*Table
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**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-KSB**




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


**For
      the Fiscal Year Ended December 31, 2007**





**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)


**1772
      Technology Drive**


**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(b) of the Act: **None**


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




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or 15(d) of the Exchange Act during the preceding 12 months (or for such 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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. 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





Issuer’s
      revenues for its most recent fiscal year were $15,023,000.





The
      aggregate market value of the issuer’s voting and non-voting common equity held
      by non-affiliates (6,305,254 shares) was approximately $4,728,941, based on
      the
      average closing bid and ask price of $0.75 for such common equity as of February
      22, 2008.





As
      of
      February 22, 2008, there were outstanding 16,599,754 shares
      of the issuer’s Common Stock, par value $0.001.





Transitional
      Small Business Disclosure Format (check one): Yes o No ý







**DOCUMENTS
      INCORPORATED BY REFERENCE**




None





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        of Contents*




**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-KSB 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.


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**DOCUMENT
      CAPTURE TECHNOLOGIES, INC**




**FORM 10-KSB**




**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2007**




**INDEX**





**PART
                I**
            **Page**Item
                1
            Description
                of Business
            4Item
                2
            Description
                of Property
            15Item
                3
            Legal
                Proceedings
            15Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            15**PART
                II**Item
                5
            Market
                for Common Equity and Related Stockholder
                Matters
            16Item
                6
            Management’s
                Discussion and Analysis of Financial
                Condition
            19Item
                7
            Financial
                Statements
            28Item
                8
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            29**PART
                III**Item
                9
            Directors,
                Executive Officers, Promoters, Control Persons
                and Corporate Governance; Compliance with Section 16(a) of the Exchange
                Act
            32Item
                10
            Executive
                Compensation
            35Item
                11
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            39Item
                12
            Certain
                Relationships and Related Transactions, and
                Director Independence
            40Item
                13
            Exhibits
            41Item
                14
            Principal
                Accounting Fees and Services
            44








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**PART
      I**





**ITEM
      1. DESCRIPTION OF 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, 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.




***Terminated
      Research and Development Efforts***




In
      2002,
      we began investigating potential transfer of areas of our image scanning
      technology and know-how to the enhancement of certain high definition (“HD”)
      display technologies. And from 2002 until November 2007, we were involved in
      the
      research and development of certain technologies related to the field of HD
      display. During that time, we expanded our HD display initiative through
      acquisition, exclusive licensing and the addition of key personnel, and we
      expended significant resources to develop our HD display technology. However,
      in
      November 2007, we terminated our HD display research and development efforts. All
      HD-related expenses, including employees and contractors, were terminated by
      December 31, 2007. We do not expect to expend any additional effort or funds
      to
      further develop and deploy our HD technology in 2008.





***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.


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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 and is as follows ( *in
      thousands* ):




**Year
                Over Year Growth****Year
                Ended**
            
            **Net
                Revenue**
            
            **Dollars**
            
            **Percentage**December
                31, 2007
            
            $
            15,023
            
            $
            2,554
            
            
            20
            %December
                31, 2006
            
            
            12,469
            
            
            4,621
            
            
            59December
                31, 2005
            
            
            7,848
            
            
            1,790
            
            
            30




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
                and Waste Electrical and Electronic Equipment (“WEEE”)
                compliant.




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***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 than 40 independent 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, 2007. These competitors, in general, 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.





***Manufacturing
      and Raw Material Supply***





**Manufacturing.** We
      purchase the majority of our finished scanner imaging products from Syscan
      Lab
      Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology Holdings Limited
      (“STH”), the parent company of our former majority stockholder. Our Chairman and
      former CEO, Darwin Hu, was formerly the CEO of STH. He resigned from STH
      effective December 2004. See Part III, “Item 12: Certain Relationships and
      Related Transactions, and Director Independence.”





We
      purposely limit the manufacturing of our product to SLL 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 SLL, which is negotiated
      periodically. From the early stages of product design and development, DCT
      engineers worked closely with SLL’s production team to ensure optimal and cost
      effective manufacturing. The strategy of using only one subcontract manufacturer
      could be disadvantageous if SLL 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.** SLL
      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 documents/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.




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***Customers***





A
      small
      number of customers have historically accounted for a substantial portion of
      our
      net revenue. Sales to our four largest customers represented 72% and 81% of
      our
      net sales during the years ended December 31, 2007 and 2006, respectively.
      See
      Note 1 included in Part
      II,
“Item 7: 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, which 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.




***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.




***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 future HD display products. During November 2007,
      we
      terminated our HD display research and development efforts. 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 $2,439,000 and $3,084,000 for the years
      ended December 31, 2007 and 2006, 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.





***Employees***





As
      of
      December 31, 2007, we employed 14 people on a full-time basis, 13 employees
      were
      located in the United States and one employee was located in Europe. Of the
      total, four were in product research and development, four in sales and
      marketing and six in general administration. None of our employees located
      in
      the United States or internationally
      are represented by unions or collective bargaining agreements. We have
      experienced no work stoppages and believe that our employee relations are
      good.




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***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 1772 Technology Drive 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.


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**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.**





Sales
      to
      our 4 largest customers represented 72% and 81% of net sales during the year
      ended December 31, 2007 and 2006, respectively. 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 $1,913,000 and $5,948,000
      for
      the years December 31, 2007 and 2006, respectively. Our accumulated deficit
      as
      of December 31, 2007 was $30,618,000. 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 12: 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 six 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 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.


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**Due
      to intense competition for qualified personnel, we may not be able to attract
      new qualified employees or retain existing personnel, the consequences of which
      could adversely affect our business.**





There
      is
      intense competition for qualified personnel in the areas in which we operate.
      The loss of existing personnel or the failure to recruit additional qualified
      managerial, technical and sales personnel could adversely affect our business.
      As we grow, we will need to attract, train and retain more employees for
      management, engineering, research and development, sales and marketing and
      support positions. The competition for qualified employees, particularly
      engineers and research and development personnel, continues to be intense.
      Consequently, we may not be able to attract, train and retain the personnel
      we
      need to continue to offer our products to current and future customers in a
      cost-effective manner, if at all.





**Syscan
      Imaging Limited, owns and controls a significant number of the outstanding
      shares of our common stock and will continue to have significant ownership
      of
      our voting securities for the foreseeable future.**





Syscan
      Imaging Limited beneficially owns approximately 49.2% of our outstanding common
      stock as of February 22, 2008. As a result, they likely have the ability to
      control our affairs and business, including the election of directors and
      subject to certain limitations, approval or preclusion of fundamental corporate
      transactions. This concentration of ownership of our common stock
      may:





·
            Delay
                or prevent a change in the control;


·
            Impede
                a merger, consolidation, takeover or other transaction involving
                us;
                or


·
            Discourage
                a potential acquirer from making a tender offer or otherwise attempting
                to
                obtain control of our Company.





**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,
      2007. 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
      evaluated our existing controls for the year ended December 31, 2007. Our
      Chief
      Executive Officer and Chief Financial Officer identified material weaknesses
      in
      our internal control over financial reporting and determined that DCT did not
      maintain effective internal control over financial reporting as of December
      31,
      2007. T he
      identified material weaknesses did not result in material audit adjustments
      to
      our 2007 financial statements; however, uncured material weaknesses could
      negatively impact our financial statements for subsequent years.





We
      cannot
      be certain that we will be able to successfully complete the procedures,
      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


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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. In addition, 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.





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


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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 A 5% Cumulative Convertible Preferred Stock
                or 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.





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


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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.


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          13 -
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**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 February 22,
      2008, there were 16,599,754  shares
      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 A 5% Cumulative Convertible Preferred Stock (“Series A Stock”) or our
      Series B Convertible Preferred Stock (“Series B Stock”). As of February 22,
      2008, we had the following common shares reserved for future
      issuance:


Conversion
                ofSeries
                A Preferred Stock
            
            
            1,150,000Maximum
                Dividend Shares on the Conversion ofSeries
                A Preferred Stock
            
            
            191,396Conversion
                ofSeries
                B Preferred Stock
            
            
            150,000Stock
                options outstanding
            
            
            5,142,165Warrants
                outstanding
            
            
            2,644,000**Total**
            
            
            **9,277,561**





The
      above
      table does not include 848,333 and 1,100,667 shares that are reserved pursuant
      to our 2002 Amended and Restated Stock Option Plan and our 2006 Stock Option
      Plan, respectively, for options that are available for future grant. To the
      extent that options or warrants are exercised, or the preferred stock holders
      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 shares of preferred stock other than the
      Series A Preferred Stock and the Series B Preferred Stock, 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.


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**ITEM
      2. DESCRIPTION OF PROPERTY**





At
      December 31, 2007 details of our property were as follows:





**Location**
            
            **Lease
                expiration**
            
            **Total
                Square Footage**
            
            **Primary
                Usage**San
                Jose, CA
            
            November
                2008
            
            10,700
            
            Corporate
                headquarters,research
                and development labSan
                Jose, CA
            
            Month
                to month
            
            2,300
            
            Inventory
                management and distributionArnhem,
                Netherlands
            
            Month
                to month
            
            250
            
            Field
                service and sales officeSchiphol,
                Netherlands
            
            Month
                to month
            
            1,400
            
            Inventory
                management and distributionBrisbane,
                Australia
            
            Month
                to month
            
            1,100
            
            Inventory
                management and distribution





We
      plan
      to reduce the square footage of leased space at our current San Jose location
      as
      a result of terminating our HD display related research and development
      activities. After such time, we believe our properties will be 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 required to be disclosed under this Item 3.





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





No
      matters were submitted to a vote of security holders during the fourth quarter
      the year ended December 31, 2007.


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**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”). From April 2, 2004
      through June 26, 2006, our shares of common stock were quoted under the symbol
      “SYII.” From June 27, 2006 through January 10, 2008, our shares of common stock
      were quoted under the symbol “SYVT” as a result of changing our name from
“Syscan Imaging, Inc.” to “Sysview Technology, Inc.” Effective January 11, 2008,
      in connection with the name change from “Sysview Technology, Inc.” to “Document
      Capture Technologies, Inc.,” the Company’s shares of common stock are quoted
      under the symbol “DCMT.” The following table sets forth the range of high and
      low sales prices for the Company’s common stock for the periods
      indicated:





**High**
            
            **Low**Fiscal
                2007:1stQuarter
            
            $
            0.98
            
            $
            0.552ndQuarter
            
            
            0.89
            
            
            0.603rdQuarter
            
            
            0.99
            
            
            0.504thQuarter
            
            
            1.00
            
            
            0.50Fiscal
                2006:1stQuarter
            
            $
            0.80
            
            $
            0.552ndQuarter
            
            
            1.55
            
            
            0.653rdQuarter
            
            
            1.49
            
            
            0.754thQuarter
            
            
            0.85
            
            
            0.45




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




***Record
      Holders***





As
      of
      February 22, 2008, there were 16,599,754 shares
      of
      common stock issued and outstanding, held by approximately 370 holders of record
      as indicated on the records of the Company’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.** The
      holders of our Series A 5% cumulative convertible preferred stock (“Series A
      Stock”) are entitled to receive dividends at a rate of 5% per year. Dividends
      are 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, is at the Company’s
      discretion. To date, the Company has not paid any cash dividends on its Series
      A
      Stock and has chosen to accrete dividends to the stated value of the Series
      A
      Stock.





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            16 -
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***Equity
      Compensation Plan Information***





The
      following table sets forth certain information, as of December 31, 2007,
      concerning shares of common stock authorized for issuance under the Company’s
      existing equity compensation plans.




**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
            
            
            3,001,000
            
            $
            0.73
            
            
            1,699,000Equity
                compensation plans not approved by security holders
            
            
            3,846,550
            
            
            0.03
            
            
            —Total
            
            
            6,847,550
            
            $
            0.34
            
            
            1,699,000





**2002
      Amended and Restated Stock Option Plan**





On
      June
      23, 2006 at our stockholders’ annual meeting, 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, 2007, options to purchase 598,333 common shares were available
      for
      future grant.





**2006
      Stock Option Plan**





On
      June
      23, 2006 at our stockholders’ annual meeting, 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


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          17 -
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exercisable.
      The maximum number of options that can be granted under the 2006 Plan is
      1,500,000. As of December 31, 2007, options to purchase 1,100,667 common shares
      were available for future grant.




***Recent
      Sales of Unregistered Securities***




During
      the year ended December 31, 2007, 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, 2007.





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**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION**




The
      following discussion should be read in conjunction with other sections of this
      Form 10-KSB including Part 1, “Item 1: Business” and Part II, “Item 7: 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, 2007 (“Fiscal 2007”) compared to the year ended
                December 31, 2006 (“Fiscal 2006”). 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, 2007 and our cash flows for Fiscal 2007 compared to
                Fiscal
                2006.




***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 and easier-to-use products as well as increased security to meet the
      growing need for information protection, including identity and financial
      transaction protection.




During
      September 2007, we engaged an independent investment firm to explore and
      evaluate a range of strategic opportunities to enhance shareholder value,
      including, but not limited to, combinations, partnerships, sales or mergers
      of
      our operations or assets with another entity and/or a recapitalization. As of
      the date of this filing, we continue to evaluate different strategic
      opportunities.





During
      November 2007, we terminated our high definition (“HD”) display research and
      development efforts. All HD-related expenses, including employees and
      contractors were terminated by December 31, 2007. We do not expect to expend
      any
      additional effort or funds to further develop and deploy our HD technology
      in
      2008.




***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, often as a result of the need to make estimates of matters
      that are inherently uncertain. Our most critical accounting estimates include
      the assessment of recoverability of long-lived assets and intangible assets,
      which impacts operating expenses when we impair assets or accelerate their
      amortization or depreciation.


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          19 -
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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 image capturing devices,
      modules of optical 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, 2007, we had a $20,000 inventory reserve for
      slow-moving inventory.




Currently,
      we purchase the majority of our finished scanner imaging products from Syscan
      Lab Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology
      Holdings Limited ("STH"), the parent company of our majority stockholder. 
SLL 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, SLL 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 SLL, 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*





DCT
      purchases the majority of its finished scanner imaging products from Syscan
      Lab
      Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology Holdings Limited
      ("STH"), the parent company of DCT’s former majority stockholder. DCT's Chairman
      and former Chief Executive Officer, Darwin Hu, was formerly the Chief Executive
      Officer of STH. He resigned from STH effective December 2004.





