanded significantly as advancing technologies in digital duplication and scanning combined with increasingly sophisticated design software has enabled easier reproduction of originals.

Our industry is highly fragmented and characterized by rapid technological change and product innovations and evolving standards. We feel a consolidation of the industry may transpire in the near future as larger, well financed companies acquire smaller technology companies to position themselves in the industry ~~and~~to access their intellectual property and access to client lists. Many of our current competitors have longer operating histories, more established products, greater name recognition, larger customer bases, and greater financial, technical and marketing resources. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products. Competition may also force us to decrease the price of our products and services. There is no assurance that we will be successful in developing and introducing new technology on a timely basis, new products with enhanced features, or that these products, if introduced, will enable us to establish selling prices and gross margins at profitable levels.

Although our technology is effective primarily on analog and digital copiers and scanners, our competition covers a wide array of document security and anti-counterfeiting solutions. We conduct research and development to improve our technology, including the development of new patents and trade secrets. We will rely primarily upon our patents and trade secrets to attempt to thwart competition, although there can be no assurance that we will be successful.

Our competitors include Standard Register Company, which specializes in printing security technologies for the check and forms and medical industries; De La Rue Plc, that specializes in printing secure currency, tickets, labels, lottery tickets and vital records for governments and Fortune 500 companies; Xerox, an industry leader in copying and scanning that has made recent entries into the anti-counterfeiting business and has a competing Safety Paper product called “X Void.” Our P3 ID card manufacturing operation competes with LaserCard Corporation which supplies advanced ID technology to the U.S. federal government and other government programs worldwide, with a range of products and solutions that includes secure ID technologies.

In addition, other competing hidden word technologies are being marketed by competitors such as NoCopi Technologies which sells and markets secure paper products, and Graphic Security Systems Corporation, which markets scrambled indicia.

Digital watermarks, RFID and biometric technologies are also being introduced into the marketplace by Digimarc Corporation, IBM and L-1 Identity Solutions. These digital protection systems require software and hardware such as scanners and computers to implement and utilize the technology and, consequently, this technology must be utilized in a controlled environment with the necessary equipment to create the verification process. ~~Therefore, versions~~Versions of our optical security technologies do not require hardware and software to operate and therefore provide a power outage fail-safe when combined or layered with RFID, digital watermarks or biometric systems.

Large Office Equipment Manufacturers, called OEMs, such as Sharp, Canon, Ricoh, Hewlett Packard and Eastman Kodak are developing “smart copier” technology that recognizes particular graphical images and produces warning words or distorted copies. Some of the OEMs are also developing user assigned and variable pantograph “hidden word” technologies in which users can assign a particular hidden ~~work~~word in copy, such as “void” that is displayed when copy of such document is made.

Optical ~~Deterrent~~deterrent features such as ours are utilized mainly by the large worldwide security printers for the protection of currency. Many of these features such as micro-printing were developed pre-1980 as they were designed to be effective on the imaging devices of the day which were mainly photography mechanisms. With the advent of modern day scanners, digital copiers, digital cameras and easy to use imaging software such as Adobe Photoshop many of the pre-1980 optical deterrents such as micro-printing are no longer used or are much less effective in the prevention of counterfeiting.

Unlike some of our competitors, our technologies are developed to defeat today’s modern imaging systems. Almost all of our products and processes are built to thwart scanners and digital copiers and we believe that our products are the most effective in doing so in the market today. In addition, our technologies do not require expensive hardware or software add-ons to authenticate a document, but instead require simple, inexpensive hand-held readers which can be calibrated to particular hidden design features. Our technologies are literally ink on paper that is printed with a particular method to hide selected things from a scanner’s “eye” or distort what a scanner “sees.” These attributes make our anti-scanning technologies very cost effective versus other current offerings on the market since our technologies are imbedded during the normal printing process, thereby significantly reducing the costs to implement the technologies.

The commercial printing industry in the US includes around 35,000 companies with $90 billion of annual revenue. (Source: http://www.firstresearch.com/industryanalysis/commercialprinting.html). Several giants like RR Donnelley and Canadian printer Quebecor World have multibillion revenues, but most printers considered "large" have annual revenues under $1 billion. The majority of commercial printers are small or midsized businesses that operate one production plant, employ fewer than 20 people, and have annual revenue under $5 million. Despite continuing consolidation, the industry is highly fragmented; the largest 50 companies hold only about 30 percent of the market. We compete primarily with locally-based printing companies in the Rochester and Western New York markets. Most of our competitors in these markets are privately-held, single location operations.

In the packaging industry, we compete with a significant number of national, regional and local companies, many of which are independent and privately-held. The largest competitors in this market are primarily focused on the long-run print order market. They include large integrated paper companies such as Rock-Tenn Company, Caraustar Industries, Inc., Graphic Packaging Holding Company and Mead Westvaco.

In general, changes in prevailing U.S. economic conditions significantly impact the general commercial printing industry. To the extent weakness in the U.S. economy causes local and national corporations to reduce their spending on advertising and marketing materials, the demand for commercial printing services may be adversely affected.

~~Segment Information~~

~~We operate through two segments:~~

~~Security and commercial printing~~. This segment consists of the license, manufacture and sale of document security technologies, including digital security print solutions and secure printed products at Document Security Systems and P3 divisions, along with commercial printing provided by P3 and DPI Secuprint.

~~Legal Supplies~~. Sale of specialty legal supplies, primarily to lawyers and law firms located throughout the United States as Legalstore.com. During the fourth quarter of 2009, the Company sold its legal products business. The Company continues to report the results as continued operations because the operations and cash flows of the component have not been eliminated and given the Company’s continued involvement after the sale.

~~Financial information regarding these segments is provided in Note 15 to our consolidated financial statements included in this Annual Report on Form 10-K.~~

Employees

As of ~~December 31, 2009,~~March 25, 2011, we had ~~80 full and part-time employees. In February 2010, we added 32 employees as the result~~a total of ~~our acquisition of Premier Packaging Corp.~~104 employees.. It is important that we continue to retain and attract qualified management and technical personnel. Our employees are not covered by any collective bargaining agreement, and we believe that our relations with our employees are good.

Government Regulation

In light of the events of September 11, 2001 and the subsequent war on terrorism, governments, private entities and individuals have become more aware of, and concerned with, the problems related with counterfeit documents. Homeland Security remains a high priority in the United States. This new heightened awareness may result in new laws or regulations which could impact our business. We believe, however, that any such laws or regulations would be aimed at requiring or promoting anti-counterfeiting, and therefore would likely have a positive impact on our business plans.

Document Security Systems plays an active role with the Document Security Alliance group, as it sits on various committees and has been involved in design recommendations for important U.S. documents. This group of security industry specialists was formed by the U.S. Secret Service to evaluate and recommend security solutions to the Federal government for the protection of credentials and vital records.

As counterfeiting continues to increase worldwide, various new laws and mandates are occurring to address the growing security problem which we believe will increase our ability to generate revenue. For example, in 2007 Federal legislation was enacted that required hospitals, physicians and pharmacies to use tamperproof paper to fill all Medicaid prescriptions. Initially, the requirement, which was part 7002(b) of the “U.S. Troop Readiness, Veterans’ Care, Katrina Recovery and Iraq Accountability Appropriations Act of 2007”, was effective April 1, 2008.

ITEM 1A – RISK FACTORS

Risks Related to Our Company

An investment in our securities is subject to numerous risks, including the Risk Factors described below. Our business, operating results or financial condition could be materially adversely affected by any of the following risks. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also materially affect our business. The trading price of our ~~Common Stock~~common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained or incorporated by reference in this Form 10-K, including our financial statements and related notes, competition and intellectual ~~property.~~property disclosures.

We have a history of ~~losses and we may experience losses in the foreseeable future.~~losses.

We have ~~not achieved profitability and we may incur losses for the foreseeable future.~~a history of losses. In fiscal 2010, 2009, ~~2008,~~ and ~~2007,~~2008, we incurred losses of approximately $4.6 million, $4.0 million, and $8.3 million, ~~and $7.0 million,~~ respectively. AsOur results of ~~December 31, 2009, our accumulated deficit was $36.5 million, which represents our net losses since inception. We~~operations in the future will ~~need to achieve incremental revenue growth and manage our costs to achieve profitability. Even if we do achieve profitability, we may be unable to sustain profitability~~depend on a quarterly or annual basis thereafter. It is possible that our revenue will grow at a slower rate than we anticipate or that operating expenses will increase beyond our current run rate. The current global economic slowdown could slow customer orders, as well as anticipated revenue growth, and could further delay our prospects for operating profitability.

~~Due to our low cash balance and negative cash flow, we may have to further reduce our costs by curtailing future operations to continue as a business.~~

~~We have incurred significant net losses in previous years. Our ability to fund our capital requirements out of our available cash and cash generated from our operations depends~~many factors, but largely on ~~a number of factors. Some of these factors include~~ our ability to ~~(i) increase security~~successfully market our anti-counterfeiting products and ~~commercial printing and plastic card sales and (ii) increase sales of our digital products. We have approximately $417,000 of cash available~~services. Our failure to ~~us under a credit facility as of December 31, 2009, that we recently extended the expiration date to January 2012, we will likely need additional funds~~achieve profitability in the future ~~in order to fund our working capital needs including equity capital. In addition, as~~could adversely affect the ~~result~~trading price of our acquisition of Premier Packaging Corp. in February 2010, we have access to a $1,000,000 revolving line of credit, although such funds can only be accessed by the Premier Packaging division. If we are not successful in generating needed funds from operations or in capital raising transactions, we may need to reduce our costs which measures could include selling or consolidating certain operations or assets,common stock and ~~delaying, canceling or scaling back product development and marketing programs. These measures could materially and adversely affect~~ our ability to ~~operate profitably.~~

raise additional capital and, accordingly, our ability to continue to grow our business. There can be no assurance that we will succeed in addressing any or all of these risks, and the failure to do so could have a material adverse effect on our business, financial condition and operating results.

We have a significant amount of ~~relatively short term~~ indebtedness and may be unable to satisfy our obligations to pay interest and principal thereon when due.

As of December 31, ~~2009,~~2010, we have the following approximate amounts of outstanding indebtedness:

(i)

$450,000 Convertible Note bearing interest at 8% per annum due June 23, 2012, convertible into up to 260,116 shares of Document Security Systems Common Stock, and is secured by the accounts receivable of the Company, excluding the accounts receivable of the Company’s wholly owned subsidiaries, Plastic Printing Professionals and DPI Secuprint, respectively.

~~(ii)~~

$350,000 Convertible Note bearing interest at 10% per annum due November 24, 2012, convertible into up to 218,750 shares of Document Security Systems Common Stock and is secured by the assets of the Company’s wholly owned subsidiary DPI Secuprint.

~~(iii)~~

$575,000 Promissory Note bearing interest at 10% per annum due November 24, 2012, ~~and accrues interest at 10% and is~~ secured by the assets of the Company’s wholly owned subsidiary ~~DPI Secuprint.~~DPI.

	~~(iv)~~
	(ii)		$~~735,000, inclusive of accrued interest of approximately $152,000,~~583,000 due under a Credit Facility to a related party under which the Company can borrow up to $1,000,000 bearing interest at LIBOR plus 2% per annum due January 4, 2012.

~~Furthermore, in February 2010, the Company entered into new debt agreements in conjunction with its acquisition of Premier Packaging Corp as follows:~~

	~~(v)~~	~~A $1,500,000~~
	(iii)		$1,250,000 due under a Term Loan which matures March 1, 2013 and is payable in 35 monthly payments of $25,000 plus interest commencing March 1, 2010 and a payment of $625,000 on the 3636th month. Interest accrues at 1 Month LIBOR plus 3.75% and is secured by all of the assets of the Company’s subsidiary, Premier Packaging ~~Corporation,~~, which the Company acquired on February 12, 2010. The Company subsequently entered into a ~~credit~~interest rate swap agreement to lock into a ~~5.66%~~5.6% effective interest rate over the life of the ~~term loan.~~Term Loan. The Term Loan has also been guaranteed by Document Security Systems, and its subsidiaries ~~Plastic Printing Professionals~~P3 and ~~DPI Secuprint.~~DPI.

	~~(vi)~~(iv)		Up to $1,000,000 in a revolving line of credit available for use by Premier Packaging, subject to certain limitations which matures on ~~February 12, 2011~~May 13, 2011(as amended) and is payable in monthly installments of interest only beginning on March 1, 2010. Interest accrues at 1 Month LIBOR plus 3.75%~~. $735,000.~~, and is secured by all of the assets of the Company’s subsidiary, Premier Packaging. As of ~~March 19,~~December 31, 2010, there was approximately ~~$300,000 is~~$615,000 outstanding on the line.
	(v)		Up to $450,000 under a Standby Term Loan Note available to Premier Packaging for the funding of eligible equipment purchases and is secured by all of the assets of the Company’s subsidiary, Premier Packaging. The ~~revolving~~Company has 12 months to draw a line of credit, ~~has also been guaranteed by Document Security System, and its subsidiaries Plastic Printing Professionals and DPI Secuprint.~~after which the balance of funds advanced from the line is converted into a 5 year term loan. Interest accrues at LIBOR plus 3.00%. As of December 31, 2010, there was approximately $53,000 outstanding on the line.

Absent a new financing or series of financings, our current operations may not generate sufficient cash to pay the interest and principal on these obligations when they become due. Accordingly, we may default in these obligations in the future.

~~Our limited cash resources may not be sufficient to fund continuing losses from operations and the expenses of the current patent validity and patent infringement litigations.~~

The cost to defend current and future litigation may be significant. We cannot assure you that the ultimate cost of current known or future unknown litigation and claims will not exceed our current expectations and/or our ability to pay such costs and it is possible that such litigation costs could have a material adverse effect on our business, financial condition and operating results. In addition, litigation is time consuming and could divert management attention and resources away from our business, which could adversely affect our business, financial condition and operating results.

127

If we lose our current litigation, we may lose certain of our technology rights, which may affect our ability to sell certain of our products and effectuate our business plan.

We are subject to litigation and threatened litigation, including without limitation our litigation with the ~~European Central Bank,~~ECB, in which parties allege, among other things, that certain of our patents are invalid. If the ECB or other parties are successful in invalidating any or all of our patents, it may materially affect us, our financial condition, and our ability to market and sell certain of our products based on any patent that is invalidated. Furthermore, we have granted nearly all control over our ECB ~~Litigation~~litigation to a third party, Trebuchet, ~~Capital Partners, LLC.,~~ who may or may not have the resources or capabilities to successfully defend our patent ~~rights.~~rights or meet its financial obligations. If Trebuchet is unable to meet its financial obligations, then we may be obligated to pay for certain court mandated legal costs to the ECB or other parties, which may materially affect our financial condition.

If we are unable to adequately protect our intellectual property, our competitive advantage may disappear.

Our success will be determined in part by our ability to obtain United States and foreign patent protection for our technology and to preserve our trade secrets. Because of the substantial length of time and expense associated with developing new document security technology, we place considerable importance on patent and trade secret protection. We intend to continue to rely primarily on a combination of patent protection, trade secrets, technical measures, copyright protection and nondisclosure agreements with our employees and customers to establish and protect the ideas, concepts and documentation of software and trade secrets developed by us. Our ability to compete and the ability of our business to grow could suffer if these intellectual property rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. We rely on a combination of patents, copyrights, trademarks and trade secret protection and contractual rights to establish and protect our intellectual property. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to more effectively compete with us and have an adverse effect on our business, financial condition and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology.

In addition, we may be required to litigate in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition or results of operations, and there can be no assurances of the success of any such litigation.

We may face intellectual property infringement or other claims against us, our customers or our intellectual property that could be costly to defend and result in our loss of significant rights.

Although we have received patents with respect to certain technologies of ours, there can be no assurance that these patents will afford us any meaningful protection. Although we believe that our use of the technology and products we developed and other trade secrets used in our operations do not infringe upon the rights of others, our use of the technology and trade secrets we developed may infringe upon the patents or intellectual property rights of others. In the event of infringement, we could, under certain circumstances, be required to obtain a license or modify aspects of the technology and trade secrets we developed or refrain from using same. We may not have the necessary financial resources to defend an infringement claim made against us or be able to successfully terminate any infringement in a timely manner, upon acceptable terms and conditions or at all. Failure to do any of the foregoing could have a material adverse effect on us and our financial condition. Moreover, if the patents, technology or trade secrets we developed or use in our business are deemed to infringe upon the rights of others, we could, under certain circumstances, become liable for damages, which could have a material adverse effect on us and our financial condition. As we continue to market our products, we could encounter patent barriers that are not known today. A patent search will not disclose applications that are currently pending in the United States Patent Office, and there may be one or more such pending applications that would take precedence over any or all of our applications.

Furthermore, third parties may assert that our intellectual property rights are invalid, which could result in significant expenditures by us to refute such assertions. If we become involved in litigation, we could lose our proprietary rights, be subject to damages and incur substantial unexpected operating expenses. Intellectual property litigation is expensive and time-consuming, even if the claims are subsequently proven unfounded, and could divert management’s attention from our business. If there is a successful claim of infringement, we may not be able to develop non-infringing technology or enter into royalty or license agreements on acceptable terms, if at all. If we are unsuccessful in defending claims that our intellectual property rights are invalid, we may not be able to enter into royalty or license agreements on acceptable terms, if at all. This could prohibit us from providing our products and services to customers, which could have a material adverse effect on us and our financial condition.

138

The value of our intangible assets may not be equal to their carrying values.

As of December 31, ~~2009,~~2010, we had ~~$2.9~~approximately $3.8 million of net intangible ~~assets.~~assets, including goodwill. We are required to evaluate the carrying value of such intangibles. ~~including goodwill.~~ Whenever events or changes in circumstances indicate that the carrying value of an intangible asset, including goodwill, may not be recoverable, we determine whether there has been impairment by comparing the anticipated undiscounted cash flows (discounted cash flows for goodwill) from the operation and eventual disposition of the product line with its carrying value. If any of our intangible assets are deemed to be impaired then it will result in a significant reduction of the operating results in such period.

~~If our products and services do not achieve market acceptance, we may not achieve our revenue and net income goals~~ An impairment of patent acquisition costs of $377,000 was recognized in the ~~time prescribed or at all.~~

~~We are at the early stage~~fourth quarter of ~~introducing our document security technology and products to the market. If we are unable to operate our business~~2010 as contemplated by our business model or if the assumptions underlying our business model prove to be unfounded, we could fail to achieve our revenue and net income goals within the time we have projected, or at all, which could have a material adverse effect on our business. As a result of adverse decisions in the ~~value of your investment could be significantly reduced or completely lost.~~

~~We cannot assure you~~Company’s patent infringement case against the ECB which caused the Company to reduce the estimated cash flows that ~~a sufficient number of such companies will demand our products or services or other document security products. In addition, we cannot predict~~supported the ~~rate of market’s acceptance of our document security solutions. Failure to maintain a significant customer base may have a material adverse effect on our business.~~Company’s capitalized patent acquisition based intangible asset.

Certain of our recently developed products are not yet commercially accepted and there can be no assurance that those products will be accepted, which would adversely affect our financial results.

Over the past several years, we have spent significant funds and time to create new products by applying our technologies onto media other than paper, including plastic and cardboard packaging, and delivered our technologies digitally. We have had limited success in selling our products that are on cardboard packaging and those that are delivered digitally. Our business plan for ~~2010~~2011 and beyond includes plans to incur significant marketing and sales costs for these newer products, particularly the digitally delivered products. If we are not able to sell these new products, our financial results will be adversely affected.

The results of our research and development efforts are uncertain and there can be no assurance of the commercial success of our products.

We believe that we will need to continue to incur research and development expenditures to remain competitive. The products we currently are developing or may develop in the future may not be technologically successful. In addition, the length of our product development cycle may be greater than we originally expect and we may experience delays in future product development. If our resulting products are not technologically successful, they may not achieve market acceptance or compete effectively with our competitors’ products.

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

The market for document security products, applications, and services is fast moving and evolving. Identification and authentication technology is constantly changing as we and our competitors introduce new products, applications, and services, and retire old ones as customer requirements quickly develop and change. In addition, the standards for document security are continuing to evolve. If any segments of our market adopt technologies or standards that are inconsistent with our applications and technology, sales to those market segments could decline, which could have a material adverse effect on us and our financial condition.

149

The market in which we operate is highly competitive, and we may not be able to compete effectively, especially against established industry competitors with greater market presence and financial resources.

Our market is highly competitive and characterized by rapid technological change and product innovations. Our competitors may have advantages over us because of their longer operating histories, more established products, greater name recognition, larger customer bases, and greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products. Competition may also force us to decrease the price of our products and services. We cannot assure you that we will be successful in developing and introducing new technology on a timely basis, new products with enhanced features, or that these products, if introduced, will enable us to establish selling prices and gross margins at profitable levels.

Our growth strategy depends, in part, on our acquiring complementary businesses and assets and expanding our existing operations to include manufacturing capabilities, which we may be unable to do.

Our growth strategy is based, in part, on our ability to acquire businesses and assets that are complementary to our existing operations and expanding our operations to include manufacturing capabilities. We may also seek to acquire other businesses. The success of this acquisition strategy will depend, in part, on our ability to accomplish the following:

identify suitable businesses or assets to buy;

complete the purchase of those businesses on terms acceptable to us;

complete the acquisition in the time frame we expect; and

improve the results of operations of the businesses that we buy and successfully integrate their operations into our own.

Although we were able to acquire our ~~Plastic Printing Professionals, Inc.~~P3 subsidiary in February 2006, ~~and~~ our DPI ~~Secuprint~~ subsidiary in December 2008, and Premier Packaging in February 2010, there can be no assurance that we will be successful in pursuing any or all of these steps on future transactions. Our failure to implement our acquisition strategy could have an adverse effect on other aspects of our business strategy and our business in general. We may not be able to find appropriate acquisition candidates, acquire those candidates that we find or integrate acquired businesses effectively or profitably.

Our acquisition program and strategy may lead us to contemplate acquisitions of companies in bankruptcy, which entail additional risks and uncertainties. Such risks and uncertainties include, without limitation, that, before assets may be acquired, customers may leave in search of more stable providers and vendors may terminate key relationships. Also, assets are generally acquired on an “as is” basis, with no recourse to the seller if the assets are not as valuable as may be represented. Finally, while bankrupt companies may be acquired for comparatively little money, the cost of continuing the operations may significantly exceed expectations.

We have in the past used, and may continue to use, our ~~Common Stock~~common stock as payment for all or a portion of the purchase price for acquisitions. If we issue significant amounts of our ~~Common Stock~~common stock for such acquisitions, this could result in substantial dilution of the equity interests of our stockholders.

We may not realize the anticipated benefits of our recent ~~acquisitions.~~acquisition of Premier Packaging.

Our expectations regarding the earnings, operating cash flow, capital expenditures and liabilities resulting from our recent acquisition of Premier Packaging ~~Corp~~ in February 2010 are based on information currently available to us and may prove to be incorrect. In ~~addition, we may not~~particular, 72% of Premier Packaging’s sales for the year ended December 31, 2009 were with two customers comprising 81% of Premier Packaging’s accounts receivable balance as of December 31, 2009. As of December 31, 2010 one of the customers, which accounted for 25% of the Company’s consolidated sales for 2010, has a contract with the Company that is currently set to expire in July 2011, and this customer also comprises 37% of the Company’s consolidated accounts receivable as of December 31, 2010. Our inability to realize any of the anticipated benefits ~~of either~~ of this acquisition and ~~may not be successful in integrating~~to successfully integrate the acquired assets into our existing ~~business.~~business will have an adverse effect on our financial condition.

If we fail to retain our key personnel and attract and retain additional qualified personnel, we might not be able to pursue our growth strategy.

Our future success depends upon the continued service of our executive officers and other key sales and research personnel who possess longstanding industry relationships and technical knowledge of our products and operations. The loss of any of our key employees could negatively impact our ability to pursue our growth strategy and conduct operations. Although we believe that our relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future. There can be no assurance that these persons will continue to agree to be employed by us after ~~such dates.~~

the expiration dates of their current contracts.

If we do not successfully expand our sales force, we may be unable to increase our revenues.

We must expand the size of our marketing activities and sales force to increase revenues. We continue to evaluate various methods of expanding our marketing activities, including the use of outside marketing consultants and representatives and expanding our in-house marketing capabilities. If we are unable to hire or retain qualified sales personnel or if newly hired personnel fail to develop the necessary skills to be productive, or if they reach productivity more slowly than anticipated, our ability to increase our revenues and grow could be compromised. The challenge of attracting, training and retaining qualified candidates may make it difficult to meet our sales growth targets. Further, we may not generate sufficient sales to offset the increased expense resulting from expanding our sales force or we may be unable to manage a larger sales force.

Future growth in our business could make it difficult to manage our resources.

Our anticipated business expansion could place a significant strain on our management, administrative and financial resources. Significant growth in our business may require us to implement additional operating, product development and financial controls, improve coordination among marketing, product development and finance functions, increase capital expenditures and hire additional personnel. There can be no assurance that we will be able to successfully manage any substantial expansion of our business, including attracting and retaining qualified personnel. Any failure to properly manage our future growth could negatively impact our business and operating results.

We cannot predict our future capital needs and we may not be able to secure additional financing.

We may need to raise additional funds in the future to fund our working capital needs, to fund more aggressive expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. We may require additional equity or debt financings, collaborative arrangements with corporate partners or funds from other sources for these purposes. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve substantial dilution of our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from operations or additional sources of financing, we may have to delay or scale back our growth plans.

Risks Related to Our Industry

If we are unable to respond to regulatory or industry standards effectively, our growth and development could be delayed or limited.

