UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K




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




For
the Fiscal Year Ended December 31, 2009





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
            
            80-0133251(State
      or other jurisdiction of
            
            (I.R.S.Employerincorporation
      or organization)
            
            Identification
      Number)




1798
Technology Drive


Suite
178


San
Jose, California 95110


(Address
of principal executive offices, Zip code)





408-436-9888
ext. 207


(Issuer’s
telephone number, including area code)





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





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





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


Yes o      No
   ý





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





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





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





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





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





The
aggregate market value of the issuer’s voting and non-voting common equity held
by non-affiliates (9,095,256 shares) was approximately $3,638,102, based on the
average closing bid and ask price of $0.40 for such common equity on June 30,
2009.





As of
March 15, 2010, there were outstanding 19,406,270 shares of the issuer’s Common
Stock, par value $0.001.







DOCUMENTS
INCORPORATED BY REFERENCE





None









FORWARD
LOOKING STATEMENTS





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





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




-2-





DOCUMENT
CAPTURE TECHNOLOGIES, INC







FORM 10-K







FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009







INDEX





PART
      I
            PageItem
      1
            Business
            3Item
      1A.
            Risk
      Factors
            9Item
      2
            Properties
            14Item
      3
            Legal
      Proceedings
            14PART
      IIItem
      5
            Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
            15Item
      7
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      8
            Financial
      Statements
            26Item
      9
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            27Item
      9A(T).
            Controls
      and Procedures
            27PART
      IIIItem
      10
            Directors,
      Executive Officers and Corporate Governance
            29Item
      11
            Executive
      Compensation
            33Item
      12
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            38Item
      13
            Certain
      Relationships and Related Transactions, and Director
      Independence
            40Item
      14
            Principal
      Accounting Fees and Services
            40PART
      IVItem
      15
            Exhibits,
      Financial Statement Schedules
            42





-3-





PART I





ITEM
1.   BUSINESS





Overview




Document
Capture Technologies, Inc. (referred to herein as "we", "us", "our", "DCT" or
"Company"), a Delaware corporation, develops, designs and delivers various
document capture  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-image
capture 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 achieved 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 that is
simple to use with a computer and or integrate into new or existing systems
where there is need for a small footprint lightweight device to scan
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:





·
            Bank
      note and check verification (remote capture deposit or
    “RDC”);


·
            Document
      and information management;


·
            Identification
      card scanners;


·
            Passport
      security scanners;


·
            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 AMBIR TECHNOLOGY, BRIDGEPORT TECHNOLOGIES, BROTHER INTERNATIONAL,
BURROUGHS, NCR, NEWELL RUBBERMAID/DYMO-CARDSCAN, UNISYS, and
VISIONEER.  Our vertically integrated design and manufacturing
business model allows our customers to introduce new products to the market
quickly and efficiently.





Current Market
Opportunities, Strategies and Products




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




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




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




-4-




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





Year
      Ended
            
            Net
      RevenueDecember
      31, 2009
            
            $
            11,529December
      31, 2008
            
            
            11,643December
      31, 2007
            
            
            15,023




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





DocketPORT®





Our
DocketPORT product group is in its 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;


·
            Small
      footprint;


·
            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


·
            Variations
      that can scan 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 via
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;


·
            Small
      footprint;


·
            Extremely
      lightweight; and


·
            RoHS-Compliant
      with Restriction of Hazardous
Substance.





Sales, Marketing and
Distribution




Our sales
and marketing efforts are designed to serve our direct customer base, rather
than the end user of our products.  We market and sell our products
both domestically and internationally through a global network of more than 45
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, 2009.  To maintain our competitive advantage, we maintain
a high level of investment in research and development, and focus on factory
efficiency.  This allows us to provide superior time-to-market product
cycles with the goal of manufacturing and delivering products to customers
virtually defect free.




-5-





We
believe that our competitive strengths include:





·
            Product
      quality and performance;


·
            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;
  and


·
            Broad
      distribution channels.





Manufacturing and Raw
Material Supply





Manufacturing.We
purchase the majority of our finished scanner imaging products from Shenzhen
Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan Technology
Holdings Limited (“STH”).  SST was DCT’s majority shareholder until
July 2008.  As of December 31, 2009, SST held less than 20% of DCT’s
outstanding common stock.  See Part III, “Item 13:  Certain
Relationships and Related Transactions, and Director Independence.”





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





At the
end of January 2010, SST announced a relocation of its primary manufacturing
facility, currently located in Shenzhen China, to Wuhan, Hubei China. The
purpose of the relocation relates directly to an opportunity for SST to reduce
its direct and overhead costs.  As of the date of this filing and
based on information provided to it by SST, DCT anticipates the new
manufacturing facility to be fully functional by April 2011 and that the
relocation will have minimal impact to the manufacturing process and DCT’s
operations.




Raw Materials.  We
do not have any long-term or exclusive purchase commitments with any of our
suppliers.




SST
purchases the raw materials, parts and components with the exception of the
critical components 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.  Some controller chips are
sole-sourced, as they are specialized devices that can effectively control the
cost of our product.  To reduce the risk associated with using a sole
supplier, we attempt to maintain strategic inventories of these sole-sourced
components.  Where possible, we also work with secondary suppliers to
qualify additional sources of supply.




To date,
we have been able to obtain adequate supplies of the components used in the
production of our document/image-capture products in a timely manner from
existing sources.  If in the future we are unable to obtain sufficient
quantities of required materials, components or subassemblies, or if such items
do not meet our quality standards, delays or reductions in product shipments
could occur, which could harm our business, financial condition and results of
operations.




Customers





A small
number of our customers have historically accounted for a substantial portion of
our net sales. Total sales to significant customers (customers who
represent more than 10% of our net sales) were 64% and 82% during the years
ended December 31, 2009 and 2008, respectively.   See Note 1
included in Part II, “Item 8: Financial Statements.”  Our largest
customer rankings and their respective contributions to our net sales have
varied and will likely continue to vary from period to
period.   However, we expect that our largest customers will
continue to account for a substantial portion of our net sales in the
foreseeable future.  As we continue to expand our customer base, we
expect the concentration of sales to be more evenly distributed among our
largest customers, thus reducing our exposure to any single
customer.





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
typically sell products pursuant to purchase orders that customers can generally
defer without incurring a significant penalty.  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.




