UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K




ý
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the Fiscal Year Ended December 31,
2008





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period
from           to





Commission
File Number: 000-25839





DOCUMENT
CAPTURE TECHNOLOGIES, INC.


(Name of
small business issuer in its charter)




Delaware
            
            59-3134518(State
      or other jurisdiction of
            
            (I.R.S.Employerincorporation
      or organization)
            
            Identification
      Number)




1798
Technology Drive


Suite
178


San
Jose, California 95110


(Address
of principal executive offices, Zip code)





408-436-9888
ext. 207


(Issuer’s
telephone number, including area code)





Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per
share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes
o      No
   ý





Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.


Yes o      No
   ý





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





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of
this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.o





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





Large
      accelerated filer    o
            Accelerated
      filer   o
            Non-accelerated
      filer    o
            Smaller
      reporting company   ý





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





The
aggregate market value of the issuer’s voting and non-voting common equity held
by non-affiliates (8,870,256 shares) was approximately $3,902,913, based on the
average closing bid and ask price of $0.44 for such common equity as of June 30,
2008.





As of
March 31, 2009, there were outstanding 18,443,770 shares of the issuer’s Common
Stock, par value $0.001.





DOCUMENTS
INCORPORATED BY REFERENCE





None










FORWARD
LOOKING STATEMENTS





Some of
the statements under “Management’s Discussion and Analysis of Financial
Condition or Plan of Operations,” and “Description of Business” in this Annual
Report on Form 10-K are forward-looking statements.  These statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by forward-looking statements.





In some
cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative
of these terms or other comparable terminology.  You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other “forward-looking” information.  There may be
events in the future that we are not able to accurately predict or
control.  Before you invest in our securities, you should be aware
that the occurrence of any of the events described in this Annual Report could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline and you could lose all or part of your
investment.  Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, growth rates, levels of activity, performance or
achievements.  We are under no duty to update any of the
forward-looking statements after the date of this Annual Report to conform these
statements to actual results.





- 2
-




DOCUMENT CAPTURE TECHNOLOGIES,
INC




FORM 10-K




FOR THE FISCAL YEAR ENDED DECEMBER 31,
2008




INDEX





PART I
            PageItem 1
            Business
            4Item
      1A.
            Risk
Factors
            8Item 2
            Properties
            13Item 3
            Legal
      Proceedings
            13Item 4
            Submission of Matters to a Vote of
      Security Holders
            13PART IIItem 5
            Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
            14Item 7
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            17Item 8
            Financial
      Statements
            25Item 9
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            26Item 9A.
            Controls
      and Procedures
            27PART IIIItem 10
            Directors,
      Executive Officers and Corporate Governance
            29Item 11
            Executive
      Compensation
            33Item 12
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            38Item 13
            Certain
      Relationships and Related Transactions, and Director
      Independence
            39Item 14
            Principal
      Accounting Fees and Services
            39PART IVItem 15
            Exhibits,
      Financial Statement Schedules
            41





- 3
-





PART I





ITEM
      1.
            BUSINESS





Overview




Document
Capture Technologies, Inc. (referred to herein as "we", "us", "our", "DCT" or
"Company"), a Delaware corporation, develops, designs and delivers various
imaging technology solutions to all types and sizes of enterprises including
governmental agencies, large corporations, small corporations, small office-home
office (“SOHO”), professional practices as well as consumers (referred to herein
collectively as “Enterprises”) . We are a market-leader in providing USB-powered
scanning solutions to a wide variety of industries and market applications. Our
patented and proprietary page-imaging devices facilitate the way information is
stored, shared and managed in both business and personal use.




Syscan,
Inc., our wholly-owned subsidiary, was incorporated in California in 1995 to
develop and manufacture a new generation of contact image sensors (“CIS”) that
are complementary metal-oxide-silicon (“CMOS”) imaging sensor devices. During
the late 1990s, we established many technical milestones and were granted
numerous patents for our linear imaging technology. Our patented CIS and mobile
imaging scanner technology provides high quality images at extremely low power
consumption levels allowing us to deliver compact scanners in a form ideally
suited for laptop or desktop computer users who need a small lightweight device
to scan or fax documents.





Our
business model was developed and continues to evolve around intellectual
property (“IP”) driven products sold primarily to original equipment
manufacturers (“OEM”), private label brands and value added resellers (“VAR”).
Our image scanning products can be found in a variety of applications, including
but not limited to, the following:





·
            Document
      and information management;


·
            Identification
      card scanners;


·
            Passport
      security scanners;


·
            Bank
      note and check verification;


·
            Business
      card readers;


·
            Barcode
      scanning; and


·
            Optical
      mark readers used in lottery
terminals.




In the
past ten years we have grown to be one of the largest manufacturers of page-fed
scanning devices worldwide and we sell to several major brand companies
including VISIONEER, PENTAX, BROTHER, DYMO-CARDSCAN, AMBIR TECHNOLOGY, DIGIMARC,
BANKSERV and OMRON. Our vertically integrated design and manufacturing business
model allows our customers to introduce new products to the market quickly and
efficiently.





Current Market
Opportunities, Strategies and Products




In the
past decade, information management, including how information is retrieved,
stored, shared and disseminated, has become increasingly important, and in many
instances critical, for all Enterprises worldwide.




Confronted
by exponentially increasing information through more and more channels,
Enterprises employ a variety of resources for managing
information.   Our document/image-capture products can help
transform business-critical information from paper, faxed and electronic forms,
documents and transactions into a manageable digital format.  Our
solutions can manage the processing of millions of forms, documents and
transactions annually, converting their content into information that is usable
in database, document, content and other information management systems. We
believe that our document/image-capture products enable organizations to reduce
operating costs, obtain higher information accuracy rates and speed processing
times.




Our
document/image-capture solutions offer Enterprises a cost-effective and accurate
alternative to manual data entry, a traditional approach that is typically a
labor intensive, time consuming and costly method of managing the input of
information into the Enterprise. Organizations can utilize our solutions to
capture and store information electronically, and extract the meaningful content
or data in a way that preserves the data’s accuracy.  As a result, we
believe there is significant growth opportunity for our solutions to help
simplify the way Enterprises manage information as well as other business
applications.




Currently,
all of our revenue is generated from sales of our document/image-capture
products.  Net revenue for the previous three years is (in thousands):




- 4
-





Year Ended
            
            Net RevenueDecember 31,
      2008
            
            $
            11,643December 31,
      2007
            
            
            15,023December 31,
      2006
            
            
            12,469




We offer
several different image scanning product groups to meet the diverse needs of our
customers.  Although all our products are based on the same patented
and proprietary technology, our product groups vary from one another by features
and configurations.  Our most popular product groups include our
DocketPORT and TravelScan line of products.





DocketPORT





Our
DocketPORT product group is our fourth generation of compact
document/image-capture devices.  Specific features of this product
group include:





·
            High-speed
      Universal Serial Bus (“USB”)
powered;


·
            True
      duplex scanning capability (several models scan both sides of a two-sided
      document at once);


·
            600
      dots per inch (“DPI”) optical
resolution;


·
            Minimal
      power consumption;


·
            Extremely
      lightweight;


·
            Compliant
      with Restriction of Hazardous Substance
  (“RoHS”);


·
            Internal
      48-bit analog-to-digital conversion for three-color channels (red, green
      and blue);


·
            No
      power adapter required; and


·
            Scans
      any size document from business cards to legal size
    documents.




TravelScan





Our
TravelScan products are entry-level document management
products.  These lightweight and convenient scanners are powered using
a fixed USB cable. Our TravelScan products can be conveniently carried alongside
laptops and require minimal additional work space.  These products
enable users to fax, email and organize all business documents with the "touch
of a button." Specific features include:





·
            Full-Speed
      USB powered;


·
            300
      dots per inch (“DPI”) optical
resolution;


·
            Minimal
      power consumption;


·
            Extremely
      lightweight; and


·
            RoHS-Compliant
      with Restriction of Hazardous
Substance.





Sales, Marketing and
Distribution




Our sales
and marketing efforts are designed to serve our direct customer base, rather
than the end user of our products.  We market and sell our products both
domestically and internationally through a global network of more than45independent distributors and channel
partners in North America, Europe and Asia.  We select these
independent entities based on their ability to provide effective field sales,
marketing communications and technical support to our targeted markets.In addition, our products are sold through several retail and
Internet-based channels.







Competition




We had
several direct competitors to our document/image-capture products, in major
worldwide markets (North America, Europe and Asia) during the year ended
December 31, 2008.  These competitors, in general, are under contract
to pay us a royalty fee for the use of our intellectual property.  To
maintain our competitive advantage we maintain a high level of investment in
research and development and focus on factory efficiency allowing us to provide
superior time-to-market product cycles with the goal of manufacturing and
delivering products to customers virtually defect free.





We
believe that our competitive strengths include:





·
            Patented
      and proprietary-based products;


·
            Favorable
      and well established reputation, experience and presence in the
      USB-powered document/image-capture devices
  market;


·
            Superior
      customer relationships that allow us to identify and work closely with
      customers to meet market demands;


·
            Vertical
      integration design and manufacturing business model which reduces the time
      to introduce a new or improved product to the
  market;


·
            Broad
      distribution channels; and


·
            Product
      quality and performance.




- 5
-




Manufacturing and Raw
Material Supply





Manufacturing.We
purchase the majority of our finished scanner imaging products from Shenzhen
Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan Technology
Holdings Limited (“STH”), the parent company of our former majority
stockholder.  See Part III, “Item 13:  Certain Relationships
and Related Transactions, and Director Independence.”





We
purposely limit the manufacturing of our product to SST as this gives us better
control over both the quality of our product and the price we pay for the
product.  We have established a pricing agreement with SST, which is
negotiated periodically.  From the early stages of product design and
development, DCT engineers worked closely with SST’s production team to ensure
optimal and cost effective manufacturing. The strategy of using only one
subcontract manufacturer could be disadvantageous if SST becomes unable or
unwilling to provide products to us in a timely manner.  If this
happens, we estimate it would take us approximately six to 12 months to
establish a new subcontract manufacturer.  To mitigate this exposure,
we provide most of the critical components and tooling required to manufacture
our proprietary products.




Raw Materials.  SST
purchases the raw materials, parts and components with the exception of the
critical components as discussed above, which we provide.  A limited
number of components included in our products are obtained from a single
supplier or a small group of suppliers.  We have some controller chips
that are sole-sourced, as they are specialized devices that can effectively
control the cost of our product.  We do not have any long-term or
exclusive purchase commitments with any of our suppliers.




Where
possible, we work with secondary suppliers to qualify additional sources of
supply.  To reduce the risk associated with using a sole supplier, we
attempt to maintain strategic inventories of these sole-sourced
components.  To date, we have been able to obtain adequate supplies of
the components used in the production of our document/image-capture products in
a timely manner from existing sources.  If in the future we are unable to
obtain sufficient quantities of required materials, components or subassemblies,
or if such items do not meet our quality standards, delays or reductions in
product shipments could occur, which could harm our business, financial
condition and results of operations.




Customers





A small number of customers have
historically accounted for a substantial portion of our net
sales.Total
sales to significant customers (customers who represent more than 10% of our net
sales) were 82% and 72% during the years ended December 31, 2008 and 2007,
respectively.  See
Note 1 included inPart II, “Item 8: Financial
Statements.”  We expect that our largest customers will continue to
account for a substantial portion of our net sales for the foreseeable
future.  Our largest customer rankings and their respective
contributions to our net sales have varied and will likely continue to vary from
period to period.  We
typically sell products pursuant to purchase orders that customers can generally
defer without incurring a significant penalty.  Currently,we do not have agreements with any of
our key customers that contain long-term commitments to purchase specified
volumes of our products.We believe that maintaining and
continuing to strengthen customer relationships will play an important role in
maintaining our leading position in the document/image-capture
market.





Intellectual
Property




While the
success of our business depends more on such factors as our employees’ technical
expertise and innovative skills, the success of our business also relies on our
ability to protect our proprietary technology. Accordingly, we seek to protect
our intellectual property rights in a variety of ways.  Obtaining
patents on our innovative technologies is one such way.  We have multiple
patents covering our document/image-capture technologies.  These
patents do not begin to expire until 2017.




Another
way we seek to protect our proprietary technology and other proprietary rights
is by requiring our employees and contractors to execute confidentiality and
invention assignment agreements.  We also rely on employee and
third-party nondisclosure agreements and other intellectual property protection
methods, including proprietary know-how, to protect our confidential information
and our other intellectual property.




- 6
-




Compliance with
Environmental, Health and Safety Regulations





In July
2006, the European Union (“EU”) began requiring all electronics products sold
within the EU to be RoHS compliant pursuant to the European Directive 2002/95/EC as amended
by European Directive 2003/108/EC(e).   Beginning in January
2006, all DCT products offered were RoHS compliant.Additionally, we are
currently completing REACH (Registration, Evaluation,
Authorization and
Restriction of Chemical
substances)certification.





Research and
Development





We have
historically devoted a significant portion of our financial resources to
research and development programs for both our current products and our future
products, and we expect to continue to allocate significant resources to these
efforts.  Until November 2007, the majority of our research and
development efforts were focused on our high definition (“HD”) display
technologies.  During November 2007, we terminated our HD display
research and development efforts.  No HD-related research and
development expenses were incurred during the year ended December 31,
2008.  By terminating our HD display research and development efforts,
we can focus our future research and development efforts and activities and
financial resources on our core revenue generating document/image-capture
products.





Our
research and development expenses were $712,000 and $2,439,000 for the years
ended December 31, 2008 and 2007, respectively.  To date, all research
and development costs have been expensed as incurred.





Our
future success will depend, in part, on our ability to anticipate changes,
enhance our current products, develop and introduce new products that keep pace
with technological advancements and address the increasingly sophisticated needs
of our customers. We intend to continue to develop our technology and innovative
products to meet customer demands.





Backlog





We do not
believe that backlog as of any particular date is meaningful as our sales are
made primarily pursuant to standard purchase orders for delivery of
products.  Additionally, all of our customer orders are
cancelable.




Seasonal
Trends





Our sales generally have followed a
seasonal trend. Historically, our sales have been higher in the second half of
the year than in the first half of the year.  This seasonal trend has
occurred during the past several years, but there can be no assurance that it
will continue in the future.





Employees





As of
December 31, 2008, we employed 15 people on a full-time basis, 12 employees were
located in the United States, two were located in China and one was located in
Europe.  Of the total, four were in product research and development
and 11 were in sales and administration. None of our employees are represented
by unions or collective bargaining agreements. We have experienced no work
stoppages and believe that our employee relations are good.





Available
Information





We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the Commission at the Commission's public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Our
Commission filings are also available to the public from the Commission's
Website at www.sec.gov.





We make
available free of charge our annual, quarterly and current reports, proxy
statements and other information upon request. To request such materials, please
contact our Corporate Secretary at 1798 Technology Drive Suite 178, San Jose,
California 95110 or call 1-408-436-9888 ext. 207.





Additionally,
many reports and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are available free of
charge on our website at www.docucap.com as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
SEC.  Information on our website and other information that can be
accessed through our website are not part of this report.




- 7
-




ITEM
      1A.
            RISK
      FACTORS





Risks Relating to Our
Business





A
significant percentage of our revenue is derived from sales to a few large
customers, and if we are not able to retain these customers, or they reschedule,
reduce or cancel orders, or delay or default on payments, our revenues would be
reduced and our financial condition and cash flows would suffer.





Total
sales to significant customers (customers who represent more than 10% of our net
sales) were 82% and 72% during the years ended December 31, 2008 and 2007,
respectively.  See
Note 1 included inPart II, “Item 8: Financial
Statements.”  We expect that our largest customers will continue to
account for a substantial portion of our net sales for the foreseeable
future.  None of our customers are obligated to purchase a minimum
number of our products in the aggregate or during any particular period. 
We cannot provide assurance that any of our customers will continue to purchase
our products at past or current levels.





The
Company has experienced a history of recurring operating losses and may continue
to incur losses for the foreseeable future.





Our net
loss attributable to common stockholders totaled $422,000 and $1,913,000 for the
years December 31, 2008 and 2007, respectively.  Our accumulated
deficit as of December 31, 2008 was $32,831,000.  We cannot provide
assurance that we can achieve profitability in the future.





We
subcontract the manufacturing of our image-capture products to one company and
this reliance on one company exposes us to risk which could damage our
reputation and adversely affect our business.





If our
manufacturer (see Part III, “Item 13: Certain Relationships and Related
Transactions, and Director Independence”) becomes unable or unwilling to provide
products to us in a timely manner, we may not be able to deliver our products to
customers on time, which could increase our costs, damage our reputation or
result in the loss of our customers. Although we have the right to utilize other
manufacturers at any time, identifying and qualifying a new manufacturer to
replace our current manufacturer could take 6 to 12 months.





We
depend on a limited number of suppliers to provide the components and raw
materials necessary to manufacture our products and any interruption in the
availability of these components and raw materials used in our product could
reduce our revenues.





Although
many alternative suppliers exist, we rely on a single or limited number of
suppliers for many of the significant components and raw materials required to
manufacture our document/image-capture products.  This reliance leads
to a number of significant risks, including:





·
            Unavailability
      of materials and interruptions in delivery of components and raw materials
      from our suppliers;


·
            Manufacturing
      delays caused by such unavailability or interruptions in delivery;
      and


·
            Fluctuations
      in the quality and the price of components and raw
    materials.





We do not
have any long-term or exclusive purchase commitments with any of our suppliers.
Failure to maintain existing relationships with our current suppliers or failure
to establish new supplier relationships in the future, could negatively affect
our ability to obtain necessary components and raw materials in a timely manner.
If we are unable to obtain ample supply of materials from our existing suppliers
or alternative supply sources, we may be unable to satisfy our customers'
orders, which could reduce our revenues and adversely affect relationships with
our customers.





Our executive officers and key
personnel are critical to our business and the loss of their services could
adversely affect our business.





Our
success depends to a significant degree upon the continuing contributions of our
key executive officers and managers.  Although we have employment
agreements with most of these individuals, we cannot guarantee that we can
retain these individuals.  In addition, we have not obtained “key man”
life insurance on the lives of any of the members of our management
team.




- 8
-




The
authorization and issuance of “blank check” preferred stock could have an
anti-takeover effect detrimental to the interests of our
stockholders.





Our
certificate of incorporation allows the Board of Directors to issue preferred
stock with rights and preferences set by our board without further stockholder
approval.  Under particular circumstances, the issuance of these
“blank check preferred” shares could have an anti-takeover
effect.  For example, in the event of a hostile takeover attempt, it
may be possible for management and the board to impede the attempt by issuing
blank check preferred shares, thereby diluting or impairing the voting power of
the other outstanding shares of common stock and increasing the potential costs
to acquire control of our Company.  Our Board of Directors has the
right to issue blank check preferred shares without first offering them to
holders of our common stock, as the holders of our common stock have no
preemptive rights.





We
are subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we
are unable to timely comply with Section 404 or if the costs related to
compliance are significant, our profitability, stock price and results of
operations and financial condition could be materially adversely
affected.





We are
required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act
of 2002, which require us to maintain an ongoing evaluation and integration of
the internal controls of our business. We were required to document and test our
internal controls and certify that we are responsible for maintaining an
adequate system of internal control procedures for the year ended December 31,
2008.  In subsequent years, our independent registered public
accounting firm will be required to opine on those internal controls and
management’s assessment of those controls. In the process, we may identify areas
requiring improvement, and we may have to design enhanced processes and controls
to address issues identified through this review.





We cannot
be certain that we will be able to successfully complete the certification and
attestation requirements of Section 404 or that our auditors will not have to
report a material weakness in connection with the presentation of our financial
statements. If we fail to comply with the requirements of Section 404 or if our
auditors report such material weakness, the accuracy and timeliness of the
filing of our annual report may be materially adversely affected and could cause
investors to lose confidence in our reported financial information, which could
have a negative affect on the trading price of our common stock. In addition, a
material weakness in the effectiveness of our internal controls over financial
reporting could result in an increased chance of fraud and the loss of
customers, reduce our ability to obtain financing and require additional
expenditures to comply with these requirements, each of which could have a
material adverse effect on our business, results of operations and financial
condition.





Further,
we believe that the out-of-pocket costs, the diversion of management’s attention
from running the day-to-day operations and operational changes caused by the
need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act
could be significant. If the time and costs associated with such compliance
exceed our current expectations, our results of operations could be adversely
affected.





Risks Related To Our
Intellectual Property and Technology





Unauthorized
use of our intellectual property and proprietary technology could adversely
affect our business and results of operations.





Our
success and competitive position depend in large part on our ability to obtain
and maintain intellectual property rights to protect our products. We currently,
and may in the future, rely on a combination of patents, copyrights, trademarks,
service marks, trade secrets, confidentiality provisions and licensing
arrangements to establish and protect our intellectual property and proprietary
rights. Unauthorized parties may attempt to copy aspects of our products or
obtain, license, sell or otherwise use information that we regard as
proprietary. Policing unauthorized use of our products is difficult, and we may
not be able to protect our technology from unauthorized use.





Additionally,
our competitors may independently develop technologies that are substantially
the same or superior to ours without infringing our rights. In these cases, we
would be unable to prevent our competitors from selling or licensing these
similar or superior technologies.  Further, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States.





Third
parties have claimed and may claim in the future that we are infringing their
intellectual property, and we could be exposed to significant litigation or
licensing expenses or be prevented from selling our products if such claims are
successful. From time to time, we are subject to claims that we or our customers
may be infringing or contributing to the infringement of the intellectual
property rights of others.




- 9
-




We may be
unaware of intellectual property rights of others that may cover some of our
technologies and products.  If it appears necessary or desirable, we
may seek licenses for these intellectual property rights. However, we may not be
able to obtain licenses from some or all claimants or the terms of any offered
licenses may not be acceptable to us, and we may not be able to resolve disputes
without litigation.  Any litigation regarding intellectual property
could be costly and time-consuming and could divert the attention of our
management and key personnel from our business operations.





In the
event of a claim of intellectual property infringement, we may be required to
enter into costly royalty or license agreements. Third parties claiming
intellectual property infringement may be able to obtain injunctive or other
equitable relief that could effectively block our ability to develop and sell
our products.





Risks Relating To Our Common
Stock





The
stock market in general has experienced volatility that often has been unrelated
to the operating performance of listed companies. These broad fluctuations may
be the result of unscrupulous practices that may adversely affect the price of
our stock, regardless of our operating performance.