Our future success will depend in part on our ability to enhance and improve the functionality and features of our products and services in accordance with regulatory or industry standards. Our ability to compete effectively will depend in part on our ability to influence and respond to emerging industry governmental standards in a timely and cost-effective manner. If we are unable to influence these or other standards or respond to these or other standards effectively, our growth and development of various products and services could be delayed or limited.

Increased emphasis on expanding our marketing efforts to foreign countries subjects us to risks that are in addition to those to which we are exposed in our domestic operations.

We believe that revenue from sales of products and services to commercial, governmental and other customers outside the United States could represent a growing percentage of our total revenue in the future. International sales efforts are subject to a number of risks that can adversely affect our sales of products and services to customers outside the United States, including:

changes in foreign government regulations and security requirements;

export license requirements, tariffs and taxes;

trade barriers;

difficulty in protecting intellectual property;

difficulty in collecting accounts receivable;

currency fluctuations;

longer payment cycles than those customary in the United States; and

political and economic instability.

We do not maintain operational infrastructure for international business. We depend on international business partners and licensees for support of our international marketing efforts. These factors may result in greater risk of performance problems or of reduced profitability with respect to our international sales efforts. In addition, if foreign customers, particularly foreign governmental authorities, terminate or delay the implementation of our products and services, it may be difficult for us to generate profitable business in these foreign jurisdictions.

Changes in the laws and regulations to which we are subject may increase our costs.

We are subject to numerous laws and regulations, including, but not limited to, environmental and health and welfare benefit regulations, as well as those associated with being a public company. These rules and regulations may be changed by local, state, provincial, national or foreign governments or agencies. Such changes may result in significant increases in our compliance costs. Compliance with changes in rules and regulations could require increases to our workforce, and could result in increased costs for services, compensation and benefits, and investment in new or upgraded equipment.

Declines in general economic conditions or acts of war and terrorism may adversely impact our business.

Demand for printing services are correlated with general economic conditions. The recent declines in U.S. economic conditions have adversely impacted our business and results of operations, and may continue to do so for the foreseeable future. The overall business climate of our industry may also be impacted by domestic and foreign wars or acts of terrorism, which events may have sudden and unpredictable adverse impacts on demand for our products and services.

Risks Related to Our Stock

Provisions of our certificate of incorporation and agreements could delay or prevent a change in control of our company.

Certain provisions of our certificate of incorporation may discourage, delay, or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:

the authority of the Board of Directors to issue preferred stock; and

a prohibition on cumulative voting in the election of directors.

We have a large number of authorized but unissued shares of common stock, which our management may issue without further stockholder approval, thereby causing dilution of your holdings of our common stock.

As of December 31, ~~2009,~~2010, there were approximately ~~184~~180 million authorized but unissued shares of our common stock. Our management continues to have broad discretion to issue shares of our common stock in a range of transactions, including capital-raising transactions, mergers, acquisitions, for anti-takeover purposes, and in other transactions, without obtaining stockholder approval, unless stockholder approval is required for a particular transaction under the rules of the NYSE Amex, New York law, or other applicable laws. If our Board of Directors determines to issue additional shares of our common stock from the large pool of authorized but unissued shares for any purpose in the future without obtaining stockholder approval, your ownership position would be diluted without your further ability to vote on such transaction.

1612

The exercise of our outstanding options and warrants and vesting of restricted stock awards may depress our stock price.

As of December 31, ~~2009,~~2010, we had ~~(i)~~ outstanding stock options and warrants to purchase an aggregate of ~~2,089,020~~2,767,131 shares of our ~~Common Stock~~common stock at exercise prices ranging from ~~$1.60~~$1.86 to $12.65 per ~~share; (ii)~~share. This amount includes the warrants issued to Fletcher on December 31, 2010 (as amended on February18, 2011 and March 14, 2011). ~~85,000~~These amounts do not include potentially issuable shares under Fletcher’s Later Investment rights which provide Fletcher the right to acquire up to 756,387 shares of the Company’s common stock at a price per share of $5.38 anytime prior to July 2, 2011. For each share purchased by Fletcher pursuant to the Later Investment, Fletcher would receive a warrant to purchase an additional share of the Company’s commons stock at $5.38 for up to nine years. If Fletcher exercises all of its Later Investment Rights, then an additional 756,387 warrants would be issued. (See Item 15 -Notes To The Consolidated Financial Statements). This amount does includes 45,000 unvested restricted shares of our common stock that are subject to various vesting ~~terms, and (iii) convertible notes that convert to up to 478,866 shares of our common stock.~~terms. To the extent that these securities are converted into common stock, dilution to our stockholders will ~~occur,~~occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise ~~or convert~~ them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise and conversion terms provided by those securities.

Sales of these shares in the public market, or the perception that future sales of these shares could occur, could have the effect of lowering the market price of our common stock below current levels and make it more difficult for us and our stockholders to sell our equity securities in the future.

Sale or the availability for sale of shares of common stock by stockholders could cause the market price of our common stock to decline and could impair our ability to raise capital through an offering of additional equity securities.

We do not intend to pay cash dividends.

We do not intend to declare or pay cash dividends on our common stock in the foreseeable future. We anticipate that we will retain any earnings and other cash resources for investment in our business. The payment of dividends on our common stock is subject to the discretion of our Board of Directors and will depend on our operations, financial position, financial requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors that our Board of Directors deems relevant.

We have material weaknesses in our internal control over financial reporting structure, which, until remedied, may cause errors in our financial statements that could require restatements of our financial statements and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.

We have identified two material weaknesses in our internal control over financial reporting in our annual assessment of internal controls over financial reporting that management performed for the year ended December 31, 2010. Management has concluded that (i) we did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties; and (ii) we lack sufficient resources within the accounting department to have effective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles, and that the foregoing represented material weaknesses in our internal control over financial reporting. We are uncertain at this time of the costs to remediate all of the above listed material weaknesses, however, we anticipate the cost to be in the range of $200,000 to $400,000 (including the cost of hiring additional qualified accounting personnel to eliminate segregation of duties issues and using the services of accounting consultants for complex and non-routine transactions if and when they arise). We cannot guarantee that the actual costs to remediate these deficiencies will not exceed this amount. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements and in our disclosure that could require restatements. Investors may lose confidence in our reported financial information and in our disclosure, which could lead to a decline in our stock price.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also materially adversely affect the results of periodic management evaluations regarding disclosure controls and procedures and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.

We may not meet the continued listing standards of the NYSE AMEX

WeIn December 2008, we received ~~notice~~a letter from the NYSE Amex ~~(formerly NYSE Alternext US) on December 2, 2008~~stating that, based on athe NYSE Amex’s review of ~~our Form 10-Q for~~publicly available information, we were considered to be below the ~~period ended September 30, 2008, that we did not meet certain of the Exchange’s~~NYSE Amex’s continued listing ~~standards related to stockholders’ equity as set forth in Part 10 of the NYSE Amex Company Guide. We were afforded the opportunity to submit~~standards. After submitting a plan of compliance to the ~~Exchange~~NYSE Amex and ~~on January 9, 2009 presented our plan to~~additional evaluation by the ~~Exchange.~~ NYSE Amex, we were informed in March 2010 that we had resolved the continued listing deficiencies.

On January ~~29, 2009,~~25, 2011, we received a warning letter from the ~~Exchange notified us~~NYSE Amex in connection with the Company's failure to secure NYSE Amex approval for the additional issuances of our securities as required by Section 301 of the NYSE Amex Company Guide and its continued listing standards. The listing deficiency involved three stock issuances totaling 1,235,153 shares made in November and December of 2010. We thereafter filed our applications for the additional share listings with the NYSE Amex. On March 15, 2011, we received notification from NYSE Amex that ~~it accepted~~ our ~~plan of compliance~~additional listing applications have been approved, and ~~granted to us an extension until June 2, 2010 to regain~~that the Company has regained full compliance with NYSE Amex listing requirements.

We cannot assure you that we will not receive additional deficiency letters in the future, or that we will continue to satisfy the continued listing standards ~~and that our listing is being continued pursuant~~in order to ~~this extension. We are subject to periodic review by Exchange Staff during~~remain listed on the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from the Exchange. There is no guarantee that we will be able to regain compliance to the listing standards and therefore, our common shares may no longer be able to be traded, which could cause the market price of our common stock to decline and could impair our ability to raise capital through an offering of additional equity securities.NYSE Amex Equities exchange.

ITEM 2 - PROPERTIES

Our administrative offices are approximately 4,700 square feet and are located in the First Federal Plaza Building, 28 East Main Street, Rochester, New York 14614 which we occupy under a lease that will expire in ~~2011.~~January 2012. Our plastic printing division leases approximately 25,000 square feet in Brisbane, CACalifornia in a lease that will expire in July 2014. DPI, ~~Secuprint,~~ our commercial printing group, leases an approximately 20,000 square foot facility in Rochester, NYNew York under a lease expiring in December 2013. ~~On February 12, 2010, in conjunction with the acquisition of Premier Packaging, the Company entered into a~~We lease ~~for~~ approximately 40,000 square feet of production and warehouse space located in Victor, ~~NY,~~New York, a suburb of ~~Rochester. The lease is with~~Rochester, from Bzdick Properties, LLC, an entity owned by the former owner of Premier Packaging and the Company’s new President and ~~COO, and~~Chief Operating Officer, which will expire on February 12, 2020. We believe that our facilities are adequate for our current operations. The Company also believes that it can negotiate renewals or similar lease arrangements on acceptable terms when our current leases expire.

ITEM 3 - LEGAL PROCEEDINGS

On August 1, 2005, the Company commenced a suit against the ~~European Central Bank (“ECB”)~~ECB alleging patent infringement by the ECB and claimed unspecified damages. We brought the suit in the European Court of First Instance in Luxembourg. We alleged that all Euro banknotes in circulation infringe the Company European Patent 0 455 750B1 ~~(the “Patent”),~~ 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 ruled on September 5, 2007 that it does not have jurisdiction to rule on the patent infringement claim, and also ruled that we will be required to pay attorneys and court fees of the ECB. The ECB formally requested the Company to pay attorneys and court fees in the amount of Euro 93,752 which, unless the amount is settled will be subject to an assessment procedure that ~~will~~has not ~~likely be concluded until late 2010, which~~been initiated, the Company will accrue as soon as the assessed amount, if any, is reasonably ~~estimatable.~~estimable.

~~On March 24,~~In 2006, the Company received ~~notice~~notices that the ECB had filed a separate ~~claim~~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 the national courts seeking revocation and declarations of invalidity of the ~~Patent in each of the Netherlands, Belgium, Italy, France, Spain, Germany and Austria.~~Patent. On March 26, 2007, the High Court of Justice, Chancery Division, Patents Court in London, England ~~(the “English Court”)~~ ruled that the Patent was deemed invalid in the United Kingdom, and on March 19, 2008 this decision was upheld on appeal. The English Court rejected the ECB’s allegations of invalidity based on lack of novelty, lack of inventive step and insufficiency, but held that the patent was invalid for added subject matter. The English Court’s decision does not affect the validity of the Patent in other European countries. As a result of these decisions, the Company was notified of the final assessment of the reimbursable ECB costs for both court cases was ₤356,490, of which ~~the Company has~~all was paid ~~₤332,000 through December 31, 2009 and owes approximately ₤25,000 (approximately $40,000~~ as of December 31, ~~2009), which amount was included in accrued expenses as of December 31, 2009.~~2010.

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. ~~As a result of this ruling,~~On July 6, 2010, the Company ~~expects to be awarded reimbursements for its costs associated with~~was notified that the German ~~validity case, which is Euro 44,692 ($65,000 at December 31, 2009), which~~Court has ruled that the Patent, that was awarded to the Company ~~will record when~~by the ~~amount, if any, is received. The ECB~~European Patent Office and upheld as valid in a previous hearing in the German Court of First Instance, has ~~filed an appeal against that decision, which is not expected~~now been deemed invalid in Germany due to ~~be decided before July 2010.~~added matter. On January 9, 2008 the French Court held that the Patent was invalid in France for the same reasons given by the English Court. The Company ~~is required to pay de minimus attorneys’ fees of the ECB as a result of the French decision. The Company~~ filed an appeal against the French decision on May 7, 2008. ~~The French appeal was heard on December 7, 2009.~~ On March 20, 2010, the Company was informed that the decision was upheld in the French appeal. On March 12, 2008 the Dutch Court ~~having considered the English, German and French decisions,~~ ruled that the Patent is valid in the Netherlands. The ECB filed an appeal against the Dutch decision on March 27, 2008. The Dutch appeal ~~will be~~was heard in June 2010, and the ~~Hague~~Company was notified on ~~June 2010.~~December 21, 2010 that the patent was deemed invalid upon appeal. On November 3, 2009, the Belgium Court held that the Patent was invalid in Belgium for the same reasons given by the English and French courts as were similarly informed by the Austrian court on November 17, 2009. ~~Costs reimbursements,~~Cost reimbursement, if any, associated with the Belgium, Austrian, and ~~Austrian~~French validity ~~case~~cases as well as the appeals in Germany and France are covered under the Trebuchet ~~Agreement as~~agreement described below. ~~A trial was also held in Madrid, Spain on June 3 and 5, 2008 and oral and written closing submissions were made on July 19, 2008.~~ On March 24, 2010 the Spanish Court ruled that the Patent was ~~valid~~.valid. In Italy the validity case is to be heard again by a newly appointed judge expected during ~~2010~~2011 and a hearing in Luxembourg ~~is expected in 2010.~~thereafter.

On August 20, 2008, the Company entered into an agreement with Trebuchet ~~Capital Partners, LLC (“Trebuchet”)~~ under which Trebuchet ~~has~~ agreed to pay substantially all of the litigation costs associated ~~with pending~~ validity proceedings ~~initiated by the European Central Bank (“ECB”)~~ in eight European countries relating to the ~~Company’s European Patent 0 455 750B1 that the Company has claimed the ECB infringed in printing of the Euro currency (the “Patent”).~~Patent. Trebuchet also agreed to pay substantially all of the litigation costs associated with any future validity challenges filed by the ECB or other parties, provided that Trebuchet elects to assume the defense of any such challenges, in its sole discretion, and patent infringement suits filed against the ECB and certain other alleged infringers of the Patent, all of which suits may be brought at the sole discretion of Trebuchet and may be in the name of the Company, Trebuchet or both. 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 agreement under the terms of the Agreement, and in consideration for Trebuchet's funding obligations, the Company assigned and transferred a 49% interest of the Company's rights, title and interest in the Patent to Trebuchet which allows Trebuchet to have a separate and distinct interest in and share of the Patent, along with the right to sue and recover in litigation, settlement or otherwise to collect royalties or other payments under or on account of the Patent. In addition, the Company and Trebuchet have 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. Trebuchet is also entitled to recoup any litigation expenses specifically awarded to the Company in such actions.

The Patent has ~~thus~~ been confirmed to be valid and enforceable in ~~three jurisdictions (Germany, the Netherlands and Spain)~~one jurisdiction (Spain) that ~~use~~uses the Euro as its national currency allowing the Company or Trebuchet, ~~Capital Partners,~~ on the Company’s behalf, to proceed with infringement cases in ~~these countries~~Spain if we choose to do so. On February 18, 2010, Trebuchet, on behalf of ~~Document Security Systems,~~the Company, filed an infringement suit in the ~~Netherlands. The suit is being lodged~~Netherlands against the ECB and two security printing entities with manufacturing operations in the Netherlands, Joh. Enschede Banknotes ~~B.V.;~~B.V and Koninklijke Joh. Enschede B.V. ~~The ECB's and~~Upon determination on December 21, 2010, that the ~~security printers have been notified and~~patent was invalid in the ~~court hearing date is tentatively scheduled for January 21, 2011.~~

Netherlands, the infringement case will not be continued.

On January 31, 2003, the Company commenced an action, unrelated to the above ECB litigation, entitled New Sky Communications, Inc., As Successor-In-Interest To Thomas M. Wicker, Thomas M.Wicker Enterprises, Inc. and Document Security Consultants V. Adler Technologies, Inc. N/K/A Adlertech International, Inc. and Andrew McTaggert (United States District Court, Western District Of New York Case No.03-Cv-6044t(F)) regarding certain intellectual property in which the Company has an interest. On December 7, 2009, the Company reached an agreement to terminate all litigation in association with this suit. In conjunction with that agreement, the Company issued to the opposing parties an aggregate of 40,000 shares of common stock valued at approximately $85,000 and 50,000 of common stock warrants for the purchase of common shares at $3.00 per share valued at approximately $30,000 utilizing the Black Scholes pricing model. The Company recorded an expense related to the estimated grant date fair value of the shares and warrants issued of approximately $115,000. In addition, both parties agreed not to compete with certain of the other party’s customers for 7 years. The Company does not believe that the competition agreement will have a material impact on its business.

~~In addition to the foregoing, we~~There are ~~subject to~~no 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 thematerial pending legal proceedings to which ~~we are~~the Company or any of its subsidiaries is a party ~~whether discussed herein~~ or ~~otherwise, will have a material adverse effect on our results~~ of ~~operations, cash flows or our financial condition.~~which any of its property is subject, other than ordinary routine litigation incidental to the Company’s business.

~~ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

~~There were no matters submitted to a vote of security holders in the fourth quarter of 2009.~~

1915

PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is listed on the NYSE Amex, where it trades under the symbol “DMC.”

The following table sets forth the high and low closing prices for the shares of our Common Stock, for the periods indicated.

QUARTER ENDING	HIGH		LOW
March 31, 2010	$	4.41	$	2.44
June 30, 2010		3.94		2.70
September 30, 2010		4.01		3.04
December 31, 2010		5.51		3.38

QUARTER ENDING	HIGH		LOW
March 31, 2009	$	1.92	$	1.59
June 30, 2009		2.24		1.63
September 30, 2009		2.45		1.86
December 31, 2009		3.14		1.95

QUARTER ENDING HIGH LOW
March 31, 2009 $ 1.92 $ 1.59
June 30, 2009 2.24 1.63
September 30, 2009 2.45 1.86
December 31, 2009 3.14 1.95

QUARTER ENDING HIGH LOW
March 31, 2008 $ 6.85 $ 4.20
June 30, 2008 6.87 4.68
September 30, 2008 5.25 4.83
December 31, 2008 4.40 1.40

The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

From January 1, ~~2010~~2011 through March ~~19, 2010,~~25, 2011, our ~~Common Stock~~common stock had a high closing price of ~~$4.41~~$5.58 and a low closing price of ~~$2.44 and a closing price on March 19, 2010 of $4.15.~~$4.48.

Issued and Outstanding

Our certificate of incorporation authorizes 200,000,000 shares of ~~Common Stock,~~common stock, par value $0.02. As of March ~~19, 2010,~~25, 2011, we had ~~17,760,324~~19,498,884 shares of ~~Common Stock,~~common stock issued and outstanding.

Equity Compensation Plan Information

The following table provides certain information as of December 31, 2010 with respect to our equity compensation plans.

	Restricted stock to be issued upon vesting		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance (under equity compensation Plans (excluding securities reflected in column (a & b))

Plan Category	(a)		(b)		(c)		(d)


Equity compensation plans approved by security holders
2004 Employee Stock Option Plan		45,000		673,500	$	6.09		846,481
2004 Non-Executive Director Stock Option Plan				157,000		5.61		43,000

Equity compensation plans not approved by security holders
Contractual warrant grants for services		-		376,760		6.65		-

Total		45,000		1,207,260	$	5.96		889,481

Recent Issuances of Unregistered ~~Securities~~Securities.

~~On February 12, 2010,~~There were no issuances of unregistered securities sold by the Company acquired all of the outstanding common stock of Premier Packaging Corporation from Robert B. and Joan T. Bzdick for $2,000,000 in cash and 735,437 shares of the Company's common stock. The shares of common stockthat have not been ~~registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued and sold~~previously reported in ~~reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.~~

On February 17, 2010, the Company completed the sale of 20 investment units in a private placement pursuant to subscription agreements with six accredited investors. Each investment unit was comprised of 5,000 shares of the Company’s common stock and five year warrants to purchase 1,000 shares of common stock at an exercise price of $3.50 per share. In the transaction, the Company sold 20 investment units for $15,000 per unit for gross cash proceeds of $300,000, consisting of 100,000 shares of common stock and warrants to purchase an aggregate of 20,000 shares of common stock. In connection with these sales EKN Financial Services Inc., a registered broker-dealer, acted as non-exclusive placement agent. EKN Financial Services, Inc. received a cash fee in the aggregate of $30,000 as commission for these sales. On February 17, 2010, the Company also sold 20 investment units for gross cash proceeds of $270,000, consisting of 100,000 shares of common stock and warrants to purchase an aggregate of 20,000 shares of common stock. No placement agent fees were paidCurrent Reports on these sales. The shares of common stock have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Form 8-K.

On January 21, 2010, the Company issued 29,400 shares to its former investor relations firm for payment of services. On February 23, 2010, the Company issued 304,000 common stock pursuant to the exercise of warrants in which the Company received proceeds of $608,000. The shares of common stock have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

Stockholders

As of March ~~19, 2010,~~24, 2011, we had approximately ~~902~~919 record holders of our ~~Common Stock.~~common stock. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.

Dividends

On September 23, 2010, our Board of Directors declared a non-monetary dividend pursuant to which we distributed to our stockholders of record on October 8, 2010 on a pro-rata basis an aggregate of 7,500,000 shares of common stock of Internet Media Services. The dividend was recorded at approximately $229,000 which was the book value of the investment as of September 23, 2010. We did not pay dividends during ~~2009 or 2008.~~2009. We presently intend to retain our cash for use in the operation and expansion of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

~~Stock Transfer Agent and Warrant Agent~~

~~Our stock transfer agent is American Stock Transfer & Trust Co., 6201 15th Avenue, Brooklyn, NY 11219. We act as our own warrant agent for our outstanding warrants.~~

~~Share~~Shares Repurchased by the Registrant

We did not purchase or repurchase any of our securities in the fiscal year ended December 31, ~~2009,~~2010, including the fourth quarter.

The information required by Item 201(d) of Regulation S-K will be contained in our Proxy Statement for our Annual Stockholders Meeting, which we will file with the Securities and Exchange Commission within 120 days after December 31, ~~2009,~~2010, and which is incorporated by reference herein.

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

~~This~~Forward-looking statements in this Annual Report, ~~contains forward-looking~~including without limitation, statements ~~within~~related to the ~~meaning~~Company’s plans, strategies, objectives, expectations, intentions and adequacy of ~~Section 27A~~resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act ~~of 1933~~ and ~~Section 21E of the Securities Exchange Act of 1934, including statements that~~ contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Part I, Item 1A “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.

Overview

Document Security Systems ~~Inc.,~~ markets and sells products designed to protect valuable information from unauthorized scanning, copying, and digital imaging. We have developed security technologies that are applied during the normal printing process and by all printing methods including traditional offset, gravure, flexo, digital or via the internet on paper, plastic, or packaging. ~~As of March 22, 2010, we hold 14 patents that protect our technology and have approximately 57 patent applications in process.~~ Our technologies and products are used by federal, state and local governments, law enforcement agencies and are also applied to a broad variety of industries as well, including financial institutions, high technology and consumer goods, entertainment and gaming, healthcare/pharmaceutical, defense and genuine parts industries. Our customers use our technologies where there is a need for enhanced security for protecting and verification of critical financial instruments and vital records, or where there are concerns of counterfeiting, fraud, identity theft, brand protection and liability.

2117

We have developed or acquired over 30 technologies that provide to our customers a wide spectrum of solutions. We hold numerous patents, patent pendings, trademarks and trade secrets that form the basis of our security technology offerings. Our competitive position in the security printing market is based largely on our attention to the research and development of technologies, ideas and know-how that combat a widening range of copying, scanning and other duplication devices that exist in today’s market that can be used for counterfeiting and unauthorized duplication of sensitive information and images. We sell our products under the AuthentiGuard® name generally in the following ways: (a) as generic products, including safety paper and plastic cards geared for the end user market for printed security products; (b) as custom printed products; (c) as technology licenses; or (d) as customized digital implementations.

Prior to 2006, the Company’s primary revenue source in its document security division was derived from the licensing of its technology. The Company had limited production capabilities. In 2006, the Company began to expand our ability to be a provider of anti-counterfeiting products that utilize our anti-counterfeiting technologies. In 2006, we acquired ~~San Francisco-based Plastic Printing Professionals, Inc. (“P3”),~~P3, a privately held ~~security printer specializing in~~ plastic cards ~~containing state of~~manufacturer located in the ~~art multiple or singular security technologies.~~San Francisco, CA area. P3’s primary focus is manufacturing long-life composite, laminated and surface printed cards which can include magnetic stripes, bar codes, holograms, signature panels, invisible ink, micro fine printing, guilloche patterns, Biometric, RFID and a patent-pending watermark technology. P3’s products are marketed through an extensive broker network that covers much of North America, Europe and South ~~America. P3’s product~~America and ~~client list includes the Grammy Awards, the Country Music Association awards, sporting event media cards, ID cards~~by manufacturing for major airports and Latin American and African driver’s licenses. Our acquisition of P3 marked the initial execution of our strategy to expand our manufacturing capabilities through acquisitions in order to expand our custom security printing business. During 2007, we moved P3’s operation to a 25,000 square foot facility and upgraded some of its equipment, most notably with a significant investment in a new state of the art laminator. These actions were taken in order to significantly increase the capacity and efficiency of the operation to meet expected future demand requirements. During 2008, we placed approximately $600,000 of leased equipment into service at our plastic printing division to significantly increase the production capability and expand its services in the variable data card and RFID markets. These leases were accounted for as operating leases.