-6-





Intellectual
Property




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




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




Compliance with
Environmental, Health and Safety Regulations





DCT and
its product manufacturer have established an ongoing product surveillance
program in coordination with standards set by Underwriters Laboratories,
Canadian Standards Association, CB Safety Standards, Federal Communication
Commission (FCC class B), Community European (CE mark) and VCCI compliance
(Japan). 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 to both enhance our current products and
create new unique products, and we expect to continue to allocate significant
resources to these efforts.





Our
research and development expenses were $1,013,000 and $712,000 for the years
ended December 31, 2009 and 2008, 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 unique 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 our customers document capture
demands.





Seasonal
Trends




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





Employees





As of
December 31, 2009, we employed 22 employees on a full-time basis; 17 employees
were located in the United States, 3 were located in China and 2 were located in
Europe.  Of the total, 7 were in product research and development and
15 were in sales, service, and administration. None of our employees are
represented by unions or collective bargaining agreements. We have experienced
no work stoppages and believe that our employee relations are good.





Available
Information





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





We make
available free of charge our annual, quarterly and current reports, proxy
statements and other information upon request. To request such materials, please
contact our Corporate Secretary at 1798 Technology Drive Suite 178, San Jose,
California 95110 or call 1-408-213-3707.




-7-





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.




-8-




ITEM
1A.   RISK FACTORS





Risks Relating to Our
Business





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





Total
sales to significant customers (customers who represent more than 10% of our net
sales) were 64% and 82% during the years ended December 31, 2009 and 2008,
respectively.   See Note 1 included in Part II, “Item 8:
Financial Statements.”  We expect that our largest customers will
continue to account for a substantial portion of our net sales for the
foreseeable future.  None of our customers are obligated to purchase a
minimum number of our products in the aggregate or during any particular
period.  We cannot provide assurance that any of our customers will
continue to purchase our products at past or current levels.





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





Our net
loss attributable to common stockholders totaled $291,000 and $422,000 for the
years December 31, 2009 and 2008, respectively.  Our accumulated
deficit as of December 31, 2009 was $33,122,000.  We cannot provide
assurance that we can achieve profitability in the future.





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





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





At the
end of January 2010, SST announced a relocation of its primary manufacturing
facility, currently located in Shenzhen China, to Wuhan, Hubei China. The
purpose of the relocation relates to an opportunity for SST to reduce its direct
and overhead costs.





Based on
information provided to it by SST as of the date of this filing, DCT anticipates
the new manufacturing facility to be fully functional by April 2011 with minimal
impact to the manufacturing process, we cannot provide assurance that production
will not be negatively impacted. In the event that there is a delay in the
relocation of the manufacturing facility our business operations could be
materially adversely affected.





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





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





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


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


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





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




-9-





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.





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.





Our
results of operations could vary as a result of the methods, estimates, and
judgments that we use in applying our accounting policies.





The
methods, estimates, and judgments that we use in applying our accounting
policies have a significant impact on our results of operations (see “Critical
Accounting Estimates” in Part II, Item 7 of this Form 10-K). Such methods,
estimates, and judgments are, by their nature, subject to substantial risks,
uncertainties, and assumptions, and factors may arise over time that lead us to
change our methods, estimates, and judgments. Changes in those methods,
estimates, and judgments could significantly affect our results of
operations.





Risks Related To Our
Intellectual Property and Technology





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





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





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





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





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.




-10-





Risks Relating To Our Common
Stock





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





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





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





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





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





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


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


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


·
            Announcements
      of new products by us or our
competitors;


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


·
            Demand
      for our products;


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


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





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





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





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





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.




-11-





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





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





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





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





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





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





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





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


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


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


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


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





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





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





We are
authorized to issue 50,000,000 shares of our common stock.  As of
March 15, 2010, there were 19,406,270 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.  As of March 1, 2009, we had the
following common shares reserved for future issuance:




-12-





Stock
      options outstanding
            
            
            11,355,498Warrants
      outstanding
            
            
            2,002,027Total
            
            
            13,357,525





The
numbers above do not include 460,667 shares that are reserved pursuant to our
2009 Stock Option Plan for future grant.  To the extent that options
or warrants are exercised, 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 additional shares of preferred stock in the
future, our board of directors has the authority (as previously discussed),
without stockholder approval, to create and issue one or more series of such
preferred stock and to determine the voting, dividend and other rights of
holders of such preferred stock.  The above table does not include any
future issuance of preferred stock.  The issuance of any of such
series of preferred stock will cause further dilution to holders of our common
stock.





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





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





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





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




-13-





ITEM
2.  PROPERTIES





The
following table lists details of our properties at December 31,
2009:





Location
            
            Lease
      expiration
            
            Total
      Square Footage
            
            Primary
      UsageSan
      Jose, CA
            
            June
      2010
            
            5,500
            
            Corporate
      headquarters and product developmentSanta
      Clara, CA
            
            June
      2010
            
            6,000
            
            Inventory
      management and distributionArnhem,
      Netherlands
            
            Month
      to month
            
            270
            
            Field
      service and sales officeSchiphol,
      Netherlands
            
            Month
      to month
            
            1,400
            
            Inventory
      management and distribution





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





ITEM
3.  LEGAL PROCEEDINGS





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




-14-





PART II





ITEM
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





Market
Information





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





High
            
            
            LowFiscal
      2009:1st
      Quarter
            
            $
            0.60
            
            
            $
            0.302nd
      Quarter
            
            
            0.68
            
            
            
            0.303rd
      Quarter
            
            
            0.64
            
            
            
            0.334th
      Quarter
            
            
            0.45
            
            
            
            0.14Fiscal
      2008:1st
      Quarter
            
            $
            0.90
            
            
            $
            0.552nd
      Quarter
            
            
            0.84
            
            
            
            0.353rd
      Quarter
            
            
            0.75
            
            
            
            0.304th
      Quarter
            
            
            0.67
            
            
            
            0.25




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




Record
Holders





As of
March 15, 2010, there were 19,406,270shares of common
stock issued and outstanding, held by approximately 375 holders of record as
indicated on the records of DCT’s transfer agent.