Shareholders
should be aware that, according to SEC Release No. 34-29093 dated
April 17, 1991, the market for penny stocks has suffered in recent years
from patterns of fraud and abuse.  Such patterns include
(1) control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer; (2) manipulation of
prices through prearranged matching of purchases and sales and false and
misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. The occurrence of these patterns or
practices could increase the volatility of our share price.





The limited prior
public market and trading market may cause possible volatility in our stock
price.





To date,
there has only been a limited public market for our securities and there can be
no assurance that we can attain an active trading market for our
securities.  Our common stock trades on the OTC Bulletin Board
(“OTCBB”), which is an unorganized, inter-dealer, over-the-counter market that
provides significantly less liquidity than the national securities
exchanges.





Quotes
for securities quoted on the OTCBB are not listed in the financial sections of
newspapers as are those for the national securities
exchanges.  Moreover, in recent years, the overall market for
securities has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller
companies.  The trading price of our common stock is expected to be
subject to significant fluctuations including, but not limited to, the
following:





·
            Quarterly
      variations in operating results and achievement of key business
      metrics;


·
            Changes
      in earnings estimates by securities analysts, if
  any;


·
            Any
      differences between reported results and securities analysts’ published or
      unpublished expectations;


·
            Announcements
      of new products by us or our
competitors;


·
            Market
      reaction to any acquisitions, joint ventures or strategic investments
      announced by us or our competitors;


·
            Demand
      for our products;


·
            Shares
      sold pursuant to Rule 144 or upon exercise of warrants and options or
      conversion of  Series B Convertible Preferred Stock;
      and


·
            General
      economic or stock market conditions unrelated to our operating
      performance.





These
fluctuations, as well as general economic and market conditions, may have a
material or adverse affect on the market price of our common stock.





The OTCBB is a quotation system, not
an issuer listing service, market or exchange. Therefore, buying and selling
stock on the OTCBB is not as efficient as buying and selling stock through an
exchange. As a result, it may be difficult for you to sell your common stock or
you may not be able to sell your common stock for an optimum trading
price.





The OTCBB
executes trades and quotations using a manual process and cannot guarantee the
market information for securities. In some instances, quote information, or even
firm quotes, may not be available. The OTCBB’s manual execution process may
delay order processing and as a result, a limit order may fail to execute or a
market order may execute at a significantly different price due to intervening
price fluctuations. Trade execution, execution reporting and legal trade
confirmation delivery may be delayed significantly. Consequently, one may not be
able to sell shares of our common stock at the optimum trading
prices.




- 10
-




OTCBB
securities are frequent targets of fraud or market manipulation not only because
of their generally low price, but also because the OTCBB reporting requirements
for these securities are less stringent than for listed or Nasdaq traded
securities, and no exchange requirements are imposed. Dealers may dominate the
market and set prices that are not based on competitive
forces.  Individuals or groups may create fraudulent markets and
control the sudden, sharp increase of price and trading volume and the equally
sudden collapse of the market price for shares of our common stock.





When
fewer shares of a security are being traded on the OTCBB, the security’s market
price may become increasingly volatile and price movement may outpace the
ability to deliver accurate quote information.  Due to lower trading
volumes of our common stock, there may be a lower likelihood that one's orders
for our common stock will be executed, and current prices may differ
significantly from the price one was quoted by the OTCBB at the time of one's
order entry.





Orders
for OTCBB securities may be canceled or edited like orders for other securities.
All requests to change or cancel an order must be submitted to, received and
processed by the OTCBB. As mentioned earlier in this document, the OTCBB
executes trades using a manual process, which could cause delays in order
processing and reporting, and could hamper one’s ability to cancel or edit one's
order. Consequently, selling shares of our common stock at the optimum trading
prices may be impossible.





The
dealer's spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of our common stock on the OTCBB
if the stock must be sold immediately.  Further, purchasers of our
common stock may incur an immediate "paper" loss due to the price
spread.  Moreover, dealers may not have a bid price for our common
stock on the OTCBB.  Due to the foregoing factors, demand for our
common stock on the OTCBB may be decreased or eliminated.





Our common stock is considered a
“penny stock.”  The application of the “penny stock” rules to our
common stock could limit the trading and liquidity of the common stock,
adversely affect the market price of our common stock and increase your
transaction costs to sell those shares.





The
Commission has adopted regulations which generally define a “penny stock” to be
any equity security that has a market price (as defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions.  As a result, our shares of common stock are subject to
rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established clients and “accredited
investors.”





For
transactions governed by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities, must obtain the
purchaser's written consent to the transaction, and must deliver to the
purchaser a SEC-mandated, penny stock risk disclosure document, all prior to the
purchase.  The broker-dealer must also disclose the commission payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market.  Finally, monthly statements must be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.  Consequently, the “penny
stock” rules may restrict the ability of broker-dealers to sell our shares of
common stock and may affect the ability of investors to sell such shares of
common stock in the secondary market and may affect the price at which investors
can sell such shares.





Investors
should be aware that the market for penny stocks has suffered in recent years
from patterns of fraud and abuse, according to the Commission.  Such
patterns include:





·
            Control of the market for the
      security by one or a few broker-dealers that are often related to the
      promoter or issuer;


·
            Manipulation of prices through
      prearranged matching of purchases and sales and false and misleading press
      releases;


·
            “Boiler room” practices involving
      high pressure sales tactics and unrealistic price projections by
      inexperienced sales persons;


·
            Excessive and undisclosed bid-ask
      differentials and markups by selling broker-dealers;
      and


·
            The wholesale dumping of the same
      securities by promoters and broker-dealers after prices have been
      manipulated to a desired level, along with the inevitable collapse of
      those prices with consequent investor
  losses.





Our management is aware of the abuses
that have occurred historically in the penny stock market.




- 11
-




Additional authorized shares of our
common stock and preferred stock available for issuance may result in
substantial dilution to our shareholders.





We are
authorized to issue 50,000,000 shares of our common stock.  As of
March 1, 2009, there were 18,443,770shares of common stock
issued and outstanding.  However, the total number of shares of our
common stock issued and outstanding does not include shares reserved in
anticipation of the exercise of options or warrants or the conversion of our
Series B Convertible Preferred Stock (“Series B Stock”).  As of March
1, 2009, we had the following common shares reserved for future
issuance:





Conversion
      of Series BStock
            
            
            150,000Stock
      options outstanding
            
            
            9,295,498Warrants
      outstanding
            
            
            3,284,000Total
            
            
            12,729,498





The
numbers above do not include 1,295,667 shares that are reserved pursuant to our
2006 Stock Option Plan for future grant.  To the extent that options
or warrants are exercised, or the preferred stockholders elect to convert their
preferred shares to common shares, the holders of our common stock will
experience further dilution. In addition, in the event that any future financing
should be in the form of, be convertible into or exchangeable for, equity
securities, and upon the exercise of options and warrants, investors may
experience additional dilution.





While we
have no present plans to issue any additional shares of preferred stock in the
future, our board of directors has the authority (as previously discussed),
without stockholder approval, to create and issue one or more series of such
preferred stock and to determine the voting, dividend and other rights of
holders of such preferred stock.  The above table does not include any
future issuance of preferred stock.  The issuance of any of such
series of preferred stock will cause further dilution to holders of our common
stock.





Future sales of our common stock
could put downward selling pressure on our common stock, and adversely affect
the per share price. There is a risk that this downward pressure may make it
impossible for an investor to sell shares of common stock at any reasonable
price, if at all.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act of 1933
(Securities Act), subject to certain limitations. In general, Rule 144 permits
the unlimited sale of securities by our stockholders that are non-affiliates
that have satisfied a six month holding period and affiliates of our Company may
sell within any three month period a number of securities that does not exceed
1% of our then outstanding shares of common stock. Any substantial sale of our
common stock pursuant to Rule 144 or pursuant to any resale prospectus may have
material adverse effect on the market price of our securities.





Limitations on director and officer
liability and our indemnification of officers and directors may discourage
shareholders from bringing suit against a director.





Our
certificate of incorporation and bylaws provide, with certain exceptions as
permitted by governing Delaware law, that a director or officer shall not be
personally liable to us or our shareholders for breach of fiduciary duty as a
director, except for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law, or unlawful payments of dividends. These
provisions may discourage shareholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by shareholders on our behalf against a director. In addition, our
certificate of incorporation and bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Delaware
law.





- 12
-




ITEM
      2.
            PROPERTIES





The
following table lists details of our properties at December 31,
2008:





Location
            
            Lease
      expiration
            
            Total
      Square Footage
            
            Primary
      UsageSan
      Jose, CA
            
            June
      2010
            
            
            5,500
            
            Corporate
      headquarters and product developmentSanta
      Clara, CA
            
            June
      2010
            
            
            6,000
            
            Inventory
      management and distributionArnhem,
      Netherlands
            
            Month
      to month
            
            
            250
            
            Field
      service and sales officeSchiphol,
      Netherlands
            
            Month
      to month
            
            
            1,400
            
            Inventory
      management and distribution





We
believe our properties are adequate for our current needs and will be sufficient
to serve the needs of our operations for the foreseeable future.





ITEM
      3.
            LEGAL
      PROCEEDINGS





We are
subject to various legal proceedings from time to time in the ordinary course of
business, none of which is currently required to be disclosed under this Item
3.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





On
October 3, 2008, the Company held its annual meeting of
stockholders.  At the annual meeting the Company’s stockholders were
asked to vote on each of the following proposals:





1.
            To
      elect each of Edward Straw, David Clark, William Hawkins, Darwin Hu and
      Frank Musso to serve as directors of the Company until the next annual
      meeting of stockholders or until their successors have been duly elected
      or appointed and qualified.





2.
            To
      vote to approve an increase in the number of shares of common stock
      authorized for issuance under the Company’s 2006 Stock Option Plan from
      1,500,000 to 2,500,000.





3.
            To
      vote to ratify the appointment by the Company’s Board of Directors of
      Clancy and Co., P.L.L.C., to serve as the Company’s independent auditors
      for the year ended December 31,
2008.





Each of
the proposals set forth above were approved by the stockholders at the annual
meeting and received the requisite number of votes to approve the proposed
actions.




- 13
-




PART II





ITEM
      5.
            MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER
  MATTERS





Market
Information





Our
common stock is listed on the OTC Bulletin Board (“OTCBB”).  Effective
January 11, 2008, in connection with the name change to “Document Capture
Technologies, Inc.” from “Sysview Technology, Inc.,” our stock symbol changed to
“DCMT” from “SYVT.” The following table sets forth the range of high and low
sales prices for the Company’s common stock for the periods
indicated:





High
            
            
            LowFiscal
      2008:1st
      Quarter
            
            $
            0.90
            
            
            $
            0.552nd
      Quarter
            
            
            0.84
            
            
            
            0.353rd
      Quarter
            
            
            0.75
            
            
            
            0.304th
      Quarter
            
            
            0.67
            
            
            
            0.25Fiscal
      2007:1st
      Quarter
            
            $
            0.98
            
            
            $
            0.552nd
      Quarter
            
            
            0.89
            
            
            
            0.603rd
      Quarter
            
            
            0.99
            
            
            
            0.504th
      Quarter
            
            
            1.00
            
            
            
            0.50




Such
prices represent quotations between dealers, without dealer markup, markdown or
commissions, and may not represent actual transactions.




Record
Holders





As of
March 1, 2009, there were 18,443,770shares of common
stock issued and outstanding, held by approximately 370 holders of record as
indicated on the records of DCT’s transfer agent.





Dividends





Common Stock.The
Company has not declared or paid dividends on its common stock to date and
intends to retain any earnings for use in the business for the foreseeable
future.





Preferred
Stock.  Through the maturity date of March 15, 2008, holders of
our Series A 5% cumulative convertible preferred stock (“Series A Stock”) were
entitled to receive dividends at a rate of 5% per year.  Dividends
were payable in cash, by accretion of the Series A Stock stated value or in
shares of common stock. Subject to certain terms and conditions, the decision
whether to accrete dividends to the stated value of the Series A Stock or to pay
for dividends in cash or in shares of common stock, was at the Company’s
discretion.  The Company chose to pay all Series A Stock dividends by
accreting the stated value of the Series A Stock, which converted to shares of
our common stock at maturity.





- 14
-




Equity Compensation Plan
Information





The
following table sets forth certain information concerning shares of common stock
authorized for issuance under the Company’s existing equity compensation plans
as of December 31, 2008:




Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              (a)
            
            
            Weighted
      average exercise price of outstanding options, warrants and
      rights
              (b)
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
              (c)Equity
      compensation plans approved by security holders
            
            
            4,404,333
            
            
            $
            0.47
            
            
            
            1,295,667Equity
      compensation plans not approved by security holders
            
            
            4,891,165
            
            
            
            0.18
            
            
            
            –Total
            
            
            9,295,498
            
            
            $
            0.32
            
            
            
            1,295,667





2002
Amended and Restated Stock Option Plan





At our
stockholders’ annual meeting on June 23, 2006, our stockholders approved the
adoption of the 2002 Amended and Restated Stock Option Plan (“2002
Plan”).  Currently, the plan is administered by our Board of
Directors.  The 2002 Plan generally provides for the grant of either
qualified or nonqualified stock options to officers, employees, directors and
consultants at not less than 85% of the fair market value of our common stock as
of the grant date.





The 2002
Plan provides that vested options may generally be exercised for three months
after termination of employment and for 12 months after termination of
employment as a result of death or disability.  If the Company
liquidates, optionees will be notified at least 30 days prior to the proposed
dissolution or liquidation to give optionees time to exercise any vested
options.  To the extent not previously exercised, all options will
terminate immediately prior to the consummation of such proposed
action.  However, the plan administrator may, under its sole
discretion, permit exercise of any options prior to their termination, even if
such options were not otherwise exercisable.





In the
event of our change in control (including our merger with or into another
corporation, or sale of substantially all our assets), the 2002 Plan provides
that each outstanding option will fully vest and become
exercisable.  The maximum number of options that can be granted under
the 2002 Plan is 3,200,000.   As of December 31, 2008, there were
no options available for future grant under the 2002 Plan.





2006
Stock Option Plan





At our
stockholders’ annual meeting on June 23, 2006, our stockholders approved the
adoption of the 2006 Stock Option Plan (“2006 Plan”).  Currently the
plan is administered by our Board of Directors.  The 2006 Plan
generally provides for the grant of either qualified or nonqualified stock
options to officers, employees, directors and consultants at not less than 85%
of the fair market value of our common stock as of the grant date.





The 2006
Plan provides that vested options may generally be exercised for three months
after termination of employment and for 12 months after termination of
employment as a result of death or disability.  If the Company
liquidates, optionees will be notified at least 30 days prior to the proposed
dissolution or liquidation to give optionees time to exercise any vested
options.  To the extent not previously exercised, all options will
terminate immediately prior to the consummation of such proposed
action.  However, the plan administrator may, under its sole
discretion, permit exercise of any options prior to their termination, even if
such options were not otherwise exercisable. In the event of our change in
control (including our merger with or into another corporation, or sale of
substantially all our assets), the 2006 Plan provides that each outstanding
option will fully vest and become exercisable.  At
the Company’s annual meeting on October 3, 2008, the Company’s shareholders
agreed to increase the maximum number of options that can be granted under the
2006 Plan from 1,500,000 to 2,500,000.   As of December 31, 2008,
options to purchase 1,295,667 common shares were available for future grant
under the 2006 Plan.





- 15
-




Recent Sales of Unregistered
Securities





During
the year ended December 31, 2008, we did not issue any securities that were not
registered under the Securities Act of 1933, as amended (the “Securities Act”)
except as disclosed in previous SEC filings.





Purchases of Equity
Securities by the Issuer and Affiliated Purchasers





There
were no repurchases of equity securities by the issuer or affiliated purchasers
during the fourth quarter of the year ended December 31, 2008.





- 16
-





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




The
following discussion should be read in conjunction with other sections of this
Form 10-K including Part 1, “Item 1: Business” and Part II, “Item 8: Financial
Statements.”  Various sections of management’s discussion and analysis
(“MD&A”) contain statements that are forward-looking. These statements are
based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially due to factors discussed
in this report, as well as factors not within our control. We undertake no duty
to update any forward-looking statement to conform the statement to actual
results or changes in our expectations.




Our
MD&A is provided as a supplement to our audited financial statements to help
provide an understanding of our financial condition, changes in financial
condition and results of operations. The MD&A section is organized as
follows:




·
            Overview.
      This section provides a general description of the Company's business, as
      well as recent developments that we believe are important in understanding
      our results of operations as well as anticipating future trends in our
      operations.




·
            Critical
      Accounting Policies. This section provides an analysis of the
      significant estimates and judgments that affect the reported amounts of
      assets, liabilities, revenues, expenses, and the related disclosure of
      contingent assets and liabilities.




·
            Results of
      Operations. This section provides an analysis of our results of
      operations for the year ended December 31, 2008 (“Fiscal 2008”) compared
      to the year ended December 31, 2007 (“Fiscal 2007”).  A brief
      description of certain aspects, transactions and events is provided,
      including related-party transactions that impact the comparability of the
      results being analyzed.




·
            Liquidity
      and Capital Resources. This section provides an analysis of our
      financial condition as of December 31, 2008 and our cash flows for Fiscal
      2008 compared to Fiscal 2007.




Overview




We are in
the business of designing, developing and delivering imaging technology
solutions. Our technology is protected under multiple patents.  We
focus our research and development toward new deliverable and marketable
technologies. We sell our products to customers throughout the world, including
the United States, Canada, Europe, South America, Australia and
Asia.




Our
strategy includes a plan to expand our document/image-capture product line and
technology while leveraging our assets in other areas of the imaging industry.
We are actively shipping six groups of image-capture products.  We
have expanded our document/image-capture product offerings, and will continue to
expand our product offerings in the future in response to the increased market
demand for faster, easier-to-use products and increased security to meet the
growing need for information protection, including identity and financial
transaction protection.




For
several years, until December 31, 2007, DCT also engaged in the research and
development of certain technologies related to the field of high definition
(“HD”) display.  During that time, DCT expanded its HD display
initiative through acquisition, exclusive licensing and the addition of key
personnel and expended significant resources to develop its HD display
technology.  However, in November 2007 management made the decision to
focus on its core competencies in an effort to cut costs and maximize profits.
To that end, the process commenced with the sale of our HD
business.   All HD-related expenses, employees and contractors
were terminated by December 31, 2007.   No HD-related expenses
were incurred in Fiscal 2008.  DCT sold its HD-related assets during
the first quarter of Fiscal 2008.  The funds received were deployed
into general operations and debt repayment. DCT’s re-alignment was advanced
significantly during Fiscal 2008 through several corporate initiatives resulting
in DCT achieving a debt-free status and increased cash flow from
operations.  The corporate re-focus continued throughout 2008 as
management further reduced costs and improved efficiencies.





Looking
forward, DCT has significant market opportunities in 2009 and we believe that
with the corporate initiatives taken in Fiscal 2008, we are well positioned to
capitalize on such opportunities.





Critical
Accounting Policies





The methods, estimates and judgments we
use in applying our accounting policies have a significant impact on the results
we report in our financial statements, which we discuss under the heading
“Results of Operations” following this section of our MD&A. Some of our
accounting policies require us to make difficult and subjective judgments, oftenresulting from the need to make estimates
onmatters that are
inherently uncertain.




- 17
-




We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements:




Revenue
Recognition




Revenues
consist of sales of merchandise, including optical document/image-capturing
devices, modules of optical document/image-capturing devices, optical image
chips and other optoelectronic products. Revenue is recognized when the product
is shipped or delivered and the risks, rewards and title of ownership have
transferred to the customer. We recognize some shipping and handling fees as
revenue, and the related expenses as a component of cost of sales. All internal
handling charges are included with selling and marketing expense.Historically, sales returns have not been
significant.  As such, we do not record a reduction to revenue for
estimated product returns in the same period that the related revenue is
recorded.




Inventory and Warranty
Reserves




We establish inventory reserves for
estimated obsolescence or unmarketable inventory in an amount equal to the
difference between the cost of inventory and its estimated realizable value
based upon assumptions about future demand and market conditions. If actual
demand and market conditions are less favorable than those projected by
management, additional inventory reserves could be required.  As of
December 31, 2008 and 2007, we had a $20,000 inventory reserve for slow-moving
inventory.




Currently,
we purchase the majority of our finished scanner imaging products from Shenzhen
Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of DCT’s former majority
stockholder.  SST warrants the products it manufactures for us against
defects in material and workmanship for a period of 18 months after the
completion of manufacture. After such 18 month period, SST provides product
repair services for us at its customary hourly repair rate plus the cost of any
parts, components or items necessary to repair the products.  As a
result of the product warranty provided by SST, DCT does not record a product
warranty reserve.





Related-Party
Transactions





We have
significant related-party transactions and agreements, which we believe have
been accounted for at fair value. We utilized our best estimate of the value of
these transactions and agreements. Had alternative assumptions been used, the
values obtained may have been different.





Related-Party
Purchases





As
discussed above, we purchase the majority of our finished scanner imaging
products from SST.  Purchases from SST totaled $6,816,000 and
$8,369,000 for the years ended December 31, 2008 and 2007,
respectively.  All purchases from SST were carried out in the normal
course of business. As a result of these purchases, DCT was liable to SST for
$393,000 and $578,000 at December 31, 2008 and 2007, respectively.





Related-Party Net
Sales





During
the year ended December 31, 2008, DCT recorded net sales totaling $57,000 for
finished scanners sold to SST.  The related cost of goods sold was
$41,000.  This transaction contained similar terms and conditions as
for other transactions of this nature entered into by DCT.




Impairment
of Long-Lived Assets





We
evaluate our intangible and long-lived assets for impairment annually or more frequently if we believe
indicators of impairment exist. Significant management judgment is required
during the evaluation, which includes forecasts of future operating results. The
estimates we have used are consistent with the plans and estimates that we use
to manage our business. It is possible, however, that the plans and estimates
used may be incorrect. If our actual results, or the plans and estimates used in
future impairment analyses, are lower than the original estimates used to assess
the recoverability of these assets, we could incur additional impairment
charges.  We had no such asset impairments during Fiscal 2008 or
Fiscal 2007.





- 18
-




Income
Taxes




We utilize the liability method of
accounting for income taxes.  Deferred income tax assets and
liabilities are calculated as the difference between the financial statements
and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable
income.