Purchases
      from SLL totaled $8,369,000 and $8,620,000 for the years ended December 31,
      2007
      and 2006, respectively. All purchases from SLL were carried out in the normal
      course of business. As a result of these purchases, DCT was liable to SLL for
      $578,000 and $952,000 at December 31, 2007 and 2006, respectively.





*Related-Party
      Loans*





In
      the
      normal course of business, DCT made interest-free loans to several related
      parties for the purpose of purchasing capital equipment, including tooling
      equipment required to manufacture DCT’s product. The original loans were entered
      into prior to January 1, 2006. The loans totaled $2,606,000 and were fully
      reserved at December 31, 2006. No new loans were entered during the year ended
      December 31, 2007.




**Intangible
      and 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


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          20 -
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impairments
      during Fiscal 2007.





During
      the fourth quarter of Fiscal 2006, we performed an annual review of our
      identified intangible assets. Based on this review, we reclassified our
      intangible assets from non-amortizing to amortizing intangible assets. As a
      result, we booked $555,000 of intangible asset amortization expense, which
      is
      included with research and development expenses, during the fourth quarter
      of
      Fiscal 2006. Additionally, we recorded an impairment charge of $838,000 related
      to our long-term investment during that same period, which was also a result
      of
      our annual review of asset impairment. For further discussion, see “Note
      1:
      Organization and Significant Accounting Policies” and “Note 6: Intangible
      Assets” in Part
      II,
      Item 7 of this Form 10-KSB .




**Income
      Taxes**




We
      utilize the liability method of accounting for income taxes. D eferred
      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, 2007.




**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, which 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 associated with our Series
      A Stock and related warrants and our Series B Stock and related warrants 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 quarterly. The Black-Scholes
      valuation model requires the input of highly subjective assumptions, including
      the expected stock price volatility. Additionally, although t he
      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 our Series
      A
      Stock and Series B Stock as
      our derivative
      instruments have characteristics significantly different from traded
      options.





**Accounting
      for Certain Registration Rights Related to Warrants Issued in Connection with
      Debt**




We
      account for certain warrant registration rights under EITF-00-19-2, *Accounting
      for Registration Payment Arrangements* (“EITF-00-19-2”).
      EITF-00-19-2 requires the contingent liability under the registration payment
      arrangement be included in the allocation of proceeds from the related debt
      financing transaction if payment is probable and can be reasonably estimated
      at
      inception. In management’s opinion, payment of the Loan Warrant


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          21 -
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registration
      rights contingent liability is not probable, and therefore, not reflected in
      our
      financial statements as of December 31, 2007. We will continue to evaluate
      the
      registration rights contingent liability and the probability of the occurrence
      of payment under the registration rights at each reporting period to determine
      if the liability should be reflected in our financial statements.




**Stock-Based
      Compensation Expense** ****





Effective
      January 1, 2006, we adopted SFAS
      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 of our awards as it does 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.





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.





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            22 -
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**Results
      of Operations**





The
      following table summarizes certain aspects of our results of operations for
      Fiscal 2007 compared to Fiscal 2006 ( *in
      thousands* ):





**Fiscal
                2007**
            
            **Fiscal
                2006**
            
            **$
                Change**
            
            **%
                Change**Net
                sales
            
            $
            15,023
            
            $
            12,469
            
            $
            2,554
            
            
            20
            %Cost
                of sales
            
            
            9,120
            
            
            8,221
            
            
            899
            
            
            11As
                a percentage of sales
            
            
            61
            %
            
            66
            %Selling
                and marketing expense
            
            
            1,349
            
            
            1,240
            
            
            109
            
            
            9General
                and administrative expense
            
            
            2,675
            
            
            5,361
            
            
            (2,686
            )
            
            (50
            )Research
                and development expense
            
            
            2,439
            
            
            3,084
            
            
            (645
            )
            
            (21
            )Impairment
                of long-term asset
            
            
            —
            
            
            838
            
            
            NM
            
            
            NMTotal
                other income (expense)
            
            
            (496
            )
            
            1,079
            
            
            NM
            
            
            NMDividend
                on 5% convertible preferredstock
                and accretion of preferredStock
                redemption value
            
            
            (853
            )
            
            (749
            )
            
            NM
            
            
            NMNet
                loss available to commonStockholders
            
            
            (1,913
            )
            
            (5,948
            )
            
            (4,035
            )
            
            (68
            )NM
                = Not Meaningful




**Net
      Sales**





The
      significant increase in net sales was attributable to our shift toward selling
      more high-end products, including our duplex scanner, with a higher average
      selling price (“ASP”). Our ASP increased 17% in 2007 as compared to 2006. We
      expect this trend to continue in 2008.





To
      a
      lesser extent, sales increased as a result of the following:





·
            Overall
                growth of the document/image-capture market resulting from an increased
                market demand for products that manage how information is retrieved,
                stored, shared and disseminated;


·
            Increased
                end-user market penetration, including distribution channel expansion,
                by
                both us and our largest customers;


·
            The
                expansion of our customer base;


·
            Our
                more consistent market delivery of our product, which is attributable
                to
                (i) the growth of our smaller customers and less dependence on our
                larger
                customers, (ii) our management of customer demand and product delivery
                and
                (iii) our movement toward a just-in-time inventory management product
                delivery system;


·
            Our
                increased use of Value Added Reseller (“VAR”) channel distributions; and


·
            Overall
                growth in the small office home office (“SOHO”) markets, and the result of
                our efforts to appeal to customers in the SOHO market.





Sales
      to
      our four largest customers represented 72% and 81% of net sales during Fiscal
      2007 and Fiscal 2006, respectively. We expect that our largest customers will
      continue to account for a substantial portion of our net sales for the
      foreseeable future. The identities of our largest customers and their respective
      contributions to our net sales have varied and will likely continue to vary
      from
      period to period.





Although
      we expect net sales to increase as we continue to expand our business and offer
      additional products in the document/image-capture market, there can be no
      assurance that our net sales will increase.


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**Cost
      of Sales, Including Gross Profit**





Cost
      of
      sales includes all direct product costs and services related to the delivery
      our
      products, and to a lesser extent, engineering services and software royalties.
      Cost of sales in Fiscal 2007 as compared to Fiscal 2006 increased in absolute
      dollars as a result of the increased net sales during Fiscal 2007 as compared
      to
      Fiscal 2006.





Cost
      of
      sales as a percentage of net sales decreased in Fiscal 2007 as compared to
      Fiscal 2006 as a result of our shift toward selling more feature-rich products,
      which bear a higher gross margin. The decrease in our cost of sales percentage
      during Fiscal 2007 as compared to Fiscal 2006 was somewhat offset by the
      currency fluctuation between the Chinese Yuan and the U.S. dollar. As our
      contract manufacturer transacts business in the Chinese Yuan, the deflation
      of
      the U.S. dollar against the Chinese Yuan increased the average cost of our
      product. To mitigate this risk, we are implementing a hedging policy to offset
      any additional deflation of the U.S. dollar against the Chinese Yuan. The
      remaining aspects of the cost to manufacture our product remained fairly stable.




**Selling
      and Marketing Expense**




Selling
      and marketing expense consists primarily of compensation costs ,
      including stock-based compensation, of employees engaged in the
      sales, marketing and customer account management functions. To a lesser extent,
      these expenses also include market development and promotional costs provided
      to
      our retail distributions channels, tradeshows, website support, warehousing,
      logistics and certain sales representative fees.




The
      increase in selling and marketing expense during Fiscal 2007 as compared to
      Fiscal 2006 was primarily attributable to the stock-based
      compensation cost (a non-cash charge) as a result of granting stock options
      to
      key employees during the first quarter of Fiscal 2007 and accounting for such
      option grants under SFAS 123R. See “ Note
      4:
      Employee Equity Incentive Plans” in Part II, Item 7 of this Form
      10-KSB. Stock-based compensation cost was $121,000 during Fiscal 2007 as compared to
      $51,000 during Fiscal 2006.




To
      a
      lesser extent, the increase for
      Fiscal 2007 as compared to Fiscal 2006 was
      attributable to our increased
      staff and related marketing activities to support our expanding product
      offerings and the addition of direct sales personnel in Europe and Asia.
      Although we expect sales and marketing expenses to fluctuate as a result of
      the
      timing of advertising and promotions of our various new products and stock
      option grants, overall we expect selling and marketing expenses to increase
      as
      we continue to expand our marketing efforts and the number of products we offer.




**General
      and Administrative Expense**





General
      and administrative expense consists primarily of costs associated with our
      executive, financial, human resources and information services functions,
      including stock-based compensation, facilities-related expenses and outside
      professional services such as legal and accounting. The decrease in general
      and
      administrative expenses during Fiscal 2007 as compared to Fiscal 2006 was
      primarily attributable to the following:





·
            A
                $2,606,000allowance
                against amounts due from related parties as it became apparent to
                management during the fourth quarter of Fiscal 2006 that such parties
                may
                not have the financial resources to repay amounts due;
                and


·
            Decreasedstock-based
                compensation cost (a non-cash charge) as a result of granting stock
                options to certain executives and key employees during the first
                quarter
                of Fiscal 2007 and accounting for such option grants under SFAS 123R.
                See
                “Note
                4: Employee Equity Incentive Plans” in Part II, Item 7 of this Form
                10-KSB.Stock-based compensation cost was $794,000 during Fiscal 2007 as
                compared
                to $1,015,000 during Fiscal 2006.





The
      above
      decreases from Fiscal 2007 compared to Fiscal 2006 were somewhat offset by
      the
      following increased expenses:





·
            The
                hiring of an outside investor relations firm to manage and enhance
                ourinvestor
                relations function;


·
            Increased
                personnel costs to support our expanding business and related
                infrastructure; and


·
            Increased
                expenses associated with maintaining our public company status, including
                the costs of complying with the Sarbanes-Oxley Act.


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          24 -
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We
      anticipate that general and administrative expenses will continue to increase
      over the long term as our business continues to grow and the costs associated
      with being a public company continue to increase as a result of our required
      reporting requirements, including but not limited to expenses incurred to comply
      with the Sarbanes-Oxley Act of 2002.





**Research
      and Development Expense**





Research
      and development expense consists primarily of salaries and related costs,
      including stock-based compensation costs, of employees engaged in product
      research, design and development activities, compliance testing, documentation,
      prototypes and expenses associated with transitioning the product to production.
      The majority of
      our
      research and development expense during all periods presented was directly
      attributable to our future products including our HD display
      products.  Our
      HD
      display research and development efforts were terminated in November
      2007.





The
      decrease during Fiscal 2007 as compared to Fiscal 2006 was primarily
      attributable to the following:





·
            The
                one-time amortization of our research and development-related intangible
                assets that totaled $555,000 during Fiscal 2006; and


·
            The
                decreased infrastructure costs, expensed equipment and personnel
                expenses
                as we began to terminate our HD display research and development
                activities in the third quarter of Fiscal
                2007.





The
      above
      decreases were somewhat offset by the stock-based
      compensation cost (a non-cash charge) as a result of granting stock options
      to
      key employees during the first quarter of fiscal 2007 and accounting for such
      option grants under SFAS 123R. See “Note 6: Employee Equity Incentive Plans” in
      Part I, Item 1 of this Form 10-QSB. Stock-based compensation cost was $511,000
      during Fiscal 2007 as compared to $245,000 during Fiscal 2006.





Although
      we plan to continue to invest in product innovation and development with respect
      to our document/image-capture products, management continues to assess research
      and development efforts, which may result in an offset to future research and
      development expenses.





**Impairment
      of Long-Term Asset**





Until
      December 2007, we owned a 16.1% equity interest in CMOS Sensor, Inc. (“CMOS”), a
      California corporation, principally engaged in the research and development
      of
      infrared sensors and CMOS sensors. We accounted for the investment using the
      cost method of accounting. As we performed our annual review of long-lived
      assets during Fiscal 2006, we perceived indicators of the investment’s value. As
      such, we recorded an impairment charge of $838,000 related to our investment
      in
      CMOS during Fiscal 2006.





As
      previously discussed, during December 2007, we sold our 16.1% investment in
      CMOS
      back to CMOS for $160,000. The sale was a result of refocusing our efforts
      and
      economic resources toward our core revenue generating activities. As we sold
      the
      investment for its carrying value, there was no additional impairment required
      during Fiscal 2007, nor was there any gain or loss associated with the
      transaction.





**Total
      Other Income (Expense)**





Other
      income (expense) for Fiscal 2007 and Fiscal 2006 was mainly attributable to
      the
      $238,000 increase and the $1,421,000 decrease, respectively, in the fair value
      of the liability for derivative contracts associated with our Series A Stock
      and
      related warrants and Series B Stock and related warrants. Pursuant to SFAS
      133
      and EITF 00-19, the increase in the fair value of the liability for derivative
      contracts is included as other expense in our Statement of Operations and the
      decrease in the fair value of the liability for derivative contracts is included
      as other income in our Statement of Operations.





Other
      income (expense) was also impacted by our increased debt, which resulted in
      interest expense increasing to $303,000 in Fiscal 2007 from $92,000 in Fiscal
      2006. Of the $303,000 interest expense recorded in Fiscal 2007, $88,000 was
      non-cash interest expense attributable to amortization of debt issuance costs.





The
      remaining other income (expense) during Fiscal 2006 was a result of issuing
      our
      Series B Stock as follows:





·
            Cash
                paid for issuance costs of $88,000 in connection with our offering;
                and


·
            A
                non-cash charge of $173,000 representing the fair value of 100,000
                warrants issued to the placement agent for the sale of the stock.




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          25 -
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**Dividend
      on Series A Stock and Accretion of Preferred Stock Redemption
      Value**





During
      Fiscal 2007 and Fiscal 2006, accretion on our preferred stock, both Series
      A and
      Series B, totaled approximately $773,000 and $668,000, respectively. The
      increase in accretion of preferred stock during Fiscal 2007 as compared to
      Fiscal 2006 was attributable to the sale of our Series B Stock during the third
      quarter of Fiscal 2006. Series A Stock dividends were $81,000 for both Fiscal
      2007 and Fiscal 2006.