Dividends





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





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





-15-




Equity Compensation Plan
Information





The
following table sets forth certain information concerning shares of common stock
authorized for issuance under the Company’s existing equity compensation plans
as of December 31, 2009:





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
            
            
            6,739,333
            
            
            $
            0.42
            
            
            
            460,667Equity
      compensation plans not approved by security holders
            
            
            4,616,165
            
            
            
            0.17
            
            
            
            –Total
            
            
            11,355,498
            
            
            $
            0.32
            
            
            
            460,667





2002
Amended and Restated Stock Option Plan





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





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





In the
event of our change in control (including our merger with or into another
corporation, or sale of substantially all our assets), the 2002 Plan provides
that each outstanding option will fully vest and become
exercisable.  The maximum number of options that can be granted under
the 2002 Plan is 3,200,000.   As of December 31, 2009, there were
no options available for future grant under the 2002 Plan.





2006
Stock Option Plan





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





The 2006
Plan provides that vested options may generally be exercised for three months
after termination of employment and for 12 months after termination of
employment as a result of death or disability.  If the Company
liquidates, optionees will be notified at least 30 days prior to the proposed
dissolution or liquidation to give optionees time to exercise any vested
options.  To the extent not previously exercised, all options will
terminate immediately prior to the consummation of such proposed
action.  However, the plan administrator may, under its sole
discretion, permit exercise of any options prior to their termination, even if
such options were not otherwise exercisable. In the event of our change in
control (including our merger with or into another corporation, or sale of
substantially all our assets), the 2006 Plan provides that each outstanding
option will fully vest and become exercisable.  At
the Company’s annual meeting on October 3, 2008, the Company’s shareholders
agreed to increase the maximum number of options that can be granted under the
2006 Plan from 1,500,000 to 2,500,000.   As of December 31, 2009,
there were no options available for future grant under the 2006
Plan.





-16-




2009
Stock Option Plan





At our
stockholders’ annual meeting on September 14, 2009, our stockholders approved
the adoption of the 2009 Stock Option Plan (“2009 Plan”).  Currently
the plan is administered by our Board of Directors.  The 2009 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 2009
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 2009 Plan provides that each outstanding
option will fully vest and become exercisable.  As of December 31,
2009, there were 460,667 options available for future grant under the 2009
Plan.





Recent Sales of Unregistered
Securities





During
the year ended December 31, 2009, 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, 2009.





-17-





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




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




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




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




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




·
            Results of
      Operations. This section provides an analysis of our results of
      operations for the year ended December 31, 2009 (“Fiscal 2009”) compared
      to the year ended December 31, 2008 (“Fiscal 2008”).  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, 2009 and our cash flows for Fiscal
      2009 compared to Fiscal 2008.




·
            Contractual
      Obligations, Off-Balance-Sheet Arrangements, and
      Trends.As of December 31, 2009, an overview of (i)
      contractual obligations and contingent liabilities and commitments,
      including an expected payment schedule, (ii) an explanation of
      off-balance-sheet arrangements, and (iii) known
  trends.




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 related to document digitization and utilization. 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 five groups of image-capture products.  We
have expanded our document/image-capture product offerings, and will continue to
expand our product offerings in the future in response to the increased market
demand for faster, easier-to-use products and increased security to meet the
growing need for information protection, including identity and financial
transaction protection.




In 2008,
DCT focused on re-aligning its operations toward its core revenue-generating
competencies in an effort to cut costs and maximize profits. In 2009 DCT
identified and pursued key significant market opportunities available to the
Company.  We believe that the result of these corporate initiatives
has uniquely positioned DCT for growth in 2010 and beyond.




DCT
introduced three new products during Fiscal 2009.  New products
include new technology for added functionality as well as improved existing
functionality.  Additionally, our new products already have an
existing market, and we have already begun delivery or received orders for all
three new products.





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 resulting from the need to make estimates on matters
that are inherently uncertain.




-18-




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




Revenue
Recognition




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




Sales
Incentives





In
certain instances, we offer sales incentives whereby we give customers
additional product for certain volume-related purchases.  We record
the cost of the product-related sales incentives as a cost of sales during the
period the incentive is earned.




Inventory
and Warranty Reserves




We
establish inventory reserves for estimated obsolescence, unmarketable, or
slow-moving 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.  At December 31, 2008, we had a $20,000 inventory
reserve for specifically identified slow-moving inventory.  We sold
such inventory during Fiscal 2009.  No additional obsolete,
unmarketable, or slow-moving inventory was identified at December 31,
2009.





Historically,
we have purchase the majority of our finished scanner imaging products from
Shenzhen Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan
Technology Holdings Limited ("STH").  SST was DCT’s majority
shareholder until July 2008.  As of December 31, 2009, SST held less
than 20% of DCT’s outstanding common stock.  SST warrants the products
it manufactures for us against defects in material and workmanship for a period
of 18 months after the completion of manufacture. After such 18 month period,
SST provides product repair services for us at its customary hourly repair rate
plus the cost of any parts, components or items necessary to repair the
products.  As a result of the product warranty provided by SST, DCT
does not record a product warranty reserve.





Related-Party
Transactions





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





Related-Party
Purchases





As
discussed above, we purchase the majority of our finished scanner imaging
products from SST.  Purchases from SST totaled $6,546,000 and
$6,816,000 for the years ended December 31, 2009 and 2008,
respectively.  All purchases from SST were carried out in the normal
course of business. As a result of these purchases, DCT was liable to SST for
$341,000 and $393,000 at December 31, 2009 and 2008, respectively.





Related-Party
Net Sales





During
the year ended December 31, 2009 and 2008, DCT recorded net sales totaling
$72,000 and $57,000, respectively, for finished scanners sold to
SST.  The related cost of goods sold was $39,000 and $41,000 for the
years ended December 31, 2009 and 2008, respectively.  All sales to
SST contained similar terms and conditions as for other transactions of this
nature entered into by DCT.





Revised
Consulting Agreement




In August
2009, DCT amended an existing consulting contract, originally entered in July
2008, with one of its shareholders who owns more than 5% of DCT’s outstanding
stock. The amendment called for DCT to make a one-time cash payment of $30,000,
and for the consultant to return to DCT 275,000 non-qualified stock options, at
an exercise price of $0.30 per share, to purchase shares of DCT common stock.
The stock options were originally granted to the shareholder in July 2008. All
other terms of the original contract remain in effect.