On August 20, 2008, we entered into an agreement with Trebuchet Capital Partners, LLC in which Trebuchet agreed to pay substantially all of the litigation costs associated with pending litigation proceedings initiated by the European Central Bank in eight European countries relating to the Company’s European Patent 0 455 750B1 that the Company has claimed the ECB infringed in printing of the Euros currency in exchange for a 50% share of any proceeds generated from the litigation. Under the terms of the agreement, and in consideration for Trebuchet’s funding obligations, the Company assigned and transferred a 49% interest of the Company’s rights, title and interest in the Patent to Trebuchet which allows Trebuchet to have as a separate and exclusive interest including a separate and distinct right to exploit the Patent.various industry integrators.

In December 2008, we acquired substantially all of the assets of DPI of Rochester, LLC, a ~~million~~ privately held commercial printer ~~with approximately $7.6 million in sales in 2007~~ located in Rochester, NY. We formed ~~a new subsidiary called~~ DPI ~~Secuprint~~ to ~~house~~incorporate this new ~~company. As a result of this acquisition, we have~~company which significantly improved our ability to ~~meet our current and expected future demand of~~produce our security paper products as well as improving our competitiveness in the market for custom security printing, especially in the areas of vital records, secure coupons, transcripts, and prescription ~~paper. In addition, as a result of~~paper along with the ~~acquisition, we believe we can~~ability to offer our customers a wider range of commercial printing offerings.

In February 2010, the Company acquired Premier Packaging, a privately held packaging company located in the Rochester NY area. Premier Packaging is an ISO 9001:2008 registered manufacturer of custom paperboard packaging serving clients in the pharmaceutical, beverage, photo packaging, toy, specialty foods and direct marketing industries, among others. The Company expects the acquisition will allow it to introduce anti-counterfeiting products to the packaging market that further expands the usage of its technologies. The Company believes that the ability to deter and prevent counterfeiting of brand packaging will provide major benefits to companies around the globe who are affected by product counterfeiting.

In the past few years, we have divested two operations so that we could focus our efforts on security and commercial printing. During 2007, we sold the assets of our retail printing and copying division, called Patrick Printing. In October 2009, we sold the assets and liabilities associated with ~~our Legalstore.Com business~~Legalstore in exchange for 7,500,000 shares of common stock of Internet Media ~~Services, Inc., representing approximately 37% of the outstanding~~Services. In October 2010, we distributed our shares of Internet Media Services in the ~~newly formed company.~~form of a dividend to our shareholders.

On February 12, 2010, the Company acquired all of the outstanding common stock of Premier Packaging Corporation from Robert B. and Joan T. Bzdick for $2,000,000 in cash and 735,437 shares of the Company's common stock. In conjunction with the transaction, the Company entered into a Credit Facility Agreement with RBS Citizens, N.A. (“Citizens Bank”) pursuant to which Citizens Bank provided Premier Packaging Corporation with a term loan of $1,500,000, and a revolving line of $1,000,000. The Credit Facility Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default and is secured by all of the assets of Premier Packaging Corporation. The credit facilities are also secured by cross guarantees by Document Security Systems, Inc., and its other wholly owned subsidiaries, Plastic Printing Professionals, Inc. and Secuprint, Inc. The $1,500,000 term loan matures March 1, 2013 and is payable in 35 monthly payments of $25,000 plus interest commencing March 1, 2010 and a payment of $625,000 on the 36 month. Interest accrues at 1 Month LIBOR plus 3.75%. The proceeds of the term loan were used as partial payment of the purchase of all of the outstanding common stock of Premier Packaging Corporation. The $1,000,000 revolving line of credit matures on February 12, 2011 and is payable in monthly installments of interest only beginning on March 1, 2010. Interest accrues at 1 Month LIBOR plus 3.75%. The Company subsequently entered into a credit swap agreement to lock into a 5.66% effective interest over the life of the term loan.

RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, ~~2009~~2010 AND ~~2008~~2009

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition. In December 2008, we acquired substantially all of the assets of DPI of Rochester, LLC, a $7.6 million privately held commercial printer located in Rochester, NY with approximately $7.6 million in sales in 2007. We formed a new subsidiary called DPI Secuprint to house this new company. DPI Secuprint’s results for the period from December 19, 2008 to December 31, 2008 are included in 2008 amounts. In October 2009, the Company sold ~~its Legalstore.com division.~~Legalstore. In accordance with FASB ASC 205-20-45, the Company reported the results of ~~Legalstore.com~~Legalstore as continued operations because the operations and cash flows of the component have not been eliminated ~~and~~ given the Company’s continued involvement after the ~~sale.~~sale as a shareholder in Internet Media Services, the purchaser of Legalstore. In October 2010, we distributed our shares of Internet Media Services in the form of a dividend to our shareholders. In February 2010, we acquired Premier Packaging, a $7,000,000 packaging company based in Victor, NY, approximately 17 miles from Rochester, NY, our headquarters. The discussion should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report.

Revenue

	Year Ended December 31, 2009		Year Ended December 31, 2008		% change			Year Ended December 31, 2010		Year Ended December 31, 2009		% change
Revenue
Security and commercial printing	$	8,773,000	$	4,386,000		100	%	$	6,988,000	$	8,773,000		(20	)%
Packaging									5,753,000		-		-
Technology license royalties and digital solutions		783,000		1,647,000		-52	%		641,000		783,000		(18	)%
Legal products		355,000		610,000		-42	%		-		355,000		(100	)%
Total Revenue		9,911,000		6,643,000		49	%	$	13,382,000	$	9,911,000		35	%

Revenue - ~~2009 vs 2008~~: Revenue in ~~2009~~2010 increased ~~49%~~35% from ~~2008.~~2009. Security and commercial print sales ~~increased 100%~~decreased 20%, primarily due to decreases in commercial printing orders from the Company’s DPI division. The Company experienced lower orders from certain customers as a result of the change in the Company’s market focus. Generally, the Company is seeking to reduce its overall commercial printing business and focus more of its printing on security printing opportunities. Furthermore, the Company utilized a portion of it press time on printing for its newly acquired packaging company, which resulted in lower external print sales. Packaging sales were $5.8 million for the ten and one-half-month period from February 12, 2010 to December 31, 2010. During 2010, the Company focused on streamlining operations between its security printing, commercial printing and packaging division to strengthen its competitive position in the markets it sells to and generate cost savings and synergies. During 2010, the Company had approximately $936,000 as opposed to $212,000 in 2009 of intercompany sales which were eliminated for consolidated reporting.

The Company’s technology license revenue declined 18% as usage by its largest licensee declined. The Company continues to seek long-term licensing partners, however, we primarily focus our sales and business development efforts on end-user solutions for our customers. Furthermore, during 2010, the Company did not have any legal product sales as this division was sold in October 2009.

Gross profit

	Year Ended December 31, 2010		Year Ended December 31, 2009		% change

Costs of revenue
Security and commercial printing	$	5,304,000	$	6,063,000		(13	)%
Packaging		4,387,000		-		-
Technology license royalties and digital solutions		5,000		14,000		(64	)%
Legal products		-		179,000		(100	)%
Total cost of revenue		9,696,000		6,256,000		55	%

Gross profit
Security and commercial printing		1,684,000		2,710,000		(38	)%
Packaging		1,366,000		-		-
Technology license royalties and digital solutions		636,000		769,000		(17	)%
Legal products		-		176,000		(100	)%
Total gross profit	$	3,686,000	$	3,655,000		1	%

		Year Ended December 31, 2010				Year Ended December 31, 2009				% change
Gross profit percentage:			28	%			37	%			(24	)%

Gross Profit - Gross profit was flat between 2010 and 2009, which was primarily due to the significant decrease in the gross profits generated from the Company’s security and commercial printing as a result of decreases in sales at the Company’s commercial printing division, which more than offset the increase in gross profits as a result of the Company’s packaging division which the Company acquired in February 2010. In addition, the Company did not have any gross profits from legal product sales as the division was sold in the fourth quarter of 2009. The Company’s gross profit percentage decrease for 2010 as compared to 2009 reflects the larger weight that packaging sales, which typically carry a lower gross profit margin, have on the Company’s overall revenue areas, along with the weakness in commercial printing sales. The Company expects that the impact of the Company’s acquisition of ~~DPI Secuprint, a commercial printer, in December, 2008. This increase was offset by a~~it packaging division will be to decrease ~~in royalty revenue~~overall gross profit margins for at least the near future, especially as the number of ~~52%~~non-security packaging projects out-number the security packaging projects, which ~~primarily reflects the impact of a non-recurring royalty of $542,000 recorded in the second quarter of 2008. Furthermore,~~ the Company ~~experienced a 42% decline of revenue~~expects will be at its Legalstore.com division due to the sale of the division in October of 2009, as well as a decline in revenue prior to the sale caused by the global recession. In accordance with ASC 205-20-45, the Company reported the results of Legalstore.com as continued operations because the operations and cash flows of the component have not been eliminated and given the Company’s continued involvement after the sale.

During 2009, all of the Company’s divisions were adversely affected by significant delays or reductions in orders by core customers that reflected the rapid decline in the U.S. and global economies during the latter half of 2008 and the first half of 2009. The Company began to see demand in each of divisions to return to more traditional levels in the third quarter of 2009 and expects this trend to continue as the U.S. and global economies stabilize.

~~Gross profit~~

Year Ended
December 31,
2009

Year Ended
December 31,
2008
% change

Costs of revenue
Security and commercial printing $ 6,063,000 $ 2,663,000 128 %
Technology license royalties and digital solutions 14,000 14,000 0 %
Legal products 179,000 352,000 -49 %
Total cost of revenue 6,256,000 3,029,000 107 %

Gross profit
Security and commercial printing 2,710,000 1,723,000 57 %
Technology license royalties and digital solutions 769,000 1,633,000 -53 %
Legal products 176,000 258,000 -32 %
Total gross profit 3,655,000 3,614,000 1 %

Year Ended
December 31,
2009

Year Ended
December 31,
2008
% change
Gross profit percentage: 37 % 54 % -32 %

~~Gross Profit~~ - ~~2009 vs 2008~~

~~Gross~~higher profit in 2009 was flat as compared to 2008. While sales increased in 2009, the mix of sales was significantly different from 2008 due to the increase of commercial printing by the Company as a result of the Company’s acquisition of DPI Secuprint in December 2008. Commercial printing typically carries lower margins than the Company’s security printing projects. In addition, the Company increased the fixed cost component of its cost of sales as a result of investments in equipment at the Company’s plastic printing facility which while significantly increasing that division’s production capacity and capabilities, caused margins in that division to decline as sales gains did not fully offset the increase in costs. Finally, gross margins were favorably impacted by a one-time non-recurring deferred revenue item in 2008 that carried a 100% gross margin. Without this one-time item, 2009 gross margins would have increased 18% over 2008.

margins.

Operating Expenses

Year Ended
December 31,
2009

Year Ended
December 31,
2008
% change

Operating Expenses
Sales, general and administrative compensation $ 3,638,000 $ 2,966,000 23 %
Professional Fees 539,000 896,000 -40 %
Sales and marketing 154,000 340,000 -55 %
Research and development 292,000 432,000 -32 %
Rent and utilities 477,000 509,000 -6 %
Other 710,000 807,000 -12 %
$ 5,810,000 $ 5,950,000 -2 %

Other Operating Expenses
Depreciation and amortization 148,000 167,000 -11 %
Stock based payments 68,000 1,747,000 -96 %
Impairment of patent defense costs and other intangible assets - 797,000
Amortization of intangibles 1,342,000 1,972,000 -32 %
1,558,000 4,683,000 -67 %

Total Operating Expenses 7,368,000 10,633,000 -31 %

~~Selling, General and Administrative – 2009 vs 2008~~

	Year Ended December 31, 2010		Year Ended December 31, 2009		% change

Operating Expenses
Sales, general and administrative compensation	$	3,431,000	$	3,638,000		(6	)%
Professional Fees		603,000		539,000		12	%
Sales and marketing		238,000		154,000		55	%
Research and development		265,000	��	292,000		(9	)%
Rent and utilities		659,000		477,000		38	%
Other		642,000		710,000		(10	)%
		5,838,000		5,810,000		0	%
Other Operating Expenses
Depreciation and software amortization		140,000		148,000		(5	)%
Stock based compensation		423,000		68,000		522	%
Impairment of patents		377,000		-		-
Amoritization of intangibles		803,000		1,342,000		(40	)%
		1,743,000		1,558,000		12	%

Total Operating Expenses	$	7,581,000	$	7,368,000		3	%

Sales, general and administrative compensation costs were ~~23% higher~~6% lower in ~~2009,~~2010 as compared to ~~2008, due~~2009, which reflects the impact of the addition of approximately $634,000 of SG&A compensation expense from the packaging division the Company acquired in February 2010. Otherwise, SG&A compensation costs would have decreased 23% during 2010 as compared to ~~sales and administrative staff additions~~2009 as the result of staff reductions made by the ~~Company’s acquisition of~~Company throughout 2009 and in early 2010 primarily in its commercial printing business in December 2008. Otherwise, SG&A compensation costs at the Company’s remaining divisions would have decreased 52% during 2009 compared to 2008, as the result of significant staff reductions in sales, marketing and administration that the Company initiated in the middle of 2008 and during the first quarter of 2009.division.

Professional fees ~~decreased 40%~~ in ~~2009 from 2008 primarily as a result of a significant decrease~~2010 increased 12% in ~~consulting fees which was offset by a significant increase~~2010 due to increases in legal fees ~~incurred by the Company as a result of increase of usage of external legal counsel after the Company’s legal counsel left the Company in March of 2009, including an increase in~~primarily associated with legal costs associated with ~~non-ECB related litigation matters. The~~the Company’s various business development and contractual activities, along with an increase in consulting costs. In February of 2011, the Company ~~has evaluated~~hired an in-house General Counsel in an effort to reduce its ~~use of external legal counsel and expects~~overall legal costs ~~to decline~~ in ~~2010.~~2011 and beyond.

Sales and marketing ~~expenses decreased significantly in~~costs during 2010 increased 55% from 2009 ~~as compared~~due to ~~2008 as the Company changed its primary~~ sales and marketing strategy resulting in a reduction in its non-direct marketing costs, its international sales cost, and an overall reduction in sales related travel. The Company focused its efforts in 2009 on direct sales techniques that utilize telephone and web-conferencing communication with current and prospective customers, along with increasing its internet presence focused onat the Company’s ~~primary e-commerce website www.protectedpaper.com.~~Premier Packaging division as well as an increase in marketing efforts and trade show participation for its security printing and plastic printing divisions in 2010 based on expectations that the sales downturn the Company had experienced during the global recession was reversing.

Research and development costs consist primarily of compensation costs for research personnel and direct costs for the use of third-party printers’ facilities to test our technologies on equipment that we do not have access to internally. Research and development costs decreased ~~during 2009 compared~~due to ~~2008 as the result of lower external research costs and~~a reduction in compensation ~~cost as the Company reduced the department by two persons.~~cost.

Rent and utilities increased ~~in 2009~~ as a result of the ~~Company’s~~ acquisition of ~~its commercial printing business~~Premier Packaging in December 2008, which operates a 20,000 square foot facility in Rochester, NY. These increases were offset by a reduction in utility costs at the Company’s plastic printing facility, along with rental cost offsets from a sublease for approximately 7,500 feet at the Company’s plastic printing facility.February 2010.

Other operating expenses are primarily equipment maintenance and repairs, office supplies, IT support, bad debt expense and insurance costs. ~~On a consolidated basis,~~During 2010, these costs decreased ~~by 12%~~10% which was primarily the result of a one time write off of previously accrued estimated expenses of approximately $139,000 that were never incurred and a write off of previous accrued expenses that never transpired. This more than offset increases in ~~2009 as compared to 2008, despite the addition~~other expenses of ~~other expenses~~$171,000 associated with the Company’s ~~acquisition of DPI Secuprint in December 2008, as~~packaging division, which the Company ~~reduced insurance costs and office and miscellaneous costs~~acquired in February 2010.

~~Stock-based~~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. Stock-based compensation 2009~~in 2010 was $423,000 as compared to ~~2008, as current-period~~$68,000 of stock based compensation expense ~~was offset by~~in 2009 which reflected the effect of reversals of previously recorded ~~stock-based~~stock based compensation expense for stock options and restricted shares issued to the Company’s employees which terminated unvested due to employee terminations that occurred during the first quarter of 2009. ~~Furthermore, the Company’s~~The 2010 stock based compensation ~~costs for option awards~~expense included options granted ~~in 2009 are lower than past awards as~~to employees at Premier Packaging when the Company ~~has typically granted out-the-money options due~~acquired it in February 2010, and to ~~the Company’s lower than average~~certain senior management, along with stock ~~price during the year.~~based compensation expense related to warrants issued to third parties for consulting services.

Impairment of patent ~~defense~~ acquisition costs ~~and other intangible assets:~~ ~~On March 19, 2008, the Company received notification that its appeal~~ of ~~the invalidation of its European Patent 455750B1~~$377,000 was recognized in the ~~UK was not successful. As~~fourth quarter of 2010 as a result of adverse decisions in the adverse court decision, the Company recognized an impairment loss of $292,000 associated with costs directly related to the U.K appeal as of March 31, 2008. The impairment loss includes a judgment for reimbursement of estimated counterpart legal fees. In January, 2009, the Company received a formal request for fee reimbursement fromCompany’s patent infringement case against the ECB for a total of $420,000 inclusive of amounts already paid by the Company. The Company hired an independent firm to assist the Company in reducing or eliminating the ECB’s fees request, however, the Company recorded $145,000 as additional accrued expenses as of December 31, 2008. On July 31, 2009, the UK Court made the final assessment of costs for the UK patent validity case due fromwhich caused the Company to reduce the ECB of ₤356,490 of which the Company has paid ₤332,000 through December 31, 2009 and owes approximately ₤25,000 ($40,000 as of December 31, 2009) as of December 31, 2009, which amount was included in accrued expenses as of December 31, 2009. In addition, the Company recorded an impairment of $361,000 for a license agreement the Company had acquired in 2006 for RSS Barcodes for which the Company assessed that the probable futureestimated cash flows ~~derived from~~that supported the ~~license did not support the net carrying value of the license as of December 31, 2008.~~Company’s capitalized patent acquisition based intangible asset.

~~No such expense was incurred in 2009.~~

Amortization of intangibles expense decreased ~~32%~~ in ~~2009,~~2010, as compared to ~~2008~~the 2009 as a result of the reduction in the Company’s net capitalized patent acquisition and defense costs asset, ~~since the Company transferred and assigned 49%~~partially offset by increases in amortization of ~~its interest in the patent to a third-party in August 2008, which resulted in a reduction in the asset~~other intangible expense of ~~approximately $1.7 million. As a result,~~new other intangibles acquired during the Company’s ~~amortizable base reduced significantly.~~acquisition of Premier Packaging in February 2010.

Other Income and expenses

	Year Ended December 31, 2009			Year Ended December 31, 2008			% change			Year Ended December 31, 2010			Year Ended December 31, 2009			% change

Other income (expense):
Gain/(Loss) on foreign currency adjustments		15,000			(59,000	)		-125	%
Interest Income		18,000			-
Interest income										$	-		$	18,000			(100	)%
Interest expense		(259,000	)		(136,000	)		90	%		(290,000	)		(259,000	)		12	%
Amortizaton of note discount		(250,000	)		(8,000	)		3025	%		(420,000	)		(250,000	)		68	%
Loss on sale of patent assets		-			(1,170,000	)
Loss in equity investment											(121,000	)		-			-
Gain on deconsolidation of Legalstore.com division		26,000			-						-			26,000			(100	)%
Gain on foreign currency transactions											-			15,000			(100	)%
Litigation settlements		(115,000	)		126,000			-191	%		-			(115,000	)		100	%
Registration rights penalties		(109,000	)		-						-			(109,000	)		100	%
Other income		416,000			-						143,000			416,000			(66	)%

Other income (expense), net		(258,000	)		(1,247,000	)		-79	%
Other expense, net										$	(688,000	)	$	(258,000	)		167	%

Future Capital Needs – The Company expects to use its existing cash to support its operations and its efforts to achieve consistent positive cash flow from operations. On February 12, 2010, the Company obtained $1,500,000 in secured debt and a $1,000,000 revolving line of credit in conjunction with its acquisition of Premier Packaging Corp. This acquisition, while adding to the Company’s debt levels, is expected to improve the Company’s operating cash flow in 2010 and beyond by adding a business that has historically generated positive cash flows, as well as by creating opportunities by integrating that business with existing product lines. During 2009, the Company raised approximately $1.4 million in net proceeds from the issuance of its Common Stock in private placements to accredited investors. Furthermore, as- As of December 31, ~~2009,~~2010, the Company has approximately ~~$449,000~~$4,087,000 in cash and $417,000 available to it under one credit facility, ~~and~~along with up to ~~$1,000,000~~$385,000 available under a credit line at its Premier Packaging ~~subsidiary acquired in 2010.~~ ~~In February 2010,~~subsidiary. While the Company’s working capital position has significantly improved since December 31, 2009, the Company raised approximately $1.1 million through the exercise of warrants and sale of shares of common stock through private placements. The Company used approximately $600,000 of these funds towards the acquisition of Premier Packaging Corp. The remainder is available for working capital requirements. ~~At its current revenue levels and with the impact of the Company’s acquisition of Premier Packaging in February 2010, the Company expects its use of cash for operations~~continued to ~~reduce~~incur operating losses during 2010, ~~from the 2009 levels,~~ and ~~is striving to reach and maintain positive operating cash flows on a consistent basis in 2010, although there is no guarantee~~therefore the Company will ~~be able to do so. The Company’s ability~~likely use its cash on hand to fund its ~~capital requirements out~~operations until it can consistently generate positive cash flow from its operations. In addition, the Company has approximately $3.3 million of debt, of which approximately $1 million is current, which may require the use of its ~~available~~ cash ~~and~~on hand in order to pay. While the Company believes that its cash ~~generated from~~on hand will provide it sufficient resources in order to fund its operations ~~depends on a number of factors. Some of these factors include~~and meet its obligations for at least the Company’s ability to (i) increase commercial and security printing and plastic card sales; (ii) increase sales of the Company’s digital products; and (iii) integrate its new acquisition of Premier Packaging with its existing product lines. Ifnext twelve months, if the Company cannot generate sufficient cash from its operations in the future, the Company may need to raise additional funds in ~~the future in~~ order to fund its working capital ~~needs.~~needs and pursue its growth strategy.

~~Key Indicators of Future Results~~

We believe that cash flow from operations is a significant key indicator for the Company. Our ability to reduce our use of cash will depend on our ability to grow revenue to a level sufficient to meet our operating expense requirements. To grow revenue, we may merge with or acquire manufacturing or related companies. Our ability to successfully complete these transactions on favorable terms will be a significant key indicator of our future results. These acquisitions may require additional funds that the Company does not currently have. To obtain additional investments in the future may require us to issue shares of our Common Stock. Our ability to sell our Common Stock on favorable terms will also be a significant key indicator of our future results. In addition, we believe that our ability to successfully enforce our patent rights, including our current litigation against the European Central Bank, is a significant key indicator for the Company.

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.

Inflation

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during ~~2009~~2010 or ~~2008~~2009 as we are generally able to pass the increase in our material and labor costs to our customers, or absorb them as we improve the efficiency of our operations.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. The consolidated financial statements for the fiscal year ended December 31, ~~2009~~2010 describe the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts and sales returns, goodwill impairments, inventory allowances, revenue recognition, stock based compensation valuations, the valuation of intangible assets, and allocation of assets in business combinations. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our consolidated financial ~~statements:~~

statements.

Long Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets.

Fixed assets are carried at cost. Depreciation is computed over the estimated useful life of five to seven years using the straight-line depreciation method. Leasehold improvements are amortized over the shorter of their useful life or the lease term. Intangible assets consist primarily of royalty rights, contractual rights, customer list, and patent acquisition, application and defense costs. Amortization is computed over the estimated useful life of five to twenty years using the straight-line depreciation method. For patent related assets, the remaining legal life of the patent is used as the estimate useful life unless circumstances determine that the useful life will be less than the legal life. Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We periodically evaluate the recoverability of our long-lived assets based on estimated future cash flows from and the estimated fair value of such long-lived assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived asset.

Goodwill

Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but are combined when reporting units within the same segment have similar economic characteristics. The Company has three reporting units with goodwill based on the current structure. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed its assessment of any potential impairment upon adoption of this standard and performs annual assessments.Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis or sooner if an indicator of impairment occurs. To determine whether goodwill is impaired, we determine the fair values of each of our reportable business unit using a discounted cash flow methodology and then compare the fair values to the carrying values of each reportable business unit. ~~The current Carrying value of goodwill of Document Security Systems is $631,000 with estimated discounted cash flow of $12,930,000~~ ~~which includes projected cash flows from operations and estimated cash flow from successful results in infringement suits. The current carrying value of goodwill of Plastic Printing Professionals is $685,000 with an estimated discounted cash flow of $1,160,000 based on projected cash flows from operations.~~ As of December 31, 2009, the 2009 annual testing date, the Company’s market capitalization was approximately $40 million compared to stockholders’ equity of $2.2 million. We have determined that a 10% decrease in the fair value of any one of our reporting units as of December 31, 2009 would have no impact on the carrying value of our goodwill. Though we believe our estimates are reasonable, these fair values require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.