***Liquidity
      and Capital Resources***





The
      following table summarizes DCT’s cash and cash equivalents, working capital and
      cash flows as of and for the years ended December 31, 2007 and 2006
      ( *in
      thousands* ):





**As
                of or for the year ended December 31,****2007**
            
            **2006**Cash
                and cash equivalents
            
            $
            1,770
            
            $
            1,333Working
                capital
            
            
            3,013
            
            
            2,040Cash
                provided (used) by operating activities
            
            
            36
            
            
            (1,239
            )Cash
                provided (used) by investing activities
            
            
            93
            
            
            (4
            )Cash
                provided by financing activities
            
            
            308
            
            
            1,150





**Operating
      Activities**





Cash
      provided by operations during Fiscal 2007 was primarily a result of our
      $1,913,000 net loss, $2,611,000 of net non-cash expenses and accretion of Series
      A and Series B preferred stock redemption value, and $662,000 net cash used
      by
      changes in operating assets and liabilities. Cash used by operations during
      Fiscal 2006 was primarily a result of our $5,948,000 net loss, $4,789,000 of
      net
      non-cash expenses and $80,000 net cash used by changes in operating assets
      and
      liabilities.





Non-cash
      items included in net loss available to common shareholders for both Fiscal
      2007
      and Fiscal 2006 include depreciation expense, stock-based compensation cost
      of
      options, fair value of warrants issued for services rendered, change in fair
      value of derivative instruments and the accretion of our Series A and Series
      B
      preferred stock redemption value. Fiscal 2006 includes additional non-recurring
      non-cash items including impairment of long-term investment and an allowance
      for
      doubtful accounts to reserve against our related party loans as previously
      discussed. See Part III, “Item 12. Certain Relationships and Related
      Transactions, and Director Independence.”





We
      had no
      significant unusual cash outlays related to operating activities during Fiscal
      2007 or Fiscal 2006. 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 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. The sale was
      a
      result of refocusing our efforts and economic resources toward our core revenue
      generating activities. 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. During
      Fiscal 2006, cash used in investing activities was solely attributable to the
      purchase of capital.




**Financing
      Activities**




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 (as
      discussed in the subsequent paragraph). During Fiscal 2006, cash provided by
      financing activities was attributable to the $1,150,000 sale of our Series
      B
      Stock. Net proceeds of this


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offering
      after payment of related commissions, fees and other expenses were approximately
      $1,070,000. We used the proceeds for sales, marketing, research and development
      and for working capital and general corporate purposes.





**Cash
      and Working Capital Requirements**





During
      September 2007, we repurchased 8,000,000, or approximately 36% of the then
      outstanding shares, of our restricted common stock from our majority shareholder
      for $2,000,000 less related transaction fees. Of the $2,000,000 consideration,
      $500,000 was paid through our newly established credit line with a commercial
      bank, and the remainder was financed through a $1,500,000 loan from Montage
      Capital, LLC a private investment group. Additionally, we agreed that if we
      sell
      our HD display business to a certain party, specifically identified in the
      repurchase agreement, and receive stock of the buyer as consideration, then
      we
      will transfer a portion of that stock to the majority stockholder. We
      repurchased the 8,000,000 shares for the purpose of retiring the shares. Our
      transfer agent retired the shared during the fourth quarter of 2007. The stock
      repurchase enhances our strategy of engaging an independent investment firm
      to
      explore and evaluate a range of strategic opportunities to enhance shareholder
      value, as previously discussed.




As
      previously discussed, we terminated our HD display research and development
      efforts during November 2007. All HD-related expenses, including employees
      and
      contractors were terminated by December 31, 2007. We do not expect to expend
      any
      additional effort or funds to further develop and deploy our HD technology
      in
      2008.




With
      the
      termination of the HD display portion of our business, our expected future
      expenses will decrease and be more aligned with our current and projected
      revenue. If we successfully re-align our 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.





**Contractual
      Obligations**





The
      following table summarizes our contractual obligations at December 31, 2007,
      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
                - Five****Total**
            
            **One
                Year**
            
            **Years**
            
            **Years**Long-term
                bank line of credit**(1)**
            
            $
            2,021
            
            $
            —
            
            $
            2,021
            
            $
            —Series
                A Stock principal**(2)**
            
            
            1,150
            
            
            1,150
            
            
            —
            
            
            —Series
                A Stock accrued dividends**(2)**
            
            
            191
            
            
            191
            
            
            —
            
            
            —Term
                loan principal payments**(3)**
            
            
            1,300
            
            
            1,300
            
            
            —
            
            
            —Term
                loan warrant liabilities**(4)**
            
            
            250
            
            
            250
            
            
            —
            
            
            —Series
                B Stock principal**(5)**
            
            
            150
            
            
            —
            
            
            150
            
            
            —Operating
                lease obligations
            
            
            269
            
            
            267
            
            
            2
            
            
            —Consulting
                agreement
            
            
            60
            
            
            60
            
            
            —
            
            
            —Total
                contractual cash obligations
            
            $
            5,391
            
            $
            3,218
            
            $
            2,173
            
            $
            —





**(1)**  During
      September 2007, we replaced our existing $2,500,000 line of credit at a
      commercial bank with a similar line of credit (“LOC”) at a different commercial
      bank. The new LOC initial maximum available credit was $2,000,000 and increased
      to $3,000,000 on December 12, 2007. 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 (7.25% at December 31, 2007) plus 1.25%
      for advances drawn against accounts receivables and prime plus 2.25% for
      advances drawn against inventory. 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, 2007, DCT had unused borrowing capacity of $160,000
      on
      its LOC.





**(2)**  On
      March
      15, 2008 (the "Series A Stock Redemption Date"), all of our outstanding Series
      A
      Stock shall be 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 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 A Stock Redemption Date.


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In
      the
      event we elect to pay all or some of the Series A 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 A Redemption Date.




**(3)**  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. We granted the Lender a continuing security interest, and pledged
      to
      the Lender, all of our assets to secure payment and performance of its
      obligations under the Loan Agreement. The Loan Agreement and the security
      interest are subordinate to our LOC.




The
      Loan
      Agreement bears an annual interest rate of 15% with interest-only payments
      due
      monthly starting from initial funding through October 31, 2007. Thereafter,
      principal of $100,000 per month plus accrued interest is due at the end of
      each
      month through the loan’s maturity date of November 30, 2008. The remaining
      principal balance and accrued interest is due on the maturity date.




**(4)** 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. Subsequent to the initial
      funding of the Loan Agreement, the warrant holders may require us to purchase
      the warrant for a maximum of $250,000. If any amount remains outstanding under
      the Loan Agreement after March 31, 2008, the warrant repurchase price increases
      to a maximum of $350,000.





**(5)**  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.




***Off-Balance
      Sheet Arrangements***





At
      December 31, 2007, 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 as defined in Item 303(c)(2) of SEC Regulation S-B.
      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, 2007, 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 7 of this Form
      10-KSB, .





**ITEM
      7. FINANCIAL STATEMENTS**





The
      information required by Item 7 is included herein Appendix
      A beginning at page F-1.


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





None.





**ITEM
      8A. 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 and Chief 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 and 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, 2007 that our disclosure controls and procedures were not effective at
      the
      reasonable assurance level due to the material weaknesses in our internal
      controls over financial reporting discussed immediately below.





***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, 2007. 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.




***Identified
      Material Weaknesses***




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.


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Management
      identified the following internal control deficiencies during its assessment
      of
      our internal control over financial reporting as of December 31, 2007:




1.
            We
                did not have effective comprehensive entity-level internal controls
                specific to the structure of our board of directors;




2.
            We
                did not have formal policies governing certain accounting transactions
                and
                financial reporting processes;




3.
            We
                did not obtain attestations by all employees regarding their understanding
                of and compliance with DCT policies related to their employment;




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;




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.




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.





A
      regionally-recognized independent consulting firm assisted management with
      its
      assessment of the effectiveness of our internal control over financial
      reporting, including scope determination, planning, staffing, documentation,
      testing, remediation and retesting and overall program management of the
      assessment project. In conclusion, our Chief Executive Officer and Chief
      Financial Officer surmised that DCT did not maintain effective internal control
      over financial reporting as of December 31, 2007.




***Management’s
      Remediation Initiatives***





We
      are in
      the process of evaluating our material deficiencies. We have already begun
      to
      remediate many of the deficiencies. However, others will require additional
      people, including adding to our board of directors, which will take longer
      to
      remediate.




In
      an
      effort to remediate the identified material weaknesses and other deficiencies
      and enhance our internal controls, we have initiated, or plan to initiate,
      the
      following series of measures:




1.
            Identify
                and retain two new directors for our board of directors including
                a member
                who is appropriately credentialed as a financial expert with a goal
                of
                having sufficient independent board of directors
                oversight;




2.
            Establish
                comprehensive formal general accounting policies and procedures and
                require employees to sign off such policies and procedures as
                documentation of their understanding of and compliance with DCT
                policies;




3.
            Make
                all employees subject to our Code of Ethics and require all employees
                and
                directors to sign our Code of Ethics on an annual basis and retain
                the
                related documentation;




4.
            Implement
                appropriate management oversight and approval activities in the areas
                of
                vendor bill payments, employee expense reimbursements, customer invoicing,
                and period-end closing processes;
                and




5.
            Centralize
                our financial reporting system and move all decentralized off-line
                processes to our new centralized financial reporting
                system.





We
      anticipate that the above five initiatives will be at least partially, if not
      fully, implemented by June 30, 2008. Additionally, we plan to test our updated
      controls and remediate our deficiencies by December 31, 2008.




***Conclusion***





The
      above
      identified material weaknesses did not result in material audit adjustments
      to
      our 2007 financial statements. However, it is reasonably possible that, if
      not
      remediated, one or more of the identified material


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weaknesses
      noted above, could result in a material misstatement in our reported financial
      statements that might result in a material misstatement in a future annual
      or
      interim period.




In
      light
      of the identified material weaknesses, management, three of whom are also
      members of DCT’s board of directors, performed (1) significant additional
      substantive review of those areas described above, and (2) performed additional
      analyses, including but not limited to a detailed balance sheet and statement
      of
      operations analytical review that compared changes from the prior period’s
      financial statements and analyzed all significant differences. These procedures
      were completed so management could gain assurance that the financial statements
      and schedules included in this Form 10-KSB fairly present in all material
      respects DCT’s financial position, results of operations and cash flows for the
      periods presented.





***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.





**ITEM
      8B. OTHER INFORMATION**





None.


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**PART
      III**





**ITEM
      9. 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,
      2008.





**Name**
            
            **Year
                First Elected**
              **As
                Officer or Director**
            
            **Age**
            
            **Office**Darwin
                Hu
            
            2004
            
            54
            
            ChairmanWilliam
                Hawkins
            
            2004
            
            51
            
            Chief
                Operating Officer, President and SecretaryDavid
                Clark
            
            2004
            
            38
            
            Chief
                Executive Officer and DirectorM.
                Carolyn Ellis
            
            2007
            
            43
            
            Chief
                Financial OfficerLawrence
                Liang
            
            2004
            
            71
            
            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. There were
      no changes in procedures for nominating DCT directors during the year ended
      December 31, 2007.





DARWIN
      HU
      became our Chairman, President and Chief Executive Officer on April 2, 2004,
      in
      connection with our acquisition of Syscan, Inc. Prior thereto, Mr. Hu was the
      President and Chief Executive Officer of Syscan, Inc., our wholly-owned
      subsidiary. Effective March 1, 2008, Mr. Hu resigned as Chief Executive Officer
      and President of the Company, but has agreed to remain as the non-executive
      Chairman of the board of directors. Before joining Syscan, Inc., 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, California USA.





WILLIAM
      HAWKINS became our Chief Operating Officer and Secretary on April 2, 2004,
      in
      connection with our acquisition of Syscan, Inc. On June 8, 2007 he was appointed
      to our board of directors. On February 26, 2008, Mr. Hawkins was appointed
      by
      our board of directors to be the President of our Company effective March 1,
      2008. Mr. Hawkins has held various management positions at Syscan, Inc., the
      Company'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 has been 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 in Management
      of
      Technology Concentration (MOT).





DAVID
      CLARK has been our Senior Vice President of Business Development and a director
      since July 15, 2004 and our Chief Investment Officer since September 2007.
      On
      February 26, 2008, Mr. Clark was appointed by our board of directors to be
      the
      Chief Executive Officer of our company effective March 1, 2008. Also on February
      26, 2008, Mr. Clark tendered his resignation as Chief Investment Officer
      effective March 1, 2008. In July 2005, Mr. Clark was appointed President of
      Sysview Technology, Inc., our wholly owned subsidiary. 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. 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.





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


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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.





LAWRENCE
      LIANG has been a director since April 2, 2004. Mr. Liang serves as an
      "independent director" as defined by Nasdaq Rule 4200(a)(15). Since 1984 Mr.
      Liang has been the President and Vice President of Genoa Systems Corporation,
      a
      graphics company that developed the flicker free and true color technologies
      in
      the late 1980's, the President of Telecom Marketing, a marketing consultant
      for
      telecommunications infrastructure, and the President of Cwaves Technology,
      a
      wireless LAN/WAN company. From 1967 to 1978, Mr. Liang worked for IBM's
      Technology Component Division to help develop semiconductor products and RISC
      CPU Instruction sets. From1978 to 1982 Mr. Liang worked in IBM's Disk Drive
      division in Silicon Valley where he held various management positions. Mr.
      Liang
      holds a master's degree in Applied Mathematics from the City University of
      New


York.





***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, 2007.





***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 orany
                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 ofcompetent
                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.




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***Board
      of Directors Meetings and Subcommittees***





**Meetings**





Our
      Board
      of Directors did not hold any meetings during the fiscal year ended December
      31,
      2007. All board actions were completed through unanimous written consents.





**Audit
      Committee and Financial Expert**





Our
      Board
      of Directors does not have a separate audit committee. The Board has determined
      that it does not have a member of its Board that qualifies as an “audit
      committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation
      S-B.





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, DCT plans to appoint an independent qualified
      audit
      committee financial expert as well as an additional independent professional
      to
      its Board of Directors to strengthen and improve its internal disclosure
      controls and procedures during the fiscal year ending December 31,
      2008.





**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
      full
      Board of Directors.





**Nominating
      Committee**





We
      do not
      currently have a separate nominating committee as this function is performed
      by
      our full Board of Directors.





***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 at www.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 Secretary at
      1772
      Technology Drive, 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.”


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          34 -
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          of Contents*


**ITEM
      10. 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, 2007: (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, 2007; and (ii) our two other most highly compensated
      executive officers, who together with the principal executive officer are our
      most highly compensated officers whose salary and bonus exceeded $100,000 with
      respect to the years ended December 31, 2007 and 2006 and who were employed
      by
      us at December 31, 2007.