-19-





Legal
Services Agreement





On
September 15, 2009, DCT entered into a legal services agreement with Jody R.
Samuels, a director of the Company.  Pursuant to the agreement Mr. Samuels
provides certain legal services to us which consists of assisting the Company in
(i) the preparation of its periodic and other filings with the Securities and
Exchange Commission (“SEC”), including proxy statements, special and annual
meetings of shareholders, (ii) the negotiation of financing and corporate
development transactions, (iii) preparation and review of documentation related
to financing arrangements and corporate development transactions, (iv) preparing
registration statements, and responding to any SEC inquiries/comment letters,
(v) documenting corporate governance policies and procedures, and (vi) any other
legal matters reasonably within the legal expertise of Mr. Samuels.





Pursuant
to the Agreement, Mr. Samuels is paid $4,000 per month, and for the year ended
December 31, 2009, was paid an aggregate of $14,000.  The Agreement may be
cancelled by either party with 30 days prior written notice.




Impairment
of Long-Lived Assets





We
evaluate our long-lived assets for impairment annually or more frequently if we
believe indicators of impairment exist. Significant management judgment is
required during the evaluation, which includes forecasts of future operating
results. The estimates we have used are consistent with the plans and estimates
that we use to manage our business. It is possible, however, that the plans and
estimates used may be incorrect. If our actual results, or the plans and
estimates used in future impairment analyses, are lower than the original
estimates used to assess the recoverability of these assets, we could incur
additional impairment charges.  We had no such asset impairments
during Fiscal 2009 or Fiscal 2008.




Income
Taxes




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




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




The
application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws themselves are subject to
change as a result of changes in fiscal policy, changes in legislation,
evolution of regulations and court rulings. Therefore, the actual income taxes
may be materially different from our estimates.  As a result of our
analysis, we concluded that a full valuation allowance against our net deferred
tax assets is appropriate at December 31, 2009 and 2008.




Contingencies




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





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





We
account for our Series A 5% Cumulative Convertible Preferred Stock (“Series A
Stock”), which matured March 15, 2008, and our Series B Convertible Preferred
Stock (“Series B Stock”), which matured August 7, 2009, pursuant to the
Derivative Instruments and Hedging Topic of the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification
(“Codification”).  Accordingly, the embedded conversion feature of our
Series A Stock and Series B Stock were accounted for as derivative instruments
and were bifurcated from the host contract.




-20-





The fair
value of these derivative instruments, as determined by applying the
Black-Scholes valuation model, was adjusted at each reporting period until the
maturity of the host contract.  The Black-Scholes valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. The Black-Scholes valuation
model requires the input of highly subjective assumptions, including the
expected stock price volatility. Our derivative instruments have characteristics
significantly different from traded options, and the input assumptions used in
the model can materially affect the fair value estimate.





Stock-Based
Compensation Expense





DCT’s has
incentive plans that permit us to grant incentive stock options and
non-qualified stock options to employees, directors and
consultants.  All stock options are valued using a Black-Scholes
option pricing model. 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 is based on awards
that are ultimately expected to vest. We evaluate the assumptions used to value
our awards on a quarterly basis. If factors change and we employ different
assumptions, stock-based compensation expense may differ significantly from what
we have recorded in the past. If there are any modifications or cancellations of
the underlying unvested securities, we may be required to accelerate, increase
or cancel any remaining unearned stock-based compensation expense. Future
stock-based compensation expense and unearned stock-based compensation will
increase to the extent that we grant additional equity awards to
employees.





Fair
Value of Financial Instruments





We
account for certain liabilities pursuant to the Fair Value Topic of the
Codification, which defines three levels of inputs that may be used to measure
fair value:





Level 1. Quoted
prices in active markets for identical assets or liabilities.  DCT had
no Level 1 assets or liabilities during Fiscal 2009 or Fiscal 2008.





Level 2. Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated with observable market data for substantially the full term of the
assets or liabilities.  DCT had no Level 2 assets or liabilities
during Fiscal 2009 or Fiscal 2008.





Level 3.  Unobservable
inputs to the valuation methodology that are significant to the measurement of
the fair value of assets or liabilities.  The determination of fair
value for Level 3 instruments requires the most management judgment and
subjectivity.   DCT had no Level 3 assets during Fiscal 2009 or
Fiscal 2008.    Level 3 liabilities include (i) warrant and
(ii) derivative contracts liabilities.  DCT estimates the fair value
of Level 3 liabilities using the Black-Scholes valuation
model.  During Fiscal 2009, DCT’s Level 3 liabilities either matured
or converted to equity.  As such, DCT had no Level 3 liabilities at
December 31, 2009. The adjustment to the fair value of our Level 3 liabilities
was not significant in Fiscal 2008.





-21-




Results of
Operations





The
following table summarizes certain aspects of our results of operations for
Fiscal 2009 compared to Fiscal 2008 (in thousands):





Fiscal 2009
            
            
            Fiscal 2008
            
            
            $ Change
            
            
            % ChangeNet
      sales
            
            $
            11,529
            
            
            $
            11,643
            
            
            $
            (114
            )
            
            
            (1
            )%Cost
      of sales
            
            
            6,936
            
            
            
            7,696
            
            
            
            (760
            )
            
            
            (10
            )As
      a percentage of sales
            
            
            60
            %
            
            
            66
            %Selling,
      general and administrative expenses
            
            
            3,880
            
            
            
            3,465
            
            
            
            415
            
            
            
            12Research
      and development expense
            
            
            1,013
            
            
            
            712
            
            
            
            301
            
            
            
            42Total
      non-operating income (expense), net
            
            
            (35
            )
            
            
            255
            
            
            NM
            
            
            NMProvision
      (benefit) for income taxes
            
            
            (74
            )
            
            
            77
            
            
            NM
            
            
            NMDividend
      and deemed dividend on 5%convertible
      preferred stock and accretion ofpreferred
      stock redemption value
            
            
            (30
            )
            
            
            (370
            )
            
            NM
            
            
            NMNM
      = Not Meaningful





Net
Sales





Net sales
for Fiscal 2009 were relatively flat in comparison to net sales for Fiscal 2008.
The overall slowdown of the general economic and market conditions in the U.S.
economy and the related slowdown of information technology (“IT”) capital
spending were offset by several effective marketing efforts.  Our net
sales were positively impacted by the following:





·
            Increasing
      sales efforts and market recognition of our newer and more feature-rich
      products, which resulted in a 25%  increase to our
      weighted-average selling price;


·
            Capitalizing
      on several market opportunities during the last half of Fiscal 2009;
      and


·
            Implementing
      sales incentives for certain volume-related purchases of our more
      feature-rich products.