Other Intangible Assets and Patent Defense Costs

Other intangible assets consists 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, a non-exclusive licensing agreement, and customer lists 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, in accordance to guidance provided by FASB Concept Statement No. 6 and related guidance in AICPA Technical Questions and Answers, Section 2260, Other Assets, paragraph .03, “Legal Expenses Incurred to Defend Patent Infringement Suit”.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. The Company amortizes its other intangible assets over their estimated useful lives. Patents are amortized over the remaining legal life, up to 20 years. Intangible asset amortization expense is generally 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. To date, the amount of related amortization expense for other intangible assets directly attributable to revenue recognized is not material.

In December 2008, the Company recorded an impairment $361,000 for this license agreement the Company had acquired in 2006 for RSS Barcodes for which the Company assessed that the probable future cash flows derived from the license did not support the net carrying value Impairment of ~~the license as~~patent acquisition costs of ~~December 31, 2008.~~

~~On March 19, 2008, the Company received notification that its appeal of the invalidation of its European Paten 455750B1~~$377,000 was recognized in the ~~UK was not successful. As~~fourth quarter of 2010 as a result of adverse decisions in the adverse court decision, the Company recognized an impairment loss of $292,000 associated with the costs directly related to the UK appeal. The impairment loss includes a judgment for reimbursement of estimated counterpart legal fees. In January 2009, the Company received a formal request for the fee reimbursement fromCompany’s patent infringement case against the ECB of $420,000 in addition to the amounts already paid by the Company. The Company hired an independent firm to assist the Company in reducing or eliminating the ECB’s fees request, however, the Company recorded $145,000 as additional accrued expenses and an impairment loss as of December 31, 2008. On July 31, 2009, the UK court made the final assessment of costs for the UK patent validity case due fromwhich caused the Company to the ECB of ₤356,490, of which the Company has paid ₤332,000 pounds through December 31, 2009 and owes approximately ₤25,000 ($40,000 as of December 31, 2009), which amount was included in accrued expenses as of December 31, 2009.

On August 20, 2008, the Company entered into an agreement with Trebuchet Capital Partners, LLC (“Trebuchet”) under which Trebuchet has agreed to pay substantially all of the litigation costs associated with pending validity proceedings initiated by the European Central Bank (“ECB”) in eight European countries relating to the Company’s European Patent 0 455 750B1 that the Company has claimed the ECB infringed in printing of the Euro currency (the “Patent”). Trebuchet also agreed to pay substantially all of the litigation costs associated with future validity challenges filed by the ECB or other parties, provided that Trebuchet elects to assume the defense of any such challenges, in its sole discretion, and patent infringement suits filed against the ECB and certain other alleged infringers of the Patent, all of which suits may be brought at the sole discretion of Trebuchet and may be in the name of the Company, Trebuchet or both. 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 agreement. Under the terms of the Agreement, the Company and Trebuchet have 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. Trebuchet is also entitled to recoup any litigation expenses specifically awarded to the Company in such actions. Under the terms of the Agreement, and in consideration for Trebuchet’s funding obligations, the Company assigned and transferred a 49% interest of the Company’s rights, title and interest in the Patent to Trebuchet which allows Trebuchet to have a separate and distinct interest in and share of the Patent, along with the right to sue and recover in litigation, settlement or otherwise to collect royalties or other payments under or on account of the Patent. Pursuant to this transaction, the Company recognized a loss on the sale of patent assets for its assignment and transfer of 49% of its ownership rights in the patent, which had a net book value of approximately $1,670,000, for proceeds of $500,000, As a result, the Company recognized a loss on sale of patent assets of $1,170,000.

As of December 31, 2009, the Company had a net carrying value of approximately $1,589,000 of other intangible assets and patent defense costs of which $134,000 was acquired intangibles, $851,000 was patent acquisition and defense costs and $604,000 was patent application costs. ~~The estimated cash flow that support the carrying values of these assets are derived at the reporting unit level, except for patent defense costs which are only supported by~~reduce the estimated cash ~~flow from successful results in infringement suits, if any.~~flows that supported the Company’s capitalized patent acquisition based intangible asset.

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 were first allocated between the convertible debt and any embedded or detachable free standing instruments that are included, such as common stock warrants. We record a BCF as a debt discount pursuant to FASB ASC Topic 470-20, formerly EITF Issue No. 98-5 (EITF 98-05"), Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio," and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instrument(s) ."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.

Revenue Recognition

Sales of security and ~~other~~commercial printing products, packaging and legal products are recognized when a product or service is delivered, shipped or provided to the customer and all material conditions relating to the sale have been substantially performed.

For digital solutions sales, revenue is recognized in accordance with the American Institute of Certified Public Accountant's Statement of Position (SOP) No. 97-2, "Software Revenue Recognition," as modified by SOP No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions" and Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition."FASB ASC 985-605. Accordingly, revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable (4) the collection of our fees is reasonably assured.

The Company recognizes revenue from technology licenses once all the following criteria for revenue recognition have been met: (1) persuasive evidence of an agreement exists; (2) the right and ability to use the product or technology has been rendered; (3) the fee is fixed and determinable and not subject to refund or adjustment; and (4) collection of the amounts due is reasonably assured.

Business Combinations

The Company adopted the new FASB guidance on business combinations and non-controlling interests. The new guidance on business combinations retains the underlying concepts of the previously issued standard in that the acquirer of a business is required to account for the business combination at fair value. As under previous guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair values is recorded as goodwill. The new pronouncement results in some changes to the method of applying the acquisition method of accounting for business combinations in a number of significant aspects. Under the new guidance, all acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.

Share-Based Payments

We measure compensation cost for stock awards at fair value and recognize compensation expense over the service period for which awards are expected to vest. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of subjective assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. For equity instruments issued to consultants and vendors in exchange for goods and services the Company determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement

The fair value of each option award is estimated on the date of grant utilizing the Black Scholes Option Pricing Model that uses the assumptions noted in the following table.

	2010		2009

Volatility	54.3	%	54.7	%
Expected option term	3.8	years	3.9	years
Risk-free interest rate	2.5	%	2.3	%
Expected forfeiture rate	0.0	%	0.0	%
Expected dividend yield	0.0	%	0.0	%

PART III

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, CORPORATE GOVERNANCE

The information required by this Item will be contained in the Company’s Proxy Statement for its 2011 Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after December 31, ~~2009,~~2010, and which is incorporated by reference herein.

We make available free of charge through the investor relations page of our Web site (www.documentsecurity.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. We have adopted codes of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. Copies of the codes of business conduct and ethics are available on our Web ~~site.~~site at www.documentsecurity.com.

Our Web ~~sites~~site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the SEC.

ITEM 11 - EXECUTIVE COMPENSATION

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

The Exhibits listed below designated by an * are incorporated by reference to the filings by Document Security Systems, Inc. under the Securities Act of 1933 or the Securities and Exchange Act of 1934, as indicated. All other exhibits are filed herewith.

3.1	~~Articles~~Certificate of ~~Organization,~~Incorporation of Document Security Systems, Inc., as amended (incorporated by reference to exhibit 3.1 to the Company’s Registration Statements No. 2-98684-NY on Form S-18).amended
3.2	By-laws, as amended (incorporation by reference to exhibit 3.2 to the Company’s Registration Statement No. 2-98684-NY on Form S-18).*
~~10.1~~	Agreement dated November 7, 1996 with Charles M. LaLoggia (incorporated by reference from Company’s Form 10-Q for March 31, 1997).*
~~10.2~~	Agreement dated July 2, 1996 with Frank LaLoggia (incorporated by reference from Company’s Form 10-Q for June 30, 1996).*
~~10.3~~	~~Agreement dated July 31, 2002 between New Sky Communications, Inc.~~Amended and Patrick White (incorporated by reference from Company’s Form 8-K filed on August 8, 2002).*

~~10.4~~	Agreement dated July 31, 2002 between New Sky Communications, Inc. and Thomas M. Wicker (incorporated by reference from Company’s Form 8-K filed on August 8, 2002).*
~~10.5~~	Agreement dated November 1, 2002 between New Sky Communications, Inc. and David Thomas M. Wicker, Christine Wicker, Kenneth Wicker and Michael Caton (incorporated by reference to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002). *
~~10.6~~	Employment Agreement dated November 1, 2002 between New Sky Communications, Inc. and David Wicker (incorporated by reference to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002). *
~~10.7~~	Form of Warrant Agreement between the Registrant and Fordham Financial Management, Inc.(incorporated by reference on Company’s registration statement on Form S-3 filed on January 20, 2004).*
~~10.8~~	Form of Warrant Agreement between the Registrant and W.A.B. Capital (incorporated by reference on Company’s registration statement on Form S-3 filed on January 20, 2004).*
~~10.9~~	Form of Warrant Agreement between the Registrant and Howard Safir (incorporated by reference on Company’s registration statement on Form S-3 filed on January 20, 2004).*
~~10.10~~	Form of Series A Warrant Agreement issued by the Registrant to participants in its private placement offering completed on December 29, 2003. (incorporated by reference on Company’s registration statement on Form S-3 filed on January 20, 2004).*
~~10.11~~	Form of Registration Rights Agreement issued by the Registrant to participants in its private placement offering completed on December 29, 2003. (incorporated by reference on Company’s registration statement on Form S-3 filed on January 20, 2004)*
~~10.12~~	Form of Warrant issued to IDT Venture Capital Corporation dated October 31, 2003.(incorporated by reference on Schedule 13D filed by IDT Venture Capital Corporation dated December 2, 2003)*
~~10.13~~	Form of Securities Purchase Agreement between Registrant and IDT Venture Capital Corporation dated as of October 31, 2003. (incorporated by reference on Schedule 13D filed by IDT Venture Capital Corporation dated December 2, 2003).*
~~10.14~~	~~Form of Licensing and Marketing Agreement between Registrant and Boise White Paper LLC dated January 19, 2005. (redacted version)~~
~~10.15~~	Form of Surrender and Assignment Agreement dated as of February 25, 2005 between Registrant and the Net Interest Holders. (filed as Exhibit 10.1 to form 8-K dated February 25, 2005)*
~~10.16~~	Form of Surrender and Assignment Agreement dated as of February 25, 2005 between Registrant and the Gross Interest Holders (filed as Exhibit 10.2 to Form 8-K dated February 25, 2005)*
~~10.17~~	Agreement of Sublease dated May 2004 for the Premises Located at 28 E. Main Street, Rochester, New York (filed as Exhibit 10.1 to Form 10-QSB for the Quarter ended June 30, 2004)*
~~10.18~~	Form of Employment Agreement dated as of June 10, 2004 between Registrant and Patrick White (filed as Exhibit 10.2 to Form 10-QSB for the Quarter ended June 30, 2005)*
~~10.19~~	Form of Employment Agreement dated as of June 11, 2004 between Registrant and Thomas Wicker (filed as Exhibit 10.26 of 10-KSB for the fiscal year ended December 31, 2004)*
~~10.20~~	Form of 2004 Employee Stock Option Plan (filed as Appendix D to Proxy Statement for the Meeting of Stockholders held on December 17, 2004)*
~~10.21~~	Form of Non Executive Director Stock Option Plan (filed as Appendix E to Proxy Statement for the Meeting of Stockholders held on December 17, 2004)*
~~10.22~~	Asset Purchase Agreement, dated February 7, 2006 by and between the Registrant and Plastic Printing Professionals, Inc. . (filed as exhibit 10.30 to Form 10-KSB for the fiscal year ended December 31, 2005)*
~~10.23~~	Stock Option Agreement pursuant to the Registrant’s 2004 Employee Stock Option Plan (filed as exhibit 10.31 to Form S-8 filed May 12, 2006)*
~~10.24~~	Warrant and Amendment to Warrant dated June 16, 2006, granted to International Barcode Corporation (filed as exhibit 10.33 and 10.34 respectively to Form 10-Q for the quarter ended June 30, 2007)*
~~10.25~~	License and Distribution Agreement dated November 8, 2006 by and between the Registrant and PT Sekur Grafika (filed as exhibit 10.30 to Form 10-Q for the quarter ended June 30, 2007)*
~~10.26~~	Form of Subscription Agreement by and between the Registrant and investors in a Private Placement (filed as Exhibit 10.1 to Form 8-K/A dated December 27, 2006)*
~~10.27~~	Registration Rights Agreement dated December 12, 2006 between the Registrant and Perrin, Holden &Davenport Capital Corp. as agent for those investing in a Private Placement (filed as Exhibit 10.2 to Form 8-K/A dated December 27, 2006)*
~~10.28~~	Form of Common Stock Purchase Warrant granted pursuant to a Private Placement (filed as Exhibit 4.1 to Form 8-K/A dated December 27, 2006)*
~~10.29~~	Limited Exclusive Patent License Agreement dated December 29, 2006 between the Registrant and Ergonomic Group, Inc. (filed as exhibit 10.31 to Form 10-Q for the quarter ended June 30, 2007)*

~~10.30~~	Letter Agreement dated June 11, 2007 between the Registrant and International Barcode Corporation (BTI) (filed as exhibit 10.35 to Form 10-Q for the quarter ended June 30, 2007)*
~~10.31~~	License and Distribution Agreement dated June 27, 2007 by and between the Registrant and Cultura Interactiva S.A. de C.V. (filed as exhibit 10.32 to Form 10-Q for the quarter ended June 30, 2007)*
~~10.32~~	~~Credit Facility Agreement, dated January 4, 2008, between the Registrant and Fagenson & Co., Inc., as Agent~~
~~10.33~~	~~Security Agreement, dated January 4, 2008, between the Registrant and Fagenson & Co., Inc., as Agent~~
~~10.34~~	~~Form of Secured Promissory Note between the Registrant and Fagenson & Co., Inc., as Agent~~
~~10.35~~	~~Credit Facility Agreement, dated January 4, 2008, between the Registrant and Patrick White~~
~~10.36~~	~~Security Agreement, dated January 4, 2008, between the Registrant and Patrick White~~
~~10.37~~	~~Form of Secured Promissory Note between the Registrant and Patrick White~~
~~10.38~~	Agreement, dated April 11, 2008, between the Registrant and Ergonomic Group (filed as exhibit 10.1 to Form 8-K dated April 11, 2008)*
~~10.39~~	Credit Facility Note, dated May 7, 2008, between the Registrant and Taiko III Corp. (filed as exhibit 10.1 to Form 8-K dated May 7, 2008)*
~~10.40~~	Confidential Separation Agreement and General Release, dated May 10, 2008, between Peter Ettinger and the Company (filed as exhibit 10.1 to Form 8-K dated May 10, 2008)*
~~10.41~~	Consulting Agreement, dated May 12, 2008, between Peter Ettinger and the Company (filed as exhibit 10.2 to Form 8-K dated May 10, 2008)*
~~10.42~~	Share Purchase Agreement, dated as of June 25, 2008, between the Registrant and Walton Invesco Inc. (filed as exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2008)*
~~10.43~~	Share Purchase Agreement, dated as of June 25, 2008, between the Registrant and Walton Invesco Inc. (filed as exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2008)*
~~10.44~~	Asset Purchase Agreement, dated as of November 6, 2008, among Secuprint Inc., DPI of Rochester, LLC, James Stanley and Matthew Kellman (filed as exhibit 10.1 to Form 8-K dated November 6, 2008)*
~~10.45~~	Agreement, dated August 20, 2008, between Document Security Systems, Inc. and Trebuchet Capital Partners, LLC (filed as exhibit 10.1 to Form 10-Q for the quarter ending September 30, 2008)*
~~10.46~~	~~Warrant, dated December 18, 2008,~~Restated By-laws of Document Security Systems, Inc. ~~issued to Baum Capital Investments Inc. (filed as exhibit 4.1 to Form 8-K~~ dated ~~December 22, 2008)~~March 18, 2010.*
~~10.47~~	Secured Promissory Note, dated December 18, 2008, between Document Security Systems, Inc. , Secuprint Inc. and Baum Capital Investments Inc. (filed as exhibit 10.2 to Form 8-K dated December 22, 2008)*
~~10.48~~	Security Agreement, dated December 18, 2008, between Secuprint Inc. and Baum Capital Investments Inc. (filed as exhibit 10.3 to Form 8-K dated December 22, 2008)*
~~10.49~~10.1	Form of Registration Rights Agreement dated as of May 29, 2009 ~~executed and delivered by~~between Document Security Systems, Inc. and the holders listed ~~therein. (filed as~~therein (incorporated by reference to exhibit 10.2 to Form 8-K dated May 29, 2009)*.
~~10.50~~10.2	Form of Warrant to Purchase Common Stock of Document Security Systems, Inc. dated May 29, ~~2009.~~2009
10.3	(~~filed as~~incorporated by reference to exhibit 4.1 to Form 8-K dated May 29, 2009)*
~~10.51~~	. Form of Subscription Agreement dated as of May 29, 2009 between Document Security Systems, Inc. and the ~~Subscribers. (filed as~~Subscribers (incorporated by reference to exhibit 10.1 to Form 8-K dated May 29, 2009)*.
~~10.52~~10.4	Asset Purchase Agreement between Lester Levin Inc. and Internet Media Services, Inc. dated October 8, ~~2009. (filed as~~2009 (incorporated by reference to exhibit ~~10.1~~2.1 to Form 8-K dated October 8, 2009)*.
~~10.53~~10.5	Stock Pledge and Escrow Agreement between Lester Levin Inc., Document Security Systems, Inc., Internet Media Services, Inc., Michael Buechler and Manufacturers and Traders Trust Company dated October 8, ~~2009. (filed as~~2009 (incorporated by reference to exhibit 10.3 to Form 8-K dated October 8, 2009)*.
~~10.54~~10.6	Stock Pledge and Escrow Agreement between Lester Levin Inc., Document Security Systems, Inc., Internet Media Services, Inc., Raymond Meyers and Manufacturers and Traders Trust Company dated October 8, ~~2009. (filed as~~2009 (incorporated by reference to exhibit 10.2 to Form 8-K dated October 8, 2009)*.

~~10.55~~10.7	Voting Agreement between Document Security Systems, Inc., Internet Media Services, Inc., Raymond Meyers and Michael Buechler dated October 8, ~~2009. (filed as~~2009 (incorporated by reference to exhibit 10.4 to Form 8-K dated October 8, 2009)*.
~~10.55~~10.8	$350,000 Convertible Promissory Note dated November 24, ~~2009. (filed as~~2009 (incorporated by reference to exhibit 10.1 to Form 8-K dated December 15, 2009)*.
~~10.56~~10.9	$575,000 Promissory Note dated November 24, ~~2009. (filed as~~2009 (incorporated by reference to exhibit 10.2 to Form 8-K dated December 15, 2009)*.
~~10.57~~10.10	Form of Letter Agreement dated December 11, ~~2009. (filed as~~2009 (incorporated by reference to exhibit 10.3 to Form 8-K dated December 15, 2009)*.
~~10.58~~	~~Form of Letter Agreement dated December 11, 2009~~
~~10.59~~10.11	Form of $450,000 Convertible Promissory ~~Note. (filed as~~Note (incorporated by reference to exhibit 10.1 to Form 8-K dated December 30, 2009)*.
10.12	Form of Warrant to Purchase Common Stock of Document Security Systems, Inc. dated January 28, 2010 (incorporated by reference to exhibit 4.1 to Form 8-K dated February 17, 2010).
10.13	Stock Purchase Agreement dated as of February 12, 2010 by and among Robert B. Bzdick and Joan T. Bzdick and Document Security Systems, Inc. (incorporated by reference to exhibit 10.2 to Form 8-K dated February 17, 2010).
10.14	Employment Agreement dated February 12, 2010 between Document Security Systems, Inc. and Robert Bzdick (incorporated by reference to exhibit 10.3 to Form 8-K dated February 17, 2010).
10.15	$1,500,000 Acquisition Term Loan Note dated February 12, 2010 made by Premier Packaging Corporation in favor of RBS Citizens, N.A. (incorporated by reference to exhibit 10.4 to Form 8-K dated February 17, 2010).
10.16	Revolving Line Note dated February 12, 2010 made by Premier Packaging Corporation in favor of RBS Citizens, N.A. (incorporated by reference to exhibit 10.5 to Form 8-K dated February 17, 2010).
10.17	Credit Facility Agreement dated February 12, 2010 by and between Premier Packaging Corporation and RBS Citizens, N.A. (incorporated by reference to exhibit 10.6 to Form 8-K dated February 17, 2010).
10.18	Security Agreement dated February 12, 2010 by and between RBS Citizens, N.A. and Document Security Systems, Inc, Plastic Printing Professionals, Inc. and Secuprint, Inc. (incorporated by reference to exhibit 10.7 to Form 8-K dated February 17, 2010).
10.19	Guaranty and Indemnity Agreement dated February 12, 2010 by and between RBS Citizens, N.A. and Document Security Systems, Inc., Plastic Printing Professionals, Inc. and Secuprint, Inc. (incorporated by reference to exhibit 10.8 to Form 8-K dated February 17, 2010).
10.20	Form of Subscription Agreement dated as of January 28, 2010 between Document Security Systems, Inc. and Subscribers (incorporated by reference to exhibit 10.9 to Form 8-K dated February 17, 2010).
10.21	Form of Subscription Agreement (incorporated by reference to exhibit 10.1 to Form 8-K/A dated July 21, 2010).
10.22	Form of Common Stock Purchase Warrant (incorporated by reference to exhibit 10.2 to form 8-K dated July 21, 2010).
10.23	Agreement between Document Security Systems, Inc. and Fletcher International, Ltd. dated December 31, 2010 (incorporated by reference to exhibit 99.1 to Form 8-K dated December 31, 2010).
10.24	Warrant Certificate No. 1 dated December 31, 2010 (incorporated by reference to exhibit 99.2 to Form 8-K dated December 31, 2010).
10.25	Warrant Certificate No. 2 dated December 31, 2010 (incorporated by reference to exhibit 99.3 to Form 8-K dated December 31, 2010).
10.26	Amended and Restated Agreement dated February 18, 2011 (incorporated by reference to exhibit 10.1 to Form 8-K dated February 24, 2011).
10.27	Warrant Certificate No. 3 dated February 18, 2011 (incorporated by reference to exhibit 4.1 to Form 8-K dated February 24, 2011).
10.28	Warrant Certificate No. 4 dated February 18, 2011 (incorporated by reference to exhibit 4.2 to Form 8-K dated February 24, 2011).
10.29	Amendment dated March 14, 2011 (incorporated by reference to exhibit 10.1 to Form 8-K dated March 17, 2011).
10.30	Warrant Certificate No. 5 dated March 14, 2011 (incorporated by reference to exhibit 4.1 to Form 8-K dated March 17, 2011).
10.31	Warrant Certificate No. 6 dated March 14, 2011 (incorporated by reference to exhibit 4.2 to Form 8-K dated March 17, 2011).
10.32	2004 Employee Stock Option Plan (incorporated by reference to Appendix D to the definitive proxy statement filed with the SEC on November 17, 2004).