We record a valuation allowance to
reduce our deferred tax assets to the amount that we believe is more likely than
not to be realized. In assessing the need for a valuation allowance, we consider
all positive and negative evidence, including scheduled reversals of deferred
tax liabilities, projected future taxable income, tax planning strategies, and
recent financial performance.




The
application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws themselves are subject to
change as a result of changes in fiscal policy, changes in legislation,
evolution of regulations and court rulings. Therefore, the actual income taxes
may be materially different from our estimates.  As a result of our
analysis, we concluded that a full
valuation allowance against our net deferred tax assets is appropriate at
December 31, 2008.




Contingencies




From time to time, we are involved in
disputes, litigation and other legal proceedings.  We record a charge
equal to at least the minimum estimated liability for a loss contingency when
both of the following conditions are met: (i) information available prior
to issuance of the financial statements indicates that it is probable that an
asset had been impaired or a liability had been incurred at the date of the
financial statements, and (ii) the range of loss can be reasonably
estimated. However, the actual liability in any such litigation may be
materially different from our estimates, which could result in the need to
record additional costs.Currently, we have no outstanding
legal proceedings or claims that require a loss contingency.





Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity





We
account for our Series A 5% Cumulative Convertible Preferred Stock (“Series A
Stock”) and our Series B Convertible Preferred Stock (“Series B Stock”) pursuant
to SFAS 133, Accounting
for Derivative Instruments and
Hedging Activities (“SFAS 133”) and the Emerging Issues Task Force
(“EITF”) Abstract 00-19, Accounting for Derivative Financial
Instruments (“EITF 00-19”).  Accordingly, the embedded
conversion feature of our Series A Stock and Series B Stock have been determined
to be derivative instruments.





The fair
value of these derivative instruments, as determined by applying the
Black-Scholes valuation model, is adjusted at each reporting
period.  The Black-Scholes valuation model requires the input of
highly subjective assumptions, including the expected stock price
volatility.   Additionally, although the Black-Scholes model meets the
requirements of SFAS 133, the fair values generated by the model may not be
indicative of the actual fair values of ourSeries A Stock and Series B
Stock as ourderivative
instruments have characteristics significantly different from traded
options.





Stock-Based Compensation Expense





Effective January 1, 2006, we
adoptedSFAS 123R,Share-Based Payments(“SFAS
123R”).  SFAS 123R
requires all share-based payments, including grants of employee stock options
and warrants, be recognized in our financial statements based on their
respective grant date fair values. Under this standard, the fair value of each
share-based payment award is estimated on the date of grant using an option
pricing model that meets certain requirements. We currently use the
Black-Scholes option pricing model to estimate the fair value of our share-based
payment awards. The Black-Scholes model meets the requirements of
SFAS 123R; however, the fair values generated by the model may not be
indicative of the actual fair values ofour awards as the modeldoes not consider certain factors
important to our awards, such as continued employment, periodic vesting
requirements and limited transferability.





The determination of the fair value of
share-based payment awards utilizing the Black-Scholes model is affected by our
stock price and a number of assumptions, including expected volatility, expected
life, risk-free interest rate and expected dividends. We use the historical
volatility for our common stock as the expected volatility assumption required
in the Black-Scholes model, which could be significantly different than actual
volatility.  The expected life of the awards is based on historical
and other economic data trended into the future. The risk-free interest rate
assumption is based on observed interest rates appropriate for the terms of our
awards. The dividend yield assumption is based on our history and expectation of
dividend payouts.  Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates.




- 19
-




Stock-based compensation expense
recognized in our financial statements beginning January 1, 2006 and thereafter
is based on awards that are ultimately expected to vest. We evaluate the
assumptions used to value our awards on a quarterly basis. If factors change and
we employ different assumptions, stock-based compensation expense may differ
significantly from what we have recorded in the past. If there are any
modifications or cancellations of the underlying unvested securities, we may be
required to accelerate, increase or cancel any remaining unearned stock-based
compensation expense. Future stock-based compensation expense and unearned
stock-based compensation will increase to the extent that we grant additional
equity awards to employees.





Fair
Value of Financial Instruments





DCT
accounts for its warrant liability under the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements
(“SFAS 157”).  SFAS 157 defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market
participants at the measurement date.





SFAS 157 establishes three levels of
inputs that may be used to measure fair value:




Level 1. Quoted
prices in active markets for identical assets or liabilities.  DCT had
no Level 1 assets or liabilities at December 31, 2008.





Level 2. Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated with observable market data for substantially the full term of the
assets or liabilities.  DCT had no Level 2 assets or liabilities at
December 31, 2008.





Level 3.  Unobservable
inputs to the valuation methodology that are significant to the measurement of
the fair value of assets or liabilities.  DCT had no Level 3
assets.  DCT’s warrant liabilities are defined as Level 3
liabilities.  The determination of fair value for Level 3
instruments requires the most management judgment and
subjectivity.   The
adjustment to the fair value of our warrant liability was not significant in
Fiscal 2008.





- 20
-




Results of
Operations





The
following table summarizes certain aspects of our results of operations for
Fiscal 2008 compared to Fiscal 2007 (in thousands):





Fiscal 2008
            
            
            Fiscal 2007
            
            
            .$ Change
            
            
            % Change.Net
      sales
            
            $
            11,643
            
            
            $
            15,023
            
            
            $
            (3,380
            )
            
            
            (22
            )%Cost
      of sales
            
            
            7,696
            
            
            
            9,120
            
            
            
            (1,424
            )
            
            
            (16
            )As
      a percentage of sales
            
            
            66
            %
            
            
            61
            %Selling,
      general and administrative expenses
            
            
            3,465
            
            
            
            4,024
            
            
            
            (559
            )
            
            
            (14
            )Research
      and development expense
            
            
            712
            
            
            
            2,439
            
            
            
            (1,727
            )
            
            
            (71
            )Total
      other income (expense)
            
            
            255
            
            
            
            (496
            )
            
            NM
            
            
            NMProvision
      for income taxes
            
            
            77
            
            
            
            4
            
            
            NM
            
            
            NMDividend
      and deemed dividend on 5%
              convertible
      preferred stock and accretion of
              preferred
      stock redemption value
            
            
            (370
            )
            
            
            (853
            )
            
            NM
            
            
            NMNet
      loss available to common
              Stockholders
            
            
            (422
            )
            
            
            (1,913
            )
            
            
            (1,491
            )
            
            
            (78
            )NM
      = Not Meaningful





Net
Sales





The
decrease in net sales during Fiscal 2008 as compared to Fiscal 2007 is
attributable to the overall slowdown of the general economic and market
conditions in the U.S. economy and the related slowdown of information
technology (“IT”) spending.  To a lesser extent, the decrease in net
sales was a result of the decreased demand within the banking and financial
sectors of our market.  These sectors have been more focused on
regulatory actions and financial hardships than on investing in transaction
system infrastructure, of which we are a key supplier.   Sales to
these particular sectors decreased $828,000 during Fiscal 2008 as compared to
Fiscal 2007.





Our
international sales have continued to grow as a result of (i) the European
markets for our products continue to show strong growth, and (ii) we nearly
doubled our distribution network within this market during Fiscal
2008.  Our European sales were $758,000, or 7% of net sales, and
$611,000, or 4% of net sales, during Fiscal 2008 and Fiscal 2007,
respectively.  We expect our European sales to continue to increase as
we continue to improve our ability to deliver all channel products from our
Netherlands-based warehouse and improve our time-to-market.





From time
to time, our key customers place large orders causing our quarterly net revenue
to fluctuate significantly. We expect this trend and resulting fluctuations to
continue.  Although the number of scanners shipped during any quarter
has fluctuated significantly, our average selling price has remained fairly
stable and we expect this stability to continue for the foreseeable
future.





Although
we continually concentrate on expanding our significant customer base, our
revenue remains dependent on a small number of significant
customers.  Total sales to significant customers (customers who
represent more than 10% of our net sales) were 82% and 72% during the years
ended December 31, 2008 and 2007, respectively.  See Note 1 included inPart
II, “Item 8: Financial Statements.”  The identities of our largest
customers and their respective contributions to our net sales have varied in the
past and will likely continue to vary from period to period.




- 21
-




Cost
of Sales, Including Gross Profit




Cost of
sales includes all direct costs related to the purchase of scanners, imaging
modules and services related to the delivery of those items manufactured in
China, and to a lesser extent, engineering services and software license
royalties.  Cost of sales as a percentage of net sales increased
during Fiscal 2008 as compared to Fiscal 2007 as a direct result of the
devaluation of the U.S. dollar against the Chinese Yuan.  This
increase was somewhat offset by the following factors:




·
            The
      negotiated price reduction of our finished
  product;




·
            The
      phase out of certain third-party software as we move toward less costly
      third-party software; and




·
            Our
      continued efforts toward reducing the cost of our
  products.





We expect
our cost of sales as a percentage of net sales to fluctuate somewhat in the
future as (i) we experience changes in our product mix, (ii) the value of the
U.S. dollar remains volatile and (iii) we implement further product cost
reduction strategies.





Selling,
General and Administrative Expenses




Selling,
general and administrative expenses consist primarily of personnel-related
expenses, including stock-based
compensation costs, facilities-related expenses and outside professional
services such as legal and accounting.  To a lesser extent,
market development and promotional funds for our retail distribution channels,
tradeshows, website support, warehousing, logistics and certain sales
representative fees are also included.




The
decrease in selling, general and administrative expense during Fiscal 2008 as
compared to 2007 was primarily attributable to the termination of our HD
display-related activities, which added approximately $298,000 of product
promotion and marketing expense during Fiscal 2007.  No HD-related
expenses were incurred in Fiscal 2008.




Additionally,
the decrease during Fiscal 2008 as compared to Fiscal 2007 was attributable to
lower stock-based compensation
costs (a non-cash charge) as a result of granting stock options to key employees
and accounting for such options underSFAS 123R.  See “Note 4:Employee Equity Incentive
Plans” in Part II, Item 8
of this Form 10-K.Stock-based compensation cost was $486,000 and
$915,000 during Fiscal 2008 and Fiscal 2007, respectively.




The decrease in our selling, general and
administrative expenses discussed above was somewhat offset by our increased
personnel costs to support our public company status, including the costs of
implementing and complying with the Sarbanes-Oxley Actof 2002.





Research
and Development Expense





Research and development expense
consists primarily of salaries and related costs, includingstock-based compensation
costsof employees engaged
in product research, design and development activities, compliance testing,
documentation, prototypes and expenses associated with transitioning the product
to production.The decrease in research and development
expenses during Fiscal 2008 as compared to Fiscal 2007 was a result of
terminating our HD display-related product development during November
2007.  During Fiscal 2008, salaries, expensed equipment and
contractors related to our HD display product was approximately
$1,488,000.  No HD-related research and development expenses were
incurred in Fiscal 2008.





To a
lesser extent, research and development expenses decreased as a result of
reduced stock-based compensation
cost (a non-cash charge) attributable to granting stock options to key employees
and accounting for such option grants under SFAS 123R.  See
“Note 4:  Employee Equity Incentive
Plans” in PartII, Item 8
of this Form 10-K.  Stock-based compensation
cost was $116,000 and $511,000during Fiscal2008and Fiscal 2007,
respectively.





Total
Other Income (Expense)





The most
significant component of our non-operating income (expense) was a $550,000 gain
on sale of assets during Fiscal 2008.  In December 2007, DCT entered
into an asset purchase agreement with Sky Glory Enterprise Investment Co., Ltd
(“Sky Glory”), whereby Sky Glory agreed to purchase certain HD display-related
assets, subject to certain terms and conditions.  There were no costs
associated with the sale of HD related assets.  As such, the entire
cash proceeds of $550,000 were recorded as a gain on sale of
assets.   See “Note
6:  Sale of HD Display-Related Assets” in Part II, Item 8 of this Form
10-K.





Another
significant component of our non-operating income (expense) was interest
expense, which increased during Fiscal 2008 as a result of our increased
debt.  Interest expense increased to $432,000 during Fiscal 2008 as
compared to $303,000 during Fiscal 2007.  Of the interest expense
recorded during Fiscal 2008 and Fiscal 2007 $311,000 and $88,000, respectively,
was non-cash interest expense attributable to amortization of debt discount
resulting from debt issuance costs.





- 22
-





Provision
for Income Taxes





DCT
generated taxable income during the year ended December 31, 2008.  And
although DCT has state and federal net operating loss carryforwards (“NOLs”), to
offset any current year taxable income, the current federal tax expense of
$10,000 represent alternative minimum tax as NOLs can only offset 90% of current
year taxable income.  Additionally, the State of California legislated
a two-year suspension of NOLs for tax years 2008 and 2009.  As such,
DCT’s taxable income generated during the year ended December 31, 2008 was fully
taxable at the current California statutory tax rate and resulted in state taxes
of $67,000.





Provision
for income taxes for the year ended December 31, 2007 represents the minimum
franchise tax due, $800 per annum, in the State of California for each of DCT’s
separate taxable entities.





Dividend
and Deemed Dividend on Series A Stock and Accretion of Preferred Stock
Redemption Value





The total
accretion on our Series A Stock and Series B Stock was $126,000 and $773,000
during Fiscal 2008 and Fiscal 2007, respectively.  The decrease was
attributable to the maturity of our Series A Stock on March 15,
2008.





Total
dividends on our Series A Stock were $13,000 and $80,000 during Fiscal 2008 and
Fiscal 2007, respectively.   The decrease was attributable to the
maturity of our Series A Stock on March 15, 2008.  We do not pay dividends on our Series B
Stock.





DCT
recorded a deemed dividend on its Series A Stock during the first quarter of
2008 totaling $231,000.  This non-cash dividend was recorded to
reflect the implied economic value to the preferred stockholder of converting
Series A shares into common stock at a 15% discount of the common stock price at
the time of conversion.  The fair value was calculated using the
difference between the agreed-upon conversion price of the Series A Preferred
Stock into shares of common stock and the fair market value of DCT's common
stock on the conversion date. See
“Note 8:  Equity”
in Part II, Item 8 of this
Form 10-K.





Liquidity and Capital
Resources





At
December 31, 2008, our principal sources of liquidity included cash and cash
equivalents of $405,000 and an available borrowing capacity of $1,200,000 on our
bank line of credit.





The
following table summarizes DCT’s cash and cash equivalents, working capital and
cash flows as of and for the years ended December 31, 2008 and 2007 (in thousands):




As
      of or for the year
              ended
      December 31,2008
            
            
            2007Cash
      and cash equivalents
            
            $
            405
            
            
            $
            1,770Working
      capital
            
            
            1,820
            
            
            
            2,864Cash
      provided by operating activities
            
            
            1,429
            
            
            
            36Cash
      provided by investing activities
            
            
            519
            
            
            
            93Cash
      provided (used) by financing activities
            
            
            (3,313
            )
            
            
            308





Operating
Activities





Cash
provided by operations during Fiscal 2008 was primarily a result of our $52,000
net loss, $586,000 of net non-cash expenses, and $895,000 net cash provided by
changes in operating assets and liabilities.  Cash used by operations
during Fiscal 2007 was primarily a result of our $1,060,000 net loss, $1,838,000
of net non-cash expenses and $742,000 net cash used by changes in operating
assets and liabilities.





Non-cash
items included in net loss are depreciation expense, stock-based compensation
cost of options, fair value of warrants issued for services rendered, change in
fair value of derivative instruments, change in fair value of warrant liability
and amortization of debt discount.  Changes in our operating assets
and liabilities are indicative of the decrease in the sales of our product
during Fiscal 2008 compared to Fiscal 2007.





During
the second quarter of Fiscal 2008, we sold, and our customer immediately paid
for, “end of life” parts, which totaled $230,000.  Although we don’t
recognize revenue associated with the sale until the finished scanner is shipped
to the customer, the entire transaction had a positive impact on our cash flow
from operations.




- 23
-




We had no
significant unusual cash outlays related to operating activities during Fiscal
2008 or Fiscal 2007.  We expect future cash provided (used) by
operating activities to fluctuate, primarily as a result of fluctuations in our
operating results, timing of product shipments, trade receivables collections,
inventory management and timing of vendor payments.





Investing
Activities





During
Fiscal 2008, cash provided by investing activities included a $550,000 gain on
the sale of our HD display-related assets, which positively impacted our cash
position.  This was slightly offset by the purchase of capital
equipment.





During
Fiscal 2007, cash provided by investing activities was attributable to the sale
of our 16.1% equity interest in CMOS.  As previously discussed, during
December 2007, we sold our investment in CMOS back to CMOS for
$160,000.  Cash generated from the sale of our investment in CMOS was
somewhat offset by our capital expenditures, which were primarily related to
tooling equipment required to support the production of our
products.





Both the
sale of our HD display-related assets in Fiscal 2008 and the sale of our CMOS
investment in Fiscal 2007 were a result of refocusing our efforts and economic
resources toward our core revenue generating activities.




Financing
Activities




During
Fiscal 2008, our financing activities consisted of (i) paying off our bank line
of credit, (ii) normal recurring monthly principal payments according to the
terms of our notes payable agreement, which totaled $900,000, and (3) additional
principal payments and early pay off of our notes payable, which totaled
$400,000.




During
Fiscal 2007, our financing activities consisted of (i) a $500,000 draw against
our bank line of credit to meet short-term obligations, including payment on the
purchase of our product, (ii) the replacement of our existing line of credit at
a commercial bank with a similar line of credit at a different commercial bank,
and (iii) the scheduled repayment of principal on our notes
payable.





Cash
and Working Capital Requirements





As
previously discussed, we terminated our HD display research and development
efforts during November 2007.  With the termination of the HD display
portion of our business, our operating expenses during Fiscal 2008 were more
aligned with our net sales.  Additionally, our anticipated future
operating expenses will be more aligned with our projected net
sales.  If we successfully manage our projected net sales and
realigned operating expenses, of which there can be no assurance, management
believes that current cash and other sources of liquidity are sufficient to fund
normal operations through the next 12 months.





Our
current line of credit matures on September 13, 2009.  DCT is
currently in the process of renegotiating its line of credit and has already
received an extension term sheet from its current lender.  Although
management believes DCT will be able to obtain an additional line of credit upon
maturity of the existing line of credit, there is no guarantee that DCT will be
able to secure a line of credit on terms that are acceptable to
DCT.





Contractual
Obligations





The
following table summarizes our contractual obligations at December 31, 2008, and
the effect such obligations are expected to have on our liquidity and cash flows
in future periods (in
thousands):


Less
      Than
            
            
            One
      – Three
            
            
            Three
      – FiveTotal
            
            
            One
      Year
            
            
            Years
            
            
            YearsTerm
      loan warrant liabilities(1)
            
            $
            350
            
            
            $
            350
            
            
            $
            -
            
            
            $
            -Series
      B Stock principal(2)
            
            
            150
            
            
            
            150
            
            
            
            -
            
            
            
            -Operating
      lease obligations
            
            
            336
            
            
            
            228
            
            
            
            108
            
            
            
            -Consulting
      agreement
            
            
            170
            
            
            
            170
            
            
            
            -
            
            
            
            -Total
      contractual cash obligations
            
            $
            1,006
            
            
            $
            898
            
            
            $
            108
            
            
            $
            -




(1)On
September 27, 2007, we entered into a $1,500,000 term loan agreement ("Loan
Agreement") with Montage Capital, LLC ("Lender") and used the funds to
repurchase 8,000,000 shares of our restricted common stock, as previously
discussed.  The loan was fully paid in September 2008.  In
connection with the Loan Agreement, the Company issued warrants (“Loan
Warrants”) to purchase up to 650,000 shares of our common stock at an initial
exercise price of $0.60 per share.   The Loan Warrants vested
immediately and expire September 2012.  From the initial funding of
the Loan Agreement through March 31, 2008, the warrant holders had the right to
require DCT to purchase the warrant for a maximum of $250,000.  On
March 31, 2008, the Loan Warrant repurchase price increased to a maximum of
$350,000.  The Loan Warrant repurchase feature expires September
2012.





(2)On
August 7, 2009 (the "Series B Stock Redemption Date"), all of our outstanding
Series B Stock shall be redeemed for a per share redemption price equal to the
stated value on the Series B Stock Redemption Date (the "Series B Stock
Redemption Price"). The Series B Stock Redemption Price is payable by us in cash
or in shares of common stock at our discretion and shall be paid within five
trading days after the Series B Stock Redemption Date. In the event we elect to
pay all or some of the Series B Stock Redemption Price in shares of common
stock, the shares of common stock to be delivered to the purchasers shall be
valued at 85% of the fifteen-day volume weighted average price of the common
stock on the Series B Redemption Date.




- 24
-




Off-Balance Sheet
Arrangements





At
December 31, 2008, we did not have any relationship with unconsolidated entities
or financial partnerships, which other companies have established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. Therefore, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in such relationships.





Trends





As of
December 31, 2008, to the best of our knowledge, no known trends or demands,
commitments, events or uncertainties existed, which are likely to have a
material effect on our liquidity, except as described in “Note 10: Commitments
and Contingencies” in Part II, Item 8 of this Form 10-K.




- 25
-




Item
      8.
                  FINANCIAL
      STATEMENTS
  Index to Consolidated
Financial Statements
  PageFinancial
      Statements:Report
      of Independent Registered Public Accounting Firm.
                F-2Report
      of Independent Registered Public Accounting Firm.
                F-3Consolidated
      Balance Sheets
                F-4Consolidated
      Statements of Operations
                F-5Consolidated
      Statements of Stockholders' Equity (Deficit)
                F-6Consolidated
      Statements of Cash Flows.
                F-7Notes
      to Consolidated Financial Statements
                F-8
  F -
1
  REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
 
 To the Board of Directors and
Stockholders of
 Document Capture Technologies,
Inc.
 
 We have audited the accompanying
consolidated balance sheet of Document Capture Technologies, Inc. and subsidiary
as of December 31, 2008, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year 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 audit.
 
 We conducted our audit 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.  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 audit provides 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 Capture Technologies, Inc. as of December 31,
2008, and the results of their operations and their cash flows for the year then
ended, in conformity with U.S. generally accepted accounting
principles.
 
 As discussed in Note 15 to the financial
statements, Document Capture Technologies, Inc. has changed its method of
accounting for warrants subject to registration rights agreements for the years
ending December 31, 2008 and2007due to the adoption of FSP EITF
00-19-2, Accounting for Registration Payment Arrangements.
 