**SUMMARY
      COMPENSATION TABLE**




**Name
                    and Principal Position**
                
                **Year**
                
                **Salary**
                  **($)**
                
                **Bonus**
                  **($)**
                
                **Stock**
                  **Awards
                    ($)****(3)**
                
                **Option
                    Awards**
                  **($)**
                
                **Non-Equity
                    Incentive Plan Compen-**
                  **sation**
                  **($)**
                
                **Nonquali-fied
                    Deferred Compen-sation Earnings**
                  **($)**
                
                **All
                    Other**
                  **Compensation****(1)**
                  **($)**
                
                **Total**
                  **Compensation
                    ($)**Darwin
                    Hu,
                  Chief
                    Executive Officer and Chairman
                
                
                2006
                  2007
                
                
                200,000
                  200,000
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  267,300**(4)**
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                7,292
                  7,833
                
                
                207,292
                  475,133William
                    Hawkins,
                  Chief
                    Operating Officer,Secretary
                    and Director
                
                
                2006
                  2007
                
                
                160,000
                  160,000
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  194,400**(5)**
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                6,133
                  3,633
                
                
                166,133
                  358,033David
                    Clark,
                  Chief
                    Investment Officer and Director
                
                
                2006
                  2007
                
                
                150,000
                  150,000
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  194,400**(6)**
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                150,000
                  344,400M.
                    Carolyn Ellis,
                  Chief
                    Financial Officer
                
                
                2006
                  2007
                
                
                -0-
                  22,500**(2)**
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  99,000**(7)**
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  -0-
                
                
                -0-
                  121,500


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




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





**(3)** 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” in Part
      II,
      Item 7 - Financial Statements of this Form 10-KSB.





**(4)** Represents
      the total fair value (as discussed in **(3)** above)
      of 550,000 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 vest on March 28, 2008 and
      one-third vest on March 28, 2009.





**(5)** Represents
      the total fair value (as discussed in **(3)** 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 vest on March 28, 2008 and
      one-third vest on March 28, 2009.


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**(6)** Represents
      the total fair value (as discussed in **(3)** 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 vest on March 28, 2008 and
      one-third vest on March 28, 2009.





**(7)** Represents the total fair value (as discussed in **(3)** above)
      of 150,000 non-qualified stock options granted during the year ended December
      31, 2007. All options vest on November 1, 2008.





***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, 2007 by the named executive officers.




**OUTSTANDING
      EQUITY AWARDS TABLE**





**Option
                Awards****Name
                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
                Date**Darwin
                Hu
            
            
            1,398,850
            
            
            —
            
            
            —
            
            $
            0.01
            
            
            4/26/2012Chief
                Executive Officer and
                Chairman
            
            
            313,333
            
            
            156,667**(1)**
            
            
            —
            
            
            0.70
            
            
            3/25/201726,666
            
            
            53,334**(1)**
            
            
            —
            
            
            0.70
            
            
            3/25/2017William
                Hawkins
            
            
            898,850
            
            
            —
            
            
            —
            
            $
            0.01
            
            
            4/26/2012Chief
              Operating Officer,Secretary
              and Director
            
            
            133,333
            
            
            266,667**(1)**
            
            
            —
            
            
            0.70
            
            
            3/25/2017—David
                Clark
            
            
            698,850
            
            
            —
            
            
            —
            
            $
            0.01
            
            
            4/26/2012Chief
              Investment Officerand
              Director
            
            
            106,667
            
            
            213,333**(1)**
            
            
            —
            
            
            0.70
            
            
            3/25/201726,666
            
            
            53,334**(1)**
            
            
            —
            
            
            0.70
            
            
            3/25/2017M.
                Carolyn Ellis
            
            
            —
            
            
            150,000**(2)**
            
            
            —
            
            $
            0.60
            
            
            10/30/2014Chief
              Financial Officer





**(1)** One-half
      of the unexercisable options at December 31, 2007 will vest on March 28, 2008
      and one-half of the unexercisable options at December 31, 2007 will vest on
      March 28, 2009.


**(2)** All
      of
      the unexercisable options at December 31, 2007 will vest on November 1,
      2008.




***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, 2007.


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***Compensation
      of Directors***





The
      general policy of the Board is that compensation for directors should consist
      primarily of equity-based compensation. DCT did not pay any cash compensation
      to
      any members of our Board of Directors during the year ended December 31,
      2007.





The
      following table details the total compensation earned by DCT’s non-employee
      director during the year ended and as of December 31, 2007:





**Year
                Ended December 31, 2007****Name**
            
            **Year**
            
            **Option
                Award ($)****(1) (2)**
            
            **Total
                Compensation ($)**Lawrence
                Liang
            
            2007
            
            38,880
            
            38,880





**(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” in Part
      II,
      Item 7 - Financial Statements of this Form 10-KSB.


**(2)** Represents
      the total fair value (as discussed in **(1)** above)
      of 80,000 incentive stock options granted during the year ended December 31,
      2007, for serving as a DCT director. One-third
      of the options vested on March 28, 2007, one-third vest on March 28, 2008 and
      one-third vest on March 28, 2009.





***Employment
      Contracts***





***Darwin
      Hu, President and Chief Executive Officer***





In
      April
      2005, we entered into an employment agreement with Mr. Darwin Hu pursuant to
      which he agreed to serve as our President and Chief Executive Officer. The
      agreement provides for an initial term of three years, an annual salary to
      Mr.
      Hu of $200,000 and an annual bonus to be determined by our Board of Directors.
      In connection with the agreement, Mr. Hu was issued non-qualified options to
      purchase up to 1,500,000 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. Hu'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, DCT entered into an addendum to the April 2005 employment
      agreement with Mr. Hu (the "Hu Addendum"). The Hu Addendum extends the initial
      term of Mr. Hu's employment with DCT for an additional six months, from
      thirty-six months to forty-two months, commencing on April 26, 2005. In
      addition, the Hu Addendum provides for an increase in Mr. Hu's annual base
      salary from $200,000 to $225,000 effective January 1, 2008. The Hu Addendum
      is
      incorporated by reference at Exhibit 10.9.





On
      February 26, 2008, DCT entered into a second addendum to the employment
      agreement with Mr. Hu (the “Hu Second Addendum”). The Hu Second Addendum amends
      Mr. Hu’s employment agreement and the Hu Addendum to reflect his resignation as
      President and Chief Executive Officer of DCT effective March 1, 2008. The Hu
      Second Addendum also provides for a decrease in Mr. Hu’s annual salary from
      $225,000 to $112,500 effective June 1, 2008, unless DCT appoints Mr. Hu to
      an
      executive officer position of DCT in the future at which point Mr. Hu’s
      compensation will be determined by the Board. The Hu Second Addendum is
      incorporated by reference at Exhibit 10.29.





***William
      Hawkins, Chief Operating Officer***





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.


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          37 -
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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, DCT entered into an addendum to the April 2005 employment
      agreement with Mr. Hawkins (the "Hawkins Addendum"). The Hawkins Addendum
      extends the initial term of Mr. Hawkins’ employment with DCT for an additional
      six months, from thirty-six months to forty-two months, commencing on April
      26,
      2005. In addition, the Hawkins Addendum provides for an increase in Mr. Hawkins'
      annual base salary from $160,000 to $180,000 effective January 1, 2008. The
      Hawkins Addendum is incorporated by reference at Exhibit 10.10.





On
      February 26, 2008, DCT entered into an addendum to the employment agreement
      with
      Mr. Hawkins (the “Hawkins Second Addendum”). The Hawkins Second Addendum amends
      Mr. Hawkins’ employment agreement and the Hawkins Addendum to include his new
      position as President of DCT effective March 1, 2008. The Hawkins Second
      Addendum is incorporated by reference at Exhibit 10.30.





***David
      Clark, Chief Investment Officer***





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, DCT entered into an addendum to the April 2005 employment
      agreement with Mr. Clark (the "Clark Addendum"). The Clark Addendum extends
      the
      initial term of Mr. Clark's employment with DCT for an additional six months,
      from thirty-six months to forty-two months, commencing on April 26, 2005. In
      addition, the Clark Addendum provides for an increase in Mr. Clark's annual
      base
      salary from $150,000 to $175,000 effective January 1, 2008. The Clark Addendum
      is incorporated by reference at Exhibit 10.11.





On
      February 26, 2008, DCT entered into an addendum to the employment agreement
      with
      Mr. Clark (the “Clark Second Addendum”). The Clark Second Addendum amends Mr.
      Clark’s employment agreement to reflect his new position as Chief Executive
      Officer of DCT and his resignation as Chief Investment Officer of DCT effective
      March 1, 2008. The Clark Second Addendum is incorporated by reference at Exhibit
      10.31.





***M.
      Carolyn Ellis, Chief Financial Officer***





In
      November 2007, we entered into an employment agreement with Ms. M. Carolyn
      Ellis
      pursuant to which she will 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 will vest and become exercisable on the 12-month
      anniversary of their issuance date. 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’s employment agreement is incorporated by reference at Exhibit
      10.12.





***Report
      on Repricing of Options/SARs***





We
      did
      not re-price any options or SARS during the year ended December 31, 2007.


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





The
      following table sets forth, as of February 22, 2008, 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
      February 22, 2008 there were 16,599,754 shares
      of
      our common stock outstanding.





**Name
                and Address of Beneficial Owner**
            
            **Number
                of Common Shares**
              **Beneficially
                Owned****(1)**
            
            **Percentage
                of Common**
              **Shares
                Beneficially Owned**Syscan
                Imaging Limited**(2)**
              Unit
                C, 21stFloor, 9-23 Shell Street
              North
                Point , Hong Kong
            
            
            8,173,514
            
            
            49.2
            %Directors
                and Executive Officers:
              c/o
                Document Capture Technologies, Inc
              1772
                Technology Drive
              San
                Jose, CA 95110Darwin
                Hu**(3)**
            
            
            1,865,517
            
            
            10.4William
                Hawkins**(4)**
            
            
            1,265,517
            
            
            7.2David
                Clark**(5)**
            
            
            1,110,142
            
            
            6.5M.
                Carolyn Ellis**(6)**
            
            
            —
            
            
            *Lawrence
                Liang**(7)**
            
            
            53,333
            
            
            *All
                directors and executive officers as a group (consisting of 5
                persons)
            
            
            4,294,509
            
            
            22.0





***** 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)** **** 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 .





**(3)** Includes
      (i) 500,000 shares of common stock and (ii) 1,365,517 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 183,333 shares of common stock
      underlying options that are not exercisable within the next 60
      days.





**(4)** Includes
      (i) 400,000 shares of common stock and (ii) 865,517 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 133,333 shares of common stock
      underlying options that are not exercisable within the next 60 days.





**(5)** Includes
      (i) 500,010 shares of common stock and (ii) 610,132 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 133,333 shares of common stock
      underlying options that are not exercisable within the next 60
      days.





**(6)** Does not
      include 150,000 shares of common stock underlying options that are not
      exercisable within the next 60 days.




**(7)** Includes
      53,333 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
      26,667 shares of common stock underlying options that are not exercisable within
      the next 60 days.




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**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE**





During
      the year ended December 31, 2007, we entered into the following transactions
      required to be reported under Item 404 of Regulation S-B (“Item
      404”):





**Certain
      Relationships and Related Transactions**





***Manufacturing
      of Our Product***





We
      purchase the majority of our finished scanner imaging products from Syscan
      Lab
      Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology Holdings
      Limited ("STH"), the parent company of our former majority stockholder. 
Our Chairman and former CEO, Darwin Hu, was formerly the CEO of STH.  He
      resigned from STH effective December 2004.





Purchases
      from SLL totaled $8,369,000 for the year ended December 31, 2007 and $8,620,000
      during the year ended December 31, 2006. All purchases from SLL were carried
      out
      in the normal course of business. We have established a pricing agreement with
      SLL, 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, the Company was liable to SLL for $578,000 and
      $952,000 at December 31, 2007 and 2006, respectively.





***Related-Party
      Loans***





In
      the
      normal course of business, the Company entered into several interest-free loans
      to related parties for the purpose of purchasing capital equipment, including
      tooling required for the manufacture of our product, as follows:


Year
                Ended December 31, 2006
            
            $
            —Year
                Ended December 31, 2005
            
            
            341,000Prior
                to December 31, 2004
            
            
            2,265,000**Total
                due at December 31, 2006**
            
            **$**
            **2,606,000**





As
      of
      December 31, 2006, such loans were fully reserved. On March 21, 2007, we entered
      into an agreement with Syscan Technology Holdings, LTD whereby we agreed to
      forego any further collections efforts, including legal action, in exchange
      for
      the cancellation of 2,600,000 shares of our common stock beneficially owned
      by
      Syscan Technology Holdings, LTD. In addition, both parties mutually agreed
      to
      release and discharge any and all claims that each may have against the other
      party.





No
      new
      loans were entered during the year ended December 31, 2007.





**Director
      Independence**





The
      following director is an independent director as that term is defined under
      Nasdaq Rule 4200(a)(15): Lawrence
      Liang.