3731

10.33	Non-Executive Director Stock Option Plan (incorporated by reference to Appendix E to the definitive proxy statement filed with the SEC on November 17, 2004).
10.34	Standby Term Loan Note dated October 8, 2010 between Premier Packaging Corporation and RBS Citizens, N.A. (incorporated by reference to exhibit 10.1 to Form 8-K dated October 12, 2010).
10.35	Amended and Restated Credit Facility Agreement dated October 8, 2010 between Premier Packaging Corporation and RBS Citizens, N.A. (incorporated by reference to exhibit 10.2 to Form 8-K dated October 12, 2010).
10.36	Amended and Restated Security Agreement dated October 8, 2010 between RBS Citizens, N.A. and Document Security Systems, Inc., Plastic Printing Professionals, Inc. and Secuprint, Inc. (incorporated by reference to exhibit 10.3 to Form 8-K dated October 12, 2010).
10.37	Amended and Restated Guaranty and Indemnity Agreement dated October 8, 2010 between RBS Citizens, N.A. and Document Security Systems, Inc., Plastic Printing Professionals, Inc. and Secuprint, Inc. (incorporated by reference to exhibit 10.4 to Form 8-K dated October 12, 2010).
10.38	Interest Rate Swap Transaction Agreement between Premier Packaging Corporation and RBS Citizens, N.A., dated February 25, 2010*
10.39	Amended and Restated 2004 Employee Stock Option Plan (incorporated by reference to Appendix A to the definitive proxy statement filed with the SEC on December 8, 2005).
10.40	Amended and Restated 2004 Non-Executive Stock Option Plan (incorporated by reference to Appendix B to the definitive proxy statement filed with the SEC on December 8, 2005).
21	Subsidiaries of ~~Registrant~~Registrant*
23.1	Consent of Freed Maxick & Battaglia, CPAs, PCPC*
31.1	Certification of Chief Executive Officer Pursuant to 18 USC 1350 Section ~~302~~302*
31.2	Certification Principal Accounting Officer Pursuant to 18 USC 1350 Section ~~302~~302*
32.1	Certification of Chief Executive Officer Pursuant to 18 USC 1350 Section ~~906~~906*
32.2	Certification Principal Accounting Officer Pursuant to 18 USC 1350 Section ~~906~~906*

~~(1) This exhibit contains a redacted copy of the agreement. We have filed a confidentiality request with the Commission with respect to certain portions of the agreement.~~

*	filed herewith

3832

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

Report of Independent Registered Public Accounting Firm		F-1


Consolidated Financial Statements:

	Balance Sheets	F-2

	Statements of Operations	F-3

	Statements of Cash Flows	F-4

	Statements of Changes in Stockholders’ Equity	F-5


Notes to the Consolidated Financial Statements		F6 - ~~F30~~F29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Document Security Systems, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Document Security Systems, Inc. and Subsidiaries as of December 31, ~~2009~~2010 and ~~2008,~~2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor have we been engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Document Security Systems, Inc. and Subsidiaries as of December 31, ~~2009~~2010 and ~~2008,~~2009, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

~~FREED MAXICK & BATTAGLIA, CPAs, PC~~

/s/ FREED MAXICK & BATTAGLIA, CPAs, PC

Buffalo, New York

March ~~24, 2010~~31, 2011

F-1

~~DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES~~

~~Consolidated Balance Sheets~~

~~As of December 31,~~

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

As of December 31,

	2010			2009

ASSETS

Current assets:
Cash and cash equivalents	$	4,086,574		$	448,895
Accounts receivable, net of allowance
of $66,000 ($66,000- 2009)		2,227,877			1,143,939
Inventory		601,359			184,174
Prepaid expenses and other current assets		231,190			91,310
Total current assets		7,147,000			1,868,318

Equipment and leasehold improvements, net		2,543,494			1,286,226
Other assets		325,953			305,507
Goodwill		1,943,081			1,315,721
Other intangible assets, net		1,847,859			1,588,969
Investment		-			350,000
Total assets	$	13,807,387		$	6,714,741

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	1,828,138		$	1,673,901
Accrued expenses and other current liabilities		1,312,363			934,595
Revolving line of credit		614,833			-
Current portion of long-term debt		300,000			-
Current portion of capital lease obligations		88,776			78,167
Total current liabilities		4,144,110			2,686,663

Revolving notes from related party		583,000			583,000
Long-term debt, net of unamortized discount of $0 in 2010 ($420,000 -2009)		1,578,242			954,616
Capital lease obligations		98,532			182,424
Deferred tax liability		89,779			70,830
Derivative liabilities		3,866,836			-
Commitments and contingencies (see Note 13)

Stockholders' equity
Common stock, $.02 par value; 200,000,000 shares authorized,
19,391,319 shares issued and outstanding (16,397,887 in 2009)		387,825			327,957
Additional paid-in capital		44,178,569			38,399,033
Accumulated other comprehensive loss		(25,834	)		-
Accumulated deficit		(41,093,672	)		(36,489,782	)

Total stockholders' equity		3,446,888			2,237,208

Total liabilities and stockholders' equity	$	13,807,387		$	6,714,741

2009 2008
ASSETS

Current assets:
Cash and cash equivalents $ 448,895 $ 87,820
Restricted cash - 131,004
Accounts receivable, net of allowance of $66,000 ($50,000- 2008) 1,143,939 1,284,208
Inventory 184,174 359,034
Loans to employees - 67,781
Prepaid expenses and other current assets 91,310 75,066
Total current assets 1,868,318 2,004,913

Fixed assets, net 1,286,226 1,517,357
Other assets 305,507 264,529
Investment 350,000 -
Goodwill 1,315,721 1,396,734
Other intangible assets, net 1,588,969 2,873,789

Total assets $ 6,714,741 $ 8,057,322

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 1,673,901 $ 1,411,942
Accrued expenses & other current liabilities 909,432 1,312,745
Deferred revenue & customer deposits 25,163 30,193
Short-term debt, net of unamortized discount of $247,000 -2008 - 652,511
Current portion of capital lease obligations 78,167 78,367

Total current liabilities 2,686,663 3,485,758

Revolving notes from related parties 583,000 2,283,000
Long term debt, net of unamortized discount of $420,000 ($0 -2008) 954,616 -
Capital lease obligations 182,424 210,365
Deferred tax liability 70,830 51,878

Commitments and contingencies (see Note 13)

Stockholders' equity
Common stock, $.02 par value; 200,000,000 shares authorized, 16,397,887 shares issued and outstanding (14,369,764 in 2008) (325,000 subscribed in 2008) 327,957 287,395
Additional paid-in capital 38,399,033 35,538,695
Common stock subscriptions receivable - (1,300,000 )
Accumulated deficit (36,489,782 ) (32,499,769 )
Total stockholders' equity 2,237,208 2,026,321
Total liabilities and stockholders' equity $ 6,714,741 $ 8,057,322

See accompanying notes.

F-2

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended December 31,

	2010			2009

Revenue
Security and commercial printing	$	6,987,930		$	8,773,131
Packaging		5,752,601			-
Technology license royalties and digital solutions		641,050			783,453
Legal products		-			355,107
Total Revenue		13,381,581			9,911,691

Costs of revenue
Security and commercial printing		5,303,952			6,063,479
Packaging		4,386,829			-
Technology license royalties and digital solutions		5,476			14,028
Legal products		-			178,892
Total costs of revenue		9,696,257			6,256,399

Gross profit		3,685,324			3,655,292

Operating expenses:
Selling, general and administrative		6,136,152			5,733,908
Research and development		265,360			291,538
Impairment of intangible assets		376,481			-
Amortization of intangibles		803,468			1,342,105

Operating expenses		7,581,461			7,367,551

Operating loss		(3,896,137	)		(3,712,259	)

Other income (expense):
Interest income		-			18,140
Loss on equity investment		(121,393	)		-
Interest expense		(290,087	)		(258,918	)
Amortizaton of note discount		(420,385	)		(250,102	)
Gain on deconsolidation of Legalstore.com division		-			25,755
Litigation settlements		-			(115,101	)
Registration rights penalties		-			(109,464	)
Gain on foreign currency transactions		-			15,050
Other income		143,061			415,838

Loss before income taxes		(4,584,941	)		(3,971,061	)

Income tax expense		18,949			18,952

Net loss	$	(4,603,890	)	$	(3,990,013	)

Other comprehensive loss:
Interest rate swap loss		(25,834	)		-

Comprehensive Loss	$	(4,629,724	)	$	(3,990,013	)

Divedend per share	$	0.01		$	-

Net loss per share -basic and diluted:	$	(0.26	)	$	(0.27	)

Weighted average common shares outstanding, basic and diluted		17,755,141			14,700,453

2009 2008
Revenue
Security and commercial printing $ 8,773,131 $ 4,386,552
Technology license royalties and digital solutions 783,453 1,646,648
Legal products 355,107 609,807

Total Revenue 9,911,691 6,643,007

Costs of revenue
Security and commercial printing 6,063,479 2,663,309
Technology license royalties and digital solutions 14,028 14,028
Legal products 178,892 351,769
Total costs of revenue 6,256,399 3,029,106

Gross profit 3,655,292 3,613,901

Operating expenses:
Selling, general and administrative 5,733,908 7,431,313
Research and development 291,538 432,550
Impairment of patent defense costs and other intangible assets - 797,143
Amortization of intangibles 1,342,105 1,972,233

Operating expenses 7,367,551 10,633,239

Operating loss (3,712,259 ) (7,019,338 )

Other income (expense):
Interest income 18,140 658
Gain (loss) on foreign currency transactions 15,050 (59,094 )
Interest expense (258,918 ) (136,306 )
Amortizaton of note discount (250,102 ) (8,227 )
Loss on sale of patent assets - (1,169,947 )
Gain on deconsolidation of Legalstore.com division 25,755 -
Litigation settlements (115,101 ) 126,073
Registration rights penalties (109,464 ) -
Other income 415,838 -

Loss before income taxes (3,971,061 ) (8,266,181 )

Income tax expense 18,952 18,961

Net loss $ (3,990,013 ) $ (8,285,142 )

Net loss per share -basic and diluted: $ (0.27 ) $ (0.59 )

Weighted average common shares outstanding, basic and diluted 14,700,453 14,002,034

See accompanying notes.

F-3

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31,

		2010			2009
Cash flows from operating activities:
Net loss	$	(4,603,890	)	$	(3,990,013	)
Adjustments to reconcile net loss to net cash and cash equivalents used by operating activities:
Depreciation and amortization		1,261,122			1,661,522
Stock based compensation		423,471			67,709
Stock based payments for legal settlements		-			115,101
Warrants issuable for registration rights penalty		-			109,464
Amortization of note discount		420,385			250,102
Gain on deconsolidation of division		-			(25,755	)
Loss on equity investment		121,393			-
Intangible asset impairment		376,481			-
(Increase) decrease in assets:
Accounts receivable		200,339			109,108
Inventory		86,977			73,849
Prepaid expenses and other assets		(101,465	)		(81,547	)
Increase (decrease) in liabilities:
Accounts payable		(209,516	)		276,070
Accrued expenses and other current liabilities		265,450			(160,711	)
Net cash used by operating activities		(1,759,253	)		(1,595,101	)

Cash flows from investing activities:
Decrease in restricted cash		-			131,004
Purchase of equipment and leashold improvements		(157,422	)		(62,522	)
Purchase of other intangible assets		(269,729	)		(176,083	)
Acquisition of business		(2,000,000	)		-
Net used by investing activities		(2,427,151	)		(107,601	)

Cash flows from financing activities:
Net borrowing on revolving note- related parties		-			300,000
Net borrowings on revolving line of credit		342,428			-
Payments on short-term debt		-			(900,000	)
Borrowings on long-term debt		1,553,242			575,000
Payments of long-term debt		(250,000	)		-
Borrowings on long-term convertible notes		-			800,000
Payments of capital lease obligations		(73,283	)		(86,124	)
Issuance of common stock, net		6,251,696			1,374,901
Net cash provided by financing activities		7,824,083			2,063,777

Net increase in cash and cash equivalents		3,637,679			361,075
Cash and cash equivalents beginning of year		448,895			87,820

Cash and cash equivalents end of year	$	4,086,574		$	448,895

2009 2008
Cash flows from operating activities:
Net loss $ (3,990,013 ) $ (8,285,142 )
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,661,522 2,288,061
Stock based compensation 67,709 1,747,368
Stock based payments for legal settlements 115,101 -
Warrants issuable for registration rights penalty 109,464 -
Impairment of patent defense costs and other intangible assets - 797,143
Amortization of note discount 250,102 8,227
Gain on deconsolidation of division (25,755 )
Loss of sale of patent assets - 1,169,947
Decrease in restricted cash for foreign currency loss - 46,341
(Increase) decrease in assets:
Accounts receivable 109,108 209,399
Inventory 73,849 (32,342 )
Prepaid expenses and other assets (81,547 ) (36,653 )
Increase (decrease) in liabilities:
Accounts payable 276,070 31,096
Accrued expenses and other liabilities (155,681 ) 383,884
Deferred revenue and customer deposits (5,030 ) (718,100 )
Net cash used by operating activities (1,595,101 ) (2,390,771 )

Cash flows from investing activities:
Purchase of fixed assets (62,522 ) (334,800 )
Decrease in restricted cash 131,004 -
Acquisition of business - (1,082,537 )
Proceeds from the sale of patent assets - 500,000
Purchase of other intangible assets (176,083 ) (1,348,666 )
Net cash used by investing activities (107,601 ) (2,266,003 )

Cash flows from financing activities:
Borrowing on revolving note- related parties 1,030,000 1,983,000
Repayment on revolving note- related parties (730,000 ) -
Borrowings on short-term credit facility - 500,000
Repayment on short-term credit facility - (500,000 )
Borrowings on short- term debt - 900,000
Payments on short-term debt (900,000 ) -
Borrowings on long-term debt 575,000 -
Borrowings on long-term convertible notes 800,000 -
Payments of capital lease obligations (86,124 ) (86,037 )
Issuance of common stock, net 1,374,901 1,205,163
Net cash provided by financing activities 2,063,777 4,002,126

Net increase (decrease) in cash and cash equivalents 361,075 (654,648 )
Cash and cash equivalents beginning of period 87,820 742,468

Cash and cash equivalents end of period $ 448,895 $ 87,820

See accompanying notes.

F-4

~~DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES~~

Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended December 31, ~~2009~~2010 and ~~2008~~2009

	Common Stock												Accumulated
	Shares			Amount			Additional Paid-in Capital			Subscriptions Receivable			Other Comprehensive Income			Accumulated Deficit			Total

Balance, December 31, 2008		14,369,764		$	287,395		$	35,538,695		$	(1,300,000	)	$	-		$	(32,499,769	)	$	2,026,321

Issuance of common stock, net		1,010,000			20,200			1,354,702			-			-			-			1,374,902
Conversion of debt to equity		1,250,000			25,000			1,975,000			-			-			-			2,000,000
Discount on debt		-			-			72,126			-			-			-			72,126
Fair value of beneficial conversion features		-			-			350,871			-			-			-			350,871
Stock based payments, net of tax effect		93,123			1,862			401,139			-			-			-			403,001
Cancellation of subscribed shares		(325,000	)		(6,500	)		(1,293,500	)		1,300,000			-			-			-
Net Loss											-			-			(3,990,013	)		(3,990,013	)

Balance, December 31, 2009		16,397,887		$	327,957		$	38,399,033		$	-		$	-		$	(36,489,782	)	$	2,237,208

Issuance of common stock, net		1,729,129			34,583			5,977,113			-			-			-			6,011,696
Acquisition of Premier Packaging		735,437			14,709			2,551,966			-			-			-			2,566,675
Stock based payments, net of tax effect		50,000			1,000			555,476			-			-			-			556,476
Property dividend								(228,607	)		-			-			-			(228,607	)
Conversion of debt		478,866			9,576			790,424			-			-			-			800,000
Other comprehensive loss		-			-						-			(25,834	)		-			(25,834	)
Derivative liabilities		-			-			(3,866,836	)		-			-			-			(3,866,836	)
Net Loss		-			-						-			-			(4,603,890	)		(4,603,890	)

Balance, December 31, 2010		19,391,319		$	387,825		$	44,178,569		$	-		$	(25,834	)	$	(41,093,672	)	$	3,446,888

Common Stock Additional Paid- Subscriptions Accumulated
Shares Amount in Capital Receivable Deficit Total

Balance, December 31, 2007 13,654,364 $ 273,087 $ 31,298,571 $ - $ (24,214,627 ) $ 7,357,031

Shares issued upon the exercise of warrants and options 50,000 1,000 99,000 - - 100,000
Stock based payments 65,400 1,308 1,497,407 - - 1,498,715
Warrants issued with debt - - 255,717 - - 255,717
Issuance of common stock, net 600,000 12,000 2,388,000 (1,300,000 ) - 1,100,000
Net Loss - - - - (8,285,142 ) (8,285,142 )

Balance, December 31, 2008 14,369,764 $ 287,395 $ 35,538,695 $ (1,300,000 ) $ (32,499,769 ) $ 2,026,321

Issuance of common stock, net 1,010,000 20,200 1,354,702 - - 1,374,902
Conversion of debt to equity 1,250,000 25,000 1,975,000 - 2,000,000
Discount on debt and beneficial conversion features 422,997 - 422,997
Stock based payments 93,123 1,862 401,139 - - 403,001
Cancellation of subscribed shares (325,000 ) (6,500 ) (1,293,500 ) 1,300,000 -
Net Loss - (3,990,013 ) (3,990,013 )

Balance, December 31, 2009 16,397,887 $ 327,957 $ 38,399,033 $ - $ (36,489,782 ) $ 2,237,208

See accompanying notes.

F-5

DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. - DESCRIPTION OF BUSINESS

~~Document Security Systems, Inc. (the “Company”), a New York corporation, and its subsidiaries, primarily operates in the security and commercial printing markets.~~ The Company develops, ~~patents,~~ markets, ~~produces~~manufactures and ~~licenses technology that prevents documents~~sells paper and plastic products designed to protect valuable information from unauthorized ~~copying,~~ scanning, ~~and counterfeiting. The Company also provides commercial print services for high quality documents produced on offset~~copying, and digital ~~presses, along with~~imaging. We have developed security technologies that are applied during the normal printing process and by all printing methods including traditional offset, gravure, flexo, digital or via the internet on paper, plastic, ~~documents~~or packaging. Our technologies and ~~ID’s that include embedded electronics, such as RFID (Radio Frequency Identification)~~products are used by federal, state and ~~variable data magnetic strips. The Company’s customers include~~local governments, law enforcement agencies and are also applied to a broad variety of industries as well, including financial institutions, high technology and consumer goods, entertainment and gaming, healthcare/pharmaceutical, defense and genuine parts industries. Our customers use our technologies where there is a need for enhanced security ~~printers, check~~for protection and ~~forms printers~~verification of critical financial instruments and ~~corporations.~~vital records, or where there are concerns of counterfeiting, fraud, identity theft, brand protection and liability.

NOTE 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements include the accounts of Document Security ~~Systems, Inc.~~System and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable, fair values of intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options and warrants to purchase our common stock, valuation of derivative liabilities arising from issuances of common stock and associated warrants and other rights to acquire common stock in the future, deferred revenue and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We engage third-party valuation consultants to assist management in the allocation of the purchase price of significant ~~acquisitions.~~acquisitions and the determination of the fair value of derivative liabilities.

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

Cash and Cash Equivalents – The Company maintains its cash in bank deposit accounts and, from time to time, short term Certificates of Deposits with original maturities of three months or less. For financial statement presentation purposes, the Company considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents.

~~Restricted Cash~~- In July 2007, the Company established a restricted cash balance of 87,500 British pounds, as collateral for a deed of guarantee that was required by the English Court of Appeals in order for the Company to pursue an appeal in that court. On March 19, 2008, the Company was notified that its appeal was denied and that the Company owed the European Central Bank, the successful party in the appeal, the 87,500 British pounds. Final assessment by the Court was made on July 31, 2009 and in August 2009, the funds were used to pay a portion of the appeal costs owed by the Company.

Accounts Receivable - The Company carries its trade accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management’s estimates that include a review of the history of past write-offs and collections and an analysis of current credit conditions. At December 31, ~~2009~~2010, the Company established a reserve for doubtful accounts of approximately $66,000 ($~~50,000~~66,000 – ~~2008)~~2009). The Company does not accrue interest on past due accounts receivable.

Inventory - - Inventories consist primarily of paper, plastic materials and cards, pre-printed security paper, paperboard and ~~legal supplies held for resale~~fully-prepared packaging which and are stated at the lower of cost or market on the first-in, first-out (“FIFO”) method.Packaging Work-in-process and finished goods included the cost of materials, direct labor and overhead.

~~Fixed Assets~~Equipment and Leasehold Improvements - ~~Fixed assets~~Equipment and leasehold improvements are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives or lease period of the assets whichever is shorter. Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Any gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Depreciation expense in ~~2009~~2010 was approximately ~~$319,000~~$458,000 ($~~316,000- 2008)~~319,000- 2009).

F-6

Investment - On October 8, 2009, the Company entered into an Asset Purchase Agreement with Internet Media Services ~~Inc.~~ whereby the Company sold the assets and liabilities of ~~Legalstore.com,~~Legalstore, a division of the Company, in exchange for 7,500,000 shares of common stock of the Internet Media ~~Services, Inc.~~Services. The Company recorded its investment in Internet Media Services as an equity method investment at the fair market value of the business sold. Management determined that the transaction qualified as a ~~derecoginition~~derecognition of a subsidiary under FASB ASC 810-10-40. Therefore, the Company accounted for the deconsolidation of a subsidiary (“the business”) by recording the consideration received at fair market value and recognizing a gain in net income measured as the difference between: the fair value of the consideration received (7,500,000 shares of common stock of Internet Media Services ~~Inc.~~ or a 37% interest) and the carrying value of the assets and liabilities sold. Given that the consideration received is not readily measurable because of the lack of activity in Internet Media Services ~~Inc.~~shares prior to the transaction, the Company determined that the value of the “business transferred” is more readily ~~measurable. The Company determined~~measurable by determining the fair market value of the business transferred based on a discounted cash flow model. The Company recorded the equity method investment at fair value. Under the equity method investment the Company is required to account for the difference between the cost of an investment and the amount of the underlying equity in net assets of an investee as if the investee were a consolidated subsidiary. If the investor is unable to relate the difference to specific accounts of the investee (e.g., property and equipment), the difference should be considered to be the same as goodwill. Investors shall not amortize goodwill associated with equity method investments after the date FASB ASC ~~350/Statement No. 142,~~ ~~Goodwill and Other Intangible Assets~~,350 is initially applied by the entity in its entirety. The Company ~~has~~ determined that given the lack of activity in Internet Media Services ~~Inc.~~shares prior to the transaction, the difference between the cost of the investment (fair market value) and the underlying equity interest is attributable to goodwill which difference amounted to approximately $243,000 at December 31, 2009. For the period from October 9, 2009 through December 31, 2009, the Company’s equity in the earnings of Internet Media Services was di minimus and not recorded by the Company. The total assets and liabilities of Internet Media Services ~~Inc.~~ as of December 31, 2009 amounted to approximately $350,000 and $60,000, respectively. ~~(See Note 8)~~

The Company recognized gains or losses on its investment under the equity method of accounting for investments. During 2010, the Company recorded a cumulative loss on its investment of approximately $121,000. On September 23, 2010, the Company’s Board of Directors declared a dividend whereas the Company distributed to its stockholders of record on October 8, 2010 on a pro-rata basis its 7,500,000 shares of stock of Internet Media Services. As a result, the Company has recorded a dividend of approximately $229,000 which was the book value of the investment as of September 23, 2010.

Business Combinations -The Company adopted new FASB guidance on business combinations and non-controlling interests. The new guidance on business combinations retains the underlying concepts of the previously issued standard in that the acquirer of a business is required to account for the business combination at fair value. As under previous guidance, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair values is recorded as goodwill. The new pronouncement results in some changes to the method of applying the acquisition method of accounting for business combinations in a number of significant aspects. Under the new guidance, all acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.

Goodwill - Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but are combined when reporting units within the same segment have similar economic characteristics. The Company has three reporting units based on the current structure. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company performs annual assessments and has determined that no impairment is necessary during the years ended December 31, 2010 and 2009.

Other Intangible Assets, Patent Defense Costs and Patent Application Costs– Other intangible assets consists 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 and a customer list 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, in accordance to guidance provided by FASB Concept Statement No. 6 and related guidance in AICPA Technical Questions and Answers, Section 2260, Other Assets, paragraph .03, “Legal Expenses Incurred to Defend Patent Infringement Suit”.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.

F-7

Impairment of Long-Lived Assets - The Company accounts for long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset including its ultimate disposition. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. In December 2008, the Company recorded an impairment $361,000 for a license agreement the Company had acquired in 2006 for which the Company assessed that the probable future cash flows expected to be derived from the license did not support the net carrying value of the license as of December 31, 2008. (See Note 5)

~~F-7~~

Fair Value of Financial Instruments - Effective January 1, 2008, the Company adopted the new accounting guidance relating to fair value measurements as required by the Fair Value Measurement Topic of the FASB ASC for financial instruments measured at fair value on a recurring basis and effective January 1, 2009 on a non-recurring basis. The new accounting guidance defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements.

Fair value ~~estimates discussed herein are based upon certain~~is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market ~~assumptions~~participants at the measurement date. The Fair Value Measurement Topic of the FASB ASC establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and ~~pertinent information available~~the lowest priority to ~~management as of December 31, 2009.~~ unobservable inputs (Level 3 measurements). These tiers include:

·	Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

·	Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

·	Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The carrying amounts reported in the balance sheet ~~as of December 31, 2009~~ of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of revolving credit lines, notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. Derivative instruments are recorded as assets and liabilities at estimated fair value based on available market information. One of the Company's derivative instruments is an interest rate swap that changes a variable rate into a fixed rate on the term loan and qualifies as a cash flow hedge and is included in accrued expenses on the accompanying Consolidated Balance Sheet as of December 31, 2010. 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 cumulative net loss attributable to this cash flow hedge recorded in AOCl at December 31, 2010, was approximately $26,000.

The Company accounts for warrants and other rights to acquire capital stock with exercise price reset features, or “down-round” provisions, as derivative liabilities. Similarly, down-round provisions for issuances of common stock are also accounted for as derivative liabilities. These derivative liabilities are measured at fair value with the changes in fair value at the end of each period reflected in current period income or loss. The fair value of derivative liabilities is estimated using a binomial model or Monte Carlo simulation to model the financial characteristics, depending on the complexity of the derivative being measured. A Monte Carlo simulation provides a more accurate valuation than standard option valuation methodologies such as the Black-Scholes or binomial option models when derivatives include changing exercise prices or different alternatives depending on average future price targets. In computing the fair value of the derivatives, the Company uses significant judgments, which, if incorrect, could have a significant negative impact to the Company’s consolidated financial statements. The input values for determining the fair value of the derivatives include observable market indices such as interest rates, and equity indices as well as unobservable model-specific input values such as certain volatility parameters. Future changes in the fair value of the derivatives liabilities, if any, will be recorded in the statement of operations as gains or losses from derivative liabilities.

F-8

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 were first allocated between the convertible debt and any detachable free standing instruments that are included, such as common stock warrants. We record a BCF as a debt discount pursuant to FASB ASC Topic 470-20, formerly EITF Issue No. 98-5 (EITF 98-05"), Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio," and EITF Issue No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible Instrument(s)".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. During 2010, the holders of both of the Company’s convertible notes totaling $800,000 exercised the conversion features of the respective convertible notes for an aggregate of 478,866 shares of the Company’s common stock, which retired the debt in full. In conjunction with the conversions, the Company recognized approximately $263,000 of unamortized note discount expense.

Share-Based Payments - Compensation cost for stock awards are measured at fair value and recognize compensation expense over the service period for which awards are expected to vest. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of subjective assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. For equity instruments issued to consultants and vendors in exchange for goods and services follows the Company determines the measurement date for the fair value of the equity instruments issued at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Revenue Recognition - Sales of security and commercial printing products, and legal products are recognized when a product or service is delivered, shipped or provided to the customer and all material conditions relating to the sale have been substantially performed.

For digital solutions sales, revenue is recognized in accordance with ~~authoritative guidance on software revenue recognition.~~FASB ASC 985-605. Accordingly, revenue is recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable (4) the collection of our fees is reasonably assured.