 We were not engaged to examine
management's assessment of the effectiveness of Document Capture Technologies,
Inc. 's internal control over financial reporting as of December 31, 2008,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
 
 
 HEIN
& ASSOCIATES LLP
 Irvine,
California
 April 14,
2009
 
 F -
2
  REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
  
 To the
Board of Directors and Stockholders of
 Document
Capture Technologies, Inc.
 
 We have
audited the accompanying consolidated balance sheet of Document Capture
Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2007, and
the related consolidated statements of operations, stockholders' (deficit)
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit 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 were we engaged to perform, an audit of its internal
control over financial reporting. Our audit 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
audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Document
Capture Technologies, Inc. and subsidiaries as of December 31, 2007, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred recurring net losses in recent years
resulting in a substantial accumulated deficit. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 Clancy
and Co., P.L.L.C.
 Phoenix,
Arizona
 
 February
29, 2008
 
 F -
3
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands)
  December
      31,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent assets:Cash
      and cash equivalents
              
              $
              405
              
              
              $
              1,770Trade
      receivables
              
              
              1,366
              
              
              
              2,464Inventories,
      net
              
              
              1,353
              
              
              
              1,400Prepaid
      expenses and other current assets
              
              
              99
              
              
              
              32Total
      current assets
              
              
              3,223
              
              
              
              5,666Fixed
      assets, net
              
              
              98
              
              
              
              127Total
      assets
              
              $
              3,321
              
              
              $
              5,793LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Notes
      payable
              
              $
              -
              
              
              $
              989Trade
      payables to related parties
              
              
              393
              
              
              
              578Trade
      payables and other accrued expenses
              
              
              276
              
              
              
              569Accrued
      compensation and benefits
              
              
              122
              
              
              
              89Income
      taxes payable
              
              
              75
              
              
              
              -Deferred
      revenue and customer deposits
              
              
              187
              
              
              
              -Fair
      value of warrant liability
              
              
              350
              
              
              
              399Accrued
      dividends on Series A 5% cumulative convertible preferred
      stock
              
              
              -
              
              
              
              178Total
      current liabilities
              
              
              1,403
              
              
              
              2,802Long-term
      bank line of credit
              
              
              -
              
              
              
              2,021Liability
      under derivative contracts
              
              
              9
              
              
              
              91Total
      liabilities
              
              
              1,412
              
              
              
              4,914Commitments
      and contingencies (Note 12)Convertible
      preferred stock, $.001 par value, 2,000 authorized:Series
      A 5% cumulative convertible preferred stock, 0 and 11.5
shares
                issued
      and outstanding at December 31, 2008 and December 31, 2007,
                respectively;
      liquidation value of $0 and $1,150 at December 31, 2008
                and
      December 31, 2007, respectively
              
              
              -
              
              
              
              1,074Series
      B convertible preferred stock, 1.5 shares issued and
                outstanding
      at December 31, 2008 and December 31, 2007; liquidation
                value
      of $150 at December 31, 2008 and December 31, 2007
              
              
              120
              
              
              
              70Stockholders’
      equity (deficit):Common
      stock $.001par value, 50,000 authorized, 18,444 shares issued
                and
      outstanding at December 31, 2008 and 15,904 shares issued
                and
      15,404 outstanding at December 31, 2007 (500 shares held in
      escrow)
              
              
              18
              
              
              
              15Additional
      paid-in capital
              
              
              34,602
              
              
              
              32,129Accumulated
      deficit
              
              
              (32,831
              )
              
              
              (32,409
              )Total
      stockholders’ equity (deficit)
              
              
              1,789
              
              
              
              (265
              )Total
      liabilities and stockholders’ equity (deficit)
              
              $
              3,321
              
              
              $
              5,793
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F -
4
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except per share amounts)
  Years
      Ended December 31,2008
              
              
              2007Net
      sales
              
              $
              11,643
              
              
              $
              15,023Cost of
    sales
              
              
              7,696
              
              
              
              9,120Gross
      profit
              
              
              3,947
              
              
              
              5,903Operating
      expenses:Selling,
      general and administrative
              
              
              3,465
              
              
              
              4,024Research
      and development
              
              
              712
              
              
              
              2,439Total
      operating expenses
              
              
              4,177
              
              
              
              6,463Operating
      loss
              
              
              (230
              )
              
              
              (560
              )Other
      income (expense):Change
      in fair value of derivative instruments and warrant
    liability
              
              
              131
              
              
              
              38Gain
      on sale of assets
              
              
              550
              
              
              
              -Interest
      income
              
              
              3
              
              
              
              24Interest
      expense
              
              
              (432
              )
              
              
              (303
              )Other
              
              
              3
              
              
              
              (255
              )Total
      other income (expense)
              
              
              255
              
              
              
              (496
              )Net
      income (loss) before income taxes
              
              
              25
              
              
              
              (1,056
              )Provision
      for income taxes
              
              
              77
              
              
              
              4Net
      loss
              
              
              (52
              )
              
              
              (1,060
              )Accretion
      of preferred stock redemption value
              
              
              (126
              )
              
              
              (773
              )Preferred
      stock dividends
              
              
              (13
              )
              
              
              (80
              )Deemed
      dividend on preferred stock
              
              
              (231
              )
              
              
              -Net
      loss available to common stockholders
              
              $
              (422
              )
              
              $
              (1,913
              )Net
      loss available to common stockholders per common share –
                basic
      and diluted
              
              $
              (0.02
              )
              
              $
              (0.09
              )Weighted
      average common shares outstanding – basic and diluted
              
              
              17,950
              
              
              
              20,420
 The
accompanying notes are an integral part of these consolidated financial
statements.
 F -
5
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 (in
thousands)
 
 Additional
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              Stockholders’Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit .
              
              
              Equity
      (Deficit)Balances
      at December 31, 2006
              
              
              24,142
              
              
              $
              24
              
              
              $
              29,651
              
              
              $
              (28,705
              )
              
              $
              970Cumulative
      effect adjustment of applying EITF 00-19-2, net of
                tax
      (Note 15)
              
              
              
              
              
              
              
              
              
              
              1,955
              
              
              
              (1,791
              )
              
              
              164Common
      stock acquired from related party
              
              
              (2,600
              )
              
              
              (3
              )
              
              
              3
              
              
              
              -
              
              
              
              -Issuance
      of common stock upon conversion of preferred stock
              
              
              1,562
              
              
              
              2
              
              
              
              1,068
              
              
              
              -
              
              
              
              1,070Stock
      based compensation cost – options
              
              
              -
              
              
              
              -
              
              
              
              1,426
              
              
              
              -
              
              
              
              1,426Issuance
      of common stock upon cashless exercise of stock
                options
              
              
              300
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
      of common stock for retirement
              
              
              (8,000
              )
              
              
              (8
              )
              
              
              (1,992
              )
              
              
              -
              
              
              
              (2,000
              )Fair
      value of common stock warrants issued for services
                rendered
              
              
              -
              
              
              
              -
              
              
              
              18
              
              
              
              -
              
              
              
              18Accretion
      of preferred stock redemption value
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (773
              )
              
              
              (773
              )Preferred
      stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (80
              )
              
              
              (80
              )Comprehensive
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,060
              )
              
              
              (1,060
              )Balances
      at December 31, 2007
              
              
              15,404
              
              
              
              15
              
              
              
              32,129
              
              
              
              (32,409
              )
              
              
              (265
              )Issuance
      of common stock upon conversion of preferred stock
              
              
              1,844
              
              
              
              2
              
              
              
              1,339
              
              
              
              -
              
              
              
              1,341Deemed
      dividend on Series A preferred stock maturity and
                conversion
      tocommon
      stock
              
              
              
              
              
              
              
              
              
              
              231
              
              
              
              (231
              )
              
              
              -Stock
      based compensation cost – options
              
              
              -
              
              
              
              -
              
              
              
              602
              
              
              
              -
              
              
              
              602Issuance
      of common stock upon cashless exercise of stock
                options
              
              
              646
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of common stock upon exercise of stock options
              
              
              800
              
              
              
              1
              
              
              
              7
              
              
              
              -
              
              
              
              8Cancellation
      of common stock for non-performance of contract
              
              
              (250
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Fair
      value of common stock warrants issued for services
                rendered
              
              
              -
              
              
              
              -
              
              
              
              294
              
              
              
              -
              
              
              
              294Accretion
      of preferred stock redemption value
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (126
              )
              
              
              (126
              )Preferred
      stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (13
              )
              
              
              (13
              )Comprehensive
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (52
              )
              
              
              (52
              )Balances
      at December 31, 2008
              
              
              18,444
              
              
              $
              18
              
              
              $
              34,602
              
              
              $
              (32,831
              )
              
              $
              1,789
 The
accompanying notes are an integral part of these consolidated financial
statements.
 F -
6
  DOCUMENT CAPTURE TECHNOLOGIES, INC. AND
SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
  Years
      Ended December 31,2008
              
              
              2007Operating
      activitiesNet
      loss
              
              $
              (52
              )
              
              $
              (1,060
              )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
              
              
              47
              
              
              
              48Fair
      value of common stock warrants issued for services
rendered
              
              
              294
              
              
              
              18Stock
      base compensation cost – options
              
              
              602
              
              
              
              1,426Change
      in fair value of derivative instruments and warrant
    liability
              
              
              (131
              )
              
              
              (38
              )Interest
      expense attributable to amortization of debt issuance
costs
              
              
              311
              
              
              
              88Gain
      on sale of assets
              
              
              (550
              )
              
              
              -Allowance
      for slow-moving inventory
              
              
              -
              
              
              
              20Loss
      on disposal of assets and other non-cash non-operating
      expenses
              
              
              13
              
              
              
              276Changes
      in operating assets and liabilities:Trade
      receivables
              
              
              1,098
              
              
              
              (651
              )Inventories
              
              
              47
              
              
              
              222Prepaid
      expenses and other current assets
              
              
              (67
              )
              
              
              41Trade
      payables to related parties
              
              
              (185
              )
              
              
              (374
              )Trade
      payables and other accrued expenses
              
              
              (293
              )
              
              
              51Accrued
      compensation and benefits
              
              
              33
              
              
              
              (31
              )Income
      taxes payable
              
              
              75
              
              
              
              -Deferred
      revenue and customer deposits
              
              
              187
              
              
              
              -Cash
      provided by operating activities
              
              
              1,429
              
              
              
              36Investing
      activitiesCash
      proceeds from sale of assets
              
              
              550
              
              
              
              -Cash
      proceeds from sale of long-term investment
              
              
              -
              
              
              
              160Capital
      expenditures
              
              
              (31
              )
              
              
              (67
              )Cash
      provided by investing activities
              
              
              519
              
              
              
              93Financing
      activitiesPrincipal
      payments on notes payable
              
              
              (1,300
              )
              
              
              (200
              )(Decrease)
      increase in bank line of credit, net
              
              
              (2,021
              )
              
              
              508Proceeds
      from exercise of common stock options
              
              
              8
              
              
              
              -Cash
      (used) provided by financing activities
              
              
              (3,313
              )
              
              
              308(Decrease)
      increase in cash and cash equivalents
              
              
              (1,365
              )
              
              
              437Cash
      and cash equivalents at beginning of year
              
              
              1,770
              
              
              
              1,333Cash
      and cash equivalents at end of year
              
              $
              405
              
              
              $
              1,770Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
              
              $
              137
              
              
              $
              198Income
      taxes
              
              $
              2
              
              
              $
              4Non-cash
      investing and financing activities:Restricted
      common stock acquired from related party
              
              $
              -
              
              
              $
              2Conversion
      of convertible preferred stock to common stock
              
              $
              1,341
              
              
              $
              1,070Issuance
      of common stock warrants in connection with debt financing
              
              $
              -
              
              
              $
              399Purchase
      of restricted common stock for retirement
              
              $
              -
              
              
              $
              2,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F -
7
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Note
1 – Organization and Significant Accounting Policies
 
 Organization
 
 Document
Capture Technologies, Inc. ("DCT" or "Company") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices (“SOHO”), professional practices as well as consumers
(referred to herein collectively as “Enterprises”). DCT is a market-leader in
providing USB-powered scanning solutions to a wide variety of industries and
market applications. DCT’s patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed in both business
and personal use.
 
 Syscan,
Inc. (“Syscan”), DCT’s wholly-owned subsidiary, was incorporated in California
in 1995 to develop and manufacture a new generation of contact image sensors
(“CIS”) that are complementary metal-oxide-silicon (“CMOS”) imaging sensor
devices. During the late 1990s, DCT established many technical milestones and
was granted numerous patents for its linear imaging technology. DCT’s patented
CIS and mobile imaging scanner technology provides high quality images at
extremely low power consumption levels allowing delivery of compact scanners in
a form ideally suited for laptop or desktop computer users who need a small
lightweight device to scan or fax documents.
 
 DCT’s
business model was developed around intellectual property (“IP”) driven products
sold primarily to original equipment manufacturers (“OEM”), private label brands
and value added resellers (“VAR”) and can be found in a variety of applications,
including but not limited, to the following:
 
 ·
              Document
      and information management;
 ·
              Identification
      card scanners;
 ·
              Passport
      security scanners;
 ·
              Bank
      note and check verification;
 ·
              Business
      card readers;
 ·
              Barcode
      scanning; and
 ·
              Optical
      mark readers used in lottery
terminals.
 
 Until
December 31, 2007, DCT engaged in the research and development of certain
technologies related to the field of high definition (“HD”)
display.  During that time, DCT expanded its HD display initiative
through acquisition, exclusive licensing and the addition of key personnel and
expended significant resources to develop its HD display
technology.  However, in November 2007, DCT terminated its HD display
research and development efforts.  All HD-related expenses, employees
and contractors were terminated by December 31, 2007.  DCT sold its
HD-related assets during the first quarter of 2008.  See Note
6.  No HD-related expenses were incurred during the year ended
December 31, 2008.
 
 Basis
of Financial Statements
 
 The
consolidated financial statements include the accounts of DCT and its one
subsidiary Syscan.  All significant intercompany transactions and
balances have been eliminated.  DCT’s functional currency is the
United States (U.S.) dollar.  As such, DCT does not have any
translation adjustments.  Monetary accounts denominated in non-U.S.
currencies, such as cash or payables to vendors, have been re-measured to the
U.S. dollar.  Gains and losses resulting from foreign currency
transactions are included in the results of operations.  To date, DCT
has not entered into hedging activities to offset the impact of foreign currency
fluctuations.
 
 Certain
accounts have been reclassified to conform to the current period
presentation.  Such reclassifications did not affect DCT’s total net
sales, operating loss, net loss available to common stockholders, financial
position or liquidity at December 31, 2007.  Specifically, $149,000,
which related to the fair value classification of warrants, was reclassed from
additional paid-in capital to current liabilities at December 31,
2007.  See Note 10 for further discussion of the accounting for
warrants.
  F -
8
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Use
of Estimates
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes its best estimate of the ultimate outcome for
these items based on historical trends and other information available when the
financial statements are prepared. Changes in estimates are recognized in
accordance with the accounting rules for the estimate, which is typically in the
period when new information becomes available to management.  Actual
results could differ from those estimates.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents consist of cash and highly liquid investments.  DCT
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.  DCT had no cash equivalents at
December 31, 2008 or 2007.
 
 Fair
Value of Financial Instruments
 
 On
January 1, 2008, DCT adopted Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements
(“SFAS 157”).  SFAS 157 defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market
participants at the measurement date.
 
 SFAS 157 establishes three levels of
inputs that may be used to measure fair value:
 
  Level 1. Quoted
prices in active markets for identical assets or liabilities.  DCT had
no Level 1 assets or liabilities at December 31, 2008.
 
 Level 2. Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated with observable market data for substantially the full term of the
assets or liabilities.  DCT had no Level 2 assets or liabilities at
December 31, 2008.
 
 Level 3.  Unobservable
inputs to the valuation methodology that are significant to the measurement of
the fair value of assets or liabilities.  DCT had no Level 3
assets.  Level 3 liabilities include (i) warrant and (ii) derivative
contracts liabilities.  DCT estimates the fair value of Level 3
liabilities using the Black-Scholes valuation model. See Note 7 for further
discussion of the fair value of DCT’s Level 3 liabilities.
  The
carrying value of cash and cash equivalents, trade receivables and payables,
prepaid expenses and other current assets, amounts due to related parties, and
other payables and accruals approximates fair value due to the short period of
time to maturity.
 
 Concentration
of Credit Risk and Major Customers
 
 Financial
instruments that subject DCT to credit risk are cash balances maintained in
excess of federal depository insurance limits and trade
receivables.
 
 Cash and Cash
Equivalents.  DCT
maintains cash balances at several banks. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As
of December 31, 2008, DCT had consolidated balances of approximately $324,000,
which were not guaranteed by FDIC. DCT has not experienced any losses in such
accounts and believes the exposure is minimal.
 
 F -
9
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Major Customers and Trade
Receivables.  A relatively small number of customers account
for a significant percentage of DCT’s sales.  The percentage of sales
derived from significant customers is as follows:
 
 Year
      Ended December 31,2008
              
              
              2007Customer
      A
              
              
              27
              %
              
              
              27
              %Customer
      B
              
              
              19
              
              
              
              16Customer
      C
              
              
              13
              
              
              
              12Customer
      D
              
              
              12
              
              
              
              **Customer
      E
              
              
              11
              
              
              
              17
 
 **Represents
less than 10% of sales.
 
 Trade
receivables from these customers totaled $1,261,000 at December 31,
2008.  As of December 31, 2008 all DCT's trade receivables were
unsecured.  The risk with respect to trade receivables is mitigated by
credit evaluations performed on customers and the short duration of payment
terms extended to customers.
 
 Concentration
of Supplier Risk
 
 Manufacturing.  DCT
purchases substantially all its finished scanner imaging products from one
vendor that is also a wholly-owned subsidiary of the parent company of DCT’s
former majority stockholder.  See Note 3.  If this vendor
became unable to provide materials in a timely manner and DCT was unable to find
alternative vendors, DCT's business, operating results and financial condition
would be materially adversely affected.
 
 Components.  DCT purchases some controller chips that
are sole-sourced, as they are specialized devices.  To date, DCT has
been able to obtain adequate component supplies from existing sources.  If
in the future DCT became unable to obtain sufficient quantities of required
materials, components or subassemblies, or if such items do not meet quality
standards, delays or reductions in product shipments could occur, which could
harm DCT’s business,operating results and financial condition.
 
 Inventories
 
 Inventories
consist of finished goods and components, which are stated at the lower of cost
or net realizable value, with cost computed on a first-in, first-out basis.
Provision is made for obsolete, slow-moving or defective items where
appropriate. The amount of any provision is recognized as a component of cost of
sales in the period the provision occurs.  DCT had no material
inventory write offs during the years ended December 31, 2008 or
2007.
 
 Fixed
Assets
 
 Fixed
assets, stated at cost, are depreciated over the estimated useful lives of the
assets using the straight-line method over periods ranging from three to seven
years. Significant improvements and betterments are capitalized. Routine repairs
and maintenance are expensed when incurred. Gains and losses on disposal of
fixed assets are recognized in the Statement of Operations based on the net
disposal proceeds less the carrying amount of the assets.
 
 Long-Term
Investments
 
 Until
December 2007, DCT owned one long-term investment, which consisted of an equity
interest in CMOS Sensor, Inc. (“CMOS”), a California corporation, principally
engaged in the research and development of infrared sensors and CMOS sensors.
DCT owned 16.1% of CMOS and accounted for the investment using the cost method
of accounting. DCT carried the CMOS investment at cost less provision for any
impairment in value. During December 2007, DCT sold its 16.1% investment in CMOS
back to CMOS for $160,000.  As the long-term investment was sold for
the carrying value of the asset, there was no gain or loss associated with the
transaction.  DCT had no long-term investments at December 31, 2008 or
at December 31, 2007.
 
 F -
10
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Impairment
of Long-Lived Assets
 
 In
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”), if indicators of impairment
exist, DCT assesses the recoverability of the affected long-lived assets by
determining whether the carrying value of such assets can be recovered through
the undiscounted future operating cash flows. If impairment is indicated, DCT
measures the amount of such impairment by comparing the assets’ carrying value
to the assets’ present value of the expected future cash flows.  DCT
had no impairment losses during the years ended December 31, 2008 and
2007.
 
 Preferred
Stock Accounting Treatment
 
 Preferred Stock
Classification.  Pursuant to the FASB’s Emerging Issues Task
Force (“EITF”) EITF 00-19, Accounting for Derivative Financial
Instruments (“EITF 00-19”), and EITF Topic D-98, Classification and Measurement of
Redeemable Securities (“Topic D-98”), DCT’s series A 5% cumulative
convertible redeemable preferred stock (“Series A Stock”) and series B
convertible redeemable preferred stock (“Series B Stock”) was reported as
temporary equity.
 
 The
difference between the initial recorded value of the Series A Stock and Series B
Stock and the minimum redemption value is accreted, on a straight-line basis,
from the respective issuance date through the maturity date with the offset
booked to DCT’s accumulated deficit.  The accretion of DCT’s Series A
Stock and Series B Stock redemption value is disclosed as a reconciling item and
adjusts DCT’s reported net loss, together with the Series A Stock dividends and
deemed dividends, to net loss available to common stockholders.
 
 Likely Embedded
Derivative.  Under the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”) and EITF 00-19, the
conversion feature of DCT’s Series A Stock (until the March 15, 2008 maturity
date) and Series B Stock are derivative instruments (referred to collectively as
“Derivative Instruments”) that require bifurcation from the host
contract.  Accordingly, the fair value of DCT’s outstanding Derivative
Instruments has been recorded in DCT’s Balance Sheet as a liability at December
31, 2008 and 2007.  The fair value of the Derivative Instruments are
adjusted at each reporting date.  Increases in the estimated fair
value of DCT’s Derivative Instruments are recorded as non-operating expense on
DCT’s Statements of Operations.  Decreases in the estimated fair value
of DCT’s Derivative Instruments are recorded as non-operating income on DCT’s
Statements of Operations.
 
 DCT
estimates the fair value of these derivatives using the Black-Scholes valuation
model. The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. The Black-Scholes valuation model requires the input of highly
subjective assumptions, including the expected stock price volatility. DCT's
Derivative Instruments have characteristics significantly different from traded
options, and the input assumptions used in the model can materially affect the
fair value estimate.
 