While
international sales are strategically important to the growth of our business,
they represent less than 10% of our total sales during both Fiscal 2009 and
Fiscal 2008.  During the third quarter of Fiscal 2009, we expanded our
sales and support staff in Europe for the purpose of further developing our
global presence and product recognition internationally.  We also have
been asked by several of our major channel partners to broaden our product
support and fulfillment capabilities in Europe, Middle East, Africa and Western
Asia.





While we
continually concentrate on expanding and diversifying our significant customer
base, our revenue remains dependent on a small but growing number of significant
customers.  Total sales to significant customers (customers who
represent more than 10% of our net sales) were 64% and 82% during the years
ended December 31, 2009 and 2008, respectively.   See Note 1
included in Part II, “Item 8: Financial Statements.”  The identities
of our largest customers and their respective contributions to our net sales
have varied in the past and will likely continue to vary from period to
period.





From time
to time, our key customers place large orders causing our quarterly sales to
fluctuate significantly.   Additionally, the timing of when we
receive product to sell has a significant impact to our sales.  We
expect both of these trends and resulting fluctuations to continue.





Cost
of Sales, Including Gross Profit




Cost of
sales includes all direct costs related to the purchase of scanners, imaging
modules and services related to the delivery of those items manufactured in
China, and to a lesser extent, engineering services and software
royalties.  Cost of sales as a percentage of sales decreased during
Fiscal 2009 as compared to Fiscal 2008, and was due to the
following:




-22-




·
            A
      higher proportion of overall net sales were generated from our more
      feature-rich products, which typically bear higher gross margins than our
      scanners with fewer product
features;




·
            The
      reworking of certain third-party software configurations as we move toward
      less costly and greater value-added
software;




·
            The
      negotiated cost reduction to some of our finished product;
    and




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




The above
noted factors were somewhat offset by the aforementioned sales incentive program
implemented during the third and fourth quarters of Fiscal 2009 and the
fluctuation of the U.S. dollar against the Chinese Yuan.





Selling,
General and Administrative Expenses




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




The
increase in selling, general and administrative expenses increased during Fiscal
2009 as compared to Fiscal 2008 was primarily attributable to the
following:




·
            Increased
      investor relations efforts associated with DCT’s initiatives toward
      increasing DCT’s awareness in the investment
  community;




·
            Increased
      legal fees associated with various actions related to breach of contract
      and patent defense;




·
            Increased
      headcount as DCT expands its sales and diagnostic-level customer support
      initiatives; and




·
            Increased
      accounting fees associated with changing independent accountants and
      maintaining DCT’s public reporting
requirements.




The above
increases were somewhat offset by the decrease in the amortization of the fair
value of common stock and common stock warrants (a non-cash
charge).  As part of the aforementioned investor relations
initiatives, common stock and common stock warrants were issued and amortized
during Fiscal 2008.




We
anticipate that selling, general and administrative expenses will continue to
increase as our business continues to grow and the costs associated with being a
public company continue to increase as a result of our reporting
requirements.





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 increase during Fiscal 2009 as compared to Fiscal
2008 was attributable to utilizing outside, specialized engineering contractors
to enhance our product development efforts.   Additionally, we
doubled our in-house research and development headcount from Fiscal 2008 to
Fiscal 2009.





We
anticipate that research and development expense will continue to increase over
the long term as a result of the growth of our existing products, new product
opportunities and expansion into new markets and technologies. We remain
committed to significant research and development efforts to extend our
technology leadership in the imaging technology markets.





Total
non-operating income (expense), net





Our total
non-operating income (expense) during Fiscal 2009 was immaterial to our results
of operations.





During
Fiscal 2008, the most significant component of our non-operating income
(expense) was the one-time gain on sale of assets of $550,000.  During
Fiscal 2008, non-operating income (expense) was also impacted by our increased
debt, which resulted in interest expense of $432,000, of which $311,000 was
non-cash interest expense attributable to amortization of debt discount
resulting from debt issuance costs.




-23-





Provision
for Income Taxes





Our
income tax expense for Fiscal 2008 was based on an estimate.  Our
actual tax returns calculated a tax loss for the tax year ended December 31,
2008.  The benefit for income taxes during Fiscal 2009 reflects the
reversal of the estimate and overpayment of income taxes for Fiscal
2008.  We had an estimated tax loss for Fiscal 2009.





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





The total
accretion on our Series A Stock and Series B Stock was $30,000 and $126,000
during Fiscal 2009 and Fiscal 2008, respectively.  The decrease was
attributable to the maturity of our Series A Stock during March 2008 and the
maturity of our Series B Stock August 2009.





Total
dividends on our Series A Stock were $0 and $13,000 during Fiscal 2009 and
Fiscal 2008, respectively.   The decrease was attributable to the
maturity of our Series A Stock on March 15, 2008.  We did not pay
dividends on our Series B Stock.





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





As of
December 31, 2009 we had no preferred stock outstanding.





Liquidity and Capital
Resources





At
December 31, 2009, our principal sources of liquidity included cash and cash
equivalents of $328,000 and an available borrowing capacity of $862,000 on our
bank line of credit.  During March 2010, we negotiated an increase to
our existing line of credit borrowing.  We anticipate approximately
$500,000 additional borrowing capacity as a result of the increase to our
borrowing base.





The
following table summarizes DCT’s cash and cash equivalents, working capital and
cash flows as of and for the years ended December 31, 2009 and 2008 (in thousands):




As
      of or for the year ended December 31,2009
            
            
            2008Cash
      and cash equivalents
            
            $
            328
            
            
            $
            405Working
      capital
            
            
            2,413
            
            
            
            1,820Cash
      (used) provided by operating activities
            
            
            (116
            )
            
            
            1,429Cash
      (used) provided by investing activities
            
            
            (91
            )
            
            
            519Cash
      provided (used) by financing activities
            
            
            130
            
            
            
            (3,313
            )





Operating
Activities





Cash used
by operations during Fiscal 2009 was primarily a result of our $261,000 net
loss, $703,000 of net non-cash expenses and $558,000 net cash used by changes in
operating assets and liabilities.  Cash provided by operations during
Fiscal 2008 was primarily a result of our $52,000 net loss, $586,000 of net
non-cash expenses, and $895,000 net cash provided by changes in operating assets
and liabilities.