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          40 -
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**ITEM
      13. EXHIBITS**





**Exhibit****Number**
            **Description
                of Exhibit**
            **Method
                of Filing**2.1
            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, 20053.3
            Certificate
                of Designation of Preferences, Rights and Limitations of Series A
                Stock as
                filed with the Secretary of State of the State of Delaware on March
                15,
                2005
            Incorporated
                by reference toExhibit
                10.4 to Form 8-K as filed March 21, 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 A 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 March 21, 200510.2
            Form
                of Common Stock Purchase Warrant
            Incorporated
                by reference to Exhibit
                10.2 to Form 8-K as filed March 21, 200510.3
            Form
                of Registration Rights Agreement
            Incorporated
                by reference to Exhibit
                10.3 to Form 8-K as filed March 21, 200510.4
            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, 200610.5
            Form
                of Common Stock Purchase Warrant
            Incorporated
                by reference to Exhibit10.2
                to Form 8-K as filed August 14, 200610.6
            Form
                of Registration Rights Agreement
            Incorporated
                by reference to Exhibit10.3
                to Form 8-K as filed August 14, 200610.7
            2002
                Amended and Restated Stock Option Plan
            Incorporated
                by reference to Exhibit
                10.4 to Form 10-KSB as filed March 31, 200510.8
            2006
                Stock Option Plan
            Incorporated
                by reference to Exhibit
                10.8 to Form 10-QSB as filed August 21, 200610.9
            Employment
                Agreement entered between the Company and Darwin Hu dated April 26,
                2005
            Incorporated
                by reference to Exhibit 10.5 to Form 8-K as filed May 2,
                200510.10
            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,
                200510.11
            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,
                200510.12
            Addendum
                to Employment Agreement entered between the Company and Darwin Hu
                dated
                January 18, 2008
            Incorporated
                by reference to Exhibit 10.1 to Form 8-K as filed January 23,
                2008


-
          41 -
 *Table
          of Contents*




**Exhibit
                Number**
            **Description
                of Exhibit**
            **Method
              of Filing**10.13
            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,
              200810.14
            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,
              200810.15
            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,
                200710.16
            Incentive
                Stock Option Agreement between the Company and Darwin Hu dated March
                30,
                2007
            Incorporated
                by reference to exhibit 10.6 to Form SB-2 dated January 17,
                200810.17
            Incentive
                Stock Option Agreement between the Company and Darwin Hu dated March
                30,
                2007
            Incorporated
                by reference to exhibit 10.7 to Form SB-2 dated January 17,
                200810.18
            Incentive
                Stock Option Agreement between the Company and William M. Hawkins
                dated
                March 30, 2007
            Incorporated
                by reference to exhibit 10.8 to Form SB-2 dated January 17,
                200810.19
            Incentive
                Stock Option Agreement between the Company and David P. Clark dated
                March
                30, 2007
            Incorporated
                by reference to exhibit 10.9 to Form SB-2 dated January 17,
                200810.20
            Incentive
                Stock Option Agreement between the Company and David P. Clark dated
                March
                30, 2007
            Incorporated
                by reference to exhibit 10.10 Form SB-2 dated January 17,
                200810.21
            Incentive
                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,
                200710.22
            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,
                200710.23
            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,
                200710.24
            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,
                200710.25
            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,
                200710.26
            Warrant
                to Purchase Stock to Montage Capital, LLC
            Incorporated
                by reference to exhibit 10.3 to Form 10-QSB dated November 14,
                200710.27
            Warrant
                to Purchase Stock to North Atlantic Resources Limited
            Incorporated
                by reference to exhibit 10.4 to Form 10-QSB dated November 14,
                200710.28
            Lease
                Agreement by and between the Company and Airport II Property Management,
                LLC dated August 9, 2006
            Incorporated
                by reference to Exhibit10.12
                to Form 10-KSB dated April 3, 200710.29
            Addendum
                to Employment Agreement dated February 26, 2008 by and between the
                Document Capture Technologies, Inc. and Darwin Hu
            Incorporated
                by reference to Exhibit 10.1 to form 8-K as filed March 3,
                200810.30
            Addendum
                to Employment Agreement dated February 26, 2008 by and between the
                Document Capture Technologies, Inc. and William Hawkins
            Incorporated
                by reference to Exhibit 10.2 to form 8-K as filed March 3,
                2008


-
          42 -
 *Table
          of Contents*





**Exhibit
                Number**
            **Description
                of Exhibit**
            **Method
                of Filing**10.31
            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,
                200814.1
            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
            Filed
                herewith32.2
            Certifications
                Pursuant to Section 906 of the Sarbanes-Oxley Act - M. Carolyn
                Ellis
            Filed
                herewith





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          43 -
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          of Contents*




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND
      SERVICES**





The
      following table is a summary of the fees billed for the audit and other services
      provided by our
      independent registered public accounting firm, Clancy and Co., P.L.L.C.
      (“Clancy”) :





**Fee
                Category**
            
            **Year
                Ended**
              **December
                31, 2007**
            
            **Year
                Ended**
              **December
                31, 2006**Audit
                fees
            
            $
            79,413
            
            $
            67,185Audit-related
                fees
            
            
            —
            
            
            —Tax
                fees
            
            
            4,550
            
            
            3,200All
                other fees
            
            
            —
            
            
            —





***Audit
      Fees*** .
      Consists of fees billed for professional services rendered for the audit and
      restatement of our consolidated financial statements and review of our interim
      consolidated financial statements included in quarterly reports and services
      that are normally provided by Clancy in
      connection with statutory and regulatory filings or engagements, including
      Registrations Statements on Form SB-2 and 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.***





As
      we do
      no currently have an audit committee, our Board of Directors has 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.





-
          44 -
 *Table
          of Contents*




**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
            
            March
                5, 2008David
              P. Clark





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
            
            March
                5, 2008David
              P. Clark
            
            (Principal
              Executive Officer)*/s/**William
                Hawkins*
            
            President,
                Chief Operating Officer, Secretary and Director
            
            March
                5, 2008William
              Hawkins*/s/Darwin
                Hu*
            
            Chairman
            
            March
                5, 2008Darwin
              Hu*/s/M.
                Carolyn Ellis*
            
            Chief
                Financial Officer
            
            March
                5, 2008M.
              Carolyn Ellis
            
            (Principal
              Financial Officer)*/s/**Lawrence
                Liang*
            
            Director
            
            March
                5, 2008Lawrence
              Liang




-
          45 -
 *Table
          of Contents*




**APPENDIX
      - A**




**Item
      7. FINANCIAL STATEMENTS**




Index
                to Consolidated Financial StatementsFinancial
                Statements:Report
                of Independent Registered Public Accounting
                Firm.
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and
                2006
            F-3Consolidated
                Statements of Operations for the years ended
                December 31, 2007 and 2006
            F-4Consolidated
                Statements of Stockholders' (Deficit) Equity for
                the years ended December 31, 2007 and 2006
            F-5Consolidated
                Statements of Cash Flows for the years ended
                December 31, 2007 and 2006.
            F-6Notes
                to Consolidated Financial
                Statements
            F-7




F-1
 *Table
          of Contents*




**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 sheets of Document Capture
      Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and
      2006, and the related consolidated statements of operations, stockholders'
      (deficit) equity, and cash flows for the years ended December 31, 2007 and
      2006.
      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 audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those
      standards require that we plan and perform the audit to obtain reasonable
      assurance about whether the financial statements are free of material
      misstatement. The Company is not required to have, nor 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
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Document
      Capture Technologies, Inc. and subsidiaries as of December 31, 2007 and 2006,
      and the consolidated results of their operations and their cash flows for the
      years ended December 31, 2007 and 2006, 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-2
 *Table
          of Contents*




**DOCUMENT
      CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


*(in
      thousands)*




**December
                31,****2007**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            **$**
            **1,770**
            
            $
            1,333Trade
                receivables
            
            
            **2,464**
            
            
            1,813Inventories,
                net
            
            
            **1,400**
            
            
            1,642Prepaid
                expenses and other current assets
            
            
            **32**
            
            
            73**Total
                current assets**
            
            
            **5,666**
            
            
            4,861Fixed
                assets, net
            
            
            **127**
            
            
            108Long-term
                investment
            
            
            **—**
            
            
            160**Total
                assets**
            
            **$**
            **5,793**
            
            $
            5,129**LIABILITIES
                AND STOCKHOLDERS' (DEFICIT) EQUITY**Current
                liabilities:Bank
                line of credit
            
            **$**
            **—**
            
            $
            1,013Notes
                payableand
                related warrant liability
            
            
            **1,239**
            
            
            —Trade
                payables to related parties
            
            
            **578**
            
            
            952Trade
                payables
            
            
            **415**
            
            
            198Other
                payables and accruals
            
            
            **243**
            
            
            506Accrued
                dividends on Series A 5% cumulative convertible stock preferred
                stock
            
            
            **178**
            
            
            152**Total
                current liabilities**
            
            
            **2,653**
            
            
            2,821Long-term
                bank line of credit
            
            
            **2,021**
            
            
            —Liability
                under derivative contracts
            
            
            **255**
            
            
            229**Total
                liabilities**
            
            
            **4,929**
            
            
            3,050Commitments
                and contingencies (Note 10)Convertible
                preferred stock, $.001 par value, 2,000 authorized:Series
                A 5% cumulative convertible preferred stock, 11.5 and 16
              shares
                issued and outstanding at December 31, 2007 and December
              31,
                2006, respectively; liquidation value of $1,150 and $1,565 at
              December
                31, 2007 and December 31, 2006, respectively
            
            
            **1,074**
            
            
            957Series
                B convertible preferred stock, 1.5 and 11.5 shares issued and
              outstanding
                at December 31, 2007 and December 31, 2006,
              respectively;
                liquidation value of $150 and $1,150 at December 31,
              2007
                and December 31, 2006, respectively
            
            
            **70**
            
            
            152Stockholders'
                (deficit) equity:Common
                stock $.001par value, 50,000 authorized, 15,904
              shares
                issued and 15,404 outstanding at December 31, 2007 and
              24,642
                shares issued and 24,142 outstanding at December 31,
              2006
                (500 shares held in escrow)
            
            
            **15**
            
            
            24Additional
                paid-in capital
            
            
            **30,323**
            
            
            29,651Accumulated
                deficit
            
            
            **(30,618**
            **)**
            
            (28,705
            )**Total
                stockholders' (deficit) equity**
            
            
            **(280**
            **)**
            
            970**Total
                liabilities and stockholders’ (deficit) equity**
            
            **$**
            **5,793**
            
            $
            5,129


The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-3
 *Table
          of Contents*




**DOCUMENT
      CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


*(in
      thousands, except per share amounts)*




**Year
                Ended December 31,****2007**
            
            **2006****Net
                sales**
            
            **$**
            **15,023**
            
            $
            12,469**Cost
                of sales**
            
            
            **9,120**
            
            
            8,221**Gross
                profit**
            
            
            **5,903**
            
            
            4,248**Operating
                expenses:**Selling
                and marketing
            
            
            **1,349**
            
            
            1,240General
                and administrative
            
            
            **2,675**
            
            
            5,361Research
                and development
            
            
            **2,439**
            
            
            3,084Impairment
                of long-term investment
            
            
            **—**
            
            
            838**Total
                operating expenses**
            
            
            **6,463**
            
            
            10,523**Operating
                loss**
            
            
            **(560**
            **)**
            
            (6,275
            )**Other
                income (expense):**Change
                in fair value of derivative instruments
            
            
            **(238**
            **)**
            
            1,421Fair
                value of warrants issued
            
            
            **—**
            
            
            (173
            )Preferred
                stock issuance costs
            
            
            **—**
            
            
            (88
            )Interest
                income
            
            
            **24**
            
            
            28Interest
                expense
            
            
            **(303**
            **)**
            
            (92
            )Other
            
            
            **21**
            
            
            (17
            )**Total
                other income (expense)**
            
            
            **(496**
            **)**
            
            1,079Net
                loss before income taxes
            
            
            **(1,056**
            **)**
            
            (5,196
            )Provision
                for income taxes
            
            
            **4**
            
            
            3Net
                loss
            
            
            **(1,060**
            **)**
            
            (5,199
            )Dividend
                on Series A and accretion of Series A and Series Bpreferred
                stock redemption value
            
            
            **(853**
            **)**
            
            (749
            )**Net
                loss available to common stockholders**
            
            **$**
            **(1,913**
            **)**
            $
            (5,948
            )**Net
                loss available to common stockholders per common share -****basic
                and diluted**
            
            **$**
            **(0.09**
            **)**
            $
            (0.25
            )**Weighted
                average common shares outstanding - basic and
                diluted**
            
            
            **20,420**
            
            
            24,105


The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-4
 *Table
          of Contents*




**DOCUMENT
      CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ (DEFICIT)
      EQUITY**


*(in
      thousands)*




**Additional**
            
            
            
            
            
            **Total****Common
                Stock**
            
            
            **Paid-in**
            
            
            **Accumulated**
            
            
            **Stockholders’****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Deficit****.**
            
            
            **Equity****.****Balances
                at December 31, 2005**
            
            
            **24,092**
            
            **$**
            **24**
            
            **$**
            **28,138**
            
            **$**
            (22,757
            )
            **$**
            **5,405**Issuance
                of common stock upon conversion of preferred stock
            
            
            50
            
            
            —
            
            
            29
            
            
            —
            
            
            29Stock
                base compensation cost - options
            
            
            —
            
            
            —
            
            
            1,311
            
            
            —
            
            
            1,311Fair
                value of warrants issued for payment of preferred stock issuance
                costs
            
            
            —
            
            
            —
            
            
            173
            
            
            —
            
            
            173Net
                loss available to common shareholders and comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,948
            )
            
            (5,948
            )**Balances
                at December 31, 2006**
            
            
            **24,142**
            
            **$**
            **24**
            
            **$**
            **29,651**
            
            **$**
            (28,705
            )
            **$**
            **970**Common
                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
                base 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
            
            
            —
            
            
            18Fair
                value of warrants issued for debt issuance costs
            
            
            —
            
            
            —
            
            
            149
            
            
            —
            
            
            149Net
                loss available to common shareholders and comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,913
            )
            
            (1,913
            )**Balances
                at December 31, 2007**
            
            
            **15,404**
            
            **$**
            **15**
            
            **$**
            **30,323**
            
            **$**
            (30,618
            )
            **$**
            **(280**
            **)**


The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-5
 *Table
          of Contents*




**DOCUMENT
      CAPTURE TECHNOLOGIES** **,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


*(in
      thousands)*




**Year
                ended December 31,****2007**
            
            **2006****Operating
                activities**Net
                loss available to common shareholders
            
            **$**
            **(1,913**
            **)**
            $
            (5,948
            )Adjustments
                to reconcile net loss to cash used in operating activitiesDepreciation
                and amortization
            
            
            **48**
            
            
            597Fair
                value of common stock warrants issued for services
                rendered
            
            
            **18**
            
            
            —Stock
                base compensation cost - options
            
            
            **1,426**
            
            
            1,311Change
                in fair value of derivative instruments
            
            
            **238**
            
            
            (1,421
            )Accretion
                of Series A and Series B preferred stock redemption value
            
            
            **773**
            
            
            668Preferred
                stock issuance expenses paid by issuance of warrants
            
            
            **—**
            
            
            173Allowance
                for doubtful accounts
            
            
            **—**
            
            
            2,606Allowance
                for slow-moving inventory
            
            
            **20**
            
            
            —Impairment
                of long-term investment
            
            
            **—**
            
            
            838Interest
                expense attributable to amortization of debt issuance
                costs
            