 The fair
values of DCT’s Derivative Instruments were determined under the following
assumptions:
 
 December
      31,2008
              
              
              2007Series A Stockremaining contractual term
      (years)
              
              
              -
              
              
              
              0.2Series B Stockremaining contractual term
      (years)
              
              
              0.6
              
              
              
              1.6Expected
      volatility
              
              
              111
              %
              
              
              40%-164
              %Expected
      dividend yield
              
              
              -
              
              
              
              -Risk
      free interest rate
              
              
              0.3
              %
              
              
              3
              %
 
 See
further discussion and disclosure of fair value at Note 7.
 
 F -
11
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Revenue
Recognition and Allowance for Doubtful Accounts and Returns
Allowances
 
 Revenues.  Revenues
consist of product sales including the sale of optical image capturing devices,
modules of optical image capturing devices, and chips and other optoelectronic
products. Revenue is recognized when the product is shipped and the risks and
rewards of ownership have transferred to the customer. Shipping charges billed
to customers are included in net sales and the related shipping costs are
included in cost of sales, separately, in the period of shipment.
 
 Allowance for doubtful
accounts and return allowances.  DCT presents trade
receivables, net of allowances for doubtful accounts and returns, to ensure
trade receivables are not overstated due to uncollectible accounts. Allowances,
when required, are calculated based on a detailed review of certain individual
customer accounts and an estimation of the overall economic conditions affecting
DCT’s customer base. DCT reviews a customer’s credit history before extending
credit. If the financial condition of its customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. DCT had no allowance for doubtful accounts as of
December 31, 2008 or 2007 and no material trade receivable write offs during any
period presented.
 
 Research
and Development Expenses
 
 Research
and development costs are expensed as incurred.
 
 Advertising
Costs
 
 Advertising
costs are expensed as incurred and were immaterial for all periods
presented.
 
 Employee
Equity Incentive Programs
 
 In
December 2004, the FASB issued SFAS 123-R, Share-Based Payment (“SFAS
123(R)”).SFAS 123(R)
replaces SFAS 123, Accounting
for Stock-Based Compensation, and supersedes the Accounting Principles
Board(“APB”)APB
Opinion 25, Accounting for
Stock Issued to Employees (“APB 25”).  SFAS 123(R) requires,
among other things, that all share-based payments to employees, including grants
of stock options, be measured based on their grant-date fair value and
recognized as expense.
 
 Effective
January 1, 2006, DCT adopted the fair value recognition provisions of SFAS
123(R) using the modified prospective application method. Under this transition
method, compensation expense recognized for the years ended December 31, 2008
and 2007, includes the applicable amounts of: (a) compensation expense of all
stock-based payments granted prior to, but not yet vested as of January 1, 2006
(based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123 and APB 25), and (b) compensation expense for all
stock-based payments granted subsequent to January 1, 2006 (based on the
grant-date fair value estimated in accordance with the new provisions of SFAS
123(R)). Compensation expense recognized for the year ended December 31, 2008
includes only compensation expense calculated under the provisions of SFAS
123(R) as the expense attributable to options issued prior to January 1, 2006
was fully recognized by December 31, 2007.  DCT used the straight-line
method to recognize share-based compensation over the service period of the
award.
 
 DCT
estimates the fair value of the options on the grant date using the
Black-Scholes valuation model under the following assumptions:
 
 Year
      Ended December 31,2008
              
              
              2007Weighted
      average expected option life in years
              
              
              3.5
              
              
              
              3.0Weighted
      average expected volatility
              
              
              259
              %
              
              
              111
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %Weighted
      average risk free interest rate
              
              
              2.8
              %
              
              
              5.2
              %
  F -
12
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Income
Taxes
 
 DCT
accounts for income taxes under the liability method of accounting for income
taxes in accordance with the provisions of SFAS 109, Accounting for Income Taxes
(“SFAS 109”) and related interpretations and guidance including FIN 48, Accounting for Uncertainty in Income
Taxes–an interpretation of FASB Statement No. 109 (“FIN
48”).  Current income tax expense or benefit is the amount of income
taxes expected to be payable or refundable for the current year. A deferred
income tax asset or liability is computed for the expected future impact of
differences between the financial reporting and tax basis of assets and
liabilities and for the expected future tax benefit to be derived from tax
credits and loss carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.   All tax positions are first analyzed to determine if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of any related
appeals or litigation processes.   After the initial analysis,
the tax benefit is measured as the largest amount that is more than 50% likely
of being realized upon ultimate settlement.
 
 Comprehensive
Income (Loss)
 
 DCT
includes items of other comprehensive income (loss) by their nature in a
financial statement and displays the accumulated balance of other comprehensive
income (loss) separately in the equity section of the Balance
Sheet.   DCT had no other comprehensive income (loss) items for
any of the periods presented.
 
 Net
Loss Per Share
 
 Basic net
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the period.  Diluted net
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period.  As DCT incurred net losses for all periods presented, common
stock equivalents of 2,569,000 and 6,102,000 for the years ended December 31,
2008 and 2007, respectively, were excluded from diluted net loss per share as
their effect would be anti-dilutive.  As a result, for all periods
presented, DCT’s basic and diluted net loss per share is the same.
 
 Note
2 – Recent Accounting Pronouncements
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133
(“SFAS 161”).  SFAS 161 requires enhanced disclosure related to
derivatives and hedging activities and thereby seeks to improve the transparency
of financial reporting. Under SFAS 161, entities are required to provide
enhanced disclosures relating to: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedge items are
accounted for under SFAS 133 and related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.
 
 SFAS 161
must be applied prospectively to all derivative instruments and non-derivative
instruments that are designated and qualify as hedging instruments and related
hedged items accounted for under SFAS 133 for all financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, and, as
such, DCT will adopt this standard on January 1, 2009.  DCT is
currently evaluating the potential impact this standard may have on its
consolidated financial position, cash flows and results of
operations.
 
 In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days following the SEC's approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles." We do not expect the adoption of SFAS 162 to have a material effect
on our consolidated financial position, cash flows and results of
operations.
  F -
13
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  In May
2008, the FASB issued a FASB Staff Position (“FSP”) APB 14-1 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer's
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis and will be adopted by
DCT on January 1, 2009.  DCT is currently evaluating the potential
impact this standard may have on its consolidated financial position, cash flows
and results of operations.
  In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock(“EITF-07-05”).
EITF 07-5 mandates a two-step process for evaluating whether an equity-linked
financial instrument or embedded feature is indexed to the entity’s own stock.
EITF 07-5 is effective for DCT beginning with its first quarter ended March 31,
2009. The Company does not expect the adoption of EITF 07-5 will have a material
impact on its financial condition or results of operations.
 
 Other
recent accounting pronouncements issued by the FASB (including the EITF), the
American Institute of Certified Public Accountants (“AICPA”), and the SEC did
not or are not believed by management to have a material impact on DCT's present
or future financial statements.
 
 Note
3 – Related-Party Transactions
 
 Related-Party
Purchases
 
 The
Company purchases the majority of its finished scanner imaging products from
Shenzhen Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan
Technology Holdings Limited ("STH"), the parent company of DCT’s former majority
stockholder.
 
 Purchases
from SST totaled $6,816,000 and $8,369,000 for the years ended December 31, 2008
and 2007, respectively.  All purchases from SST were carried out in
the normal course of business. As a result of these purchases, DCT was liable to
SST for $393,000 and $578,000 at December 31, 2008 and 2007,
respectively.
 
 Related-Party Net
Sales
 
 During
the year ended December 31, 2008, DCT recorded net sales totaling $57,000 for
finished scanners sold to SST, a wholly-owned subsidiary of STH.  The
related cost of goods sold was $41,000.  This transaction contained
similar terms and conditions as for other transactions of this nature entered
into by DCT.
 
 Note
4 – Employee Equity Incentive Plans
 
 General
 
 DCT’s
share-based awards are long-term retention plans that are intended to attract,
retain and provide incentives for talented employees.  DCT believes
its share-based awards are critical to its operation and productivity. The
employee share-based award plans allow DCT to grant, on a discretionary basis,
incentive stock options and non-qualified stock options.
 
 F -
14
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Stock
Options
 
 DCT
issues options under two different stock option plans (both approved by
shareholders) as well as through employment agreements with key employees,
executives and consultants (approved by the board of directors on a case-by-case
basis).  The following table sets forth, by the respective option
plan, certain aspects of DCT’s stock options as of December 31,
2008:
 
 Option
      Approval Method
              
              
              Options
      Outstanding and Options AvailableDescription
              
              Board
      of Directors
              
              
              Board
      of Directors and Shareholders
              
              
              Total
              
              
              Outstanding
              
              
              Available
      For Future Grant
              
              
              Total2002
      Amended and Restated Stock Option Plan
              
              
              -
              
              
              
              3,200,000
              
              
              
              3,200,000
              
              
              
              3,200,000
              
              
              
              -
              
              
              
              3,200,000Key
      Personnel Option Grants
              
              
              6,650,000
              
              
              
              -
              
              
              
              6,650,000
              
              
              
              4,891,165
              
              
              
              -
              
              
              
              4,891,1652006
      Stock Option Plan
              
              
              
              
              
              
              2,500,000
              
              
              
              2,500,000
              
              
              
              1,204,333
              
              
              
              1,295,667
              
              
              
              2,500,000Total
              
              
              6,650,000
              
              
              
              5,700,000
              
              
              
              12,350,000
              
              
              
              9,295,498
              
              
              
              1,295,667
              
              
              
              10,591,165
 
 Stock-Based
Compensation
 
 The
following table sets forth the total stock-based compensation expense included
in DCT’s Statements of Operations (in thousands):
 
 Year
      Ended December 31,2008
              
              
              2007Selling,
      general and administrative
              
              $
              486
              
              
              $
              915Research
      and development
              
              
              116
              
              
              
              511$
              602
              
              
              $
              1,426
 
 At
December 31, 2008, DCT had approximately $1,349,000 of total unrecognized
compensation cost related to unvested stock options. This cost is expected to be
recognized over a weighted-average period of approximately three
years.
 
 Stock
Option Activity and Outstanding
 
 Additional
information with respect to stock option activity is as follows:
 
 Options
              
              
              Weighted-Average
      Exercise PriceOutstanding
      at December 31, 2006
              
              
              4,890,000
              
              
              $
              0.18Granted
              
              
              3,186,000
              
              
              
              0.70Exercised
              
              
              300,000
              
              
              
              0.01Cancelled
              
              
              928,450
              
              
              
              0.82Outstanding
      at December 31, 2007
              
              
              6,847,550
              
              
              
              0.34Granted
              
              
              5,105,000
              
              
              
              0.30Exercised
              
              
              1,446,000
              
              
              
              0.01Cancelled
              
              
              1,211,052
              
              
              
              0.74Outstanding
      at December 31, 2008
              
              
              9,295,498
              
              
              $
              0.32
 
 F -
15
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  The
following table summarizes all options outstanding and exercisable by price
range as of December 31, 2008:
 
 Options
      Outstanding
              
              
              Options
      ExercisableRange
      of Exercise Prices
              
              
              Number
      Outstanding
              
              
              Weighted-Average
      Remaining Contractual Life (Years)
              
              
              Weighted-Average
      Exercise Price
              
              
              Number
      Exercisable
              
              
              Weighted-Average
      Exercise Price$
              0.01
              
              
              
              2,241,165
              
              
              
              3.32
              
              
              $
              0.01
              
              
              
              2,241,165
              
              
              $
              0.01$
              0.30
              
              
              
              5,035,000
              
              
              
              9.54
              
              
              $
              0.30
              
              
              
              -
              
              
              
              -$
              0.60
      - $0.70
              
              
              
              2,019,333
              
              
              
              8.06
              
              
              $
              0.69
              
              
              
              1,424,000
              
              
              $
              0.699,295,498
              
              
              
              
              
              
              
              
              
              
              
              3,665,165
 
 The “intrinsic value” of options is the
excess of the value of DCT stock and the exercise price of such
options.  The total intrinsic value of options outstanding was
approximately $4,369,000 and $5,410,000 at December 31, 2008 and 2007,
respectively. The total intrinsic value for exercisable options was $1,723,000
and $3,934,000 at December 31, 2008 and 2007, respectively. The total intrinsic
value for stock options exercised was approximately $965,000 and $222,000 for
the years ended December 31, 2008 and 2007, respectively.
 
 Note
5 – Composition of Certain Financial Statement Captions
 
 Inventories
are summarized as follows (in
thousands):
 
 December
      31,2008
              
              
              2007Raw
      materials
              
              $
              135
              
              
              $
              -Finished
      goods
              
              
              1,238
              
              
              
              1,4201,373
              
              
              
              1,420Less:  Allowance
      for slow-moving inventory
              
              
              (20
              )
              
              
              (20
              )$
              1,353
              
              
              $
              1,400
 
 Fixed
assets are summarized as follows (in thousands):
 
 December
      31,2008
              
              
              2007Computer
      and office equipment
              
              $
              51
              
              
              $
              37Tooling
      and product design
              
              
              166
              
              
              
              187217
              
              
              
              224Less:
      Accumulated depreciation
              
              
              (119
              )
              
              
              (97
              )$
              98
              
              
              $
              127
  Fixed
asset depreciation expense totaled $47,000 and $48,000 for the years ended
December 31, 2008 and 2007, respectively.
 
 Deferred
revenue and customer deposits are summarized as follows (in thousands):
 
 December
      31,2008
              
              
              2007Deferred
      revenue
              
              $
              148
              
              
              $
              -Customer
      deposits
              
              
              39
              
              
              
              -$
              187
              
              
              $
              -
 
 In
certain instances, DCT requires advance payments from
customers.  Revenue from advanced payments for is recognized when the
finished product is shipped.  Revenue from advanced payments for
services is recognized when earned.
  F -
16
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  During
the year ended December 31, 2008, DCT entered into a financial transaction
whereby it sold, and the customer immediately paid for, “end of life” parts used
to manufacture certain scanners.  The associated revenue is recognized
when the finished scanner is shipped to the customer.  During year
ended December 31, 2008, DCT recognized revenue of $82,000 and deferred revenue
of $148,000 associated with this financial transaction.  DCT
anticipates shipping all completed scanners within 12 months.  As
such, the $148,000 deferred revenue is classified as a current
liability.
 
 Note
6 – Sale of HD Display-Related Assets
 
 In
December 2007, DCT entered into an asset purchase agreement with Sky Glory
Enterprise Investment Co., Ltd (“Sky Glory”), whereby Sky Glory agreed to
purchase certain HD display-related assets, subject to certain terms and
conditions, for a total of $600,000 cash.  On March 31, 2008, DCT
received an initial $400,000 cash payment.  A second cash payment of
$150,000 was received on May 2, 2008.  On June 26, 2008, DCT entered
an agreement with Darwin Hu to assign and transfer DCT’s rights to the final
$50,000 owed by Sky Glory to Mr. Hu in lieu of any additional severance
compensation (approximately $72,000) owed to Mr. Hu as of June 26,
2008.
 
 Darwin Hu
is a current member of DCT’s board of directors and was the Chairman of DCT’s
board of directors until his resignation effective July 15, 2008.  Mr.
Hu was instrumental in negotiating and closing the sale of the HD
display-related assets.  Until March 1, 2008, Mr. Hu was DCT’s
President and Chief Executive Officer, at which time he resigned from DCT to
become an executive at a subsidiary of Sky Glory.
 
 There
were no costs associated with the sale of HD related assets.  As such,
the entire cash proceeds of $550,000 were recorded as a gain on sale of assets
during the year ended December 31, 2008.
 
 Note
7 – Fair Value
 
 As
discussed in Note 1, DCT has only Level 3 liabilities that are measured at fair
value on a recurring basis.  Level 3 liabilities were presented on
DCT’s Balance Sheet as of December 31, 2008 as follows (in thousands):
 
 Description
              
              Balance
      Sheet Presentation
              
              Fair
      Value (1)Warrant
      liability for puttable warrants
              
              Fair
      value of warrant liability
              
              $
              350Derivative
      liabilities
              
              Liability
      under derivative contracts
              
              
              9$
              359
 
 (1) Fair
value measurement at reporting date using significant unobservable inputs (Level
3).
 
 The
following table summarizes the changes in Level 3 liabilities measured at fair
value on a recurring basis for the year ended December 31, 2008 (in thousands):
 
 Fair
      Value of Warrant Liability (Note 10)
              
              
              Liability
      under Derivative Contracts
              
              
              TotalBalance
      at December 31, 2007
              
              $
              399
              
              
              $
              91
              
              
              $
              490Unrealized
      gain included in Net income
              
              
              (49
              )
              
              
              (82
              )
              
              
              (131
              )Balance
      at December 31, 2008
              
              $
              350
              
              
              $
              9
              
              
              $
              359
 
 Note
8 – Equity
 
 Common
Stock Activity
 
 During
the first quarter of 2007, DCT acquired 2,600,000 shares of DCT’s restricted
common stock.  DCT’s transfer agent subsequently cancelled the
shares.
  F -
17
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  During
the second quarter of 2007, DCT issued 300,000 shares of common stock upon the
exercise of employee stock options by DCT’s principal officers in a cashless
exercise.
 
 During
the second quarter of 2007, DCT issued 30,927 shares of common stock resulting
from the conversion of $26,500 (265 shares) of Series A Stock and the related
accrued dividend shares of 4,427 as discussed below.
 
 During
the third quarter of 2007, DCT issued 560,734 shares of common stock resulting
from the conversion of  (i) $388,500 (3,885 shares) of Series A Stock
and the related accrued dividend shares of 55,527 and 86,707 shares for payment
of penalties associated with an ineffective SB-2 registration statement, and
(ii) $30,000 (300 shares) of Series B Stock as discussed below.
 
 During
the third quarter of 2007, DCT repurchased 8,000,000 of its restricted common
stock from its majority shareholder for $2,000,000 less related transaction
fees.  Of the $2,000,000 consideration, $500,000 was paid through the
DCT’s line of credit and the remainder was financed through a $1,500,000 loan
from Montage Capital, LLC a private investment group.  See Note
10.  DCT repurchased the 8,000,000 shares for the purpose of retiring
the shares.
 
 During
the fourth quarter of 2007, DCT issued 970,000 shares of common stock resulting
from the conversion of $970,000 (9,700 shares) of Series B Stock as discussed
below.
 
 During
the first quarter of 2008, DCT cancelled 750,000 shares of its common stock (of
which 500,000 shares were never released from escrow) as a result of terminating
its HD display-related research and development
efforts.    The shares were originally issued in
anticipation of reaching research and development milestones and
conditions.  However, the milestones and performance criteria were not
met before the project was terminated.
 
 During
the first quarter of 2008, DCT issued 1,446,000 shares of common stock upon the
exercise of stock options by DCT’s principal officers, employees and
consultants.  Of the options exercised, 646,000 shares were completed
through a cashless exercise.
 
 During
the first quarter of 2008, DCT issued 1,844,016 shares of common stock resulting
from the maturity of $1,150,000 (11,500 shares) of Series A Stock and the
related accrued dividend shares.
 
 Preferred
Stock Activity
 
 Series
A Stock Activity
 
 During
the second quarter of 2007, 265 shares of Series A Stock ($26,500) and the
related accrued dividend shares of 4,427 were converted into shares of common
stock.
 
 During
the third quarter of 2007, 3,885 shares of Series A Stock ($388,500) and the
related accrued dividend shares of 55,527 were converted into shares of common
stock.
 
 Series
A Stock Dividends
 
 Through
the Series A Stock Redemption Date, DCT’s Series A Stock called for cumulative
dividends at a rate of five percent per annum, payable semiannually on July 1
and January 1.  Dividends were payable in cash, by accretion of the
stated value or in shares of common stock. Subject to certain terms and
conditions, the decision whether to accrete dividends to the stated value of the
Series A Stock or to pay for dividends in cash or in shares of common stock, was
at DCT’s discretion.  DCT did not pay any cash dividends on its Series
A Stock.  During the years ended December 31, 2008 and 2007, Series A
Stock dividends were approximately $13,000 and $80,000, respectively, and were
recorded as a reconciling item adjusting reported net loss to net loss available
to common stockholders.
 
 F -
18
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Series
A Stock Maturity
 
 On March
15, 2008 (the "Series A Stock Redemption Date"), all of DCT’s outstanding Series
A Stock was redeemed for a per share redemption price equal to the stated value
on the Series A Stock Redemption Date (the "Series A Stock Redemption
Price").  The Series A Stock Redemption Price included principal and
accrued dividends.  The Series A Stock Redemption Price was payable
either in cash or in shares of common stock at DCT’s sole
discretion.  DCT elected to pay all of the Series A Stock Redemption
Price in shares of common stock.  According to the terms of the Series
A Stock agreement, the shares of common stock that were delivered to holders of
the Series A Stock were valued at 85% of the fifteen-day volume weighted average
price of the common stock on the Series A Redemption Date.
 
 Series
A Stock Deemed Dividends
 
 In
accordance with EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios(“EITF 98-5”), and EITF Issue No. 00-27, Application of Issue 98-5 to Certain
Convertible Instruments(“EITF 00-27”), DCT’s Series A Stock had an
embedded contingent beneficial conversion feature because the conversion price
was less than the fair value of DCT’s common stock on the maturity and
conversion of the Series A Stock into common stock.  The embedded
beneficial conversion feature was considered contingent because it was based on
how much of the Series A Stock Redemption Price was paid in DCT’s common stock
versus cash.
 
 Under
EITF 98-5, a contingent beneficial conversion feature should be recognized in
earnings when all contingencies are resolved.  DCT recorded a deemed
dividend on its Series A Stock during the first quarter of 2008 totaling
$231,000.  This non-cash dividend was recorded to reflect the implied
economic value to the preferred stockholder of converting Series A shares into
common stock at a 15% discount of the common stock price at the time of
conversion.  The fair value was calculated using the difference
between the agreed-upon conversion price of the Series A Preferred Stock into
shares of common stock and the fair market value of DCT's common stock on the
conversion date. This amount was charged to accumulated deficit with the
offsetting credit to additional paid-in-capital.
 
 DCT
treated the deemed dividend on Series A Stock as a reconciling item to adjust
its reported net loss, together with Series A Stock dividends recorded during
the applicable period, to the net loss available to common stockholders line
item on the Statements of Operations.
 
 Series
B Convertible Preferred Stock
 
 Series B
Stock Conversion Rights.
All or any portion of the stated value of the Series B Stock outstanding may be
converted into common stock at anytime by the investors. The initial fixed
conversion price of the Series B Stock is $1.00 per share ("Conversion Price").
The Conversion Price is subject to anti-dilution protection adjustments, on a
full ratchet basis, until the date that is twelve months from the effective date
of the Registration Statement required to be filed pursuant to the Registration
Rights Agreement, upon DCT's issuance of additional shares of common stock, or
securities convertible into common stock, at a price that is less than the then
Conversion Price.
 