Non-cash
items included in net loss are depreciation expense, stock-based compensation
cost of options, fair value of warrants issued for services rendered, change in
fair value of derivative instruments, change in fair value of warrant liability
and amortization of debt discount.  The most significant change in our
operating assets and liabilities in Fiscal 2009 was attributable to the buildup
of inventory, which negatively impacted our cash flows from operations, in
anticipation of future sales growth.  The most significant change in
our operating assets and liabilities during Fiscal 2008 was a decrease in
accounts receivable, which positively impacted our cash flows from operations,
as a result of decreased revenues experienced during the period.




-24-





We had no
significant unusual cash outlays related to operating activities during Fiscal
2009 or Fiscal 2008.  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 2009, our investing activities were from the purchase of capital
equipment, the majority of which was for tooling equipment to support the
manufacturing of our recently-released products.





During
Fiscal 2008, cash provided by investing activities included proceeds of $550,000
gain on the sale of our HD display-related assets, which positively impacted our
cash position.  This was slightly offset by the purchase of capital
equipment.  The sale of our HD display-related assets in Fiscal 2008
was a result of refocusing our efforts and economic resources toward our core
revenue generating activities.




Financing
Activities




During
Fiscal 2009, our financing activities consisted of (i) replacing our existing
line of credit with a similar line of credit with a different commercial bank
(as discussed below), and (ii) $75,000 cash payment upon the maturity of our
Series B Stock.




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





Cash
and Working Capital Requirements





Our
working capital increased $593,000 to $2,413,000 at December 31, 2009 from
$1,820,000 at December 31, 2008.  The increase in working capital was
a result of the one-time conversion of warrants to purchase 650,000 shares of
common stock into 750,000 shares of common stock.  The warrants
included a put option liability totaling $350,000, which was de-recognized
during the second quarter of Fiscal 2009.  The increase in working
capital as a result of the $350,000 warrant liability de-recognition, was
slightly offset by the $75,000 cash paid upon the maturity of our preferred
stock.  As of December 31, 2009 we have no preferred stock and no
warrants with put options outstanding.





DCT
actively controls operating expenses to align with current and projected net
sales.  If we continue to successfully manage our projected net sales
and control our operating expenses, of which there can be no assurance,
management believes that current cash and other sources of liquidity are
sufficient to fund normal operations through the next 12 months.





Contractual
Obligations





The
following table summarizes our contractual obligations at December 31, 2009, and
the effect such obligations are expected to have on our liquidity and cash flows
in future periods (in
thousands):




Less
      Than
            
            
            One
      – Three
            
            
            Three
      – FiveTotal
            
            
            One
      Year
            
            
            Years
            
            
            YearsBank
      line of credit(1)
            
            $
            225
            
            
            $
            225
            
            
            $
            -
            
            
            $
            -Operating
      lease obligations
            
            
            109
            
            
            
            108
            
            
            
            1
            
            
            
            -Total
      contractual cash obligations
            
            $
            334
            
            
            $
            333
            
            
            $
            1
            
            
            $
            -





(1)During
September 2009, DCT replaced its existing line of credit with a similar
$2,000,000 line of credit (“LOC”) at a different commercial
bank.  Borrowings under the LOC are limited to 75% of eligible
accounts receivable less the aggregate face amount of all outstanding letters of
credit, cash management services, and foreign exchange contracts (all as defined
in the 2009 LOC agreement).  The LOC bears an annual interest rate of prime
(3.25% at December 31, 2009) plus 2.00% for advances drawn against accounts
receivables, with a minimum interest rate of 6%.  Interest payments
are due monthly and all unpaid interest and principal is due in full on
September 2, 2010.  Upon certain events of default (as defined in the LOC
agreement), the default variable interest rate increases five percentage points
above the interest rate applicable immediately prior to the
default.  Additionally, the lender has the right to declare all of the
amounts due under the LOC immediately due and payable upon an event of
default.




As of
December 31, 2009, DCT was in compliance with all 2009 LOC debt
covenants.




-25-




Off-Balance Sheet
Arrangements





At
December 31, 2009, we did not have any relationship with unconsolidated entities
or financial partnerships, which other companies have established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. Therefore, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in such relationships.





Trends





As of
December 31, 2009, 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 11: Commitments
and Contingencies” in Part II, Item 8 of this Form 10-K.





ITEM
8.  FINANCIAL STATEMENTS




The
information required by this Item is set forth beginning on page F-1 of this
Annual Report on Form 10-K and is incorporated by reference
herein.




-26-




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





None.





ITEM
9A(T).  CONTROLS AND PROCEDURES





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 permit the company to provide only management's report in this
annual report.





Evaluation of Disclosure
Controls and Procedures





We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer (Principal Executive Officer)
and Chief Financial Officer (Principal Financial Officer), of the effectiveness
of the design and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange
Act”), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures also include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were not effective as of December 31, 2009 for the
reasons discussed below related to material weaknesses in our internal control
over financial reporting.





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. generally
accepted accounting principles (“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, 2009.  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 permit us to provide only
management's report in this annual report.




-27-




Identified
Material Weakness as of December 31, 2009, Management’s Remediation Efforts, and
Conclusion





Identified Material
Weakness.  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.  At DCT’s Annual Shareholders’ meeting held on
September 14, 2009, our independent financial expert was not re-elected to our
Board of Directors.  As a result, we did not have effective
comprehensive entity-level internal controls specific to the structure of our
board of directors.




Management’s Remediation
Initiative.We are currently in the
process of interviewing candidates that meet the definition of independent and
financial expert and can fill the vacant position on our Board of
Directors.  We plan to test our updated controls and remediate our
material weaknesses by mid-2010.




Conclusion.  To
mitigate the above identified material weakness, DCT’s executive management, two
of whom are also members of DCT’s Board of Directors, performed detailed
analyses.  These included, but were 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. Additionally, DCT’s executive management compared the actual
results of operations to its internal budgeted forecast and investigated any
items where the actual results differed from expectations.  In
addition to executive management’s detailed analyses, DCT’s independent board
members performed extensive analysis of our financial performance.





Such
detailed analyses were completed so management and our board of directors could
gain assurance that the financial statements and schedules included in this
Annual Report on Form 10-K present fairly in all material respects DCT’s
financial position, results of operations and cash flows for all periods
presented.