~~The Company recognizes~~For technology licenses revenue ~~from technology licenses~~is recognized once all the following criteria for revenue recognition have been met: (1) persuasive evidence of an agreement exists; (2) the right and ability to use the product or technology has been rendered; (3) the fee is fixed and determinable and not subject to refund or adjustment; and (4) collection of the amounts due is reasonably assured.

Advertising Costs– Generally consist of online, keyword advertising with Google with additional amounts spent on certain print media in targeted industry publications. Advertising costs were ~~$23,000~~$32,000 in ~~2009~~2010 ($~~42,000~~23,000 – ~~2008)~~2009).

Research and Development– Research and development costs are expensed as incurred.

Foreign Currency-. Net gains and losses resulting from transactions denominated in foreign currency are recorded as other income or loss.

Income Taxes - The Company recognizes estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. We recognize penalties and accrued interest related to unrecognized tax benefits in income tax expense.

~~F-8~~

Earnings Per Common Share - The Company presents basic and diluted earnings per share. Basic earnings per share ~~reflects~~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.

F-9

For the years ended December 31, ~~2009~~2010 and ~~2008,~~2009, there were up to ~~2,652,886~~2,767,131 and ~~1,868,063,~~2,652,886, respectively, of shares potentially issuable under convertible debt agreements, options, warrants and restricted stock agreements that could potentially dilute basic earnings per share in the future 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 years. ~~From January 1,~~This amount includes the warrants issued to Fletcher on December 31, 2010 (as amended on February18, 2011 and March 14, 2011). These amounts do not include potentially issuable shares under Fletcher’s Later Investment rights which provide Fletcher the right to ~~March 19, 2010 , the Company issued a total of 1,277,437~~acquire up to 756,387 shares of the Company’s common stock ~~that will dilute future earnings~~at a price per share of $5.38 anytime prior to July 2, 2011. For each share purchased by Fletcher pursuant to the Later Investment, Fletcher would receive a warrant to purchase an additional share of the ~~Company, consisting~~Company’s commons stock at $5.38 for up to nine years. If Fletcher exercises all of ~~735,437 shares that were issued in conjunction with the acquisition of Premier Packaging~~its Later Investment Rights, then an additional 756,387 warrants would be issued. (See Note 16), 304,000 share issued for the exercise of warrants, 200,000 shares issued for private placements, and 38,000 shares issued for payments. In addition, the Company issued 150,000 options to employees during this period that could potentially dilute basic earnings per share in the future.7).

Concentration of Credit Risk - The Company maintains its cash and cash equivalents 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 2010, two customers accounted for 25% and 10% of the Company’s total revenue from continuing operations, respectively. As of December 31, 2010, these customers accounted for 37% and 7% of the Company’s trade accounts receivable balance, respectively. During 2009, two customers accounted for 19% and 12% of the Company’s total revenue from continuing operations, respectively. As of December 31, 2009, two customers’ account receivable balance accounted for 21% and 17% of the Company’s trade accounts receivable balance, respectively. During 2008, two customers accounted for 11% and 10% of the Company’s total revenue from continuing operations, respectively. As of December 31, 2008, one customer account receivable balance that was acquired as part of the Company’s acquisition of the assets of a commercial printer in December 2008, accounted for 42% 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.

~~Continuing Operations -~~ The Company has incurred significant net losses in previous years. The Company’s ability to fund its capital requirements out of its available cash and cash generated from its operations depends on a number of factors. Some of these factors include the Company’s ability to (i) increase commercial and security printing and plastic card sales; (ii) increase sales of the Company’s digital products; and (iii) integrate its new acquisition of Premier Packaging with its existing product lines. If the Company cannot generate sufficient cash from its operations as of December 31, 2009, the Company has approximately $449,000 in cash and $417,000 available to it under one credit facility. In February 2010, the Company raised approximately $1.1 million through the exercise of warrants and sale of shares of common stock through private placements. The Company used approximately $600,000 of these funds towards the acquisition of Premier Packaging Corp. The remainder is available for working capital requirements together with up to $1,000,000 available under a credit line at its Premier Packaging, subsidiary acquired in 2010. (See Note 16). ~~Further, the Company may need to raise additional funds in the future in order to fund its working capital needs~~ ~~and pursue its growth strategy, which although there can be no assurances, management feels that sources for these additional funds will be available through either current or future investors.~~

Recent Accounting Pronouncements

In ~~December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 141(r),~~ ~~Business Combinations~~, now Accounting Standards Codification (“ASC”) 805, which addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. In April 2009,January 2010, the FASB issued ~~FASB Staff Position No. FAS 141(r)-1,~~ ASU 2010-6, “~~Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies~~Improving Disclosures About Fair Value Measurements” ~~(FSP FAS 141(r)-1)~~(“ASU 2010-6”), which ~~amended certain provisions of SFAS 141(r) related~~requires reporting entities to the recognition, measurement, and disclosure of assets acquired and liabilities assumed in a business combination that arise from contingencies. SFAS 141(r) and FSP FAS 141(r)-1 became effective in the first quarter of 2009, and did not have a material impact on the consolidated financial statements.

In June 2008, the EITF reached a consensus in Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”), now ASC 815. This Issue addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception in paragraph 11(a) of SFAS 133. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The adoption of EITF 07-5 during the first quarter of 2009 did not have a material impact on the consolidated financial statements.

~~F-9~~

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), now ASC 855, to incorporate accounting guidance that originated as auditing standards into the body of authoritative literature issued by the FASB. SFAS No. 165 requires the evaluation of subsequent events through the date the financial statements are issued and the disclosure of the date through which subsequent events were evaluated and the basis for that date. This statement is effective for interim and annual financial periods ending after June 15, 2009. The Company adopted the requirements of SFAS No. 165 for the period ending June 30, 2009. The adoption of SFAS No. 165 did not have a significant impact on our consolidated financial position, results of operations or cash flows. (See Note 16).

~~FASB Codification.~~ In July 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“GAAP”) (as amended)” (“SFAS No. 168”), now ASC 105, making the FASB Accounting Standards Codification the single source of authoritative nongovernmental U.S. GAAP. The Codification is not intended to change GAAP, however, it will represent a significant change in researching issues and referencing U.S. GAAP in financial statements and accounting policies. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has adopted themake new ~~codification standards.~~

~~ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements This ASU affects all entities that are required to make~~ disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and ~~nonrecurring fair~~out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value ~~measurements under FASB ASC Topic 820, originally issued as FASB Statement No. 157, Fair Value Measurements. The~~measurements. ASU ~~requires certain new disclosures and clarifies two existing disclosure requirements. The new disclosures and clarifications of existing disclosures are~~2010-6 is effective for interim and annual reporting periods beginning after December 15, 2009, except for ~~the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in~~ Level 3 ~~fair value measurements. Those~~reconciliation disclosures which are effective for ~~fiscal years~~interim and annual periods beginning after December 15, ~~2010, and for interim periods within those fiscal years.~~2010. The Company partially adopted the requirements within ASU 2010-6 as of January 1, 2010. The adoption did not have an impact on our financial statements.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU specifies that when comparative financial statements are presented, the revenue and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective for business combinations with acquisition dates on or after the beginning of the first annual reporting period beginning on or after December 15, 2010; early adoption is permitted. Management is currently evaluating the ~~potential~~ impact ofthat the adoption of ASU 2010-29 will have and does not believe the adoption will have a material impact on ~~the~~our consolidated financial ~~position, results of operations and cash flows.~~statements.

F-10

NOTE 3. – INVENTORY

Inventory consisted of the ~~following:~~following at December 31,:

	December 31,		December 31,		2010		2009
	2009		2008

Finished Goods	$	38,093	$	137,972	$	193,346	$	38,093
Work in process		58,493		120,713		86,776		58,493
Raw Materials		87,588		100,349		321,237		87,588

	$	184,174	$	359,034	$	601,359	$	184,174

~~F-10~~

NOTE 4. - ~~FIXED ASSETS~~EQUIPMENT AND LEASEHOLD IMPROVEMENTS

~~Fixed assets~~Equipment and leasehold improvements consisted of the following at December 31:

		2010				2009
	Estimated Useful Life	Purchased		Under Capital Leases		Purchased		Under Capital Leases

Machinery & equipment	5-7 years	$	2,514,045	$	369,114	$	752,387	$	547,936
Leasehold improvements	up to 13 years (1)		741,919		-		735,434		-
Furniture & fixtures	7 years		104,709		-		70,209		-
Software & websites	3 years		356,125		-		270,725		-

Total cost		$	3,716,798	$	369,114	$	1,828,755	$	547,936
Less accumulated depreciation			1,391,693		150,725		809,082		281,383

Net		$	2,325,105	$	218,389	$	1,019,673	$	266,553

	2010					2009
	Warrants			Weighted Average Exercise Price		Warrants		Weighted Average Exercise Price
Outstanding January 1	1,318,020		$	6.15		761,032	$	8.73
Granted during the year	962,009			5.02		556,988		2.63
Exercised	(363,398	)		(2.16	)	-		-
Lapsed	(25,000	)		(12.59	)	-		-

Outstanding at December 31	1,891,631		$	6.26		1,318,020	$	6.15
Exercisable at December 31	1,891,631		$	6.26		1,118,020	$	6.63
Weighted average months remaining
				44.2				43.0

F-18

2009 2008
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price

Outstanding January 1 761,032 $ 8.73 591,093 $ 10.82

Granted during the year 556,988 $ 2.63 250,000 $ 2.00
Exercised - $ - (50,000 ) $ (2.00 )
Lapsed - $ - (30,061 ) $ (5.00 )

Outstanding at December 31 1,318,020 $ 6.15 761,032 $ 8.73

Exercisable at December 31 1,118,020 $ 6.63 761,032 $ 8.73

Weighted average months remaining 43.0 44.7

Stock Options - The Company has two stock-based compensation plans. The 2004 Employees’ Stock Option Plan (the “2004 Plan”) provides for the issuance of up to a total of 1,700,000 shares of common stock authorized to be issued for grants of options, restricted stock and other forms of equity to employees and consultants. Under the terms of the 2004 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment (“ISOs”) under Section 422A of the Internal Revenue Code, or options which do not qualify (“NQSOs”). The exercise price for options granted under the Director Plan is 100% of the fair market value of the Common Stock on the date of grant. The Non-Executive Director Stock Option Plan (the “Director Plan”) provides for the issuance of up to a total of 200,000 shares of common stock authorized to be issued for options grants for non-executive directors and advisors. Under the terms of the Director Plan, an option to purchase (a) 5,000 shares of our common stock shall be granted to each non-executive director upon joining the Board of Directors and (b) 5,000 shares of our common stock plus an additional 1,000 shares of our common stock for each year that the applicable director has served on the Board of Directors, up to a maximum of 10,000 shares per year shall be granted to each non-executive director thereafter on January 2nd of each year; provided that any non-executive director who has not served as a director for the entire year immediately prior to January 2nd shall receive a pro rata number of options based on the time the director has served in such capacity during the previous year. Both Plans were adopted by the Company’s shareholders.

~~F-17~~

The following is a summary with respect to options outstanding at December 31, ~~2009~~2010 and ~~2008~~2009 and activity during the years then ended:

	2004 Employee Plan								Non-Executive Director Plan

	Number of Options			Weighted Average Exercise Price			Weighted Average Life Remaining		Number of Options			Weighted Average Exercise Price			Weighted Average Life Remaining
							(in years)								(in years)
Outstanding at December 31, 2008		663,500			7.27					115,750		$	7.99
Granted		274,000			4.00					40,000			1.86
Exercised		-			-					-			-
Forfeited		(298,500	)		(6.37	)				(23,750	)		(4.59	)
Outstanding at December 31, 2009:		639,000			6.29					132,000			6.74
Granted		185,000			3.40					40,000			2.45
Exercised		-			-					-			-
Forfeited		(150,500	)		5.54					(15,000	)		(7.14	)
Outstanding at December 31, 2010:		673,500			5.66			2.6		157,000			5.61			2.4
Exercisable at December 31, 2010:		329,850			7.64			1.4		117,000			6.69			1.8

Aggregate Intrinsic Value of outstanding options at December 31, 2010	$	631,225							$	258,800
Aggregate Intrinsic Value of exercisable options at December 31, 2010	$	116,969							$	141,200

2004 Employee Plan

Non-Executive Director Plan

Number of
Options

Weighted
Average
Exercise Price

Weighted
Average Life
Remaining

Number of
Options

Weighted
Average
Exercise Price

Weighted
Average Life
Remaining

(in years) (in years)
Outstanding at December 31, 2007 617,500 9.70 78,750 $ 8.78
Granted 83,000 5.01 37,000 6.31
Exercised - - - -
Forfeited (37,000 ) (8.87 ) - -
Outstanding at December 31, 2008: 663,500 7.27 115,750 7.99
Granted 274,000 4.00 40,000 1.86
Exercised - -
Forfeited (298,500 ) (6.37 ) (23,750 ) (4.59 )
Outstanding at December 31, 2009: 639,000 6.29 2.8 132,000 6.74 2.5
Exercisable at December 31, 2009: 336,833 8.16 1.4 92,000 8.86 1.9

Aggregate Intrinsic Value of outstanding options at December 31, 2009 $ - $ 23,600
Aggregate Intrinsic Value of exercisable options at December 31, 2009 $ - $ -

The weighted-average grant date fair value of options granted during the year ended December 31, ~~2009~~2010 was ~~$0.53~~$1.38 ($~~2.03 -2008)~~0.53 -2009). The aggregate grant date fair value of options that vested during the year was approximately $128,000. There were no options exercised during the year ended December 31, ~~2009~~2010 or ~~2008.~~2009.

The fair value of each option award is estimated on the date of grant utilizing the Black Scholes Option Pricing Model that uses the assumptions noted in the following table.

F-19

2009

2008

Volatility 54.7 % 53.6 %
Expected option term 3.9 years 3.3 years
Risk-free interest rate 2.30 % 3.09 %
Expected forfeiture rate 0.0 % 0.0 %
Expected dividend yield 0.0 % 0.0 %

	2010		2009

Volatility	54.3	%	54.7	%
Expected option term	3.8	years	3.9	years
Risk-free interest rate	2.5	%	2.3	%
Expected forfeiture rate	0.0	%	0.0	%
Expected dividend yield	0.0	%	0.0	%

Restricted Stock Issued to Employees – Restricted common stock is issued under the 2004 Plan for services to be rendered and may not be sold, transferred or pledged for such period as determined by our Compensation Committee. Restricted stock compensation cost is measured as the stock’s fair value based on the quoted market price at the date of grant. The restricted shares issued reduce the amount available under the employee stock option plans. Compensation cost is recognized only on restricted shares that will ultimately vest. The Company estimates the number of shares that will ultimately vest at each grant date based on historical experience and adjust compensation cost and the carrying amount of unearned compensation based on changes in those estimates over time. Restricted stock compensation cost is recognized ratably over the requisite service period which approximates the vesting period. An employee may not sell or otherwise transfer unvested shares and, in the event that employment is terminated prior to the end of the vesting period, any unvested shares are surrendered to us. We have no obligation to repurchase any restricted stock.

~~F-18~~

The following is a summary of activity of restricted stock during the years ended at December 31, ~~2009~~2010 and ~~2008:~~

2009:

	Shares			Weighted-average Grant Date Fair Value
Restricted shares outstanding, December 31, 2008	327,781		$	9.05
Restricted shares granted	-			-
Restricted shares vested	(30,281	)		(6.77	)
Restricted shares forfeited	(212,500	)		(10.05	)
Restricted shares outstanding, December 31, 2009	85,000		$	7.61
Restricted shares granted	-			-
Restricted shares vested	-			-
Restricted shares forfeited	(40,000	)		(2.10	)
Restricted shares outstanding, December 31, 2010	45,000		$	12.50

Shares
Weighted- average
Grant Date Fair
Value

Restricted shares outstanding, December 31, 2007 513,323 $ 12.35
Restricted shares granted 110,592 2.31
Restricted shares vested (46,134 ) (10.49 )
Restricted shares forfeited (250,000 ) (12.50 )
Restricted shares outstanding, December 31, 2008 327,781 $ 9.05
Restricted shares granted - -
Restricted shares vested (30,281 ) (6.77 )
Restricted shares forfeited (212,500 ) (10.05 )
Restricted shares outstanding, December 31, 2009 85,000 $ 7.61

As of December 31, ~~2009,~~2010, there are ~~40,000 unvested restricted shares granted to an employee that vests proratably through December 2013 and~~ 45,000 restricted shares that will vest only upon the occurrence of certain through ~~December 2014~~May 2012 which include, among other things a change of control of the Company or other merger or acquisition of the Company, the achievement of certain financial goals, including among other things a successful result of the Company’s patent infringement lawsuit against the European Central Bank. These 45,000 shares, if vested, would result in the recording of stock based compensation expense of approximately $562,500, the grant date fair value, over the period beginning when any of the contingent vesting events is deemed to be probable over the expected requisite service period. As of December 31, ~~2009,~~2010, vesting is not considered probable and no compensation expense has been recognized related to the performance grants.

On May 10, 2008, the Company accelerated the vesting of 33,333 restricted shares and retired 250,000 of unvested restricted stock as the result of a separation agreement with the Company’s former President. The 33,333 shares of restricted stock, formerly set to vest pro-ratably through June 2009, were accelerated to vest pro-ratably on a monthly basis over a ten-month vesting period ending in March 2009. As a result of the acceleration of the 33,333 shares of restricted stock, the Company recognized approximately $194,000 of stock based compensation during the year ended December 31, 2008. (See Note 13) On December 18, 2008, the Company issued under the 2004 Plan 50,000 restricted shares of the Company’s common stock each to two former employees of DPI of Rochester, LLC, which the Company acquired substantially all of the assets of on that date. The restricted shares had an aggregated grant date fair value of $210,000 and will vest proratably over five years.

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 year ended December 31, ~~2009,~~2010, the Company had stock compensation expense of approximately ~~$292,000~~$423,000 or $0.02 per share ($~~1,747,000- 2008; $0.12~~292,000- 2009; $0.02 per share). As of December 31, ~~2009,~~2010, there was approximately ~~$550,000~~$368,000 of total unrecognized compensation costs (excluding the ~~$563,000~~$562,500 that vest upon the occurrence of certain events) related to non-vested options and restricted stock granted under the Company’s stock option plans which the Company expects to vest over a period of not to exceed five years.

On August 13, 2008, the Company cancelled 330,500 employee stock options with exercise prices ranging from $6.24 to $12.50, and replaced the cancelled options with 330,500 employee stock options with an exercise price of $6.00. No other terms of the options were modified. On the date of grant, the fair market value of the Company’s Common Stock was $5.15. The repricing was treated as a modification under FAS123R, and resulted in an additional aggregate fair value expense determined using the Black- Scholes option pricing model of approximately $225,000, of which approximately $170,000 was expensed as of the grant date for fully vested options. The remaining fair value of the modified options is being expensed proratably during the expected vesting period of the options thru 2010.

~~F-19~~F-20

NOTE 8. –DECONSOLIDATION OF ~~LEGALSTORE.COM~~LEGALSTORE DIVISION

On October 8, 2009, the Company entered into an Asset Purchase Agreement with Internet Media Services ~~Inc. (IMS)~~ whereby the Company sold the assets and liabilities of ~~Legalstore.com,~~Legalstore, a division of the Company with assets of approximately $252,000 and liabilities of $13,000, in exchange for 7,500,000 shares of common stock of ~~the~~ Internet Media ~~Services, Inc.~~Services. The Company recorded its investment in Internet Media Services as an equity method investment at the fair market value of the business sold. Management determined that the transaction did not qualify as a non-monetary exchange due to the exception noted in FASB ASC 845-10 (A( [ A transfer of assets to an entity in exchange for an equity interest in that entity). Management determined that the transaction qualified as a derecoginition of a subsidiary under FASB ASC 810-10-40. Therefore, the Company accounted for the deconsolidation of a subsidiary (“the business”) by recording the consideration received at fair market value and recognizing a gain in net income measured as the difference between: the fair value of the consideration received (7,500,000 shares of common stock of Internet Media Services ~~Inc.~~ or a 37% interest) and the carrying value of the assets and liabilities sold. Given that the consideration received is not readily measurable because of the lack of activity in Internet Media Services ~~Inc.~~shares prior to the transaction, the Company determined that the value of the “business transferred” is more readily ~~measurable. The Company determined~~measurable by determining the fair market value of the business transferred based on a discounted cash flow model amounted to $350,000, which resulted in a gain ~~after transaction expenses~~ of approximately $26,000 which is included in the consolidated statement of operations. The Company ~~is recording~~recorded the equity method investment at fair value. Under the equity method investment the Company iswas required to account for the difference between the cost of an investment and the amount of the underlying equity in net assets of an investee as if the investee were a consolidated subsidiary. If the investor is unable to relate the difference to specific accounts of the investee (e.g., property and equipment), the difference should be considered to be the same as goodwill. Investors shall not amortize goodwill associated with equity method investments after the date FASB ASC ~~350/Statement No. 142,~~ ~~Goodwill and Other Intangible Assets~~,350 is initially applied by the entity in its entirety. The Company ~~has~~ determined that given the lack of activity in Internet Media Services ~~Inc.~~shares prior to the transaction, the difference between the cost of the investment (fair market value) and the underlying equity interest is attributable to goodwill. The Company is continuing to report the activity in operating loss and not breaking out and reporting it as discontinued operations because the operations and cash flows of the component have not been eliminated from the ongoing operations of the entity as a result of the equity method investment and because the Company ~~will have~~had significant continuing involvement in the operations of Internet Media Services ~~Inc.~~ after the disposal transaction because of the ownership percentage and ~~the~~ board representation. The Company recognized gains or losses on its investment under the equity method of accounting for investments. During 2010, the Company recorded a cumulative loss in its investment of $121,000. On September 23, 2010, the Company’s Board of Directors declared a dividend whereas the Company would distribute to its stockholders of record on October 8, 2010 on a pro-rata basis its shares of stock in Internet Media Services. As a result, the Company has recorded a dividend of approximately $229,000 which was the book value of the investment as of September 23, 2010.

~~In conjunction with the Asset Purchase Agreement, the Company and Internet Media Services made the followg agreements:~~

Within 180 days of closing, IMS will file a registration statement on Form S-1 with respect to the IMS Common Stock pursuant to the terms of the Asset Purchase Agreement and Registration Rights Agreement (the “Registration Rights Agreement”) executed by IMS and the Company concurrently with the Asset Purchase Agreement. Pursuant to the terms of the Asset Purchase Agreement, Registration Rights Agreement, and the Stock Pledge and Escrow Agreements executed by IMS’ principal shareholders, IMS, Lester Levin, Inc. and the Company (the “Pledge Agreements”), if IMS fails to secure registration of at least 20% of the IMS Common Stock within 360 days of closing, and to meet certain working capital thresholds contained in the Asset Purchase Agreement, then IMS will be in default. In the event of a default by IMS with respect to the registration of the IMS Common Stock, if IMS has failed to satisfy the working capital requirements provided for in the Asset Purchase Agreement, the Company may take back the collateral, consisting of 12,500,000 shares (an additional 61% of the IMS shares outstanding) of IMS Common Stock owned by the IMS shareholders identified in the Pledge Agreements. If IMS is in default with respect to the registration of IMS Common Stock, and IMS has satisfied the working capital requirements contained in the Asset Purchase Agreement, the Company may take back the collateral, consisting of 5,250,000 shares (an additional 26% of IMS shares outstanding) of IMS Common Stock owned by the IMS shareholders identified in the Pledge Agreements. In addition to the Asset Purchase Agreement, the Registration Rights Agreement, and the Pledge Agreements, IMS’ principal shareholders, IMS and the Company entered into a voting agreement (the “Voting Agreement”) whereby the principal shareholders of IMS agreed to vote all IMS Common Stock held by them so as to elect two nominees designated by Lester Levin, Inc. or the Company as members of the IMS Board of Directors.

NOTE 9. –BUSINESS ~~COMBINATIONS-~~COMBINATIONS

On ~~December 18, 2008,~~February 12, 2010, the ~~Company” through its wholly owned subsidiary, Secuprint, Inc. (dba DPI Secuprint, Inc.)~~Company acquired ~~substantially~~ all of the ~~assets~~outstanding common stock of ~~DPI of Rochester, LLC (“DPI”)~~Premier Packaging from Robert B. and Joan T. Bzdick for ~~approximately $938,000~~$2,000,000 in cash and ~~$145,000~~735,437 shares of ~~expenses,~~ the ~~right~~Company's common stock with a value of $2,566,675 at February 12, 2010. In addition, the purchase price was subject to ~~assume certain leases, including~~increase if the ~~lease~~capital gains tax rate that was in effect as of February 12, 2010 is retroactively increased by legislation or otherwise whereas the seller’s tax on its ~~building, and a contingent payment~~gain increases, which did not occur. In addition, the seller had registration rights for its shares to which the Company was subject to registration penalties of up to ~~$50,000 within five years of~~$5,000 per month after 120 days, which the ~~acquisition.~~ sellers waived

The acquisition has been accounted for as a business ~~combination. Under~~combination, whereby the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value. The Company incurred approximately $30,000 of acquisition related legal and professional fees that were expensed in the period in which they were incurred. The Company is required to recognize and measure any related goodwill acquired in the business combination ~~accounting (formerly SFAS141),~~or a gain from a bargain purchase. Management determined that the ~~total~~fair value of the assets acquired and liabilities assumed was less than the purchase price ~~was allocated to DPI’s net~~resulting in the recording of goodwill. Goodwill totaling approximately $627,000 represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets ~~if any, based on their estimated fair values as~~acquired, which included $861,000 for customer relationships and $511,000 for non-compete agreement, and is due primarily to expected increased market penetration from future products in the secure packaging market s and synergies expected from combining packaging capabilities of ~~December 18, 2008 as determined by management. No goodwill was recorded as a result~~Premier Packaging with the printing capabilities of the ~~business combination.~~Company’s DPI division. The ~~contingent payment of up to $50,000 was considered remote, therefore, future payments made, if any, will be considered additional purchase price when paid.~~goodwill recorded with the transaction is not deductible for income taxes.

