NOTE 5. - INTANGIBLE ASSETS

Goodwill - The Company performs an annual fair value test of its recorded goodwill for its reporting units using a discounted cash flow and capitalization of earnings approach. As of December 31, 2011, the Company had goodwill of approximately $3,323,000 ($3,084,000 December 31, 2010) attributable to the Company’s printing division ($631,000) , packaging division ($1,768,000), plastics division ($685,000) and digital division ($239,000), respectively.

Other Intangible Assets - Other intangible assets are comprised of the following at December 31:

		2011						2010
	Useful Life	Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortizaton		Net Carrying Amount
Acquired intangibles	5 -10 years		2,405,300		999,761		1,405,539		2,038,300		815,177		1,223,123
Patent acquisition and defense costs	Varied		-		-		-		4,729,889		4,729,889		-
Patent application costs	Varied (1)		843,145		205,472		637,673		843,693		218,957		624,736
		$	3,248,445	$	1,205,233	$	2,043,212	$	7,611,882	$	5,764,023	$	1,847,859

(1)- patent rights are amortized over their expected useful life which is generally the legal life of the patent. As of December 31, 2011 the weighted average remaining useful life of these assets in service was 12 years.

Actual amortization expense for the years ended December 31, 2011 amounted to approximately $285,000 ($803,000 -2010). Expected amortization for each of the next five years is as follows:

2012		291,515
2013		291,515
2014		291,515
2015		206,348
2016		171,815
Thereafter		790,504
	$	2,043,212

Acquired Intangible Assets – Acquired intangibles are recorded by the Company in conjunction with business combinations. In May 2011, the Company acquired intangible assets associated with its acquisition of ExtraDev as described in Note 8. The Company valued these intangible assets were valued at $408,000 and consist of customer lists, amortized over the expected life of 10 years, and a non-compete agreement, amortized over the expected life of 5 years.

Patent Application Costs - On an ongoing basis, the Company submits formal and provisional patent applications with the United States, Canada and countries included in the Patent Cooperation Treaty (PCT). The Company capitalizes these costs and amortizes them over the patents’ estimated useful life.

Patent Acquisition and Defense Costs- Included in the Company’s capitalized patent defense costs are costs associated with the acquisition of certain rights associated with patents that the Company is defending. In December 2004, the Company entered into an agreement with the Wicker Family in which Document Security Systems obtained the legal ownership of technology (including patent ownership rights) previously held by the Wicker Family. At that time, the agreement with the Wicker Family provided that the Company would retain 70% of the future economic benefit derived from settlements, licenses or subsequent business arrangements from any infringer of the Wicker patents that Document Security Systems chooses to pursue. The Wicker Family was to receive the remaining 30% of such economic benefit. In February 2005, the Company further consolidated its ownership of the Wicker Family based patents and its rights to the economic benefit of infringement settlements when the Company purchased economic interests and legal ownership from approximately 45 persons and entities that had purchased various rights in Wicker Family technologies over several decades. The Company issued an aggregate of 541,460 shares of its common stock for the rights of the interest holders and secured 100% ownership of a US Patent and approximately 16% of additional economic rights to settlements with infringers of the Wicker Family’s foreign patents. The value of the shares of common stock was determined based upon the closing price of the shares of the Company’s common stock on the American Stock Exchange on February 15, 2005 of $7.25 per share was, $ 3,905,672 net of expenses. The Company amortized these costs over the weighted average expected life of the patents underlying the acquired rights, which was 6.75 years as of the date of acquisition.

Patent defense costs were comprised of legal cost associated with the Company’s patent infringement suit against the ECB which the Company commenced in 2005. The Company based it decision to defer the costs associated with this case on the principal that successful patent defense costs are capitalizable. During the course of the ECB litigation, the most significant events in the case were challenges of patent validity by the ECB in nine jurisdictions in Europe as a core component of its defense. The Company believed that the ECB’s challenge of patent validity represented the biggest hurdle to a successful outcome of the overall infringement case. During the course of the ECB litigation, the Company spent approximately $4,247,000 on legal and related court cost associated with defending the patent in these jurisdictions. The Company amortized these costs over the expected life of the patent which expired as of January 2010. During the course of the ECB litigation, the Company analyzed the recoverability of its capitalized patent defense costs. The Company used the potential proceeds from its ECB Litigation as the primary source of future cash flows. Specifically, the Company used assumptions of banknote production volumes during the alleged infringement period and estimated banknote production costs from third party sources to determine the estimated total costs of the production of the Euro banknotes in each year of infringement. The Company then applied a royalty rate that the Company generally charges international licensees and that the Company believes is consistent with industry standards to determine the amount that would be due to the Company if the ECB had licensed the technology from the Company on the Company’s standard licensing terms. The Company uses this amount as an estimate of the gross proceeds it could receive from a successful outcome of the litigation in all jurisdictions. The Company then allocated these potential proceeds by the percent of circulation of each jurisdiction in which the Company has ongoing litigation to determine the potential proceeds of a successful outcome in the jurisdictions where the patent has been held as valid or where the patent validity has not yet been determined. Finally, the Company used a probability factor in its analysis that discounts these potential future proceeds that takes into account the different status levels of each jurisdiction. Thus, the Company determined a probability based cash flow which is compared to the net patent defense costs balance to determine whether an impairment of these costs has occurred. As of December 31, 2010, the net unamortized balance of acquired patent assets was $377,000, which was recorded in the corporate segment. As a result of the losses in the appeal of two court decisions in the fourth quarter of 2010 related to the Company’s infringement case against the ECB (as described in Note 12- Legal Proceedings), the Company’s management determined that an impairment of this asset occurred as it is more likely than not that the Company would not receive proceeds from infringement litigation in these non-European jurisdictions, and the remaining balance was considered impaired. As of December 31, 2011, there were no longer any unamortized patent defense costs or patent acquisition costs reflected on the Company’s balance sheet.