            
            **88**
            
            
            —Loss
                on disposal of assets
            
            
            **—**
            
            
            17Changes
                in operating assets and liabilities:Trade
                receivables
            
            
            **(651**
            **)**
            
            (528
            )Inventories
            
            
            **222**
            
            
            (891
            )Prepaid
                expenses and other current assets
            
            
            **41**
            
            
            246Trade
                payables
            
            
            **217**
            
            
            (61
            )Trade
                payables to related parties
            
            
            **(374**
            **)**
            
            749Other
                payables and accruals
            
            
            **(198**
            **)**
            
            324Accrued
                dividends on Series A 5% cumulative convertible stock
            
            
            **81**
            
            
            81**Cash
                provided (used) by operating activities**
            
            
            **36**
            
            
            (1,239
            )**Investing
                activities**Cash
                proceeds from sale of long-term investment
            
            
            **160**
            
            
            —Capital
                expenditures
            
            
            **(67**
            **)**
            
            (4
            )**Cash
                provided (used) by investing activities**
            
            
            **93**
            
            
            (4
            )**Financing
                activities**Proceeds
                from the issuance of preferred stock
            
            
            **—**
            
            
            1,150Payoff
                of existing bank line of credit
            
            
            **(1,013**
            **)**
            
            —Advances
                on replacement bank line of credit
            
            
            **1,521**
            
            
            —Principal
                payments on notes payable
            
            
            **(200**
            **)**
            
            —**Cash
                provided (used) by financing activities**
            
            
            **308**
            
            
            1,150**Increase
                (decrease) in cash and cash equivalents**
            
            
            **437**
            
            
            (93
            )**Cash
                and cash equivalents at beginning of year**
            
            
            **1,333**
            
            
            1,426**Cash
                and cash equivalents at end of year**
            
            **$**
            **1,770**
            
            $
            1,333**Supplemental
                disclosures of cash flow information:****Cash
                paid during the year for:**Interest
            
            **$**
            **198**
            
            $
            92Income
                taxes
            
            **$**
            **4**
            
            $
            3**Non-cash
                investing and financing activities:**Restricted
                common stock acquired from related party
            
            **$**
            **2**
            
            $
            —Conversion
                of convertible preferred stock to common stock
            
            **$**
            **1,070**
            
            $
            30Issuance
                of common stock warrants in connection with debt financing
            
            **$**
            **399**
            
            $
            —Purchase
                of restricted common stock for retirement
            
            **$**
            **2,000**
            
            $
            —


The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-6
 *Table
          of Contents*




**DOCUMENT
      CAPTURE TECHNOLOGIES, INC. AND
      SUBSIDIARIES**


**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., 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.





In
      addition, during the past several years, DCT has 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, including employees and contractors were terminated by
      December 31, 2007. DCT does not expect to expend any additional effort or funds
      to further develop and deploy its HD technology in 2008.





*Basis
      of Financial Statements*





The
      consolidated financial statements include the accounts of DCT and its
      subsidiaries. All significant intercompany transactions and balances have been
      eliminated. United States (U.S.) dollar is the functional currency for DCT.
      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 total net sales,
      operating loss or net loss available to common stockholders.




F-7
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Liquidity
      and Going Concern*





The
      accompanying financial statements have been prepared assuming that DCT will
      continue as a going concern. As shown in the financial statements, during the
      years ended December 31, 2007 and 2006, DCT incurred net losses available to
      common shareholders of $1,913,000 and $5,948,000, respectively, of which
      approximately $2,611,000 and $4,789,000, respectively, is attributed to non-cash
      items. As of December 31, 2007, accumulated deficit was $30,618,000 and total
      stockholders’ deficit was $280,000. These factors raise substantial doubt about
      DCT’s ability to continue as a going concern.





The
      Company's ability to continue as a going concern is mitigated because DCT’s
      current sources of liquidity as of January 31, 2008, are as follows: (i)
      $500,000 of cash and cash equivalents, (ii) $2,300,000 of current accounts
      receivables, (iii) $1,300,000 of inventory (at cost), (iv) $700,000 line of
      credit available for use under its current line of credit facility, and (v)
      working capital in excess of $2,000,000. Management also believes that it has
      the ability to borrow additional funds from third parties such as financial
      institutions or will be successful in a debt or equity financing that will
      be
      sufficient to fund its operations for the next twelve months. Therefore, for
      at
      least the next twelve months, DCT can continue to operate as a going concern.
      The consolidated financial statements do not include any adjustments relating
      to
      the recoverability and classification of recorded asset amounts or the amount
      and classification of liabilities or any other adjustment that might be
      necessary should the Company be unable to continue as a going
      concern.





*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. Highly liquid
      investments include debt securities with remaining maturities of three months
      or
      less when acquired. They are stated at cost, which approximates market
      value.





*Fair
      Value of Financial Instruments*





The
      carrying value of cash and cash equivalents, trade receivables and payables,
      prepaid expenses and other current assets, amounts due to and from 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 $100,000.
      As
      of December 31, 2007, DCT had consolidated balances of approximately $1,568,000,
      which were not guaranteed by FDIC. DCT has not experienced any losses in such
      accounts and believes the exposure is minimal.




F-8
 *Table
          of Contents*




**DOCUMENT
      CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**


**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,****2007**
            
            **2006**Customer
                A
            
            
            **27**
            **%**
            
            42
            %Customer
                B
            
            
            **17**
            
            
            12Customer
                C
            
            
            **16**
            
            
            14Customer
                D
            
            
            **12**
            
            
            13





Trade
      receivables from these customers totaled $2,223,000 at December 31, 2007. As
      of
      December 31, 2007 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*





DCT
      purchases substantially all its finished scanner imaging products from one
      vendor that is also a wholly-owned subsidiary of the parent company of our
      former (see Note 13) 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.





*Inventories*





Inventories
      consist of finished goods, 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 (reversal) is recognized as a component of cost of
      sales
      in the period the provision (reversal) occurs. At December 31, 2007, an
      inventory allowance of $20,000 was established as a result of slow-moving
      inventory. There was no inventory allowance at December 31, 2006. DCT has not
      had any material inventory write offs for the period from January 1, 2006 to
      December 31, 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.





*Intangible
      Assets*





Acquisition-related
      intangibles include 1.) intellectual property, which has reached technological
      feasibility, to be integrated into DCT’s future products and 2.) technological
      expertise required to complete the integration. Intangible assets are amortized
      on a straight-line basis over the periods of benefit. DCT performs an annual
      review of its identified intangible assets to determine if facts and
      circumstances exist which indicate that the assets’ useful life is shorter than
      originally estimated or that the assets’ carrying amount may not be recoverable.
      If such facts and circumstances exist, DCT assesses the recoverability of
      identified intangible assets by comparing the projected undiscounted net cash
      flows associated with the related asset or group of assets over their remaining
      lives against their respective carrying amounts. Impairment, if any, is based
      on
      the excess of the carrying amount over the fair value of those assets.





*Long-Term
      Investments*





Long-term
      investments are carried at cost less provision for any impairment in value.
      Income from long-term investments is accounted for to the extent of dividends
      received or receivable. Upon disposal of investments, any profit and loss
      thereon is accounted for in the Statement of Operations.




F-9
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Impairment
      of Long-Lived Assets*





In
      accordance with Statement of Financial Accounting Standards (“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. As such, DCT recognized $838,000 of impairment losses during the
      year ended December 31, 2006. The underlying asset is used in DCT’s operations.
      Therefore, the impairment loss is included with operating expenses on the DCT’s
      Statement of Operations. See Note 7.




*Preferred
      Stock Accounting Treatment*





Preferred
      Stock Classification. As of
      December 31, 2007 and 2006, pursuant to the Financial Accounting Standards
      Board’s (“FASB”) 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 related warrants and the series B convertible redeemable
      preferred stock (“Series B Stock”) was reported as temporary equity, as the
      stock is conditionally redeemable at the holder’s option on the redemption date.





The
      difference between the initial recorded value of the Series A Stock and Series
      B
      Stock and the minimum redemption value is being accreted, on a straight-line
      basis, from the respective issuance date through the earliest redemption date.
      The increases in the carrying amount of the Series A Stock and Series B Stock
      for the years ended December 31, 2007 and 2006 totaled approximately $773,000
      and $668,000, respectively, and were recorded as increases 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, to net loss available to common
      stockholders.





In
      February 2006, the FASB issued SFAS 155, *Accounting
      for Certain Hybrid Financial Instruments - an amendment of FASB Statements
      133
      and 140* (“SFAS
      155”). SFAS 155 permits interests in hybrid financial instruments that contain
      an embedded derivative that would otherwise require bifurcation to be accounted
      for as a single financial instrument at fair value, with changes in fair value
      recognized in earnings. This election is permitted on an
      instrument-by-instrument basis for all hybrid financial instruments held,
      obtained, or issued as of the adoption date. DCT adopted SFAS 155 on January
      1,
      2007 and will apply the standard to any new hybrid financial instruments issued
      subsequent to January 1, 2007. However, as allowed by paragraph 4(c) of SFAS
      155, DCT did not elect to apply SFAS 155 to previously existing hybrid financial
      instruments including DCT’s Series A Stock and Series B Stock.





Likely
      Embedded Derivative. Under
      the provisions of SFAS 133, *Accounting
      for Derivative Instruments and Hedging Activities* (“SFAS
      133”) and EITF 00-19, the redemption feature of both DCT’s Series A Stock and
      related warrants and Series B Stock and related warrants is likely a derivative
      instrument that requires bifurcation from the host contract. Accordingly, the
      fair value of these derivative instruments has been recorded in DCT’s Balance
      Sheet as a liability. The total increase in the fair value of the liability
      for
      derivative contracts, for both Series A Stock and Series B Stock, totaled
      approximately $238,000 for the year ended December 31, 2007 with the offsetting
      adjustment disclosed as non-operating expense on DCT’s Statements of Operations.
      The total decrease in the fair value of the liability for derivative contracts,
      for both Series A Stock and Series B Stock, totaled approximately $1,421,000
      for
      the year ended December 31, 2006 with the offsetting adjustment disclosed as
      non-operating income on DCT’s Statements of Operations.





DCT
      computes fair value of these derivatives using the Black-Scholes valuation
      model. The Black-Scholes model was developed for use in estimating the fair
      value of traded options that have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions, including the expected stock price volatility. DCT's
      derivative instruments have characteristics significantly




F-10
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


different
      from traded options, and the input assumptions used in the model can materially
      affect the fair value estimate.





The
      assumptions used in the Black-Scholes valuation model to estimate fair value
      of
      each derivative instrument and the resulting weighted average estimated value
      of
      the Series A Stock derivative liability and the Series B Stock derivative
      liability as of December 31, 2007 and 2006 are as follows:





**December
                31,****2007**
            
            **2006**Weighted
                average estimated values per share
            
            $
            0.08
            
            $
            0.05Expected
                life in years
            
            
            3.0
            
            
            3.0Expected
                volatility
            
            
            49
            %
            
            38
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Risk
                free interest rate
            
            
            4
            %
            
            5.2
            %




*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. All internal handling charges are included with
      selling and marketing expenses.





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 uncollectibility.
      Allowances, when required, are calculated based on 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, 2007 or December 31, 2006. DCT has not
      had
      any material trade receivable write offs for the period from January 1, 2006
      to
      December 31, 2007.





*Research
      and Development Expenses*





Research
      and development costs are expensed as incurred.





*Advertising
      Costs*





Advertising
      costs are expensed as incurred and were immaterial for both 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, 2007 and 2006, 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




F-11
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


subsequent
      to January 1, 2006 (based on the grant-date fair value estimated in accordance
      with the new provisions of SFAS 123(R)). See Note 4.





*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 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. There was no
      comprehensive income (loss) 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 the years ended December 31, 2007 and 2006, common
      stock equivalents 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
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements* (“SFAS
      157”), which provides guidance about how to measure assets and liabilities that
      use fair value. SFAS 157 will apply whenever another US Generally Accepted
      Accounting Principle (“GAAP”) standard requires (or permits) assets or
      liabilities to be measured at fair value but does not expand the use of fair
      value to any new circumstances. This standard also will require additional
      disclosures in both annual and quarterly reports. SFAS 157 will be effective
      for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and will be adopted by DCT January 1, 2008. DCT is currently evaluating the
      potential impact this standard may have on its consolidated financial position,
      cash flows and results of operations, but does not believe the impact of the
      adoption will be material.




In
      February 2007, the FASB issued SFAS 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      amendment of FASB Statement No. 115* (“SFAS
      159”). SFAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value that are not currently required to be
      measured at fair value, with unrealized gains and losses related to these
      financial instruments reported in earnings at each subsequent reporting date.
      SFAS 159 will be effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and will be adopted by DCT January 1, 2008.
      DCT does not expect the adoption of SFAS 159 to result in a significant impact
      on its consolidated financial position, cash flows and results of
      operations.





In
      June
      2007, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue No. 07-3,
“ *Accounting
      for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
      Research and Development*




F-12
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Activities* ”
(“EITF
      07-3”). EITF 07-3 requires non-refundable advance payments for goods and
      services to be used in future research and development activities to be recorded
      as an asset and the payments to be expensed when the research and development
      activities are performed. EITF 07-3
      is effective, on a prospective basis, for fiscal years beginning after
      December 15, 2007 and will be adopted in the first quarter of fiscal 2008.
      DCT is currently evaluating the potential impact this standard may have on
      its
      consolidated financial position, cash flows and results of operations, but
      does
      not believe the impact of the adoption will be material.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements—an Amendment of Accounting
      Research Bulletin No. 51* ,
      which
      establishes accounting and reporting standards for ownership interests in
      subsidiaries held by parties other than the parent, the amount of consolidated
      net income attributable to the parent and to the noncontrolling interest,
      changes in a parent’s ownership interest and the valuation of retained
      noncontrolling equity investments when a subsidiary is deconsolidated. SFAS
      No. 160 also establishes reporting requirements that provide sufficient
      disclosures that clearly identify and distinguish between the interests of
      the
      parent and the interests of the noncontrolling owners. SFAS No. 160 is
      effective for fiscal years, and interim periods within those fiscal years,
      beginning on or after December 15, 2008. DCT
      is
      currently evaluating the potential impact this standard may have on its
      consolidated financial position, cash flows and results of operations, but
      does
      not believe the impact of the adoption will be material.