~~F-20~~F-21

The Company engaged a valuation expert, The Financial Valuation Group, to assist management in determining the fair value of the assets acquired. The allocation of the purchase price and the estimated useful lives associated with the acquired assets and liabilities is as follows:

Fair value of the consideration transferred	$	4,566,675	Estimated Useful Lives

Fair value of assets acquired and liabilities assumed:

Cash	$	5,290
Accounts receivable		1,284,227
Inventories		504,162
Machinery and equipment		1,557,500	3 to 7 years
Other intangible assets		1,372,000	5 to 10 years
Goodwill		627,360
Total Assets	$	5,350,539

Liabilities assumed:
Accounts payable	$	448,128
Revolving credit lines		277,645
Accrued Liabilities		58,091
Total Liabilities	$	783,864

Total prelimary purchase price	$	4,566,675

Estimated
Amount Useful Life
Accounts receivable $ 876,287
Inventory and work in process 67,250
Machinery and equipment 139,000 5 years
Total assets acquired 1,082,537
Liabilities assumed —
Total preliminary purchase price $ 1,082,537

Set forth below is the unaudited ~~pro forma~~proforma revenue, operating loss, net loss and loss per share of the Company as if ~~DPI~~Premier Packaging had been acquired by the Company as of January 1, ~~2008:~~2009.

	Year Ended December 31,

(unaudited)	2010			2009


Revenue		14,265,949			17,011,427
Operating Loss		(3,961,963	)		(3,170,288	)
Net Loss		(4,671,527	)		(3,526,173	)
Basic and diluted loss per share		(0.26	)		(0.24	)

Year Ended December 31,
(unaudited)
2008

Revenue $ 14,119,500
Gross profit 5,886,063
Net Loss (8,717,790 )
Basic and diluted loss per share (0.62 )
Since the acquisition, Premier Packaging had sales of $5,753,000 and profit of $54,000.

NOTE 10. – OTHER INCOME

The Company received ~~approximately~~$143,000 during 2010 and $416,000 induring 2009 for New York State Qualified Emerging Technology Company (“QETC”) refundable tax credits for the tax years ended ~~2005,~~2008, 2007, 2006, and ~~2007 which the Company received in December, 2009.~~ 2005.

In May 2008, the Company was awarded a judgment of approximately $126,000 pursuant to a positive judgement for the Company in its counterclaim the matter “Frank LaLoggia v. Document Security Systems, Inc”, which the Company won in June 2006. The Company expects to collect the full amount of the judgment.

~~F-21~~F-22

NOTE 11. - INCOME TAXES

Following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31:

~~The provision (benefit) for income taxes consists of the following:~~

The provision (benefit) for income taxes consists of the following:

	2010			2009
Currently payable:
Federal	$	-		$	-
State		-			-
Total currently payable		-			-
Deferred:
Federal		(1,150,645	)		(1,113,695	)
State		(274,396	)		(265,310	)
Total deferred		(1,425,041	)		(1,379,005	)
Less increase in allowance		1,443,990			1,397,957
Net deferred		18,949			18,952
Total income tax provision (benefit)	$	18,949		$	18,952

Individual components of deferred taxes are as follows:

Deferred tax assets:		2010			2009
Net operating loss carry forwards	$	11,909,891		$	10,330,310
Equity issued for services		801,204			1,006,186
Other		138,291			425,619
Total		12,849,386			11,762,115
Less valuation allowance		(11,903,718	)		(11,600,983	)
Gross deferred tax assets	$	945,668		$	161,132

Deferred tax liabilities:
Goodwill	$	87,452		$	69,665
Depreciation and amortization		947,995			162,297
Gross deferred tax liabilities	$	1,035,447		$	231,962

Net deferred tax liabilities	$	(89,779	)	$	(70,830	)

2009

2008

Currently payable:
Federal $ - $ -
State - -
Total currently payable - -
Deferred:
Federal (1,113,695 ) (2,583,341 )
State (265,310 ) (616,339 )
Total deferred (1,379,005 ) (3,199,680 )
Less increase in allowance 1,397,957 3,218,641
Net deferred 18,952 18,961
Total income tax provision $ 18,952 $ 18,961

Individual components of deferred taxes are as follows:

2009

2008

Deferred tax assets:
Net operating loss carry forwards $ 10,330,310 $ 9,321,843
Depreciation and amortization
Equity issued for services 1,006,186 1,010,084
Other 425,619 104,299
Total 11,762,115 10,436,226
Less valuation allowance (11,600,983 ) (10,342,023 )
Gross deferred tax assets $ 161,132 $ 94,203

Deferred tax liabilities:
Goodwill $ 69,665 $ 51,878
Modification of equity awards for licensing agreeement - -
Depreciation and amortization 162,297 94,203
Gross deferred tax liabilities $ 231,962 $ 146,081

Net deferred tax liabilities $ (70,830 ) $ (51,878 )

During 2010, the Company acquired the stock of Premier Packaging. As part of the business combination, various intangible assets and equipment with fair market values of $1, 372,000 and $1,557,500, respectively, were recorded along with a deferred tax liability of approximately $1,141,000.

The Company has approximately ~~$28,034,000~~$32,114,000 in net operating loss carryforwards (“NOL’s”) available to reduce future taxable income, of which approximately $1,412,000 is subject to change of control limitations that generally restricts the utilization of the NOL per year and ~~$2,400,000~~$1,855,000 of the NOL will be allocated to contributed capital when subsequently realized. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in the future and utilize the NOL’s before they expire, the Company has recorded a valuation allowance ~~accordingly~~accordingly. The excess tax benefits associated with stock option exercises are recorded directly to stockholders’ equity only when realized. As a ~~portion of~~result, the excess tax benefits included in net operating loss ~~carryforward, amounting to approximately $990,000, relates to tax deductions for stock awards, options and warrants exercised subsequent to the implementation of SFAS 123(R), which are~~carryforwards but not ~~included~~reflected in ~~the determination of the~~ deferred tax ~~asset above and will be recognized in accordance with SFAS 123(R) and FIN48, when realized for tax purposes. These~~assets was approximately $1,019,000. .These carryforwards expire at various dates from 2022 through ~~2028.~~2030. In addition, a portion of the valuation allowance amounting to approximately $318,000 will be recorded as a reduction to additional paid in capital in the event that it is determined that a valuation allowance is no longer considered necessary.

~~F-22~~F-23

The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying consolidated statements of operations are as follows:

	2010		2009

Statutory United States federal rate	34	%	34	%
State income taxes net of federal benefit	4.0		4.4
Permanent differences	(6.5	)	(3.8	)
Change in valuation reserves	(31.9	)	(35.1	)


Effective tax rate	(0.4	) %	(0.5	) %

2009 2008

Statutory United States federal rate 34 % 34 %
State income taxes net of federal benefit 4.4 5
Permanent differences (3.8 ) (0.3 )
Change in valuation reserves (35.1 ) (38.9 )

Effective tax rate (0.5 )% (0.2 )%

In July 2006, the FASB released Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (“FIN48”). Effective for fiscal years beginning after December 15, 2006, FIN48 provides guidance on the financial statement recognition and measurement for income tax positions that we have taken or expect to take in our income tax returns. It also provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN48 on January 1, 2007. The adoption did not have a material impact on the Company’s consolidated results of operations and financial position, and therefore, the Company did not have any adjustment to the January 1, 2007 beginning balance of retained earnings.

~~A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:~~

Unrecognized tax benefits balance at January 1, 2008 $ —
Gross increase for tax positions of prior years 446,000

Unrecognized tax benefits balance at January 1, 2009 $ 446,000

Unrecognized tax benefits balance at December 31, 2009 $ 446,000

At December 31, 2010 and 2009, the total unrecognized tax benefits of $446,000 have been netted against the related deferred tax assets.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, ~~2009~~2010 and ~~2008~~2009 the Company recognized no interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years ~~2006-2008~~2007-2010 generally remain open to examination by major taxing jurisdictions to which the Company is subject.

NOTE 12. - DEFINED CONTRIBUTION PENSION PLAN

The Company ~~established~~has an Employee savings plan (the “401(k) Plan”) ~~in 2006~~ which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue ~~Code.~~Code which covers its employees at its Document Security Systems, P3 and DPI subsidiaries. Employees become eligible to participate in the Plan at the beginning of the following quarter after the employee’s hire date. Employees may contribute up to 20% of their pay to the Plan, subject to the limitations of the Internal Revenue Code. Company matching contributions are discretionary. Pursuant to the 401(k) Plan, employees may elect to defer a portion of their salary on a pre-tax basis. During the years ended December 31, ~~2009~~2010 and ~~2008,~~2009, the Company did not make any matching contributions. In addition, the Company’s subsidiary, Premier Packaging, which the Company acquired in February 2010, has a 401(k) Plan which allows for employee salary deferrals with Premier Packaging matching benefits of up to 3% of the employee’s salary. The matching contribution for 2010 was approximately $25,000.

NOTE 13. – COMMITMENTS AND CONTINGENCIES

Facilities - - The Company leases a total of approximately ~~55,000~~95,000 square feet of office space for its administrative offices and its printing facilities at a monthly rental aggregating approximately ~~$36,000.~~$49,000. The leases expire at various dates through ~~July 2014,~~February 2020, although renewal options exist to extend lease agreements for up to an additional 60 months. The Company’s lease for its Premier Packaging facility is with the Company’s COO Bob Bzdick, a related party. The total rent expense for the facility lease with Mr. Bzdick during the year ended December 31, 2010 amounted to approximately $147,000. Future minimum lease commitments under the facility lease with Mr. Bzdick subsequent to December 31, 2010 are approximately $160,000 per year for the next five years and $735,000 thereafter.

Equipment Leases - The Company leases digital and offset presses, laminating and finishing equipment for its various printing operations. The leases may be capital leases or operating leases and are generally for a term of 36 to 60 months. The leases expire through March 2016.

~~F-23~~F-24

A summary of lease commitments, including related party lease to Mr. Bzdick, at December 31, ~~2009~~2010 are as follows:

				Operating Leases									Operating Leases
	Capital Leases			Equipment		Facilities		Total		Capital Leases			Equipment		Facilities		Total

Payments made in 2009	$	123,878		$	471,326	$	440,575	$	911,901

Payments made in 2010										$	107,052		$	662,701	$	568,115	$	1,230,816
Future minimum lease commitments:
2010		107,052			662,071		434,782		1,096,853
2011		107,052			625,218		467,639		1,092,857		107,052			625,218		627,639		1,252,857
2012		94,453			439,912		355,540		795,452		94,453			439,912		515,540		955,452
2013		5,665			296,284		365,366		661,650		5,665			296,284		525,366		821,650
2014		-			245,100		153,898		398,998		-			245,100		313,898		558,998
2015											-			228,300		178,333		406,633
Thereafter		-			282,750		-		282,750		-			54,450		735,000		789,450
Total future minimum lease commitments	$	314,222		$	2,551,335	$	1,777,225	$	4,328,560	$	207,170		$	1,889,264	$	2,895,776	$	4,785,040

Less amount representing interest		(53,631	)								(19,862	)
Present value of future minimum lease commitments		260,591

Present value of future minimum lease
commitments											187,308
Less current portion		(78,167	)								(88,776	)

Long term portion	$	182,424								$	98,532

Employment agreements - The Company has employment agreements ~~having terms in excess of one year~~ with four members of its management team with terms ranging from ~~three~~one to ~~five~~10 years through ~~December 2013.~~February 2020. The agreements provide for severance payments ~~of between 12 and 18 months of salary~~ in the event of termination for certain ~~causes. As~~causes.As of December 31, ~~2009,~~2010, the minimum annual severance payments under these employment agreements are, in aggregate, approximately ~~$743,000.~~$1,098,000.

In May 2008, the Company entered into a Separation Agreement with its former President that, among other things, accelerated the vesting of 33,333 shares of restricted common stock of the Company that were previously awarded to the former President pursuant to the Company’s 2004 Employee Stock Option Plan so that such shares vested in equal monthly installments during the immediately following ten months. The Separation Agreement further provided that if the former President did not realize at least $212,000 in gross proceeds from the sale of such 33,333 shares of restricted stock upon their vesting, then the Company would pay the former President the amount that such proceeds is less than $212,000 in cash or additional shares of common stock of the Company. As of ~~June 30, 2009, all 33,333 shares had vested generating gross proceeds of approximately $99,000. The Company has agreed to issue up to 30,000 shares of stock to pay the~~December 31, 2010, there is no remaining amount due ~~of $113,000. As of December 31, 2009, $74,000 remains due~~ under the ~~agreement and is recorded in accrued expenses as of December 31, 2009. Any remaining amounts due under the agreement after the shares are issued, if any, can be paid in cash or additional shares.~~agreement. ($74,000 -2009)

Contingent Litigation Payment –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 capped the fees for all matters associated with that litigation at $500,000 plus expenses, and a $150,000 contingent payment upon a successful ruling or settlement on the Company’s behalf in that litigation. The Company will record the $150,000 in the period in which the Company has determined that a successful ruling or settlement is probable.

In addition, 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. As of December 31, ~~2009,~~2010, there have been no settlement amounts related to these agreements.

~~F-24~~

Legal Proceedings On-On August 1, 2005, the Company commenced a suit against the ~~European Central Bank (“ECB”)~~ECB alleging patent infringement by the ECB and claimed unspecified damages. We brought the suit in the European Court of First Instance in Luxembourg. We alleged that all Euro banknotes in circulation infringe the Company European Patent 0 455 750B1 (the “Patent”), 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 ruled on September 5, 2007 that it does not have jurisdiction to rule on the patent infringement claim, and also ruled that we will be required to pay attorneys and court fees of the ECB. The ECB formally requested the Company to pay attorneys and court fees in the amount of Euro 93,752 which, unless the amount is settled will be subject to an assessment procedure that ~~will~~has not ~~likely be concluded until late 2010, which~~been initiated, the Company will accrue as soon as the assessed amount, if any, is reasonably ~~estimatable.~~estimable.

~~On March 24,~~

F-25

In 2006, the Company received ~~notice~~notices that the ECB had filed a separate ~~claim~~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 the national courts seeking revocation and declarations of invalidity of the ~~Patent in each of the Netherlands, Belgium, Italy, France, Spain, Germany and Austria.~~Patent. On March 26, 2007, the High Court of Justice, Chancery Division, Patents Court in London, England ~~(the “English Court”)~~ ruled that the Patent was deemed invalid in the United Kingdom, and on March 19, 2008 this decision was upheld on appeal. The English Court rejected the ECB’s allegations of invalidity based on lack of novelty, lack of inventive step and insufficiency, but held that the patent was invalid for added subject matter. The English Court’s decision does not affect the validity of the Patent in other European countries. As a result of these decisions, the Company was notified of the final assessment of the reimbursable ECB costs for both court cases was ₤356,490, of which ~~the Company has~~all was paid ~~₤332,000 through December 31, 2009 and owes approximately ₤25,000 (approximately $40,000~~ as of December 31, ~~2009), which amount was included in accrued expenses as of December 31, 2009.~~2010.

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. ~~As a result of this ruling,~~On July 6, 2010, the Company ~~expects to be awarded reimbursements for its costs associated with~~was notified that the German ~~validity case, which is Euro 44,692 ($65,000 at December 31, 2009), which~~Court has ruled that the Patent, that was awarded to the Company ~~will record when~~by the ~~amount, if any, is received. The ECB~~European Patent Office and upheld as valid in a previous hearing in the German Court of First Instance, has ~~filed an appeal against that decision, which is not expected~~now been deemed invalid in Germany due to ~~be decided before July 2010.~~added matter. On January 9, 2008 the French Court held that the Patent was invalid in France for the same reasons given by the English Court. The Company ~~is required to pay de minimus attorneys’ fees of the ECB as a result of the French decision. The Company~~ filed an appeal against the French decision on May 7, 2008. ~~The French appeal was heard on December 7, 2009.~~ On March 20, 2010, the Company was informed that the decision was upheld in the French appeal. On March 12, 2008 the Dutch Court ~~having considered the English, German and French decisions,~~ ruled that the Patent is valid in the Netherlands. The ECB filed an appeal against the Dutch decision on March 27, 2008. The Dutch appeal ~~will be~~was heard in June 2010, and the ~~Hague~~Company was notified on ~~June 2010.~~December 21, 2010 that the patent was deemed invalid upon appeal. On November 3, 2009, the Belgium Court held that the Patent was invalid in Belgium for the same reasons given by the English and French courts as were similarly informed by the Austrian court on November 17, 2009. ~~Costs reimbursements,~~Cost reimbursement, if any, associated with the Belgium, Austrian, and ~~Austrian~~French validity ~~case~~cases as well as the appeals in Germany and France are covered under the Trebuchet ~~Agreement as~~agreement described below. ~~A trial was also held in Madrid, Spain on June 3 and 5, 2008 and oral and written closing submissions were made on July 19, 2008.~~ On March 24, 2010 the Spanish Court ruled that the Patent was valid. In Italy the validity case is to be heard again by a newly appointed judge expected during ~~2010~~2011 and a hearing in Luxembourg ~~is expected in 2010.~~thereafter.

~~F-25~~

The Patent has thus been confirmed to be valid and enforceable in ~~three jurisdictions (Germany, the Netherlands and Spain)~~one jurisdiction (Spain) that ~~use~~uses the Euro as its national currency allowing the Company or Trebuchet, ~~Capital Partners,~~ on the Company’s behalf, to proceed with infringement cases in ~~these countries~~this country if we choose to do so. On February 18, 2010, Trebuchet, on behalf of ~~Document Security Systems,~~the Company, filed an infringement suit in the Netherlands. The suit iswas being lodged 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. ~~The ECB's~~ and was cancelled upon determination on Dcember 21, 2010, that the ~~security printers have been notified and~~patent was invalid in the ~~court hearing date is tentatively scheduled for January 21, 2011.~~Netherlands.

F-26

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.

NOTE 14. - SUPPLEMENTAL CASH FLOW INFORMATION

	2010		2009

Cash paid for interest	$	302,000	$	157,000

Non-cash investing and financing activities:
Conversion of debt to equity		800,000		2,000,000
Equity issued for severance agreements		74,000		55,000
Non-monetary dividend		229,000		-
Equity issued for acqusition		2,567,000		-
Equity issued for prepaid services		115,000		56,000
Accrued placement agent fees		240,000		-
Issuance of derivative liability instruments		3,867,000		-
Interest rate swap loss		26,000		-
Equipment purchased via capital lease		-		63,000
Warrants issued with debt		-		72,000
Beneficial conversion features of convertible debt		-		351,000
Equity method investment received in exchange for the assets and liabilities of Legalstore.com		-		350,000

Cash paid for interest $ 157,000 $ 69,000

Non-cash investing and financing activities:
Conversion of debt to equity 2,000,000 -
Equity issued for severance agreements 55,000 129,000
Equity issued for prepaid services 56,000 -
Equity issued for to satisfy an obligation - 94,000
Equipment purchased via capital lease 63,000 -
Deferred tax liability offsetting additional paid in capital - (156,000 )
Warrants issued with debt 72,000 256,000
Beneficial conversion features of convertible debt 351,000 -
Equity method investment received in exchange for the assets and liabilities of Legalstore.com 350,000 -

NOTE 15. - SEGMENT INFORMATION

The Company's businesses are organized, managed and internally reported as four operating segments. ~~Each~~Three of these operating segments, Document Security Systems, ~~Plastic Printing Professionals,~~P3 and DPI, ~~Secuprint,~~ are engaged in various aspects of developing and applying printing technologies and procedures to produce, or allow others to produce, documents with a wide range of features, including the Company’s patented technologies and trade ~~secrets.~~secrets, along with traditional commercial printing on paper and plastic. For the purposes of providing segment information, these three operating segments have been aggregated into one reportable segment in accordance with FASB ASC 280. The fourth operating segment is engaged in the production of packaging products and is classified as a separate segment. A summary of the ~~two~~three segments ~~is as~~ follows:

Security and Commercial Printing		License, manufacture and sale of patented document security technologies, including digital security print solutions, and general commercial printing, primarily on paper and ~~plastic. Comprises~~plastic,comprises the operations of Document Security Systems, ~~Plastic Printing Professionals,~~P3 and ~~DPI Secuprint, which the~~DPI.

Packaging		The Company acquired ~~on December 18, 2008.~~ Premier Packaging in February 12, 2010 which produces packaging products such as boxes, mailers, and point of sale displays for various end-users.

Legal Supplies		Sale of specialty legal supplies, primarily to lawyers and law firms located throughout the United States as ~~Legalstore.com.~~Legalstore. During the fourth quarter of 2009, the Company sold its legal products ~~business.~~business to Internet Media Services in exchange for Internet Media Services common stock.

~~F-26~~F-27

Approximate information concerning the Company’s operations by reportable segment as of and for the ~~year~~years ended December 31, ~~2009~~2010 and ~~2008~~2009 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:

2010	Legal Supplies		Security and Commercial Printing			Packaging Division		Corporate			Total

Revenues from external customers	$	-	$	7,629,000		$	5,753,000	$	-		$	13,382,000
Interest Expense and amortization of note discount		-		34,000			78,000		598,000			710,000
Stock based payments		-		-			-		115,000			115,000
Impairment of patent acquisition costs and other intangible assets		-		377,000			-		-			377,000
Depreciation and amortization		-		955,000			299,000		7,000			1,261,000
Net (loss) profit		-		(2,633,000	)		54,000		(2,025,000	)		(4,604,000	)
Capital Expenditures		-		59,000			98,000		-			157,000
Identifiable assets		-		4,357,000			5,324,000		4,126,000			13,807,000
Revenues from transactions with other operating segments of the Company.		-		326,000			110,000		-			436,000
Other income, net		-		-			-		143,000			143,000
Loss on equity investment		-		-			-		(121,000	)		(121,000	)
Income tax expense or benefit.		-		-			-		19,000			19,000
Stock based compensation		-		224,000			18,000		181,000			423,000


2009

Revenues from external customers	$	355,000	$	9,556,000		$	-	$	-		$	9,911,000
Interest Expense and amortization of note discount		-		363,000			-		146,000			509,000
Stock based payments		-		-			-		292,000			292,000
Depreciation and amortization		16,000		1,644,000			-		2,000			1,662,000
Net (loss) profit		40,000		(2,353,000	)		-		(1,400,000	)		(3,713,000	)
Capital Expenditures		-		302,000			-		-			302,000
Identifiable assets		-		6,276,000			-		439,000			6,715,000
Other income, net		-		-			-		232,000			232,000
Income tax expense or benefit.		-		-			-		19,000			19,000
Stock based compensation		-		73,000			-		(5,000	)		68,000

Security and
Legal Commercial
2009 Supplies Printing Corporate Total

Revenues from external customers $ 355,000 $ 9,556,000 $ - $ 9,911,000
Interest Expense and amortization of note discount - 363,000 146,000 509,000
Stock based payments - - 292,000 292,000
Depreciation and amortization 16,000 1,644,000 2,000 1,662,000
Operating (loss) profit 40,000 (2,353,000 ) (1,400,000 ) (3,713,000 )
Capital Expenditures - 302,000 - 302,000
Identifiable assets - 6,276,000 439,000 6,715,000

2008

Revenues from external customers $ 610,000 $ 6,033,000 $ - $ 6,643,000
Interest Expense and amortization of note discount - - 145,000 145,000
Stock based payments - 1,148,000 599,000 1,747,000
Depreciation and amortization 15,000 2,269,000 4,000 2,288,000
Impairment of patent defense costs and other
intangible assets - 797,000 - 797,000
Loss on sale of patent - (1,170,000 ) - (1,170,000 )
Operating (loss) profit (6,000 ) (4,709,000 ) (2,304,000 ) (7,019,000 )
Capital Expenditures 12,000 1,669,000 3,000 1,684,000
Identifiable assets 252,000 7,705,000 100,000 8,057,000

International revenue, which consists of sales to customers with operations in Western Europe, Latin America, Africa, Mddle East and Asia comprised 3%2% of total revenue for ~~2009, (4%~~2010, (3%- ~~2008)~~2009). Revenue is allocated to individual countries by customer based on where the product is shipped to, location of services performed or the location of equipment that is under an annual maintenance agreement. The Company had no long-lived assets in any country other than the United States for any period presented.