 Redemption.On August 7, 2009 ("Redemption Date"),
all of the outstanding Series B Stock shall be redeemed for a per share
redemption price equal to the stated value on the Redemption Date (“Redemption
Price"). The Redemption Price is payable by DCT in cash or in shares of common
stock at DCT's discretion and shall be paid within five trading days after the
Redemption Date. In the event DCT elects to pay all or some of the Redemption
Price in shares of common stock, the shares of common stock to be delivered to
the Investors shall be valued at 85% of the fifteen-day volume weighted average
price of the common stock on the Redemption Date
 
 Series B Stock
Activity.  During the third quarter of 2007, Series B Stock
totaling 300 shares ($30,000) were converted into 30,000 shares of common
stock.
  F -
19
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  During
the third quarter of 2007, Series B Stock totaling 9,700 shares ($970,000) were
converted into 970,000 shares of common stock.
 
 Common
Stock Warrants
 
 In
certain instances, DCT issues warrants to consultants for consulting
services.  The value of such warrants is calculated using the
Black-Scholes valuation model using the following assumptions:
 
 Year
      Ended December 31,2008
              
              
              2007Contractual
      Term
              
              
              3.0
              
              
              
              3.0Expected
      volatility
              
              
              260%-266
              %
              
              
              51
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %Risk
      free interest rate
              
              
              1.6%-2.8
              %
              
              
              5.3
              %
 
 The fair
value the warrants is amortized ratably over the consulting
agreement.  Accordingly, $294,000 and $18,000 was charged to selling,
general and administrative expense and credited to additional paid-in capital
during the years ended December 31, 2008 and 2007, respectively.
 
 The
following table summarizes certain aspects of DCT’s outstanding warrants as of
December 31, 2008:
 
 Warrants
      Issued in Connection with:
              
              Number
      of Shares
              
              
              Number
      of Shares Vested
              
              
              Exercise
      Price
              
              Issuance
      Date
              Expiration
      DateSeries A
    Stock
              
              
              186,500
              
              
              
              186,500
              
              
              $
              1.00
              
              3/15/05
              3/15/10Series A
    Stock
              
              
              932,500
              
              
              
              932,500
              
              
              
              2.00
              
              3/15/05
              3/15/10Series B
    Stock
              
              
              675,000
              
              
              
              675,000
              
              
              
              1.50
              
              8/7/06
              8/7/09Consulting
      agreement
              
              
              90,000
              
              
              
              90,000
              
              
              
              0.65
              
              1/1/07
              1/1/10Notes payable financing (Note
      10)
              
              
              650,000
              
              
              
              650,000
              
              
              
              0.60
              
              9/26/07
              9/26/12Consulting
      agreement
              
              
              110,000
              
              
              
              110,000
              
              
              
              0.65
              
              1/1/08
              1/1/11Consulting
      agreement
              
              
              640,000
              
              
              
              426,666
              
              
              
              0.60
              
              11/6/08
              11/6/113,284,000
              
              
              
              3,070,666
 
 Note
9 – Bank Line of Credit
 
 Bank
Line of Credit
 
 During
September 2007, DCT replaced its existing $2,500,000 line of credit at a
commercial bank with a similar line of credit (“LOC”) at a different commercial
bank.  As of December 31, 2008, DCT had a $3,000,000 line of credit
(“LOC”) at a commercial bank.  Borrowings under the LOC are limited to 80%
of eligible accounts receivable and 40% of eligible inventory, as defined in the
LOC agreement.  The LOC bears an annual interest rate of prime (3.25% and
7.25% at December 31, 2008 and 2007, respectively) plus 1.25% for advances drawn
against accounts receivables, with a minimum interest rate of 9%, and prime plus
2.25% for advances drawn against inventory, with a minimum interest rate of
10%.  Interest payments are due monthly and all unpaid interest and
principal is due in full on September 13, 2009.  Upon certain events of
default, the default variable interest rate increases to prime plus 5%. As of
December 31, 2008, DCT had unused borrowing capacity of $1,200,000 on its LOC.
  As of
December 31, 2008 and 2007, DCT was in compliance with all LOC debt
covenants.
  Note
10 – Notes Payable and Related Warrant Liability
  On
September 27, 2007, the Company entered into a $1,500,000 term loan agreement
("Loan Agreement") with Montage Capital, LLC ("Lender") in an arm’s length
transaction.  DCT used the funds for repurchasing shares of DCT's
common stock as previously discussed in Note 8. The loan called for monthly
principal and interest payments, at an annual interest rate of 15%, and
originally matured on November 30, 2008.  DCT paid the loan in full in
September 2008.  There was no prepayment penalty associated with the
early pay-off.
  F -
20
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  In
connection with the Loan Agreement, DCT issued warrants (“Loan Warrants”) to
purchase up to 650,000 shares of DCT’s common stock at an initial exercise price
of $0.60 per share.   The Loan Warrants vested immediately and
expire September 2012.  From the initial funding of the Loan Agreement
through March 31, 2008, the warrant holders had the right to require DCT to
purchase the warrant for a maximum of $250,000.  On March 31, 2008,
the Loan Warrant repurchase price increased to a maximum of
$350,000.  The Loan Warrant repurchase feature expires September
2012.
  The
Company accounts for the Loan Warrants under the provisions ofFSP No.150-5,Issuer’s Accounting
Under Statement No. 150 for Freestanding Warrants and Other Similar
Instruments on Shares That Are Redeemable”(“FSP 150-5”),an interpretation of SFASNo.150,Accounting for
Certain Financial Instruments with Characteristics of
both
Liabilities and Equity(“SFAS 150”). Pursuant to FSP 150-5, freestanding warrants for shares that are
either puttable or warrants for shares that are redeemable are
classifiedas liabilities
on the Balance Sheet at fair value with the offset recorded to debt
discount.  The Company amortized the debt discount to interest expense
from the loan origination date through the early pay-off
date.At each
reporting period, the Company will remeasure the fairvalue of the Loan Warrant liabilitywithany gains or lossesrecordedas a component ofnon-operatingincome (expense), net.See Note
7.
 
 The totalinitial fair value of theLoan Warrantswas approximately $399,000as calculatedusingthe Black-Scholes valuationmodel with the following assumptions:contractual term of five
years, 5.3% risk-free interest rate, expected volatility of 90% and expected
dividend yield of 0%.In connection with the Loan Warrants,
DCT recorded non-cash interest expenseof $311,000 and $88,000 for the years
ended December 31, 2008 and 2007, respectively.
 
 As of
December 31, 2008, the fair value of the warrants was less than the Loan Warrant
repurchase price as calculated using the Black-Scholes valuation model with the
following assumptions: remaining contractual term of 3.75 years, 1% risk-free
interest rate, expected volatility of 318% and expected dividend yield of
0%.  As such, the warrant liability is valued at the Loan Warrant
repurchase price.  DCT recorded a non-cash gain of $49,000 during the
year ended December 31, 2008 to account for the decrease in the fair value of
all outstanding Loan Warrants as of December 31, 2008.
 
 Note
11 – Income Tax
 
 DCT’s
provision for income taxes are summarized as follows (in thousands):
 
 Year
      Ended December 31,2008
              
              
              2007Current
    taxes:Federal
      taxes
              
              $
              10
              
              
              $
              -State
taxes
              
              
              67
              
              
              
              2$
              77
              
              
              $
              2
 
 DCT
generated taxable income during the year ended December 31, 2008.  And
although DCT has state and federal net operating loss carryforwards (“NOLs”), to
offset any current year taxable income, the current federal tax expense
represent alternative minimum tax as alternative minimum tax NOLs can only
offset 90% of current year taxable income.  Additionally, the State of
California legislated a two-year suspension of NOLs for tax years 2008 and
2009.  As such, DCT’s taxable income generated during the year ended
December 31, 2008 was fully taxable at the current California statutory tax
rate.
 
 Provision
for income taxes for the year ended December 31, 2007 represents the minimum
franchise tax due, $800 per annum, in the State of California for each of DCT’s
separate taxable entities.
 
 F -
21
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  As of
December 31, 2008 DCT has estimated available net operating loss carryforwards
of approximately $8,748,000 and $5,002,000 for federal and state income tax
purposes, respectively, which expire principally through 2026 and 2018,
respectively. Pursuant to Sections 382 and 383 of the Internal Revenue Code, the
utilization of net operating losses (“NOL”) and other tax attributes may be
subject to substantial limitations if certain ownership changes occur during a
three-year testing period (as defined). As of December 31, 2008 management has
analyzed changes to DCT’s ownership and estimated the impact of such changes to
DCT’s NOLs.  The aforementioned NOLs are based on management’s
estimates and are limited to an annual limitation of approximately $500,000 per
year.
 
 DCT
believes sufficient uncertainty exists regarding the realization of net
operating loss carryforwards and other timing differences for the periods
presented. Accordingly, a valuation allowance has been provided for the entire
amount related thereto. The
valuationallowance
decreased by approximately $6,308,000 and $1,421,000 during the years ended
December 31, 2008 and 2007, respectively.
 
 A reconciliation of the differences
between the United States statutory federal income tax rate and the effective
tax rate as provided in the consolidated statements of operations is as
follows:
  Year
      Ended December 31,2008
              
              
              2007U.S.  Federal
      statutory rate (%)
              
              
              35
              %
              
              
              (35.0
              )%State
      income taxes, net of federal income taxes
              
              
              265
              
              
              
              -Effect
      of permanent differences
              
              
              (1,462
              )
              
              
              -Alternative
      minimum tax
              
              
              40Change
      in valuation allowance
              
              
              1,427
              
              
              
              35.0305
              %
              
              
              0.0
              %
  The
deferred income tax asset consisted of the following (in thousands):
 
 December
      31,2008
              
              
              2007Deferred
      tax assetsFederal
      net operating loss carryforwards
              
              $
              2,791
              
              
              $
              7,737State
      net operating loss carryforwards
              
              
              442
              
              
              
              1,278Capitalized
      R&D expenses and tax credits
              
              
              167
              
              
              
              741Other
              
              
              48
              
              
              
              -3,448
              
              
              
              9,756Less:
      valuation allowance
              
              
              (3,448
              )
              
              
              (9,756
              )$
              -
              
              
              $
              -
  On
January 1, 2007, the Company adopted the provisions of FIN 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the entity’s financial statements in accordance with SFAS No. 109.
The adoption of FIN 48 did not result in a cumulative effect adjustment to the
Company’s accumulated deficit.  As of the date of adoption, the
Company had no unrecognized income tax benefits. Accordingly, the annual
effective tax rate was not affected by the adoption of FIN 48. Should the Company incur interest and
penalties relating to tax uncertainties, such amounts would be classified as a
component of interest expense and operating expense,
respectively.
  At
December 31, 2008, the Company had no increase or decrease in unrecognized
income tax benefits for the year. There was no accrued interest or penalties
relating to tax uncertainties at December 31, 2008. Unrecognized tax benefits
are not expected to increase or decrease within the next twelve
months.
  The
Company is subject to income tax in the U.S. federal jurisdiction and
California.  DCT is no
longer subject toU.S. federal or state income tax examination by tax
authorities for tax returns filed for the years ended on or before December
31, 2004 and December 31, 2003, respectively.  DCT has not filed itsU.S. federal or state
return for the year ended December 31, 2008.  These returns are
considered open tax years as of the date of these consolidated financial
statements.  No tax returns are currently under examination by any tax
authorities.
  F -
22
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Note
12 – Commitments and Contingencies
  Operating
Leases
  DCT is
committed under various non-cancelable operating leases which extend through
November 2011. As of December 31, 2008, future minimum rental commitments are as
follows (in
thousands):
 
 Year
      Ending
                December
      31,
              
              Future
      Minimum Lease Payments2009
              
              $
              2282010
              
              
              1072011
              
              
              1Total
              
              $
              336
  Rent
expense was $268,000 and $265,000 for the years ended December 31, 2008 and
2007, respectively.
  Employment
Agreements
  DCT
maintains employment agreements with its executive officers which extend through
2010. The agreements provide for a base salary and annual bonus to be determined
by the Board of Directors.  The agreements also provide for
termination payments, stock options, non-competition provisions, and other terms
and conditions of employment. In addition, DCT maintains employment agreements
with other key employees with similar terms and conditions.  As of
December 31, 2008 termination payments totaling $1,026,000 remain in
effect.
  Consulting
Agreements
  Effective
November 6, 2008, DCT entered an investor relations consulting agreement for an
initial term of six months.  Under the terms of the contract, DCT
agreed to pay the consultant (i) $10,000 per month for six months, (ii) up to
$150,000 for additional marketing materials and activities ($130,000 remained
outstanding at December 31, 2008), and (iii) 640,000 warrants with an exercise
price of $0.60 per share, expiring in three years from the issuance
date.  The warrants vest as follows:  (i) 67% upon signing
the agreement, and (ii) 33% on March 6, 2009.  The warrants have
piggyback registration rights to the next registration statement filed by
DCT.
  Litigation,
Claims and Assessments
  DCT
experiences routine litigation in the normal course of its business and does not
believe that any pending litigation will have a material adverse effect on DCT's
financial condition, results of operations or cash flows.
  Note
13 – Employee Benefits
  DCT has a
401(k) plan for employees who are at least 21 years of age and have completed a
minimum of 1,000 hours of service.  Under the terms of the plan,
employees may make voluntary contributions as a percent of compensation, but not
in excess of the maximum amounts allowed under the Internal Revenue Code. DCT
matches employee contributions up to 1.5% of base salary.  DCT
contributions totaled $43,000 and $40,000 for the years ended December 31, 2008
and 2007, respectively.
  F -
23
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Note
14 – Segment and Geographic Information
 
 Segment
Information
 
 DCT
operates in one segment, the design, development and delivery of various imaging
technology solutions, most notably scanners, as defined by SFAS 131, Disclosures about Segments of an
Enterprise and Related Information (“SFAS 131”).
 
 Geographic
Information
 
 During
the years ended December 31, 2008 and 2007, DCT recorded net sales throughout
the U.S., Asia and Europe as determined by the final destination of the
product.  The following table summarizes total net sales attributable
to significant countries (in
thousands):
 
 Years Ended December
      31,2008
              
              
              2007U.S.
              
              $
              10,817
              
              
              $
              14,367Europe and
      other
              
              
              758
              
              
              
              611Asia
              
              
              68
              
              
              
              45$
              11,643
              
              
              $
              15,023
 
 Presented
below is information regarding identifiable assets, classified by operations
located in the U.S., Asia, and Europe(in
thousands):
  December 31,2008
              
              
              2007U.S.
              
              $
              3,093
              
              
              $
              5,333Europe and
      other
              
              
              169
              
              
              
              350Asia
              
              
              59
              
              
              
              110$
              3,321
              
              
              $
              5,793
 
 Assets
located in Asia relate to tooling equipment required to manufacture DCT’s
product.  Assets located in Europe relate to DCT’s field service,
sales, distribution and inventory management in the Netherlands.
  Note
15 – Cumulative Effect Adjustment
  Cumulative
Effect Adjustment on January 1, 2007.On December21, 2006, FSPEITF 00-19-2,Accounting for
Registration Payment Arrangements(“EITF00-19-2”)was issued. This FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a separate agreement
or included as a provision of a financial instrument or other agreement, should
be separately recognized and measured in accordance with FASB Statement5,Accounting for
Contingencies.EITF00-19-2 amends the guidance in SFAS133, which wastheguidanceoriginallyfollowedby DCT toaccountforthewarrants issued in connection with its
Series A Stock and Series B
Stock.During the fourth quarter of 2008, DCT
determined that its Series A Stock and Series B Stock warrantsshould be accounted for under the guidance of EITF00-19-2.
 
 DCT adopted EITF00-19-2 byreclassing the fair value of the
warrants, as measured when
the warrants wereoriginallyissued,from liabilities to additional paid in
capital with acumulative-effect
adjustment to the opening balance ofaccumulated deficit on January 1, 2007.
 
 Fourth
Quarter2008Adjustment.As a result of adopting EITF 00-19-2, DCT
reversed$265,000of
expenseduring the fourth
quarter of 2008 related to thechange in fair value of the warrants, which was originally booked during the
first three quarters of 2008.
 
 F -
24




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





Clancy
and Co., P.L.L.C. (“Clancy”), the independent certified public accountants who
had been engaged by DCT as the principal accountant to audit the Company’s
consolidated financial statements, resigned effective January 9, 2009, which
resignation was approved by the Company’s board of directors on such date. The
reports by Clancy on the financial statements of the Company during the fiscal
years ended December 31, 2007 and 2006 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, except for an explanatory paragraph
describing the uncertainty as to the Company’s ability to continue as a going
concern. During the Company’s two most recent fiscal years and subsequent period
up to January 9, 2009, DCT did not have any disagreements with Clancy on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Clancy, would have caused them to make reference to the subject
matter of the disagreements in connection with their reports. In addition, no
reportable events as set forth in Item 304(a)(1)(v) of Regulation S-K have
occurred.





Also on
January 9, 2009, DCT’s Board of Directors approved the engagement of Hein &
Associates LLP (“Hein”) as the Company’s new principal independent certified
public accountants to audit DCT’s consolidated financial statements for the year
ending December 31, 2008.





Prior to
engaging Hein, DCT had not consulted Hein regarding the application of
accounting principles to a specified transaction, completed or proposed, or the
type of audit opinion that might be rendered on DCT’s financial
statements.





This
Annual Report on Form 10-K includes financial statements for the year ended
December 31, 2007 which were audited by Clancy.  On March 31, 2009,
the Public Company Accounting Oversight Board (“PCAOB”) revoked the registration
of Clancy because of deficiencies in the conduct of certain of its audits and
its procedures.  A copy of the order can be found at www.pcaobus.org/Enforcement/disciplinary_proceedings/2009/03-31-clancy.pdf.





As Clancy
is no longer registered with the PCAOB, DCT may not include Clancy’s audit
report in any future filings with the Securities and Exchange Commission (the
“Commission”).  If DCT is required to include audited financial
statements for the year ended December 31, 2007, DCT must have a firm that is
registered with the PCAOB re-audit that year.  The Commission
communicated to DCT that it would not object to the inclusion of an audit report
from Clancy for the year ended December 31, 2007 included in this Annual Report
on Form 10-K provided the filing date is prior to the due date.  The
due date, taking into consideration the filing of Form 12b-25 on March 31, 2009,
was April 15, 2009.  This exception is limited solely to DCT’s Annual
Report on Form 10-K for the year ended December 31, 2008 and does not apply to
any  future filings under Securities Act that incorporate this Annual
Report on Form 10-K by reference.





- 26
-




ITEM
      9A.
            CONTROLS
      AND PROCEDURES





Evaluation of Disclosure
Controls and Procedures





We conducted an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer(Principal Executive Officer)and Chief Financial
Officer(Principal
Financial Officer), of the
effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(“Exchange Act”), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate, to allow
timely decisions regarding required disclosure. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded as of December 31, 2008
that our disclosurecontrols and procedures wereeffective.





Management’s Report on
Internal Control Over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act.  Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures
that:




(1)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;




(2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that our receipts and expenditures are being made only in accordance with the
authorization of our management and directors; and




(3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.




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




Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008.  In making this assessment, management used
the framework set forth in the report entitled Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. The COSO framework summarizes each of the
components of a company’s internal control system, including (i) the
control environment, (ii) risk assessment, (iii) control activities,
(iv) information and communication, and
(v) monitoring.  This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permits us to provide only
management's report in this annual report.




- 27
-




Identified
Material Weaknesses as of December 31, 2007 and Remediation Efforts during the
Year Ended December 31, 2008




A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected.
Management identified and reported six internal control deficiencies during its
assessment of internal controls over financial reporting as of December 31,
2007.  During the year ended December 31, 2008, DCT was able to
remediate all six identified weakness as follows:




Identified
      Weakness at December 31, 2007
            
            Remediation
      Efforts During the Year Ended December 31, 20081.  We
      did not have effective comprehensive entity-level internal controls
      specific to the structure of our board of directors.
            
            1.  We
      retained two new independent directors for our board of directors
      including one member who is appropriately credentialed as a financial
      expert.  Our board of directors currently has three independent
      board members.2.  We
      did not have formal policies governing certain accounting transactions and
      financial reporting processes.
            
            2.  We
      established comprehensive formal general accounting policies and
      procedures and required employees to sign off such policies and procedures
      as documentation of their understanding of and compliance with DCT
      policies.3.  We
      did not obtain attestations by all employees regarding their understanding
      of and compliance with DCT policies related to their
      employment.
            
            3.  DCT
      required all employees subject to our Code of Ethics to sign our Code of
      Ethics.  We will obtain updated signatures on an annual basis
      and retain the related documentation.4.  We
      did not obtain attestations by all members of our board of directors, our
      executive officers and our senior financial officers regarding their
      compliance with our Code of Ethics and our Code of Ethics did not apply to
      our other employees.
            
            4.  DCT
      required directors to sign our Code of Ethics.  We will obtain
      updated signatures on an annual basis and retain the related
      documentation.5.  We
      did not perform adequate oversight of certain accounting functions and
      maintained inadequate documentation of management review and approval of
      accounting transactions and financial reporting processes.
            
            5.  DCT
      implemented appropriate management oversight and approval activities in
      the areas of vendor bill payments, employee expense reimbursements,
      customer invoicing, and period-end closing processes.   We
      are retaining documentation related to the oversight and approval
      activities.6.  We
      had not fully implemented certain control activities and capabilities
      included in the design of our financial system.  Certain
      features of our financial system are designed to automate accounting
      procedures and transaction processing, or to enforce
    controls.
            
            6.  DCT
      implemented a new financial accounting and reporting system and moved all
      decentralized off-line processes to our new centralized financial
      reporting system with built-in internal controls.





Changes in
Internal Control over Financial Reporting




The changes noted above, are the only
changes during our most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act.




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PART III




ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT




Directors and Executive
Officers




The
following table sets forth the names, ages, years elected and principal offices
and positions of our current directors and executive officers as of March 1,
2009.