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*





DCT
      purchases the majority of its finished scanner imaging products from Syscan
      Lab
      Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology Holdings Limited
      ("STH"), the parent company of DCT’s former (see Note 13) majority stockholder.
      See Note 1. DCT's Chairman and former Chief Executive Officer (see Note 13),
      Darwin Hu, was formerly the Chief Executive Officer of STH. He resigned from
      STH
      effective December 2004.





Purchases
      from SLL totaled $8,369,000 and $8,620,000 for the years ended December 31,
      2007
      and 2006, respectively. All purchases from SLL were carried out in the normal
      course of business. As a result of these purchases, DCT was liable to SLL for
      $578,000 and $952,000 at December 31, 2007 and 2006, respectively.





*Related-Party
      Loans*





In
      the
      normal course of business, DCT made interest-free loans to several related
      parties for the purpose of purchasing capital equipment, including tooling
      equipment required to manufacture DCT’s product. The original loans were entered
      into prior to January 1, 2006. The loans totaled $2,606,000 and were fully
      reserved at December 31, 2006. No new loans were entered during the year ended
      December 31, 2007.





***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-13
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **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, 2007:





**Option
                Approval Method**
            
            **Options
                Outstanding and Options Available****Description**
            
            **Board
                of Directors**
            
            **Board
                of Directors**
              **and
                Shareholders**
            
            **Total**
            
            **Outstanding**
            
            **Available
                For**
              **Future
                Grant**
            
            **Total**2002
                Amended and Restated Stock Option Plan
            
            
            —
            
            
            3,200,000
            
            
            3,200,000
            
            
            2,601,667
            
            
            598,333
            
            
            3,200,000Key
                Personnel Option Grants
            
            
            4,150,000
            
            
            —
            
            
            4,150,000
            
            
            3,846,550
            
            
            —
            
            
            3,846,5502006
                Stock Option Plan
            
            
            
            
            
            1,500,000
            
            
            1,500,000
            
            
            399,333
            
            
            1,100,667
            
            
            1,500,000Total
            
            
            4,150,000
            
            
            4,700,000
            
            
            8,850,000
            
            
            6,847,550
            
            
            1,699,000
            
            
            8,546,550





*Stock-Based
      Compensation*





Prior
      to
      January 1, 2006, DCT accounted for its stock-based employee compensation plans
      following the recognition and measurement principles of APB 25 and related
      interpretations. Accordingly, compensation expense equal to the difference
      between the total exercise price and the total fair market value - for awards
      granted at an exercise price less than fair market value of the underlying
      common stock on the grant date - was amortized over the vesting period and
      included in the Statement of Operations. Effective January 1, 2006, DCT adopted
      the fair value recognition provisions of SFAS 123(R).





The
      following table sets forth the total stock-based compensation expense included
      in the Statements of Operations ( *in
      thousands* ):





**Year
                Ended December 31,****2007**
            
            **2006**Selling
                and marketing
            
            **$**
            **121**
            
            $
            51General
                and administrative
            
            
            **794**
            
            
            1,015Research
                and development
            
            
            **511**
            
            
            245





The
      weighted average assumptions used to value options granted during the year
      ended
      December 31, 2007 are as follows:





Weighted
                average estimated values per share
            
            $
            0.49Expected
                option life in years
            
            
            3.0Weighted
                average expected volatility
            
            
            111.3
            %Expected
                dividend yield
            
            
            0
            %Weighted
                average risk free interest rate
            
            
            5.2
            %





At
      December 31, 2007, DCT had approximately $600,000 of total unrecognized
      compensation cost related to unvested stock options. This cost is expected
      to be
      recognized over the next 15 months.




F-14
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Stock
      Option Activity and Outstanding*





The
      following table summarizes stock option activity and related information as
      of
      and for the year ended December 31, 2007:





**Options**
            
            **Weighted-Average**
              **Exercise
                Price**Outstanding
                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
            
            $
            0.34





The
      following table summarizes all options outstanding and exercisable by price
      range as of December 31, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Number
                Outstanding**
            
            **Weighted-Average
                Remaining Contractual Life (Years)**
            
            **Weighted-Average**
              **Exercise
                Price**
            
            **Number
                Exercisable**
            
            **Weighted-Average**
              **Exercise
                Price**$0.01
            
            
            3,696,550
            
            
            4.64
            
            $
            0.01
            
            
            3,696,550
            
            $
            0.01$0.65
                - $0.70
            
            
            2,874,333
            
            
            8.65
            
            $
            0.69
            
            
            1,007,000
            
            $
            0.69$1.01
            
            
            276,667
            
            
            0.10
            
            $
            1.01
            
            
            276,667
            
            $
            1.01





***Note
      5 - Fixed Assets***





Fixed
      assets are summarized as follows ( *in
      thousands* ):




**December
                31,****2007**
            
            **2006**Computer
                and office equipment
            
            $
            37
            
            $
            40Tooling
                and product design
            
            
            187
            
            
            127224
            
            
            167Less:
                accumulated depreciation
            
            
            (97
            )
            
            (59
            )$
            127
            
            $
            108




Total
      fixed asset depreciation expense totaled $48,000 and $42,000 for the years
      ended
      December 31, 2007 and 2006, respectively.





***Note
      6 - Intangible Assets***





DCT’s
      intangible assets were recorded primarily as a result of the acquisition of
      Nanodisplay, Inc (“Nano”) in November 2005. Nano was purchased to facilitate
      DCT’s anticipated entry into the display market as Nano was a leading designer
      of liquid crystal on silicon (“LCOS”) HDTV technology and maintained a workforce
      with the technical expertise required to integrate Nano’s technology into DCT’s
      technology. As previously discussed, DCT terminated its HD-related research
      and
      development efforts during November 2007.




F-15
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


DCT
      had
      no intangible assets as of December 31, 2007. The following summarizes the
      components of intangible assets as of December 31, 2006 ( *in
      thousands* ):





**As
                of December 31, 2006****Gross**
            
            **Accumulated
                Amortization**
            
            **Net**
            
            **Life**Developed
                technology
            
            $
            463
            
            $
            (463
            )
            $
            —
            
            
            1
                YearTechnical
                integration expertise
            
            
            79
            
            
            (79
            )
            
            —
            
            
            1
                YearOther
            
            
            13
            
            
            (13
            )
            
            —
            
            
            1
                YearTotal
            
            $
            555
            
            $
            (555
            )
            $
            —





There
      was
      no amortization expense related to intangible assets for the year ended December
      31, 2007. Amortization expense related to intangible assets, included in
      research and development expenses, totaled $555,000 for the year ended December
      31, 2006.





***Note
      7 - Long-Term Investment***





DCT’s
      long-term investment at December 31, 2006 consists 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. Until December
      2007, DCT owned 16.1% of CMOS and accounted for the investment using the cost
      method of accounting. 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.





***Note
      8 - Equity***





*Common
      Stock Activity*





As
      previously discussed in Note 3, DCT acquired 2,600,000 shares of DCT’s
      restricted common stock during the first quarter of fiscal 2007. DCT’s transfer
      agent subsequently cancelled the shares.





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 in-effective 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 newly
      established credit line with a commercial bank, and the remainder was financed
      through a $1,500,000 loan from Montage Capital, LLC a private investment group.
      See Note 10. Additionally, the DCT agreed that if its HD display business is
      sold to a certain party, specifically identified in the repurchase agreement,
      and receives stock of the buyer as consideration, then it will transfer a
      portion of that stock to the majority stockholder. To date, DCT has not sold
      its
      HD display business. DCT repurchased the 8,000,000 shares for the purpose of
      retiring the shares. DCT’s transfer agent subsequently cancelled 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.




F-16
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Series
      A 5% Cumulative Convertible Preferred 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*





DCT’s
      Series A Stock records cumulative dividends at a rate of five percent per annum,
      payable semiannually on July 1 and January 1. Dividends are 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, is at DCT’s discretion. To date, DCT has not paid any cash
      dividends. During the years ended December 31, 2007 and 2006, Series A Stock
      dividends were approximately $86,000 and $81,000, respectively, and recorded
      as
      a reconciling item adjusting reported net loss to net loss available to common
      stockholders.





*Series
      B Convertible Preferred Stock Initial Issuance*





On
      August
      8, 2006, DCT completed a private placement with a group of accredited investors
      for the sale of 11,500 shares of DCT’s Series B Stock along with warrants,
      expiring three years from the date of issuance, to purchase additional shares
      of
      DCT’s stock. Pursuant to a registration rights agreement (as discussed below),
      DCT filed a Form SB-2 on October 11, 2006, with the Securities and Exchange
      Commission (“SEC”), to register the shares of common stock issuable upon
      conversion of the Series B Stock and upon exercise of the warrants. The SEC
      declared the SB-2 effective on January 18, 2007.





At
      the
      time of issuance, total common stock issuable upon conversions of underlying
      Series B Stock and related warrants follows:


Series
                B Stock(1)
            
            
            1,150,000Warrants
                issued to purchasers in private placement(2)
            
            
            575,000Warrants
                issued to placement agent in the private placement(2)
            
            
            100,0001,825,000





(1) Convertible at $1.00 per share, subject to anti-dilution
      provisions.


(2) Convertible at $1.50 per share, subject to anti-dilution
      provisions.





The
      Series B Stock was priced at $100 per share and DCT received proceeds of
      $1,150,000 less offering costs and expenses. Starboard Capital Markets, LLC,
      a
      NASD member firm, acted as placement agent in the sale for which it received
      $80,000 in commissions and 100,000 warrants to purchase shares of DCT's common
      stock at an exercise price equal to $1.50 per share. The fair value, under
      the
      Black-Scholes pricing model, of the 100,000 warrants issued to the placement
      agent was $26,000 and was charged to non-operating expense and credited to
      additional paid-in capital during the year ended December 31, 2006.





The
      material terms of the Series B Stock are as follows:





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.




F-17
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


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.





Right
      to Compel Conversion *.* If, on
      any date after August 7, 2007, (A) the closing market price for a share of
      DCT’s
      common stock for ten consecutive trading days equals at least $4.00 (subject
      to
      adjustment for certain events), and (B) the average reported daily trading
      volume during such ten-day period equals or exceeds 100,000 shares, then DCT
      shall have the right, at its option, to convert all, but not less than all,
      of
      the outstanding shares of the Series B Stock at the Conversion Price provided
      that the Registration Statement shall be effective at all times during such
      10-day period and during the 30-day notice period to the Investors.





Warrant
      Terms. The
      Warrants grant Investors the right to purchase up to an aggregate of 575,000
      shares of common stock of DCT at an exercise price of $1.50 per share. The
      Warrants expire on August 7, 2009 and must be exercised by the payment of cash,
      except if there is no effective registration statement covering the resale
      of
      the shares of common stock underlying the Warrants, at which time an investor
      may exercise their Warrants on a cashless basis. The fair value, under the
      Black-Scholes pricing model, of the 575,000 warrants was $147,000 and was
      charged to non-operating expense and credited to additional paid-in capital
      during the year ended December 31, 2006.





Restrictions
      on Conversion of Series B Stock and Exercise of Warrants *.* No
      holder of the Series B Stock is entitled to receive shares upon conversion
      of
      the Series B Stock held by such holder if such receipt would cause such holder
      to be deemed to beneficially own in excess of 4.999% of the outstanding shares
      of DCT’s common stock on the date of issuance of such shares (this provision may
      be waived upon 61 days prior written notice to DCT). In addition, no individual
      holder is entitled to receive shares upon conversion of the Series B Stock
      if
      the transaction causes such holder to beneficially own in excess of 9.999%
      of
      the outstanding shares of DCT’s common stock on the date of issuance of such
      shares (this provision may be waived upon 61 days prior written notice to
      DCT).





None
      of
      the individual holders of the Series B warrants are entitled to exercise any
      warrant held by them, if the exercise causes the holder to beneficially own
      in
      excess of 4.999% of the outstanding shares of DCT’s common stock on the date of
      issuance of such shares.





Registration
      Rights. Pursuant
      to the terms of a Registration Rights Agreement between the investors and DCT,
      DCT was obligated to file a registration statement on Form SB-2 (which was
      filed
      on October 11, 2006) registering the resale of shares of DCT's common stock
      issuable upon conversion of the Series B Stock and exercise of the related
      warrants. DCT was required to file the registration statement within 60 days
      following August 8, 2006 and to have the registration statement declared
      effective by December 6, 2006, which is 120 days following August 8, 2006.
      If
      the registration statement was not timely filed, or declared effective within
      the timeframe described, or if the registration is suspended other than as
      permitted, in the Registration Rights Agreement, DCT will be obligated to pay
      each Investor a fee equal to one percent of such investor's purchase price
      of
      the Series B Stock for each 30 day period thereafter (pro rated for partial
      periods), that such registration conditions are not satisfied, up to a maximum
      of 12 months. See Note 10.





Right
      of First Refusal. Subject
      to certain conditions, DCT has granted the investors a right of first refusal,
      for a period of one year from the effective date of the registration statement
      required to be filed in connection with this transaction, to participate in
      any
      subsequent financing that DCT conducts.





Voting
      Rights. Holders
      of the Series B Stock shall have no voting rights. However, so long as any
      shares of Series B Stock are outstanding, DCT shall not, without the affirmative
      vote of the holders of a majority of the shares of the Series B Stock then
      outstanding, (a) alter or change adversely the powers, preferences or
      rights




F-18
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


given
      to
      the Series B Stock or alter or amend the Series B Certificate of Designation,
      (b) authorize or create any class of stock ranking as to dividends or
      distribution of assets upon a liquidation senior to or otherwise PARI PASSU
      with
      the Series B Stock, (c) amend its certificate or articles of incorporation
      or
      other charter documents so as to affect adversely any rights of the holders
      of
      the Series B Stock, (d) increase the authorized number of shares of the Series
      B
      Stock, or (e) enter into any agreement with respect to the
      foregoing.





Liquidation
      Preference. Upon any
      liquidation, dissolution or winding up of DCT, whether voluntary or involuntary,
      and subject to the rights of the holders of Series A Stock, the holders of
      the
      Series B Stock shall be entitled to receive out of the assets of DCT, whether
      such assets are capital or surplus, for each share of Series B Stock an amount
      equal to the stated value per share before any distribution or payment shall
      be
      made to the holders of any securities of DCT with rights junior to the Series
      B
      Stock. If the assets of DCT shall be insufficient to pay in full such amounts,
      then the entire assets to be distributed to the holders of the Series B Stock
      shall be distributed among such holders ratably in accordance with the
      respective amounts that would be payable on such shares if all amounts payable
      thereon were paid in full.