Evaluation ofChanges in Internal Control
over Financial Reporting




Under the
supervision and with the participation of our management, including our
Principal Executive Officer and Principal Financial Officer, we have determined
that, during the fourth quarter of fiscal 2009, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





-28-





PART III





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




Directors and Executive
Officers




The
following table sets forth the names, ages, years elected and principal offices
and positions of our current directors and executive officers as of March 15,
2010.





Name
            
            Year
      First Elected As Officer or Director
            
            Age
            
            OfficeEdward
      M. Straw
            
            2008
            
            71
            
            ChairmanDavid
      Clark
            
            2004
            
            41
            
            Chief
      Executive Officer and DirectorWilliam
      Hawkins
            
            2004
            
            53
            
            Chief
      Operating Officer, President and SecretaryM.
      Carolyn Ellis
            
            2007
            
            45
            
            Chief
      Financial OfficerDarwin
      Hu
            
            2004
            
            57
            
            DirectorJody
      Samuels
            
            2009
            
            41
            
            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.  Our entire board of directors currently serves as the
nominating committee.  There were no changes in procedures for
nominating DCT directors during the year ended December 31, 2009.





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





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





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





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





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




-29-





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





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





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





JODY R. SAMUELSbecame a
director of the company in September 2009.  Mr. Samuels is currently
of counsel to the law firm of Richardson & Patel LLP and from 2006 through
2009 was a partner of Richardson & Patel LLP.  Prior thereto, he
was an associate and then a partner with the law firm of Ellenoff, Grossman
& Schole from 2004 through 2006.  From 1996 through 2004, Mr.
Samuels was an associate at the law firm of Gersten Savage LP.  Mr.
Samuels has been the Company’s corporate counsel since Syscan, Inc., our
operating subsidiary, merged with Bankengine Technologies, Inc. in
2004.  Mr. Samuels represents many public and private companies in
connection with their corporate and securities transactions including public
offerings, PIPE’s, reverse mergers, as well as M&A transactions and
regulatory compliance.  Mr. Samuels also represents broker-dealers in
connection with public and private securities offerings.  Mr. Samuels
received a B.S. in Accounting from Brooklyn College in 1991 and his Juris
Doctorate from New York Law School in 1995.





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, 2009.





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.




-30-





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





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





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




Board of Directors Meetings
and Subcommittees




Attendance
at Board Meetings and Annual Shareholders’ Meeting





The Board
held six meetings in 2009. We expect each director to attend every meeting of
the Board as well as the annual meeting. In 2009, all but one of our directors
attended the 2009 Annual Stockholders’ Meeting.  All directors
attended at least 75% of the meetings of the Board in 2009.





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





Audit
Committee and Financial Expert





DCT’s
Board established an Audit Committee on January 20, 2009 with all of DCT’s
independent directors.  Subsequent to that date, the Audit Committee
began assisting the Board in its general oversight of our financial reporting,
internal controls, and is responsible for the appointment, retention,
compensation, and oversight of the work of our independent registered public
accounting firm.  At DCT’s Annual Shareholders’ meeting held on
September 14, 2009, our independent financial expert and Audit Committee
Chairman was not re-elected to our Board of Directors.  Subsequent to
that date, our entire Board has been acting as our Audit Committee and will
continue to act as our Audit Committee until such time as we are able to retain
a qualified financial expert to head our Audit Committee.  We are
currently in the process of interviewing candidates that meet the definition of
independent and financial expert and can fill the vacant position on our Board
of Directors.





On March
31, 2009, the Audit Committee adopted a written charter, which is attached to
this Annual Report on Form 10-K at Exhibit 99.1.  The Audit Committee
will review and reassess the adequacy of the charter on an annual
basis.





Compensation
Committee





DCT’s
Board established a Compensation Committee on November 12, 2009.  The
Compensation Committee has authority for reviewing and determining salaries,
performance-based incentives, and other matters related to the compensation of
our executive officers, and administering our stock option plans, including
reviewing and granting stock options to our executive officers. The Compensation
Committee also reviews and determines various other compensation policies and
matters.





On
December 17, 2009, the Board of Directors adopted a Compensation Committee
written charter, which is attached to this Annual Report on Form 10-K at Exhibit
99.2.  The Compensation Committee will review and reassess the
adequacy of the charter on an annual basis.




-31-





Nominating
Committee





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





Shareholder
Communication





We
communicate regularly with shareholders through press releases, as well as
annual and quarterly reports. Our investor relations department and Corporate
Secretary address investor concerns on an on-going basis. We may also address
such concerns through our website 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 1798 Technology Drive, Suite 178, San Jose,
California 95110 or call 1-408-213-3707.





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, Related Stockholder Matters and Issuer
Purchases of Equity Securities.”




-32-




ITEM
11.  EXECUTIVE COMPENSATION





Summary
Compensation





The
following table sets forth, for the years indicated, all compensation awarded
to, paid to or earned by the following type of executive officers for the year
ended December 31, 2009: (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, 2009; and (ii) our only other executive officer whose salary
bonus exceeded $100,000 with respect to the years ended December 31, 2009 and
2008 and who was employed by us at December 31, 2009.





SUMMARY
COMPENSATION TABLE(1)





Name
      and Principal  Position
            
            
            Year
            
            
            Salary
      ($)
            
            
            Bonus
      ($)
            
            
            Option Awards(2)($)
            
            
            All
      Other Compensation (3)($)
            
            
            Total
      Compensation ($)David
      Clark,
            
            
            2009
            
            
            
            200,000
            
            
            
            55,000
            
            
            
            112,000
            (4)
            
            
            27,747
            
            
            
            394,747Chief
      Executive Officer and  Director
            
            
            2008
            
            
            
            186,458
            
            
            
            2,000
            
            
            
            175,188
            (5)
            
            
            -0-
            
            
            
            361,646William
      Hawkins, President,
            
            
            2009
            
            
            
            200,000
            
            
            
            5,000
            
            
            
            96,000
            (6)
            
            
            28,080
            
            
            
            329,080Chief
      Operating  Officer, Secretary and Director
            
            
            2008
            
            
            
            191,875
            
            
            
            2,000
            
            
            
            175,188
            (7)
            
            
            7,675
            
            
            
            374,738M.
      Carolyn Ellis, Chief Financial Officer
            
            
            2009
            
            
            
            165,000
            
            
            
            3,000
            
            
            
            40,000
            (8)
            
            
            22,600
            
            
            
            230,6002008
            
            
            
            148,750
            
            
            
            1,650
            
            
            
            109,493
            (9)
            
            
            4,559
            
            
            
            262,802





(1)DCT
did not have any stock awards, non-equity incentive plan compensation or
non-qualified deferred compensation earnings during 2009 or
2008.