Name
            
            Year
      First Elected As Officer or Director
            
            Age
            
            OfficeEdward
      M. Straw
            
            2008
            
            70
            
            ChairmanDavid
      Clark
            
            2004
            
            40
            
            Chief Executive Officer and
      DirectorWilliam
      Hawkins
            
            2004
            
            52
            
            Chief Operating Officer, President
      and SecretaryM.
      Carolyn Ellis
            
            2007
            
            44
            
            Chief
      Financial OfficerFrank
      Musso
            
            2008
            
            53
            
            DirectorDarwin
      Hu
            
            2004
            
            56
            
            Director





None of
the members of the Board of Directors or executive officers of the Company are
related to one another.  Each year the stockholders elect the members
of our Board of Directors.  We do not have a standing nominating
committee or compensation committee as our entire board of directors currently
serves these functions.  There were no changes in procedures for
nominating DCT directors during the year ended December 31, 2008.





EDWARD M. STRAW became
Chairman of our Board of Directors on July 15, 2008. Mr. Straw is currently
Executive Vice President of PRTM Management Consultants, a world class,
operational strategy consulting group, where he assists with business
development in federal, high tech and consumer packaged goods verticals as well
as mentors and coaches younger partners in leadership, communication,
presentation and deal closing skills. He also serves on the boards of Eddie
Bauer Holdings, MeadWestvaco Corporation, Ply Gem Industries, Panther Expedited
Services, and is the Chairman of Odyssey Logistics and Technology.





From 2000
to 2005, Mr. Straw served as President of Global Operations of the Estée Lauder
Companies Inc., where he led the manufacturing, research and development,
information systems, package engineering, quality assurance and global supply
chain areas, which support all 20 brands of the Estée Lauder Companies around
the world. From 1998 to 2000, Mr. Straw was Senior Vice President, Global
Manufacturing and Supply Chain Management at Compaq Computer Corporation, then,
the world’s largest computer company. At Compaq, Mr. Straw was responsible for
integrating and managing its global supply chain across the entire organization
and among suppliers, partners and customers. Before joining Compaq, from 1997 to
1998, Mr. Straw was President of Ryder Integrated Logistics, Inc., the leading
provider of supply chain services in North America.





Prior to
joining the private sector, Mr. Straw served in various positions in the U.S.
Navy for over 30 years, including as Vice Admiral, Director and Chief Executive
Officer of the Defense Logistics Agency, the largest military logistics command
supporting the American armed forces. Mr. Straw is also currently Trustee for
the U.S. Naval Academy Foundation, and has served on the Board of Directors of
the Navy Federal Credit Union, the U.S. Chamber of Commerce, and the Boy Scouts
of America, National Capital Region. Mr. Straw holds a Bachelor of Science
degree in Engineering from the U.S. Naval Academy and an MBA from the George
Washington University.





DAVID CLARK has been our Chief
Executive Officer since March 1, 2008 and prior thereto served as Senior Vice
President of Business Development and a director since July 2004. From October
2003 to July 2004 Mr. Clark was President of Nautical Vision, Inc. a market
specific image display company where he created and implemented the company’s
business plan which involved product sourcing, sales and marketing and general
management.  From June, 2001 to October, 2003 Mr. Clark actively
invested in and consulted to a diverse group of companies in addition to being
involved in residential development.





Mr. Clark
was President and CEO of Homebytes.com from November, 1998 to May of 2001, where
he was primarily responsible for raising in excess of twenty five million
dollars in funding from investors including America Online, FBR Technology
Venture Partners, PNC Bank, and Bank of America, as well as being instrumental
in the acquisition of a key competitor of Homebytes.com.  Prior
thereto Mr. Clark was the head of distribution and a director of Take Two
Interactive (NASDAQ:TTWO) which was a result of TTWO’s acquisition of Inventory
Management Systems, Inc. (I.M.S.I.), of which Mr. Clark was a co-founder and
President.   Prior to founding I.M.S.I., Mr. Clark held various
management positions with Acclaim Entertainment (NASDAQ:AKLM), and the Imagesoft
division of SONY Music (NYSE:SNE).   Mr. Clark received a B.S. in
Business from the State University of New York at Binghamton in
1990.




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-




WILLIAM HAWKINS became our
President on March 1, 2008 and prior thereto served as Chief Operating Officer
and Secretary since April 2, 2004. On June 8, 2007, he was appointed to our
board of directors. Mr. Hawkins has held various management positions at Syscan,
Inc., the Registrant's wholly-owned subsidiary, since 1999, including V.P. of
Sales and Marketing, President and General Manager of Syscan Imaging Group.
Prior thereto, Mr. Hawkins' product focus was primarily in the imaging systems
and computer peripheral markets, including senior positions with General
Electric (UK), Kaman Aerospace, British Aerospace Engineering, Gartner Research
and Per Scholas. Mr. Hawkins received a bachelor's degree in Physics from the
University of Maryland in 1978 and an MBA from Johns Hopkins University with a
Management of Technology Concentration (MOT).





M. CAROLYN ELLIS was appointed
our Chief Financial Officer on November 1, 2007. Ms. Ellis has been an
independent contractor to the Company since April 2006 in charge of and
supervising our financial reporting obligations. Prior to her work with the
Company, Ms. Ellis served as a director, secretary and treasurer of Knovative,
Inc., a telecommunications research and development company that she co-founded
in 2003 and where she remains a member of the board of directors today. From
April 2000 until July 2003, Ms. Ellis served as the Vice President of Finance
for Correlant Communications, a company in the telecommunications industry. Ms.
Ellis has been a certified public accountant since 1989. She earned a bachelor's
degree in Economics and Accounting from Hendrix College in 1986 and a master's
degree in Business Administration from the University of New Mexico in
1994.





FRANK MUSSO has been a
director since May 15, 2008. Mr. Musso has served in various consulting and
management roles specializing in finance, accounting and tax since July 1991. In
February 2007, Mr. Musso began working with Alix Partners on several
engagements. In December 2007, he began representing secured creditors and
debtor-in-possession lenders in a Chapter 11 filing during which time he worked
with the debtor’s financial advisor in filing statements of financial affairs,
monitoring compliance with credit agreements and reviewing budgets and cash flow
forecasts.





Since
1995, Mr. Musso has provided financial consulting for a startup competitive
intelligence software firm, including cost accounting, tax preparation and
planning, business valuation, loan compliance, establishing benefit plans,
personnel issues, training accounting staff, selecting and implementing
web-based labor reporting and resolving disputes between partners. From November
2006 to February 2007, Mr. Musso served as Acting Chief Financial Officer of a
startup company that developed a communication device for children unable to
speak, where he oversaw the general ledger, implemented new web-based accounting
software, implemented cost savings, replaced accounting staff and prepared
financial projections for lenders and investors. From March 2005 to June 2006,
he assisted a $200 million retailer refinance its debt and sell its company by
preparing cash flow and financial projections, coordinating due diligence,
preparing budgets and purchase accounting and developing procedures to monitor
revolving credit collateral. Prior to that, from October 2004 to July 2005, Mr.
Musso worked for a regional bank to monitor a $70 million medical diagnostic
services company during its refinancing, where he performed detailed revenue
analyses and identified significant lost revenue.





Mr. Musso
has also been the Treasurer, Director and Executive Committee member of two non
profit organizations over the past nine years. He received a B.S. in Accounting
and Public Administration from Georgetown University in 1977. Mr. Musso is a
member of the American Institute of Certified Public Accountants (AICPA), the
New York State Society of Certified Public Accountants (NYSSCPA), the
Connecticut Society of Certified Public Accountants (CSCPA), the Turnaround
Management Association and the Association of Certified Fraud
Examiners.





DARWIN HU became our Chairman,
President and Chief Executive Officer on April 2, 2004, in connection with our
acquisition of Syscan, Inc. Mr. Hu resigned as President and Chief Executive
Officer on March 1, 2008 and stepped down as Chairman of the Board of Directors
on July 15, 2008. Mr. Hu continues to serve as a director of the Company. Prior
to April 2, 2004, Mr. Hu was the President and Chief Executive Officer of
Syscan, Inc., our wholly-owned subsidiary.  Mr. Hu has over 21 years
of experience in the high-tech industry and has held various management related
positions within organizations related to color graphic imaging input scanning,
display output and imaging communication product development, manufacturing and
sales and marketing.  Before joining Syscan, Inc. in April 1998, Mr.
Hu held senior management positions at Microtek, Xerox, OKI, AVR, DEST, Olivetti
and Grundig.  Mr. Hu holds a bachelor's degree in Engineering Science
from National Cheng-Kung University, Taiwan, and a master's degree in Computer
Science and Engineering from California State University, Chico,
USA.





Section 16(a)
Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, as well as persons who own more than 10% of a registered
class of our equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in beneficial
ownership. Directors, executive officers, and greater than 10% shareholders are
required by Securities and Exchange Commission regulation to furnish us with
copies of all Section 16(a) forms they file. Based solely upon a review of
copies of Section 16(a) reports and representations received by us from
reporting persons, and without conducting any independent investigation of our
own, we believe all Forms 3, 4 and 5 were timely filed with the SEC by such
reporting persons during the year ended December 31, 2008.




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-




Code of
Ethics





Our Board
of Directors adopted a Code of Ethics, including an Insider Trading Policy,
applicable to all DCT employees and members of our Board of
Directors.  Each employee and board member is required to sign our
Code of Ethics every year.





Any
amendment of our Code of Ethics or waiver thereof applicable to our principal
executive officer, principal financial officer and controller, principal
accounting officer, directors or persons performing similar functions will be
disclosed on our website within five days of the date of such amendment or
waiver. In the case of a waiver, the nature of the waiver, the name of the
person to whom the waiver was granted and the date of the waiver will also be
disclosed.





Our Code
of Ethics, originally adopted in March 2005, was updated in February 2008 and is
incorporated by reference as Exhibit 14.1.





Involvement in Certain Legal
Proceedings





To the best of our knowledge, none of
our directors or executive officers has, during the past five
years:





·
            been convicted in a criminal
      proceeding or been subject to a pending criminal proceeding (excluding
      traffic violations and other minor
  offences);





·
            had any bankruptcy petition filed
      by or againstany business or property of such person or any business of which he or she
      was a general partner or executive officer, either at the time of the
      bankruptcy or within two years prior to that
  time;





·
            been subject to any order,
      judgment, or decree, not subsequently reversed, suspended or vacated, of
      any court of competent jurisdiction, permanently or temporarily enjoining,
      barring, suspending or otherwise limiting his or her involvement in any
      type of business, securities, futures, commodities or banking activities;
      or





·
            been found by a court of competent
      jurisdiction (in a civil action), the Securities and Exchange Commission
      or the Commodity Futures Trading Commission to have violated a federal or
      state securities or commodities law, and the judgment has not been
      reversed, suspended, or
vacated.


Board of Directors Meetings
and Subcommittees




Attendance
at Board Meetings and Annual Shareholders’ Meeting







The Board held three meetings in 2008.
We expect each director to attend every meeting of the Board as well as the
annual meeting. In 2008, each director attended the 2008 Annual Stockholders’
Meeting, with the exception of Darwin Hu.  All directors attended at
least 75% of the meetings of the Board in 2008.





Beginning in 2009, our Board began
holding sessions for the independent directors to meet without management
present.


Audit
Committee and Financial Expert







Our Board of Directors didnot have a separate auditcommittee during
2008.As such,the entire Board of Directors
actedas ourAudit Committee.  We believe that the
members of our Board of Directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting.However, as part of
implementing Sarbanes Oxley and to strengthen and improve our internal
disclosure controls and procedures, our Boardestablished an Audit
Committee on January 20, 2009 that includes all of DCT’s independent
directors.  Subsequent
to that date, the Audit
Committeebeganassistingthe Board in its general oversight of
our financial reporting, internal controls, and is responsible for the
appointment, retention, compensation, and oversight of the work of our
independent registered public accounting firm.The Board has determined
that Mr. Musso meets the SEC’s
qualifications to be an “audit committee financial expert,” including meeting
the relevant definition of an “independent director.”  The Board determined that each Audit
Committee member has sufficient knowledge in reading and understanding theCompany’s financial statements to serve
on the Audit Committee.On
March 31, 2009, the Audit Committee adopted awritten charter, which is
attached to this Annual Report on Form 10-K at Exhibit 99.1.  The
Audit Committee will review and reassess the adequacy of the charter on an
annual basis.




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-




Compensation
Committee





As all
our executive officers are currently under employment agreements, we do not have
a separate compensation committee.   At this point, we do not
intend to establish a separate compensation committee as this function will be
performed by our independent directors.





Nominating
Committee





At this
time, we do not have a separate nominating committee as this function is
performed by our full Board of Directors. Our entire Board of Directors is
active in the nominating process. Nominations for election to the Board of
Directors may be made by the Board of Directors or by any shareholder entitled
to vote for the election of directors. The Board of Directors carefully
considers nominees regardless of whether they are nominated by shareholders or
existing board-members.





Shareholder
Communication





We communicate regularly with
shareholders through press releases, as well as annual and quarterly reports.
Our investor relations department and Corporate Secretary address investor
concerns on an on-going basis. We may also address such concerns through our
website atwww.docucap.com.





Interested parties, including
shareholders and other security holders, may communicate directly with our Board
of Directors or with individual directors by writing to the Corporate Secretaryat 1798 Technology Drive Suite 178, San Jose, California 95110 or call
1-408-436-9888 ext. 207.





Securities Authorized for
Issuance under Equity Compensation Plans





For
information regarding securities authorized for issuance under Equity
Compensation Plans, and the equity compensation plan information table see Part
II, “Item 5: Market for Common Equity and Related Stockholder
Matters.”




- 32
-




ITEM
      11.
            EXECUTIVE
      COMPENSATION





Summary
Compensation





The
following table sets forth, for the years indicated, all compensation awarded
to, paid to or earned by the following type of executive officers for the year
ended December 31, 2008: (i)individuals who served as, or acted in the capacity
of, our principal executive officer and principal financial officer for the year
ended December 31, 2008; and (ii) our only other executive officer whose salary
bonus exceeded $100,000 with respect to the years ended December 31, 2008 and
2007 and who was employed by us at December 31, 2008.





SUMMARY
COMPENSATION TABLE(1)





Name and
      PrincipalPosition
            
            Year
            
            
            Salary
              ($)
            
            
            Option
      Awards(2)
              ($)
            
            
            
            All Other Compensation(3)
              ($)
            
            
            Total Compensation
      ($)DavidClark,  Chief ExecutiveOfficer
      and
              Director
            
            
            2008
              2007
            
            
            
            186,458 150,000
            
            
            
            175,188
              194,400
            
            (5)
              (6)
            
            
            -0-
              -0-
            
            
            
            361,646 344,400William Hawkins,President,Chief
Operating
              Officer,Secretary and
      Director
            
            
            2008
              2007
            
            
            
            191,875 160,000
            
            
            
            175,188
              194,400
            
            (7)
              (8)
            
            
            7,675
              3,633
            
            
            
            374,738 358,033M. Carolyn Ellis, Chief Financial
      Officer
            
            
            2008
              2007
            
            
            
            148,750 22,500
            (4)
            
            
            109,493
              99,000
            
            (9)
              (10)
            
            
            4,559
              -0-
            
            
            
            262,802 121,500







(1)DCT
did not have any bonuses, stock awards, non-equity incentive plan compensation
or non-qualified deferred compensation earnings during 2008 or
2007.





(2)Although
there are a number of ways that the value of an equity award may be expressed,
under SEC rules the values reported in the Option Award column of the Summary
Compensation Table represent the dollar amount, without any risk of forfeiture,
recognized for financial reporting purposes related to grants of options to each
of the listed officers.  DCT calculated these amounts in accordance
with the provisions of Statement of Financial Accounting Standards 123-R,Share-Based
Payment.  See “Note
4:  Employee Equity Incentive Plans”inPart II, Item
8 – Financial Statements of this Form 10-K.





(3)Represents
the Company’s match on the named executives’ 401(k) contribution.





(4)
Represents actual salary payments from November 1, 2007 through December 31,
2007 based on an annual salary of $135,000.





(5)Represents the total fair value (as discussed in (2)
above) of 600,000 incentive stock options granted during the year ended December
31, 2008, of which 100,000 were for serving as a DCT director.  One-third of the options
vest on July 15, 2009, one-third vest on July 15, 2010 and one-third vest on
July 15, 2011.





(6)Represents the total fair value (as discussed in (2)
above) of 400,000 incentive stock options granted during the year ended December
31, 2007, of which 80,000 were for serving as a DCT director.  One-third of the options
vested on March 28, 2007, one-third vested on March 28, 2008 and one-third vest
on March 28, 2009.





(7)Represents the total fair value (as discussed in (2)
above) of 600,000 incentive stock options granted during the year ended December
31, 2008, of which 100,000 were for serving as a DCT director.  One-third of the options
vest on July 15, 2009, one-third vest on July 15, 2010 and one-third vest on
July 15, 2011.





(8)Represents the total fair value (as discussed in (2)
above) of 400,000 incentive stock options granted during the year ended December
31, 2007.  One-third of the options
vested on March 28, 2007, one-third vested on March 28, 2008 and one-third vest
on March 28, 2009.





(9)Represents the total fair value (as discussed in (2)
above) of 375,000 incentive stock options granted during the year ended December
31, 2008.  One-third of the options
vest on July 15, 2009, one-third vest on July 15, 2010 and one-third vest on
July 15, 2011.





(10)
Represents the total fair value (as discussed in (2)
above) of 150,000 non-qualified stock options granted during the year ended
December 31, 2007. All options vested on November 1, 2008.




- 33
-




Outstanding Equity Awards at
Fiscal Year End





The
following table sets forth certain information regarding unexercised stock
options, stock that has not vested, and equity incentive plan awards at December
31, 2008 by the named executive officers.





OUTSTANDING
EQUITY AWARDS TABLE





Option
    AwardsName and
      Principal  Position
            
            Number of Securities Underlying
      Unexercised Options (#)
              Exercisable
            
            
            Number of Securities Underlying
      Unexercised Options (#)
              Unexercisable
            
            
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
              (#)
            
            
            Exercise Price
              ($)
            
            Expiration
    DateDavid Clark
            
            
            343,465
            
            
            
            -
            
            
            
            -
            
            
            
            0.01
            
            4/26/2012Chief
      ExecutiveOfficer
            
            
            213,333
            
            
            
            106,667
            (1)
            
            
            -
            
            
            
            0.70
            
            3/25/2017and
      Director
            
            
            53,334
            
            
            
            26,666
            (1)
            
            
            -
            
            
            
            0.70
            
            3/25/2017-
            
            
            
            500,000
            (2)
            
            
            -
            
            
            
            0.30
            
            7/13/2018-
            
            
            
            100,000
            (2)
            
            
            -
            
            
            
            0.30
            
            7/13/2018William Hawkins
            
            
            598,850
            
            
            
            -
            
            
            
            -
            
            
            
            0.01
            
            4/26/2012President,
            
            
            266,667
            
            
            
            133,333
            (1)
            
            
            -
            
            
            
            0.70
            
            3/25/2017Chief
      Operating Officer,
            
            
            -
            
            
            
            500,000
            (2)
            
            
            -
            
            
            
            0.30
            
            7/13/2018Secretary
      and Director
            
            
            -
            
            
            
            100,000
            (2)
            
            
            -
            
            
            
            0.30
            
            7/13/2018M. Carolyn
      Ellis
              Chief Financial
      Officer
            
            
            150,000
              -
            
            
            
            -
              375,000
            (2)
            
            
            -
              -
            
            
            
            0.60
              0.30
            
            10/30/2014
              7/13/2018





(1)All
of the unexercisable options at December 31, 2008 will vest on March 28,
2009.





(2)One-third
of the unexercisable options at December 31, 2008 vest on July 15, 2009,
one-third vest on July 15, 2010 and one-third vest on July 15,
2011.





SARS/Long-Term Incentive
Plans – Awards in Last Fiscal Year





No stock
appreciation rights or long-term incentives were awarded to any executive
officer or director during the year ended December 31, 2008.




- 34
-




Compensation of
Directors





The
general policy of the Board is that compensation for directors should consist
primarily of equity-based compensation.





The
following table details the total compensation earned by DCT’s non-employee
director during the year ended and as of December 31, 2008:





Name
            
            Fees Earned or Paid in Cash
      ($)
            
            
            Option
      Awards(1)
              ($)
            
            
            Total Compensation
      ($)Edward
Straw
            
            
            -
            
            
            
            297,643
            (2)
            
            
            297,643Frank Musso
            
            
            -
            
            
            
            29,198
            (3)
            
            
            29,198Darwin Hu
            
            
            -
            
            
            
            29,198
            (3)
            
            
            29,198Lawrence
    Liang
            
            
            10,000
            
            
            
            -
            
            
            
            10,000





(1)
Although there are a number of ways that the value of an equity award may be
expressed, under SEC rules the values reported in the Option Award column of the
Summary Compensation Table represent the dollar amount, without any risk of
forfeiture, recognized for financial reporting purposes related to grants of
options to each of the listed officers.  DCT calculated these amounts
in accordance with the provisions of Statement of Financial Accounting Standards
123-R,Share-Based
Payment.  See “Note
4:  Employee Equity Incentive Plans”inPart II, Item
8 – Financial Statements of this Form 10-K.





(2)Represents the total fair value (as discussed in (1)
above) of 1,000,000 incentive stock options granted during the year ended
December 31, 2008, for serving as DCT’s Chairman of the Board.  One-fourth of the options
vest on July 15, 2009, one-fourth vest on July 15, 2010, one-fourth on July 2011
and one-fourth on July 15, 2012.





(3)Represents the total fair value (as discussed in (1)
above) of 100,000 incentive stock options granted during the year ended December
31, 2008, for serving as director.  One-third of the options
vest on July 15, 2009, one-third vest on July 15, 2010 and one-third vest on
July 15, 2011.





Employment
Contracts





David
Clark, Chief Executive Officer and Director





Mr. Clark
has been our Chief Executive Officer since March 1, 2008 and prior thereto
served as Senior Vice President of Business Development and a director since
July 15, 2004.





In April
2005, we entered into an employment agreement with Mr. David Clark pursuant to
which he agreed to serve as our Senior VP of Business Development. The agreement
provides for an initial term of three years, an annual salary to Mr. Clark of
$150,000 and an annual bonus to be determined by our Board of Directors. In
connection with the agreement, Mr. Clark was issued non-qualified options to
purchase up to 800,000 shares of our common stock at an exercise price of $0.01
per share. One-third of the options vested immediately upon the execution of the
employment agreement, one-third vested on April 3, 2006 and one-third vested on
April 2, 2007. The agreement also provides for the executive's ability to
participate in our health insurance program. In the event that Mr. Clark's
employment is terminated other than with good cause, he will receive a payment
of the lesser of his then remaining salary due pursuant to the employment
agreement or six months of base salary at his then current annual
salary.





