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    Unassociated Document

    December
15, 2008

    VIA
EDGAR

    Securities
and Exchange Commission

    100 F
Street, NE

    Washington,
D.C. 20549

                    Attention:

                    Kari
      Jin

                    Kathleen
      Collins

                    Re:

                    Document
      Security Systems, Inc. (the “Company”)

                    Form
      10-K for Fiscal Year Ended December 31, 2007 Filed March 17,
      2008

    Dear
Staff:

    On behalf
of Document Security Systems, Inc., this letter responds to the comments of the
staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”)
to the filing of the above-referenced annual report (the “Filing”), which were
included in the Staff’s letter dated November 14, 2008 (the “Staff
Letter”).

    In this
letter, we have reproduced your comments and have followed each comment with our
response. The numbered paragraphs of this letter set forth below correspond to
the numbered paragraphs of the Staff Letter. References in the responses to
“we,” “our,” “Company” or “us” mean Document Security Systems, Inc.

    Note 5. Intangible Assets,
page F-11

              1.

              With
      regard to the capitalization of patent legal defense costs and the
      subsequent impairment analyses, the Staff acknowledges that management is
      in possession of all of the relevant technical information, facts, and
      data (including that which you claim is subject to client-attorney
      privilege) upon which you assert you have formed a conclusion that patent
      legal defense costs meet the requirement for capitalization and, moreover,
      those capitalized costs are not impaired. Based on this limited
      information you have provided to us to date, we are not in a position to
      make a judgment on the company’s accounting conclusions with respect to
      these matters and, accordingly, we do not agree or disagree with your
      conclusions. Please ensure, however, that your disclosures fully explain
      your accounting for these capitalized defense costs. In this regard, you
      should include a comprehensive discussion of the accounting models you
      applied in determining that such costs qualified for capitalization as
      well as the models you applied in assessing impairment. The disclosure
      should include a discussion of the judgments you made in applying those
      accounting models as pertaining to the infringement case and each validity
      case, including how you assessed probability of success and future
      discounted cash flows. We suggest a discussion that chronologically
      follows the progression of the various actions and that indicates amounts
      capitalized each accounting period. Further, your discussion should
      include, but not be limited to, the following
  matters:

              ·

              Both the positive and negative
      evidence supporting your decision to capitalize such costs (i.e.
      relationship of the patent’s inventor to members of the European
      anti-counterfeiting industry and the due diligence performed by counsel)
      and how the Company weighted the negative evidence against the positive
      evidence to conclude that capitalization of such costs was
      appropriate;

              ·

              The impact an adverse ruling
      in the validity trial has on the Company’s infringement case, the
      potential proceeds to be received, and ultimately on your impairment
      analysis;

              ·

              Alternatively, the impact a
      positive ruling in the validity trial has on the Company’s infringement
      case and on your cash flow analysis;
and

              ·

              The factors considered and
      assumptions used in your impairment analysis (i.e. volume of Euro
      banknotes; royalty rates used and appropriateness of such rates;
      circulation rates of the Euro banknote; and error factors used and
      appropriateness of such rates,
etc.)

    Response:

    We acknowledge your comments and the
Company will incorporate them, subject to confidentiality
requests that the Company has requested or will request of the Staff regarding certain information
concerning the litigation, into a more comprehensive disclosure of the
Company’s capitalized patent defense costs in our Annual Report on Form
10−K for the year ended December 31,
2008.

    Form 8-K Filed August 26,
2008

              2.

              We
      note that on August 20, 2008 the Company entered into an agreement with
      Trebuchet Capital Partners whereby Trebuchet has agreed to pay
      substantially all of the litigation costs associated with the pending
      validity proceedings in the ECB as well as future validity challenges in
      exchange for a 49% interest in the Company’s Patent and to share equally
      in all proceeds generated from litigation relating to the Patent
      (including judgments and licenses). With regards to this Agreement, please
      explain further the following:

              ·

              Tell us how you are accounting
      for the various terms of this Agreement such as, but not limited to, the
      $500,000 payment by Trebuchet of the Company’s debt obligations;
      Trebuchet’s purchase of 100,000 shares of the Company’s common stock; the
      assignment of a 49% interest in the Patent; and Trebuchet’s right to
      receive 50% of any settlement. Tell us the basis for that accounting
      treatment.

              ·

              Tell us whether there were any
      other funds received as part of this Agreement besides the $500,000 for
      the debt payment, and $400,000 from the common stock issuance and if so,
      tell us how you accounted for such
funds.

    Response:

    The Company accounted for the Trebuchet
transactions as follows.

    In the Company’s Quarterly Report on
Form 10-Q filed with the
Securities and Exchange Commission on November 10, 2008, the Company disclosed the
following information in
Footnote 4 related to the
Trebuchet Agreement.

    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 agreement, the Company assigned and
transferred a 49% interest of all of the Company’s right, title and interest in
the Patent to Trebuchet which allows Trebuchet to have a separate and exclusive
interest including a separate and distinct right to exploit 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 approximately
$1,170,000.  The Company considered this a triggering event and
reviewed its remaining capitalized patent costs for impairment as of September
30, 2008.  With the assistance of Trebuchet, the Company determined
that the expected eventual outcome of the legal action and recoverability of
proceeds or added economic value of the patent was still in excess of the
current carrying.

    The $500,000 proceeds were used to pay the Company’s existing
obligation owed to Taiko
III Corp.