*Series
      B Convertible Preferred 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.





During
      the third quarter of 2007, Series B Stock totaling 9,700 shares ($970,000)
      were
      converted into 970,000 shares of common stock.





***Note
      9 - Income Tax***





Provision
      for income taxes for all periods presented represents the minimum franchise
      tax
      due, $800 per annum, in the State of California for each California entity
      of
      the consolidated entity and prior years franchise taxes paid in current periods.
      No provision for Hong Kong Profits Tax has been made for the periods presented
      as DCT and its subsidiaries operating in Hong Kong have no assessable profits
      during the years being reported.





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 valuation allowance (decreased) increased by
      approximately $(1,421,000) and $286,000 during the years ended December 31,
      2007
      and 2006, respectively.





As
      of
      December 31, 2007 DCT has available net operating loss carryforwards for federal
      and state income tax purposes of approximately $22,000,000 and $14,500,000
      which
      expire principally through 2027 and 2012, respectively. State net operating
      loss
      carryforwards are based on federal net operating losses, which are limited
      to
      certain percentages and carryover periods based on the year incurred. Pursuant
      to the Tax Reform Act of 1986, annual utilization of DCT’s net operating loss
      carryforwards may be limited if a cumulative change in ownership of more than
      50% is deemed to occur within any three-year period.





The
      following table reconciles the statutory rates to DCT’s effective
      rate:


**Year
                Ended December 31,****2007**
            
            **2006**U.S.
                and California statutory rate (%)
            
            
            (43.8
            )
            
            (43.8
            )Change
                in valuation allowance
            
            
            43.8
            
            
            43.8—
            
            
            —







F-19
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


The
      net
      deferred income tax asset consisted of the following ( *in
      thousands* ):




**December
                31,****2007**
            
            **2006**Deferred
                tax assetsFederal
                net operating loss carryforwards
            
            $
            7,737
            
            $
            7,791State
                net operating loss carryforwards
            
            
            1,278
            
            
            1,746Capitalized
                R&D Expenses
            
            
            367
            
            
            932Tax
                credit carryforwards
            
            
            374
            
            
            7089,756
            
            
            11,177Less:
                valuation allowance
            
            
            (9,756
            )
            
            (11,177
            )—
            
            
            —Deferred
                tax liabilityExcess
                tax over book depreciation
            
            
            —
            
            
            —Net
                deferred income tax asset
            
            $
            —
            
            $
            —




DCT
      files  income tax returns in the United States federal jurisdiction and
      certain states in the United States and certain foreign jurisdictions. 
With a few exceptions, DCT is no longer subject to U. S.  federal, state or
      non-U.S.  income tax examination by tax authorities on  tax returns
      filed before January 31, 2004.  DCT recently filed its U. S.  federal
      return for the years ended December 31, 2007. These U. S. federal 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.




***Note
      10 - Commitments and Contingencies***




*Operating
      Leases*




DCT
      is
      committed under various non-cancelable operating leases which extend through
      November 2011. As of December 31, 2007, future minimum rental commitments are
      as
      follows ( *in
      thousands* ):




**Year
                Ending**
              **December
                31,**
            
            **Future
                Minimum Lease Payments**2008
            
            $
            2672009
            
            
            12010
            
            
            12011
            
            
            —Total
            
            $
            269




*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. The new LOC initial maximum available credit was $2,000,000 and increased
      to $3,000,000 during December 2007. 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 (7.25% at December
      31, 2007) plus 1.25% for advances drawn against accounts receivables and prime
      plus 2.25% for advances drawn against inventory. 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, 2007, DCT had unused borrowing
      capacity of $160,000 on its LOC.




As
      of
      December 31, 2007, DCT was in compliance with all LOC debt
      covenants.




F-20
 *Table
          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Long-Term
      Loan*




On
      September 27, 2007 DCT entered into a $1,500,000 term loan agreement ("Loan
      Agreement") with Montage Capital, LLC ("Lender") in an arm’s length transaction.
      DCT received $1,500,000, less closing costs, and was restricted under the Loan
      Agreement, to use the funds for repurchasing shares of DCT's common stock as
      previously discussed at Note 8. DCT granted the Lender a continuing security
      interest, and pledged to the Lender, all of its assets to secure payment and
      performance of its obligations under the Loan Agreement. The Loan Agreement
      and
      the security interest are subordinate to DCT’s LOC.




The
      Loan
      Agreement bears an annual interest rate of 15% with interest-only payments
      due
      monthly starting from initial funding through October 31, 2007. Thereafter,
      principal of $100,000 per month plus accrued interest is due at the end of
      each
      month through the loan’s maturity date of November 30, 2008. The remaining
      principal balance and accrued interest is due on the maturity date. If DCT
      sells
      any assets outside the ordinary course of business and receives cash proceeds
      from such sale, the Lender must be paid 20% of such proceeds as pre-payment
      of
      the outstanding principal.




The
      Lender has the right to declare all of the amounts due under the Loan Agreement
      immediately due and payable for any of the following reasons:




·
            DCT
                fails to make any payment of principal or interest on its due date,
                or pay
                any other amount due to the Lender within ten days after such amount
                is
                due and payable;




·
            DCT
                fails or neglects to perform, keep, or observe any term, provision,
                condition, covenant, or agreement contained in the Loan Agreement
                subject
                to, in some cases, a ten-day grace period;




·
            DCT
                or any person acting on behalf of DCT makes any warranty, representation,
                or other statement that is incorrect in any material respect when
                made;




·
            A
                default or event of default occurs under any agreement to which DCT
                is a
                party or by which it is bound, including DCT’s LOC (as discussed above)
                (i) resulting in a right by the other party or parties, whether or
                not
                exercised, to accelerate the maturity of any indebtedness in excess
                of
                $50,000 or (ii) the occurrence of a material adverse effect. A material
                adverse effect is defined as a change in DCT’s business, prospects,
                operations, results of operations, assets, liabilities, or financial
                or
                other condition, (ii) the material impairment of the prospect of
                repayment
                of any portion of the amounts due the Lender by DCT, or (iii) a material
                adverse change in the value of the collateral securing the amounts
                due
                under the Loan Agreement;




·
            Any
                portion of DCT’s assets is attached, seized, or levied upon, or a judgment
                for more than $50,000 is awarded against DCT and is not stayed within
                ten
                days;




·
            If
                DCT dissolves or begins a bankruptcy or other insolvency proceeding;
                or




·
            A
                bankruptcy or other insolvency proceeding is begun against DCT and
                is not
                dismissed or stayed within sixty days.




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. Subsequent to the initial
      funding of the Loan Agreement, the warrant holders may require DCT to purchase
      the warrant for a maximum of $250,000. And if any amount remains outstanding
      under the Loan Agreement after March 31, 2008, the warrant repurchase price
      increases to a maximum of $350,000.





Under
      the
      Black-Scholes pricing model, the fair value of the Loan Warrant on the issuance
      date was $399,000. Because the warrants were immediately redeemable for $250,000
      cash at the warrant holder’s request, DCT accounted for the $250,000 warrant
      redemption value as a current liability and the $149,000 excess fair
      value




F-21
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          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


over
      the
      warrant redemption value as additional paid-in capital. DCT will accrete the
      entire $399,000 debt discount to interest expense over the life of the Loan
      Agreement. DCT recorded interest expense for the year ended December 31, 2007
      of
      $88,000 in connection with the Loan Warrants.





Future
      annual repayment obligations as of December 31, 2007 were as follows
      ( *in
      thousands* ):





Principal
                payments due less than 12 months
            
            $
            1,300Loan
                Warrants redemption value
            
            
            250Total
                obligations
            
            
            1,550Less:
                unamortized debt discount
            
            
            (311
            )$
            1,239




DCT
      calculated the initial fair value of all its warrants under the Black-Scholes
      pricing model 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%.




The
      Loan
      Warrant includes registration rights that require DCT to file a registration
      statement with the Securities and Exchange Commission (the "SEC") registering
      the shares of common stock underlying the Loan Warrant within 120 days after
      the
      issue date and to have such registration statement declared effective within
      165
      days after the issue date. For any 30 day period during which the registration
      obligations are unfulfilled, the Lender may acquire an additional 27,500 shares
      under the Loan Warrant. DCT accounts for the Loan Warrant registrations rights
      under EITF-00-19-2, *Accounting
      for Registration Payment Arrangements* (“EITF-00-19-2”).
      EITF-00-19-2 requires the contingent liability under the registration payment
      arrangement to be included in the allocation of proceeds from the related debt
      financing transaction if payment is probable and can be reasonably estimated
      at
      inception. In management’s opinion, payment of the Loan Warrant registrations
      rights contingent liability is not probable, and therefore, not reflected in
      DCT’s financials statements as of December 31, 2007. DCT will continue to
      evaluate the registration rights contingent liability and the probability of
      the
      occurrence of payment under the registration rights at each reporting period
      to
      determine if the liability should be reflected in DCT's financial
      statements.




Upon
      the
      occurrence of an event of default under the Loan Agreement, the Lender may
      acquire 13,750 shares under the Loan Warrant on the date of such occurrence
      and
      an additional 13,750 shares on the first day of each 30 day period after such
      event of default until all amounts under the Loan Agreement have been paid
      in
      full.




The
      Loan
      Warrant provides for weighted average anti-dilution price adjustments if DCT
      issues common stock (or securities convertible into common stock) for
      consideration less than the then-effective exercise price; provided that if
      DCT
      sells or issues its equity securities within one year after the issue date
      in an
      offering in which DCT receives gross proceeds of at least $1,000,000 (“Equity
      Event”), then, at the option of the Lender, the shares into which the Loan
      Warrant is convertible will be of the type and series of stock issued in the
      Equity Event, the exercise price shall be equal to the price per share paid
      in
      the Equity Event, and the Lender shall have the rights given to the purchasers
      in the Equity Event.




*Employment
      Agreements*




DCT
      maintains employment agreements with its executive officers which, as of
      December 31, 2007, extend through 2008. The agreements provide for a base
      salary, annual bonus to be determined by the Board of Directors, 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, 2007
      termination payments totaling $329,000 remain in effect. The employment
      agreements were extended subsequent to December 31, 2007. See Note
      13.




*Consulting
      Agreement*




Effective
      on January 1, 2008, DCT extended is existing Investor Relations Consulting
      Agreement for one additional year. Under the extended contract, DCT agreed
      to
      pay the consultant (i) $5,000 per month for 12




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**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


months,
      and (ii) 110,000 warrants with an exercise price of $0.65 per share, expiring
      in
      three years from the vesting date. The warrants vest as follows: (i) 50% upon
      signing the agreement, (ii) 25% on June 30, 2008, and (iii) 25% on September
      30,
      2008. The warrants will not be registered under federal or state securities
      laws.




*Preferred
      Stock Registration Rights Agreement*





In
      connection with the issuance of Series A Stock and Series B Stock, DCT executed
      registration rights agreements with the purchasers thereof under which DCT
      agreed to register the common shares underlying the Series A Stock and related
      warrants. The registration rights agreements provide for liquidated damages
      in
      the event the registration statement is not maintained continuously effective.
      DCT did not meet the stipulated requirements and as such accrued $7,000 and
      $155,000, included in general and administrative expense, for liquidated damages
      during the years ended December 31, 2007 and 2006, respectively.




*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
      11 - 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
      $40,000 and $38,000 for the years ended December 31, 2007 and 2006,
      respectively.




***Note
      12 - 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, 2007 and 2006, 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* ):





**Year
                Ended December 31,****2007**
            
            **2006**U.S.
            
            **$**
            **14,367**
            
            $
            11,677Asia
            
            
            **611**
            
            
            405Europe
                and other
            
            
            **45**
            
            
            387**$**
            **15,023**
            
            $
            12,469







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**DOCUMENT
      CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**


**NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


Presented
      below is information regarding identifiable assets, classified by operations
      located in the U.S., Europe and Asia ( *in
      thousands* ):





**December
                31,****2007**
            
            **2006**U.S.
            
            **$**
            **5,574**
            
            $
            4,986Asia
            
            
            **110**
            
            
            84Europe
                and other
            
            
            **109**
            
            
            59**$**
            **5,793**
            
            $
            5,129




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
      13 - Subsequent Events***




*Employment
      Agreements*




DCT
      entered into addendums to extended existing employment agreements with certain
      of its executive officers and other key employees. The addendums (i) extend
      the
      initial term of each of the employment agreements for an additional six months
      from thirty-six months to forty-two months commencing April 26, 2005, and (ii)
      provide for increases to base salaries effective January 1, 2008. The remaining
      terms and conditions of the original employment agreements remain unchanged.
      As
      of the date of this report, termination payment totaling $507,000 remain in
      effect.





*Common
      Stock Transactions*





During
      January 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.





*Stock
      Option Exercises*





During
      January 2008, DCT issued 1,050,000 shares of common stock upon the exercise
      of
      stock options by DCT’s principal officers. Of the options exercised, 350,000
      shares were completed through a cashless exercise.





During
      February 2008, DCT issued 396,000 shares of common stock upon the exercise
      of
      stock options by DCT’s key employees and consultants. Of the options exercised,
      296,000 shares were completed through a cashless exercise.





*Majority
      Stockholder*





As
      of
      December 31, 2007, Syscan Imaging Limited (“SIL”) beneficially owned 50.4% of
      our outstanding common stock. During February 2008, as a result of the
      aforementioned employee stock option exercises, SIL’s beneficial ownership
      percentage decreased to 49.2%.




F-24
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          of Contents*




**DOCUMENT
        CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**


*Executive
      Management Changes*





Mr.
      Darwin Hu, DCT’s Chairman of the Board, President and Chief Executive Officer
      resigned as President and Chief Executive Officer effective March 1, 2008.
      Mr.
      Hu will continue as the Chairman of DCT’s Board of Directors.





On
      February 26, 2008, Mr. David Clark, DCT’s current Chief Investment Officer, was
      elected DCT’s Chief Executive Officer effective March 1, 2008 and Mr. William
      Hawkins, DCT’s current Chief Operating Officer, was elected DCT’s President
      effective March 1, 2008.





In
      connection with his new role as DCT’s Chief Executive Officer, Mr. Clark
      resigned his position of Chief Investment Officer effective March 1, 2008.
      Mr.
      Hawkins will continue his role as DCT’s Chief Operating Officer.




F-25