On
January 18, 2008, we entered into an addendum to the April 2005 employment
agreement with Mr. Clark (the “Clark Addendum”). The Clark Addendum extended the
initial term of Mr. Clark's employment with the Company for an additional six
months, from thirty-six months to forty-two months, commencing on April 26,
2005. In addition, the Clark Addendum provided for an increase in Mr. Clark's
annual base salary from $150,000 to $175,000 effective January 1, 2008. The
Clark Addendum was filed as Exhibit 10.11 to our Form 10-KSB for the year ended
December 31, 2007.





On
February 26, 2008, we entered into an addendum to the employment agreement with
Mr. Clark (the “Clark Second Addendum”). The Clark Second Addendum amended Mr.
Clark’s employment agreement to reflect his new position as Chief Executive
Officer of the Company and his resignation as Chief Investment Officer of the
Company effective March 1, 2008. The Clark Second Addendum was filed as Exhibit
10.31 to our Form 10-KSB for the year ended December 31, 2007.




- 35
-




On July
15, 2008, we entered into an addendum to the employment agreement with Mr. Clark
(the “Clark Third Addendum”). The Clark Third Addendum amends Mr. Clark’s
employment agreement and the other Clark Addenda to (i) extend the expiration
date of the employment agreement to December 31, 2010; (ii) increase Mr. Clark’s
annual base salary to $200,000 from $175,000; (iii) change the geographic
location provision of the “Termination by Employee” section of the Employment
Agreement to Palm Beach County, Florida from San Jose, California; (iv) extend
the term of his severance and C.O.B.R.A premium payments to twelve (12) months
from six (6) months; and (v) add an arbitration provision to the “Termination by
Employer” section of the employment agreement. The Clark Third Addendum was
filed as Exhibit 10.2 to our Form 8-K filed on July 21, 2008.





William
Hawkins, President, Chief Operating Officer, Director and Secretary





Mr.
Hawkins became our President on March 1, 2008 and prior thereto served as Chief
Operating Officer and Secretary since April 2, 2004. On June 8, 2007, he was
appointed to our board of directors.





In April
2005, we entered into an employment agreement with Mr. William Hawkins pursuant
to which he agreed to serve as our Chief Operating Officer. The agreement
provides an initial term of three years, an annual salary to Mr. Hawkins of
$160,000 and an annual bonus to be determined by our Board of Directors. In
connection with the agreement, Mr. Hawkins was issued non-qualified options to
purchase up to 1,000,000 shares of our common stock at an exercise price of
$0.01 per share. One-third of the options vested immediately upon the execution
of the employment agreement, one-third vested on April 3, 2006 and one-third
vested on April 2, 2007. The agreement also provides for the executive's ability
to participate in our health insurance program. In the event that Mr. Hawkins'
employment is terminated other than with good cause, he will receive a payment
of the lesser of his then remaining salary due pursuant to the employment
agreement or six months of base salary at his then current annual
salary.





On
January 18, 2008, we entered into an addendum to the April 2005 employment
agreement with Mr. Hawkins (the “Hawkins Addendum”). The Hawkins Addendum
extended the initial term of Mr. Hawkins’ employment with the Company for an
additional six months, from thirty-six months to forty-two months, commencing on
April 26, 2005. In addition, the Hawkins Addendum provided for an increase in
Mr. Hawkins' annual base salary from $160,000 to $180,000 effective January 1,
2008. The Hawkins Addendum was filed as Exhibit 10.10 to our Form 10-KSB for the
year ended December 31, 2007.





On
February 26, 2008, we entered into an addendum to the employment agreement with
Mr. Hawkins (the “Hawkins Second Addendum”). The Hawkins Second Addendum amended
Mr. Hawkins’ employment agreement and the Hawkins Addendum to include his new
position as President of the Company effective March 1, 2008. The Hawkins Second
Addendum was filed as Exhibit 10.30 to our Form 10-KSB for the year ended
December 31, 2007.





On July
15, 2008, we entered into an addendum to the employment agreement with Mr.
Hawkins (the “Hawkins Third Addendum”). The Hawkins Third Addendum amends Mr.
Hawkins’ employment agreement and the other Hawkins Addenda to (i) extend the
expiration date of the employment agreement to December 31, 2010; (ii) increase
Mr. Hawkins’ annual base salary to $200,000 from $185,000; (iii) extend the term
of his severance and C.O.B.R.A premium payments to twelve (12) months from six
(6) months; and (iv) add an arbitration provision to the “Termination by
Employer” section of the employment agreement. The Hawkins Third Addendum was
filed as Exhibit 10.3 to our Form 8-K filed on July 21, 2008.





M.
Carolyn Ellis, Chief Financial Officer





In
November 2007, we entered into an employment agreement with Ms. M. Carolyn Ellis
pursuant to which she agreed to serve as our Chief Financial Officer. The
agreement provides for an initial term of twelve months, an annual salary to Ms.
Ellis of $135,000 and an annual bonus to be determined by our board of
directors. In connection with the agreement, Ms. Ellis was issued non-qualified
options to purchase up to 150,000 shares of our common stock at an exercise
price of $0.60 per share. The options vested on November 1, 2007.  The
agreement also provides for the executive’s ability to participate in our health
insurance program. In the event that Ms. Ellis’ employment is terminated other
than with good cause, she will receive a payment of the lesser of her then
remaining salary due pursuant to the employment agreement or three months of
base salary at her then current annual salary. Ms. Ellis’ employment agreement
was filed as Exhibit 10.12 to our Form 10-KSB for the year ended December 31,
2007.





On July
15, 2008, we entered into an addendum to the employment agreement with Ms. M.
Carolyn Ellis (the “Ellis Addendum”). The Ellis Addendum amends Ms. Ellis’
employment agreement (i) extend the expiration date of the employment agreement
to December 31, 2010; (ii) increase Ms. Ellis’ annual base salary to $165,000
from $135,000; (iii) change the geographic location provision of the
“Termination by Employee” section of the Employment Agreement to San Diego,
California from San Jose, California; (iv) extend the term of her severance and
C.O.B.R.A premium payments to twelve (12) months from six (6) months; and (v)
add an arbitration provision to the “Termination by Employer” section of the
employment agreement. The Ellis Addendum was filed as Exhibit 10.4 to our Form
8-K filed on July 21, 2008.




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Report on Repricing of
Options/SARs





We did
not re-price any options or SARS during the year ended December 31,
2008.




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





The
following table sets forth, as of March 1, 2009, information regarding the
beneficial ownership of our common stock based upon the most recent information
available to us for: (i) each person known by us to own beneficially more than
five (5%) percent of our outstanding common stock, (ii) each of our officers and
directors, and (iii) all of our officers and directors as a group. Unless
otherwise indicated, each of the persons listed below has sole voting and
investment power with respect to the shares beneficially owned by them. As of
March 1, 2009 there were 18,443,770shares of our common
stock outstanding.





Name
      and Address of Beneficial Owner
            
            Number
      of Common Shares Beneficially Owned(1)
            
            
            Percentage
      of Common Shares Beneficially OwnedRichard
      Dietl (2)
            
            
            7,973,514
            
            
            
            36.9
            %Syscan
      Imaging Limited (3)
            
            
            3,173,514
            
            
            
            17.2Directors
      and Executive Officers:Edward
      Straw (4)
            
            
            -
            
            
            
            *William
      Hawkins (5)
            
            
            1,398,850
            
            
            
            7.2David
      Clark (6)
            
            
            1,243,465
            
            
            
            6.5M.
      Carolyn Ellis (7)
            
            
            150,000
            
            
            
            *Darwin
      Hu (8)
            
            
            1,578,850
            
            
            
            8.1Frank
      Musso (9)
            
            
            -
            
            
            
            *All
      Directors and Officers as a group (6 persons)
            
            
            4,371,165
            
            
            
            20.4





*Less than one percent.





(1)Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other person shown in the
table.





(2)
Includes (i) 4,800,000 shares of
common stock and (ii) 3,173,514 shares of common stock issuable upon the
exercise of an option granted to Mr. Dietl by Syscan Imaging Ltd. to purchase
all of the remaining shares held by Syscan Imaging Ltd., which is currently
exercisable. Does not include 750,000 shares of common stock underlying options
that are not exercisable within the next 60 days. The address for Mr. Dietl is
One Penn Plaza, 50thFloor, New
York, NY 10119.





(3)The sole shareholder of
Syscan Imaging Limited is Syscan Technology Holdings Limited (“STH”), a
publicly-held company whose shares are listed on The Growth Enterprise Market of
the Stock Exchange of Hong Kong Limited. The address for Syscan Imaging Limited
is Unit C, 21st Floor,
9-23 Shell Street, North Point , Hong Kong.





(4)
Does not include 1,000,000 shares of common stock underlying options granted to
Mr. Straw that are not exercisable within the next 60 days.





(5)Includes (i) 400,000
shares of common stock and (ii) 998,850 shares of common stock issuable upon the
exercise of options that are either vested or will vest within 60 days from the
date hereof. Does not include 600,000 shares of common stock underlying options
that are not exercisable within the next 60 days.





(6)
Includes (i) 500,000 shares of common stock and (ii) 743,465 shares of common
stock issuable upon the exercise of options that are either vested or will vest
within 60 days from the date hereof. Does not include 600,000 shares of common
stock underlying options that are not exercisable within the next 60
days.





(7)
Includes 150,000 shares of common stock issuable upon the exercise of options
that are either vested or will vest within 60 days from the date
hereof.  Does not include 375,000 shares of common stock underlying
options granted to Ms. Ellis that are not exercisable within the next 60
days.




(8)
Includes (i) 500,000 shares of common stock and (ii) 1,078,850 shares of common
stock issuable upon the exercise of options that are either vested or will vest
within 60 days from the date hereof. Does not include 100,000 shares of common
stock underlying options that are not exercisable within the next 60
days.





(9)
Does not include 200,000 shares of common stock underlying options granted to
Mr. Musso that are not exercisable within the next 60 days.




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





During
the year ended December 31, 2008, we entered into the following transactions
required to be reported under Item 404 of Regulation S-K (“Item
404”):





Certain
Relationships and Related Transactions





Manufacturing of Our
Product





We
purchase the majority of our finished scanner imaging products from Shenzhen
Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of our former majority
stockholder.





Purchases
from SST totaled $6,816,000 and $8,369,000 for the years ended December 31, 2008
and 2007, respectively.  All purchases from SST were carried out in
the normal course of business. We have established a pricing agreement with SST,
which is negotiated semi-annually.  We believe the quality of the
product as well as the price we pay for the product is far more favorable to us
than we could attain from an unrelated manufacturer.





As a
result of these purchases, DCT was liable to SST for $393,000 and $578,000 at
December 31, 2008 and 2007, respectively.





Related-Party Net
Sales





During
the year ended December 31, 2008, DCT recorded net sales totaling $57,000 for
finished scanners sold to SST.  The related cost of goods sold was
$41,000.  This transaction contained similar terms and conditions as
for other transactions of this nature entered into by DCT.





Director
Independence





Each of Messrs. Straw, Musso and Hu
qualify as “independent” in accordance with Rule 10A-3 of the Exchange
Act.   Mr. Clark and Mr. Hawkins do not qualify as independent
because they are DCT employees.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





As previously discussed in Part II, Item
9 of this Form 10-K,Clancy
and Co., P.L.L.C. (“Clancy”), the independent certified public accountants who
had been engaged by DCT as the principal accountant to audit DCT’s consolidated
financial statements, resigned effective January 9, 2009, which resignation was
approved by the Company’s board of directors on such date.





Also on January 9, 2009, the Company’s
Board of Directors approved the engagement of Hein & Associates LLP (“Hein”)
as the Company’s new principal independent certified public accountants to audit
the Company’s consolidated financial statements for the year ending December 31,
2008.





Prior to engaging Hein, the Company had
not consulted Hein regarding the application of accounting principles to a
specified transaction, completed or proposed, or the type of audit opinion that
might be rendered on the Company’s financial statements.





The following table sets forth the fees
billed to us by our independent registered public accounting firm for
each of the last two fiscal years:




Fee
Category
            
            Year Ended December 31,
      2008
            
            
            Year Ended December 31,
      2007Audit fees
            
            $
            159,675
            
            
            $
            79,413Audit-related
      fees
            
            
            -
            
            
            
            -Tax fees
            
            
            4,350
            
            
            
            4,550All other
    fees
            
            
            -
            
            
            
            -




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Audit
Fees. Consists of fees
billed for professional services rendered for the audit of our consolidated
financial statements and review of our interim consolidated financial statements
included in quarterly reports and services that are normally providedin connection with statutory and
regulatory filings or engagements, including post-effective amendments to
previously filed registration statements.





Audit-Related
Fees.Consists of fees
billed for assurance and related services that are reasonably related to the performance of the audit
or review of our consolidated financial statements and are not reported under
“Audit fees.”These services include employee benefit
plan audits, accounting consultations in connection with acquisitions, attest
services that are not required by statute or
regulation, and consultations concerning financial accounting and reporting
standards.





Tax
Fees. Consists of fees
billed for professional services for tax compliance, tax advice, and tax
planning. These services include assistance regarding federal, state
and international tax compliance, tax audit defense, mergers and acquisitions,
and international tax planning.





All
Other Fees.No
other fees have been billed for products and services billed by our
accountants.





Policy Related to
Board of Directors Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Accounting Firm.





During the years ended December 31, 2008
and 2007, our Board of Directors had a policy of pre-approving all audit and
permissible non-audit services provided by the independent
auditors.  These services may include audit services, audit-related
services, tax services, and other services. Pre-approval is generally provided
for up to one year and any pre-approval is detailed as to the particular service
or category of services and is generally subject to a specific budget. The
independent auditors and management are required to periodically report to the
Board of Directors regarding the extent of services provided by the independent
auditors in accordance with this pre-approval, and the fees for the services
performed to date. The Board of Directors may also pre-approve particular
services on a case-by-case basis.





Effective
January 20, 2009, in connection with the establishment of our Audit Committee,
the Board of Directors delegated the policy of pre-approving all audit and
permissible non-audit services provided by the independent auditors to the Audit
Committee.





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ITEM
      15.
            EXHIBITS





Exhibit
    Number
            
            Description of Exhibit
            
            Method of
      Filing2.1
            
            Share
      Exchange Agreement by and among Bankengine Technologies, Inc., Michael
      Xirinachs, Syscan Inc. and Syscan Imaging Limited
            
            Incorporated by reference to
      Exhibit 99.1 to Form 8-K as filed April 19, 20043.1
            
            Certificate
      of Incorporation, dated February 15, 2002
            
            Incorporated by reference toExhibit 3.1 to Form 10-KSB as filed March 31,
  20053.2
            
            Certificate
      of Amendment to the Company's Certificate of Incorporation dated March 19,
      2004
            
            Incorporated by reference toExhibit 3.2 to Form 10-KSB as filed March 31,
  20053.4
            
            Amended
      and Restated Bylaws
            
            Incorporated by reference to
      Exhibit 3.4 to Form 10-KSB as filed March 31,
  20053.5
            
            Certificate
      of Amendment to the Company's Certificate of Incorporation dated June 23,
      2006
            
            Incorporated by reference to
      Exhibit 3.5 to Form 10-QSB as filed August 21,
  20063.6
            
            Certificate
      of Designation of Preferences, Rights and Limitations of Series B Stock as
      filed with the Secretary of State of the State of Delaware on June 10,
      2006
            
            Incorporated
      by reference to Exhibit 10.4 to Form 8-K as filed August 14,
      200610.1
            
            Form
      of Series B Convertible Preferred Stock and Common Stock Warrant Purchase
      Agreement entered into by and between the Company and the
      purchasers
            
            Incorporated by
      reference to Exhibit10.1 to Form 8-K as filed August 14, 200610.2
            
            Form
      of Common Stock Purchase Warrant
            
            Incorporated by reference to
      Exhibit10.2 to Form 8-K as filed August 14,
200610.3
            
            Form
      of Registration Rights Agreement
            
            Incorporated by reference to Exhibit10.3 to Form 8-K as filed August 14, 200610.4
            
            Loan
      and Security Agreement by and among Silicon Valley Bank, the Company and
      Syscan Inc. dated September 13, 2007
            
            Incorporated
      by reference to exhibit 10.1 to Form 8-K dated September 19,
      200710.5
            
            Cross
      Corporate Continuing Guarantee by the Company and Syscan Inc. in favor of
      Silicon Valley Bank dated September 13, 2007
            
            Incorporated
      by reference to exhibit 10.2 to Form 8-K dated September 19,
      200710.6
            
            Shares
      Buy-back Agreement between the Company and Syscan Imaging
      Limited
            
            Incorporated
      by reference to exhibit 10.1 to Form 10-QSB dated November 14,
      200710.7
            
            Loan
      Agreement entered into by and between the Company and Montage Capital, LLC
      on September 27, 2007
            
            Incorporated
      by reference to exhibit 10.2 to Form 10-QSB dated November 14,
      200710.8
            
            Warrant
      to Purchase Stock to Montage Capital, LLC
            
            Incorporated
      by reference to exhibit 10.3 to Form 10-QSB dated November 14,
      200710.9
            
            Warrant
      to Purchase Stock to North Atlantic Resources Limited
            
            Incorporated
      by reference to exhibit 10.4 to Form 10-QSB dated November 14,
      200710.9
            
            2002
      Amended and Restated Stock Option Plan
            
            Incorporated by reference to
      Exhibit 10.4 to Form 10-KSB as filed March 31,
  200510.10
            
            2006
      Stock Option Plan
            
            Incorporated by reference to
      Exhibit 10.8 to Form 10-QSB as filed August 21,
  200610.11
            
            Employment
      Agreement entered between the Company and William Hawkins dated April 26,
      2005
            
            Incorporated by reference
      to Exhibit 10.6 to
      Form 8-K as filed May 2, 200510.12
            
            Employment
      Agreement entered between the Company and David P. Clark dated April 26,
      2005
            
            Incorporated by reference to
      Exhibit 10.7 to Form 8-K as filed May 2,
  2005




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-




Exhibit
    Number
            
            Description ofExhibit
            
            Method of
      Filing10.13
            
            Employment
      Agreement entered between the Company and M. Carolyn Ellis dated November
      1, 2007
            
            Incorporated
      by reference to exhibit 99.1 to  Form 8-K dated November 7,
      200710.14
            
            Addendum
      to Employment Agreement entered between the Company and William Hawkins
      dated January 18, 2008
            
            Incorporated
      by reference to Exhibit 10.2 to Form 8-K das filed January 23,
      200810.15
            
            Addendum
      to Employment Agreement entered between the Company and David P. Clark
      dated January 18, 2008
            
            Incorporated
      by reference to Exhibit 10.3 to Form 8-K as filed January 23,
      200810.16
            
            Addendum to Employment Agreement
      dated February 26, 2008 by and between the Document Capture Technologies,
      Inc. and William Hawkins
            
            Incorporatedby reference to Exhibit 10.2 to
      form 8-K as filed March 3, 200810.17
            
            Addendum to Employment Agreement
      dated February 26, 2008 by and between the Document Capture Technologies,
      Inc. and David Clark
            
            Incorporated by reference to
      Exhibit 10.3 to form 8-K as filed March 3,
      200810.18
            
            Addendum
      to Employment Agreement entered between the Company and William Hawkins
      dated July 15, 2008
            
            Incorporated
      by reference to exhibit 10.3 to  Form 8-K dated July 21,
      200910.19
            
            Addendum
      to Employment Agreement entered between the Company and David P. Clark
      dated July 15, 2008
            
            Incorporated
      by reference to exhibit 10.2 to  Form 8-K dated July 21,
      200910.20
            
            Addendum
      to Employment Agreement entered between the Company and M. Carolyn Ellis
      dated July 15, 2008
            
            Incorporated
      by reference to exhibit 10.4 to  Form 8-K dated July 21,
      200910.21
            
            Stock
      Option Agreement between the Company and William M. Hawkins dated April
      26, 2005
            
            Filed
      herewith10.22
            
            Stock
      Option Agreement between the Company and David P. Clark dated April 26,
      2005
            
            Filed
      herewith10.23
            
            Stock
      Option Agreement between the Company and M. Carolyn Ellis dated November
      1, 2007
            
            Incorporated
      by reference to exhibit 99.2 to Form 8-K dated November 7,
      200710.24
            
            Stock
      Option Agreement between the Company and Edward Straw dated July 15,
      2008
            
            Filed
      herewith10.25
            
            Lease
      Agreement by and between the Company and Airport II Property Management,
      LLC most recently amended on March 24, 2008
            
            Filed
    herewith14.1
            
            Code
      of Ethics adopted by the Company's Board of Directors as amended February
      2008
            
            Incorporated by reference to
      Exhibit 14.1 to form 8-K as filed March 3, 200821
            
            List
      of Subsidiaries
            
            Filed
    herewith31.1
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act – David P.
      Clark
            
            Filed
    herewith31.2
            
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act – M. Carolyn
      Ellis
            
            Filed
    herewith32.1
            
            Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act – David P.
      Clark
            
            Filedherewith32.2
            
            Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act – M. Carolyn
      Ellis
            
            Filed
    herewith99.1
            
            Audit
      Committee Charter of Document Capture Technologies as adopted March 31,
      2009
            
            Filed
    herewith





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-




Signatures




Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.





Signature
            Title
            Date/s/David P.
      Clark
            Chief Executive
      Officer
            April 15,2009David P.
    Clark
            (Principal Executive
      Officer)





Pursuant to the requirements of the
Securities Exchange Act of 1934,as amended,this report has been signed below by the
following persons in the capacities and on the dates
indicated.





Signature
            Title
            Date/s/David P.
      Clark
            Chief Executive Officer and
      Director
            April 15,
    2009David P.
    Clark
            (Principal Executive
      Officer)/s/William
      Hawkins
            President,
      Chief Operating Officer,
      Secretaryand
      Director
            April 15,
    2009William Hawkins./s/Edward
      Straw
            Chairman
            April 15,
    2009Edward
Straw/s/Frank
      Musso
            Director
            April 15,
    2009Frank Musso/s/Darwin
      Hu
            Director
            April 15,
    2009Darwin Hu/s/M. Carolyn
      Ellis
            Chief Financial
    Officer
            April 15,
    2009M. Carolyn
      Ellis
            (Principal Financial
      Officer)





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