    In the Company’s Quarterly Report on
Form 10-Q filed with the
Securities and Exchange Commission on November 10, 2008, the Company disclosed
in Footnote 6 the
following related to the
Trebuchet Agreement.

    Stock Issued in
Private Placement -On
August 20, 2008, the Company entered into an agreement with Trebuchet Capital
Partners, LLC who agreed to pay substantially all of the litigation costs
associated with pending validity proceedings initiated by the 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.   Trebuchet also purchased 100,000 shares of the
Company’s common stock for an aggregate purchase price of
$400,000, the proceeds of which were used by the Company to pay existing
litigation cost.

    The proceeds from the sale of shares were accounted for as an issuance of common
stock in the equity section.  There were no other funds
received as a result of the agreement.  There was no accounting entry recorded
by the Company as a result of the Trebuchet’s right to receive 50% of any
settlement.

              ·

              If a settlement is ultimately
      received from this litigation, tell us whether the total settlement will
      be paid first to Trebuchet and then a portion remitted to the Company, or
      vice versa.

    Response:

    In accordance with Section 4 of
the Company’s Agreement with Trebuchet, the Company and
Trebuchet have agreed
that any funds received as
a result of the covered litigation will be put into a Trust Account of Trebuchet managed by a managing
lawyer selected by Trebuchet to be distributed to each party in
accordance with the Agreement.    It is not known at this
time which party will be the party that will first receive the settlement
payments from the Trust
Account.

              ·

              Tell us whether this Agreement
      creates a derivative instrument and tell us the specific accounting
      guidance you considered in making such
    determination.

    Response:

    The Company does not believe that the
agreement with Trebuchet creates a derivative instrument due to the fact that,
among other things, the Agreement does not have either an underlying nor a
notional amount, as defined by FASB 133 Paragraph 6, (and as amended by FASB
161), associated with the agreement.   Specifically, the Company
does not consider the potential settlement payments that would come from a
successful outcome of its litigation with the ECB or other entities as an
underlying or notional amount that could be the basis of a derivative or hedge
instrument.

              ·

              Tell us the risks associated
      with this Agreement.

    Response:

    In the Company’s Quarterly Report on
Form 10-Q d filed with the Securities and Exchange
Commission on November 10, 2008, the Company disclosed the
following in the Risk Factors section related to the Trebuchet
Agreement.

    If
we lose our current litigation, we may lose certain of our technology rights,
which may affect our business plan.

    We
are subject to litigation and alleged litigation, including without limitation
our litigation with the European Central Bank, in which parties allege, among
other things, that certain of our patents are invalid.  For more
information regarding this litigation, see Part II Item 1- Legal
Proceedings.  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 a third party, Trebuchet
Capital Partners, LLC., who may or may not have the resources or capabilities to
successfully defend our patent rights.

    The Company will regularly review
and update its risk disclosures with respect in relation to the Trebuchet Agreement
and the related patent litigation involving the Company’s
patents.

              ·

              Tell us if this is a related
      party transaction. In this regard, we note that Trebuchet is owned by the
      Ergonomic Group, a private company that has a long-standing strategic
      relationship with, and substantial interest in, the
      Company.

    Response:

    The Company has reviewed its
relationship with both The Ergonomics Group and Trebuchet for determination as
to whether each entity is a related party.  The Company has concluded
that both parties are not related parties under the guidance of FAS 57 as
follows: FAS 57 provides guidance on disclosures
of transactions between related parties. Examples of related party transactions
include transactions between (a) a parent company and its subsidiaries; (b)
subsidiaries of a common parent; (c) an enterprise and trusts for the benefit of
employees, such as pension and profit-sharing trusts that are managed by or
under the trusteeship of the enterprise’s management; (d) an enterprise and its
principal owners, management, or members of their immediate families; and (e)
affiliates.

    In accordance with FAS57, the Company
reviews its relationships with The Ergonomics Group and Trebuchet in the context
of the definitions provided in Appendix B of FAS 57.   As of December 11,
2008, The Ergonomics Group owns 618,300 (or 4.27%) and Trebuchet owns 100,000
(or 0.69%), respectively,
of the common shares of
the Company.   Collectively, The Ergonomics Group and
Trebuchet own less tha 5% of the common shares of the
Company.  Document Security Systems, Inc. does not
have any ownership interest
in either The Ergonomics
Group or Trebuchet.  Accordingly, there are no levels of direct
control or ownership that cross related party
thresholds.   Furthermore, the Company considers if, due to the multiple business relations
that the Company has with The Ergonomic’s Group, and its Executive Vice
President, Robert Girards, who is also the Chief Executive Office of Trebuchet,
these entities can be considered affiliates under common control as defined in
FAS 57.   The Company has an Agreement with The Ergonomics Group
that provides for, among other things, the distribution of the Company’s technology through EGI’s existing sales
channels and to equally divide with each other the gross margin on digital sales
of the Company’s
 technology completed by either
party.  .   To date, there has been no revenue
generated by either party under this Agreement, and as a result, the Company
does not believe that this relationship provides either party a
significant  influence over the management or policies of either
entity.   In addition, the
Company considered its agreement with Trebuchet, and as described below in the
FIN 46 discussion, does not believe that Trebuchet or the Ergonomics Group is a related party to the
Company.

              ·

              Tell us what impact this
      Agreement had on the Company’s impairment analy