Major Customers –

During ~~2009,~~2010, two customers ~~in the security and commercial printing segment~~ accounted for 19% and 12% of the Company’s total revenue, respectively. As of December 31, 2009, two customer account receivable balances accounted for 21% and 17% of the Company’s trade accounts receivable balance, respectively. During 2008, two customers in the security and commercial printing segment accounted for 11%25% and 10% of the Company’s total revenue from continuing operations, respectively. As of December 31, ~~2008, one customer account receivable balance that was acquired as part of the Company’s acquisition of the assets of a commercial printer in December 2008,~~2010, these customers accounted for ~~42%~~37% and 7% of the Company’s trade accounts receivable ~~balance.~~

~~NOTE 16. – SUBSEQUENT EVENTS~~

~~Business Combination~~

~~On February 12, 2010, the Company acquired all~~balance, respectively. During 2009, two customers accounted for 19% and 12% of the ~~outstanding common stock~~Company’s total revenue from continuing operations, respectively. As of ~~Premier Packaging Corporation from Robert B.~~December 31, 2009, two customers’ account receivable balance accounted for 21% and ~~Joan T. Bzdick for $2,000,000 in cash and 735,437 shares~~17% of the ~~Company's common stock.~~Company’s trade accounts receivable balance, respectively. The ~~cash~~risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, the short duration of our payment ~~was subject to a working capital adjustment which was not required as~~terms for the ~~working capital was within the target range. In addition, the purchase price is subject to increase if the capital gains tax rate that was in effect as~~significant majority of ~~February 12, 2010 is retroactively increased by legislation or otherwise whereas the seller’s tax on its gain increases. Any increase in taxes will be payable~~our customer contracts and by the Company in either cash or stock. The Company believe this contingent payment is remote. In addition, the seller has registration rights for its shares to which the Company is subject to registration penaltiesdiversification of ~~up to $5,000 per month after 120 days.~~

~~F-27~~

In connection with the transaction, the Company incurred secured bank debt in the principal amount of $1,500,000 which was used to partially satisfy the purchase price of the Premier common stock. In conjunction with the transaction, the Company entered into a Credit Facility Agreement with RBS Citizens, N.A. (“Citizens Bank”) pursuant to which Citizens Bank provided Premier Packaging Corporation with a term loan of $1,500,000, and a revolving line of up to $1,000,000. The Credit Facility Agreement contains customary representations and warranties, affirmative and negative covenants, including financial covenants (minimum coverage ratio, debt to EBITDA ratio, and current ratio requirements) and events of default and is secured by all of the assets of Premier Packaging Corporation. The credit facilities are also secured by cross guarantees by Document Security Systems, Inc., and its other wholly owned subsidiaries, Plastic Printing Professionals, Inc. and Secuprint, Inc. The $1,500,000 term loan matures March 1, 2013 and is payable in 35 monthly payments of $25,000 plus interest commencing March 1, 2010 and a payment of $625,000 on the 36 month. Interest accrues at 1 Month LIBOR plus 3.75%. The proceeds of the term loan were used as partial payment of the purchase of all of the outstanding common stock of Premier Packaging Corporation. The revolving line of credit up to $1,000,000 is accessible by the Premier Packaging division subject to certain terms matures on February 12, 2011 and is payable in monthly installments of interest only beginning on March 1, 2010. Interest accrues at 1 Month LIBOR plus 3.75%. The Company subsequently entered into a credit swap agreement to lock into a 5.66% effective interest over the life of the term loan.our customer base.

The Company has engaged a valuation expert to assist management in determining the fair value of the assets acquired. The preliminary estimate of the fair value of assets and liabilities acquired as a result of this business combination were as follows:

Fair value of the consideration transferred $ 4,566,675

Cash 5,290
Accounts receivable 1,284,227
Inventory and work in process 504,162
Machinery and equipment 1,557,500
Goodwill and other intangible assets 1,999,360
Total Assets 5,350,539

Liabilities assumed
Accounts payable 448,128
Short-term cash overdraft 277,645
Accrued Liabilities 58,091
Total Liabilities 783,864

Total preliminary purchase price $ 4,566,675

Set forth below is the unaudited pro forma condensed balance sheet and profit and loss statements of the Company as if Premier Packaging had been acquired by the Company as of January 1, 2009, adjusted for intercompany sales, intercompany tax benefits, and contractual cost reductions as a result of the purchase agreement and employment contract.

F-28

~~Pro- Forma Profit & Loss Statement For~~NOTE 16. – SUBSEQUENT EVENTS

As discussed in Note 7, on February 18, 2011, and subsequently on March 14, 2011, the ~~Twelve Months Ended~~Company entered into certain amendments with Fletcher for the purpose of modifying the terms of an agreement previously entered into between the Company and Fletcher on December 31, ~~2009~~

Document
Security Systems

Premier
Packaging
Corp.

Pro-Forma
Adjustments
Consolidated
(Unaudited) (Unaudited) (Unaudited)
Total Revenue 9,911,691 6,938,000 (194,000 )a 16,655,691

Total costs of revenue 6,256,399 4,973,000 (194,000 )a 11,035,399

Gross profit 3,655,292 1,965,000 - 5,620,292

Operating expenses 7,367,551 1,434,000 (170,000 )b 8,631,551

Operating (loss) profit (3,712,259 ) 531,000 170,000 (3,011,259 )

Other income (expense):
Interest income 18,140 - 18,140
Interest expense (509,020 ) (1,000 ) (75,000 )c (585,020 )
Other Income 232,078 (1,000 ) 231,078

Other income (expense) (258,802 ) (2,000 ) (75,000 ) (335,802 )

Income (loss) before income taxes (3,971,061 ) 529,000 95,000 (3,347,061 )
Income Tax Expense 18,952 1,000 - 19,952

Net (loss) income $ (3,990,013 ) $ 528,000 $ 95,000 $ (3,367,013 )

Net loss per share - basic and diluted: (0.27 ) (0.22 )

Weighted average common shares outstanding, basic and diluted 14,700,453 735,437 15,435,890

~~a- Elimination of intercompany sales and offsetting cost of sales~~

~~b- Contractual reductions of rent and officer compensation expense~~

~~c- Interest expense on Term Note used to finance~~2010. As a ~~portion~~result of the ~~purchase price~~amendments, the down-round and anti-dilution provisions were eliminated, therefore, the Company determined that the derivative liabilities that existed under the terms of the original agreement no longer exist. As a result, the Company will revalue these derivative liability instruments as of the modification date with the change in fair value reported in the statement of operations. The Company will then reclass the derivative liability to equity. Furthermore, the March 14, 2011 amendments were executed by the Company and Fletcher in response to an NYSE Amex inquiry, and were required to solidify NYSE Amex approval of the Company’s additional listing applications, which approval was received from NYSE Amex on March 15, 2011.

F-29

~~Pro- Forma Condensed Consolidated Balance Sheets~~

New York		16-1229730
(State or other jurisdiction of ~~incorporation)~~incorporation or organization)		(~~IRS Employer~~I.R.S.Employer Identification Number)

Title of each class	Name of each exchange on which registered
Common Stock, ~~(Par Value - $0.02)~~par value $0.02 per share	NYSE Amex Equities

PART I

ITEM 1.	BUSINESS		31
ITEM 1A.	RISK FACTORS		117
ITEM 2.	PROPERTIES		1714
ITEM 3.	LEGAL PROCEEDINGS		1814
~~ITEM 4.~~	~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~		19

PART II

ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		20
			16
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21
			17
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		33
			28
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		33
			29
ITEM ~~9A(T).~~9A.	CONTROLS AND PROCEDURES		3329

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		3530
ITEM 11.	EXECUTIVE COMPENSATION		3530
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		3530
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		3530
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	30
	35
PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		3530
	SIGNATURES		4033

	Year Ended December 31, 2010				Year Ended December 31, 2009				% change vs. 2009

Cash flows from:

Operating activities	$	(1,759,000	)		$	(1,595,000	)			(10	)%
Investing activities		(2,427,000	)			(108,000	)			(2,147	)%
Financing activities		7,824,000				2,064,000				279	%
Working capital		3,003,000				(818,000	)			467	%
Current ratio		1.72		x		0.70		x		147	%

Cash and cash equivalents	$	4,087,000			$	449,000				810	%
Funds Available from Open Credit Facilities	$	802,000			$	417,000				92	%
Debt (excluding unamortized debt discount) and Capitalized Leases	$	3,263,000			$	2,218,000				47	%

	As Of And For The Period Ended:
	December 31, 2009			December 31, 2008			% change vs. 2008

Cash flows from:

Operating activities	$	(1,595,000	)	$	(2,391,000	)		33	%
Investing activities		(108,000	)		(2,266,000	)		95	%
Financing activities		2,064,000			4,002,000			48	%

Working capital		(818,000	)		(1,481,000	)		-45	%
Current ratio		0.70	x		0.58	x		21	%

Cash and cash equivalents	$	449,000		$	88,000			410	%

Funds Available from Open Credit Facilities	$	417,000		$	1,317,000			-68	%

Debt (excluding unamortized debt discount)	$	1,958,000		$	3,183,000			-38	%

	Common Stock						Additional Paid-			Subscriptions			Accumulated
	Shares			Amount			in Capital			Receivable			Deficit			Total

Balance, December 31, 2007		13,654,364		$	273,087		$	31,298,571		$	-		$	(24,214,627	)	$	7,357,031

Shares issued upon the exercise of warrants and options		50,000			1,000			99,000			-			-			100,000
Stock based payments		65,400			1,308			1,497,407			-			-			1,498,715
Warrants issued with debt		-			-			255,717			-			-			255,717
Issuance of common stock, net		600,000			12,000			2,388,000			(1,300,000	)		-			1,100,000
Net Loss		-			-			-			-			(8,285,142	)		(8,285,142	)

Balance, December 31, 2008		14,369,764		$	287,395		$	35,538,695		$	(1,300,000	)	$	(32,499,769	)	$	2,026,321

Issuance of common stock, net		1,010,000			20,200			1,354,702			-			-			1,374,902
Conversion of debt to equity		1,250,000			25,000			1,975,000			-						2,000,000
Discount on debt and beneficial conversion features								422,997			-						422,997
Stock based payments		93,123			1,862			401,139			-			-			403,001
Cancellation of subscribed shares		(325,000	)		(6,500	)		(1,293,500	)		1,300,000						-
Net Loss											-			(3,990,013	)		(3,990,013	)

Balance, December 31, 2009		16,397,887		$	327,957		$	38,399,033		$	-		$	(36,489,782	)	$	2,237,208

		2009						2008
	Useful Life	Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount
Royalty rights	5 years	$	90,000	$	90,000	$	-	$	90,000	$	90,000	$	-
Acquired intangibles	5 years		666,300		532,285		134,015		666,300		405,424		260,876
Patent acquisition and defense costs	Varied (1)		4,729,889		3,879,341		850,548		4,729,889		2,732,422		1,997,467
Patent application costs	Varied (2)		776,159		171,753		604,406		718,875		103,429		615,446

		$	6,262,348	$	4,673,379	$	1,588,969	$	6,205,064	$	3,331,275	$	2,873,789

		2010						2009
	Useful Life	Gross Carrying A mount		Accumulated Amortizaton		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount
Acquired intangibles	5 -10 years		2,038,300		815,177		1,223,123		666,300		532,285		134,015
Patent acquisition and defense costs	Varied		4,729,889		4,729,889		-		4,729,889		3,879,341		850,548
Patent application costs	Varied (1)		843,693		218,957		624,736		776,159		171,753		604,406
		$	7,611,882	$	5,764,023	$	1,847,859	$	6,172,348	$	4,583,379	$	1,588,969

(1)- patent rights are amortized over their expected useful life which is generally the legal life of the patent. As of December 31, 2010 the weighted average remaining useful life of these assets in service was 14.8 years.

2009 Actual		$	1,342,000
2010 Actual		$	803,000

Expected	2011	$	242,253
	2012		232,365
	2013		232,365
	2014		232,365
	2015		147,198
	Thereafter		761,313
		$	1,847,859

2008 Actual		$	1,972,000
2009 Actual		$	1,342,000

Expected	2010	$	641,185
	2011		426,781
	2012		39,845
	2013		39,845
	2014		39,845
	Thereafter		401,468
		$	1,588,969

	2010

Initial Warrant	$	3,482,486
Later Investment Rights		384,350
	$	3,866,836

	Derivative Liabilities

Balance, January 1, 2010	$	-
Fair Value upon issuance:
Expensed at issuance		-
Allocated to net proceeds		3,866,836
Balance, December 31, 2010	$	3,866,836

	2009				2008
			Weighted					Weighted
			Average					Average
			Exercise					Exercise
	Warrants		Price		Warrants			Price

Outstanding January 1		761,032	$	8.73		591,093		$	10.82

Granted during the year		556,988	$	2.63		250,000		$	2.00
Exercised		-	$	-		(50,000	)	$	(2.00	)
Lapsed		-	$	-		(30,061	)	$	(5.00	)

Outstanding at December 31		1,318,020	$	6.15		761,032		$	8.73

Exercisable at December 31		1,118,020	$	6.63		761,032		$	8.73

Weighted average months remaining				43.0					44.7

	2004 Employee Plan								Non-Executive Director Plan
	Number of Options			Weighted Average Exercise Price			Weighted Average Life Remaining		Number of Options			Weighted Average Exercise Price			Weighted Average Life Remaining
							(in years)								(in years)
Outstanding at December 31, 2007		617,500			9.70					78,750		$	8.78
Granted		83,000			5.01					37,000			6.31
Exercised		-			-					-			-
Forfeited		(37,000	)		(8.87	)				-			-
Outstanding at December 31, 2008:		663,500			7.27					115,750			7.99
Granted		274,000			4.00					40,000			1.86
Exercised		-			-
Forfeited		(298,500	)		(6.37	)				(23,750	)		(4.59	)
Outstanding at December 31, 2009:		639,000			6.29			2.8		132,000			6.74			2.5
Exercisable at December 31, 2009:		336,833			8.16			1.4		92,000			8.86			1.9

Aggregate Intrinsic Value of outstanding options at December 31, 2009	$	-							$	23,600
Aggregate Intrinsic Value of exercisable options at December 31, 2009	$	-							$	-

	Shares			Weighted- average Grant Date Fair Value

Restricted shares outstanding, December 31, 2007		513,323		$	12.35
Restricted shares granted		110,592			2.31
Restricted shares vested		(46,134	)		(10.49	)
Restricted shares forfeited		(250,000	)		(12.50	)
Restricted shares outstanding, December 31, 2008		327,781		$	9.05
Restricted shares granted		-			-
Restricted shares vested		(30,281	)		(6.77	)
Restricted shares forfeited		(212,500	)		(10.05	)
Restricted shares outstanding, December 31, 2009		85,000		$	7.61

			Estimated
	Amount		Useful Life
Accounts receivable	$	876,287
Inventory and work in process		67,250
Machinery and equipment		139,000	5 years
Total assets acquired		1,082,537
Liabilities assumed		—
Total preliminary purchase price	$	1,082,537

Unrecognized tax benefits balance at January 1, 2008	$	—
Gross increase for tax positions of prior years		446,000

Unrecognized tax benefits balance at January 1, 2009	$	446,000

Unrecognized tax benefits balance at December 31, 2009	$	446,000

Cash paid for interest	$	157,000	$	69,000

Non-cash investing and financing activities:
Conversion of debt to equity		2,000,000		-
Equity issued for severance agreements		55,000		129,000
Equity issued for prepaid services		56,000		-
Equity issued for to satisfy an obligation		-		94,000
Equipment purchased via capital lease		63,000		-
Deferred tax liability offsetting additional paid in capital		-		(156,000	)
Warrants issued with debt		72,000		256,000
Beneficial conversion features of convertible debt		351,000		-
Equity method investment received in exchange for the assets and liabilities of Legalstore.com		350,000		-

				Security and
	Legal			Commercial
2009	Supplies			Printing			Corporate			Total

Revenues from external customers	$	355,000		$	9,556,000		$	-		$	9,911,000
Interest Expense and amortization of note discount		-			363,000			146,000			509,000
Stock based payments		-			-			292,000			292,000
Depreciation and amortization		16,000			1,644,000			2,000			1,662,000
Operating (loss) profit		40,000			(2,353,000	)		(1,400,000	)		(3,713,000	)
Capital Expenditures		-			302,000			-			302,000
Identifiable assets		-			6,276,000			439,000			6,715,000

2008

Revenues from external customers	$	610,000		$	6,033,000		$	-		$	6,643,000
Interest Expense and amortization of note discount		-			-			145,000			145,000
Stock based payments		-			1,148,000			599,000			1,747,000
Depreciation and amortization		15,000			2,269,000			4,000			2,288,000
Impairment of patent defense costs and other
intangible assets		-			797,000			-			797,000
Loss on sale of patent		-			(1,170,000	)		-			(1,170,000	)
Operating (loss) profit		(6,000	)		(4,709,000	)		(2,304,000	)		(7,019,000	)
Capital Expenditures		12,000			1,669,000			3,000			1,684,000
Identifiable assets		252,000			7,705,000			100,000			8,057,000

	Document Security Systems			Premier Packaging Corp.			Pro-Forma Adjustments			Consolidated
				(Unaudited)			(Unaudited)			(Unaudited)
Total Revenue		9,911,691			6,938,000			(194,000	)a		16,655,691

Total costs of revenue		6,256,399			4,973,000			(194,000	)a		11,035,399

Gross profit		3,655,292			1,965,000			-			5,620,292

Operating expenses		7,367,551			1,434,000			(170,000	)b		8,631,551

Operating (loss) profit		(3,712,259	)		531,000			170,000			(3,011,259	)

Other income (expense):
Interest income		18,140			-						18,140
Interest expense		(509,020	)		(1,000	)		(75,000	)c		(585,020	)
Other Income		232,078			(1,000	)					231,078

Other income (expense)		(258,802	)		(2,000	)		(75,000	)		(335,802	)

Income (loss) before income taxes		(3,971,061	)		529,000			95,000			(3,347,061	)
Income Tax Expense		18,952			1,000			-			19,952

Net (loss) income	$	(3,990,013	)	$	528,000		$	95,000		$	(3,367,013	)

Net loss per share - basic and diluted:		(0.27	)								(0.22	)

Weighted average common shares outstanding, basic and diluted		14,700,453			735,437						15,435,890

	Document Security Systems		Premier Packaging Corp		Pro-forma adjustments				Consolidated
ASSETS			(Unaudited)		(Unaudited)				(Unaudited)

Current assets:
Cash and cash equivalents	$	448,895	$	37,069	$	(500,000	)	b	$	485,964
						500,000		c
Accounts receivable net of allowance		1,143,939		898,513		(66,506	)	a		1,975,946
Inventory		184,174		637,061		-				821,235
Prepaid expenses and other current assets		91,310		-		-				91,310
Total current assets		1,868,318		1,572,643		(66,506	)			3,374,455

Fixed assets, net		1,286,226		-		1,557,500		b		2,843,726
Other assets		305,507		-		-				305,507
Investment		350,000		-		-				350,000
Goodwill		1,315,721		-		959,500		b		2,275,221
Other intangible assets, net		1,588,969		-		1,000,000		b		2,588,969

Total assets	$	6,714,741	$	1,572,643	$	3,450,494			$	11,737,878

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	1,673,901	$	472,994	$	(66,506	)	a	$	2,080,389
Accrued expenses & other current liabilities		934,595		22,481		-				957,076
Short-term debt		-		-		300,000		b		300,000
Current portion of capital lease obligations		78,167		-		-				78,167

Total current liabilities		2,686,663		495,475		233,494				3,415,632

Revolving notes from related parties		583,000		-		-				583,000
Long term debt, net of unamortized discount of $420,000		954,616		-		1,200,000		b		2,154,616
Capital lease obligations		182,424		-		-				182,424
Deferred tax liability		70,830		-		-				70,830

Stockholders' equity		2,237,208		1,077,168		1,517,000		b		5,331,376
						500,000		c
Total liabilities and stockholders' equity	$	6,714,741	$	1,572,643	$	3,450,494			$	11,737,878

	~~a- Pro-forma adjustments for accounts receivable and accounts payable in each company for pre-acquisition billings owed/collectible~~ ~~to each party that will be eliminated in consolidation post acquistion.~~
	~~b- Adjustment to reflect consideration paid and assets acquired~~
	~~c- Pro-forma adjustment to remove Premier Packaging shareholder distributions~~

	DOCUMENT SECURITY SYSTEMS, INC.

March ~~24, 2010~~31, 2011	By:	/s/ Patrick White
		Patrick White Chief Executive Officer (Principal Executive Officer)

March ~~24, 2010~~31, 2011	By:	/s/ Robert Fagenson
		Robert Fagenson Director

March ~~24, 2010~~31, 2011	By:	/s/ Patrick White
		Patrick White Chief Executive Officer and Director (Principal Executive Officer)

March ~~24, 2010~~31, 2011	By:	/s/ David Wicker
		David Wicker Vice President and Director

March ~~24, 2010~~31, 2011	By:	/s/ Timothy Ashman
		Timothy Ashman Director

March ~~24, 2010~~31, 2011	By:	/s/ Alan E. Harrison
		Alan E. Harrison Director

March ~~24, 2010~~31, 2011	By:	/s/ Ira A. Greenstein
		Ira A. Greenstein Director

March ~~24, 2010~~31, 2011	By:	/s/ Philip Jones
		Philip Jones Chief Financial Officer (Principal Financial Officer)

3.1	Certificate of Incorporation of Document Security Systems, Inc., as amended*
3.2	Amended and Restated By-laws of Document Security Systems, Inc. dated March 18, 2010.*
10.1	Form of Registration Rights Agreement dated as of May 29, 2009 between Document Security Systems, Inc. and the holders listed therein (incorporated by reference to exhibit 10.2 to Form 8-K dated May 29, 2009).
10.2	Form of Warrant to Purchase Common Stock of Document Security Systems, Inc. dated May 29, 2009
10.3	(incorporated by reference to exhibit 4.1 to Form 8-K dated May 29, 2009). Form of Subscription Agreement dated as of May 29, 2009 between Document Security Systems, Inc. and the Subscribers (incorporated by reference to exhibit 10.1 to Form 8-K dated May 29, 2009).
10.4	Asset Purchase Agreement between Lester Levin Inc. and Internet Media Services, Inc. dated October 8, 2009 (incorporated by reference to exhibit 2.1 to Form 8-K dated October 8, 2009).
10.5	Stock Pledge and Escrow Agreement between Lester Levin Inc., Document Security Systems, Inc., Internet Media Services, Inc., Michael Buechler and Manufacturers and Traders Trust Company dated October 8, 2009 (incorporated by reference to exhibit 10.3 to Form 8-K dated October 8, 2009).
10.6	Stock Pledge and Escrow Agreement between Lester Levin Inc., Document Security Systems, Inc., Internet Media Services, Inc., Raymond Meyers and Manufacturers and Traders Trust Company dated October 8, 2009 (incorporated by reference to exhibit 10.2 to Form 8-K dated October 8, 2009).
10.7	Voting Agreement between Document Security Systems, Inc., Internet Media Services, Inc., Raymond Meyers and Michael Buechler dated October 8, 2009(incorporated by reference to exhibit 10.4 to Form 8-K dated October 8, 2009).
10.8	$350,000 Convertible Promissory Note dated November 24, 2009 (incorporated by reference to exhibit 10.1 to Form 8-K dated December 15, 2009).
10.9	$575,000 Promissory Note dated November 24, 2009 (incorporated by reference to exhibit 10.2 to Form 8-K dated December 15, 2009).
10.10	Form of Letter Agreement dated December 11, 2009 (incorporated by reference to exhibit 10.3 to Form 8-K dated December 15, 2009).
10.11	Form of $450,000 Convertible Promissory Note (incorporated by reference to exhibit 10.1 to Form 8-K dated December 30, 2009).
10.12	Form of Warrant to Purchase Common Stock of Document Security Systems, Inc. dated January 28, 2010 (incorporated by reference to exhibit 4.1 to Form 8-K dated February 17, 2010).
10.13	Stock Purchase Agreement dated as of February 12, 2010 by and among Robert B. Bzdick and Joan T. Bzdick and Document Security Systems, Inc. (incorporated by reference to exhibit 10.2 to Form 8-K dated February 17, 2010).
10.14	Employment Agreement dated February 12, 2010 between Document Security Systems, Inc. and Robert Bzdick (incorporated by reference to exhibit 10.3 to Form 8-K dated February 17, 2010).
10.15	$1,500,000 Acquisition Term Loan Note dated February 12, 2010 made by Premier Packaging Corporation in favor of RBS Citizens, N.A. (incorporated by reference to exhibit 10.4 to Form 8-K dated February 17, 2010).
10.16	Revolving Line Note dated February 12, 2010 made by Premier Packaging Corporation in favor of RBS Citizens, N.A. (incorporated by reference to exhibit 10.5 to Form 8-K dated February 17, 2010).
10.17	Credit Facility Agreement dated February 12, 2010 by and between Premier Packaging Corporation and RBS Citizens, N.A. (incorporated by reference to exhibit 10.6 to Form 8-K dated February 17, 2010).
10.18	Security Agreement dated February 12, 2010 by and between RBS Citizens, N.A. and Document Security Systems, Inc, Plastic Printing Professionals, Inc. and Secuprint, Inc. (incorporated by reference to exhibit 10.7 to Form 8-K dated February 17, 2010).
10.19	Guaranty and Indemnity Agreement dated February 12, 2010 by and between RBS Citizens, N.A. and Document Security Systems, Inc., Plastic Printing Professionals, Inc. and Secuprint, Inc. (incorporated by reference to exhibit 10.8 to Form 8-K dated February 17, 2010).
10.20	Form of Subscription Agreement dated as of January 28, 2010 between Document Security Systems, Inc. and Subscribers (incorporated by reference to exhibit 10.9 to Form 8-K dated February 17, 2010).
10.21	Form of Subscription Agreement (incorporated by reference to exhibit 10.1 to Form 8-K/A dated July 21, 2010).
10.22	Form of Common Stock Purchase Warrant (incorporated by reference to exhibit 10.2 to form 8-K dated July 21, 2010).
10.23	Agreement between Document Security Systems, Inc. and Fletcher International, Ltd. dated December 31, 2010 (incorporated by reference to exhibit 99.1 to Form 8-K dated December 31, 2010).
10.24	Warrant Certificate No. 1 dated December 31, 2010 (incorporated by reference to exhibit 99.2 to Form 8-K dated December 31, 2010).