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





(3)In
2009, this included (i) the Company’s match on the named executives’ 401(k)
contribution, and (ii) one-time accrued vacation payout.  In 2008,
this included the Company’s match on the named executives’ 401(k)
contribution.





(4)Represents the total fair value (as discussed in (2)
above) of 350,000 incentive stock options granted during the year ended December
31, 2009, of which 100,000 were for serving as a DCT director.  One-third of the options
vest on December 23, 2010, one-third vest on December 23, 2011 and one-third
vest on December 23, 2012.





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





(6)Represents the total fair value (as discussed in (2)
above) of 300,000 incentive stock options granted during the year ended December
31, 2009, of which 100,000 were for serving as a DCT director.  One-third of the options
vest on December 23, 2010, one-third vest on December 23, 2011 and one-third
vest on December 23, 2012.





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





(8)Represents the total fair value (as discussed in (2)
above) of 125,000 incentive stock options granted during the year ended December
31, 2009.  One-third of the options
vest on July 15, 2009, one-third vest on July 15, 2010 and one-third vest on
July 15, 2011.





-33-





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





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, 2009 by the named executive officers.





OUTSTANDING
EQUITY AWARDS TABLE





Option
      AwardsEquity
      IncentivePlan
      Awards:Number
      ofNumber
      of
              
              
              Number
      of
              
              
              SecuritiesSecurities
              
              
              Securities
              
              
              UnderlyingUnderlying
              
              
              Underlying
              
              
              UnexercisedUnexercised
              
              
              Unexercised
              
              
              Unearned
              
              
              ExerciseName
      and Principal
              
              Options
      (#)
              
              
              Options
      (#)
              
              
              Options
              
              
              PricePosition
              
              Exercisable
              
              
              Unexercisable
              
              
              
              (#)
              
              
              ($)
              
              Expiration
      DateDavid
      Clark
              
              
              343,465
              
              
              
              -
              
              
              
              -
              
              
              
              0.01
              
              4/26/2012Chief
      Executive Officer
              
              
              400,000
              
              
              
              -
              
              
              
              -
              
              
              
              0.70
              
              3/25/2017and
      Director
              
              
              200,000
              
              
              
              400,000
              (1)
              
              
              -
              
              
              
              0.30
              
              7/13/2018-
              
              
              
              350,000
              (2)
              
              
              -
              
              
              
              0.32
              
              12/23/2016William
      Hawkins
              
              
              598,850
              
              
              
              -
              
              
              
              -
              
              
              
              0.01
              
              4/26/2012President,
              
              
              400,000
              
              
              
              -
              
              
              
              -
              
              
              
              0.70
              
              3/25/2017Chief
      Operating Officer,
              
              
              200,000
              
              
              
              400,000
              (1)
              
              
              -
              
              
              
              0.30
              
              7/13/2018Secretary
      and Director
              
              
              -
              
              
              
              300,000
              (2)
              
              
              -
              
              
              
              0.32
              
              12/23/2016M.
      Carolyn Ellis
              
              
              150,000
              
              
              
              -
              
              
              
              -
              
              
              
              0.60
              
              10/30/2014Chief
      Financial Officer
              
              
              125,000
              
              
              
              250,000
              (1)
              
              
              -
              
              
              
              0.30
              
              7/13/2018-
              
              
              
              125,000
              (2)
              
              
              -
              
              
              
              0.32
              
              12/23/2016





(1)Half
of the unexercisable options at December 31, 2009 vest on July 15, 2010 and half
vest on July 15, 2011.





(2)One-third
of the unexercisable options at December 31, 2009 vest on December 23, 2010,
one-third vest on December 23, 2011 and one-third vest on December 23,
2012.





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, 2009.




-34-





Compensation of
Directors





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





The
following table details the total compensation earned by DCT’s non-employee
directors during the year ended and as of December 31, 2009:





Name
            
            Fees
      Earned or Paid in Cash ($)
            
            
            Option Awards(1)
              ($)
            
            
            Total
      Compensation ($)Edward
      Straw
            
            
            -
            
            
            
            32,000
            (2)
            
            
            32,000Darwin
      Hu
            
            
            -
            
            
            
            32,000
            (2)
            
            
            32,000Jody
      Samuels
            
            
            -
            
            
            
            83,000
            (3)
            
            
            83,000





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





(2)Represents the total fair value (as discussed in(1)above) of 100,000 incentive stock options granted during the year ended
December 31, 2009, for serving as director.  One-third of the options
vest on December 23, 2010, one-third vest on December 23, 2011 and one-third
vest on December 23, 2012.





(3)Represents the total fair value (as discussed in (1)
above) of 250,000 incentive stock options granted during the year ended
December 31, 2009, for serving as director, of which 50,000 were for serving as
Compensation Committee Chairman.  One-third of the options
vest on December 23, 2010, one-third vest on December 23, 2011 and one-third
vest on December 23, 2012.





Employment
Contracts





David
Clark, Chief Executive Officer and Director





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





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





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





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





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




-35-





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





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





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





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





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





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





M.
Carolyn Ellis, Chief Financial Officer





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





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




-36-





Report on Repricing of
Options/SARs





We did
not re-price any options or SARS during the year ended December 31,
2009.




-37-





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





The
following table sets forth, as of March 15, 2010, information regarding the
beneficial ownership of our common stock based upon the most recent information
available to us for: (i) each person known by us to own beneficially more than
five (5%) percent of our outstanding common stock, (ii) each of our officers and
directors, and (iii) all of our officers and directors as a group. Unless
otherwise indicated, each of the persons listed below has sole voting and
investment power with respect to the shares beneficially owned by them. As of
March 15, 2010 there were 19,406,270shares of our common stock
outstanding.





Name
      and Address of Beneficial Owner
            
            Number
      of Common Shares Beneficially Owned(1)
            
            
            Percentage
      of Common Shares Beneficially OwnedRichard
      Dietl(2)
            
            
            8,092,264
            
            
            
            35.7
            %Syscan
      Imaging Limited(3)
            
            
            3,173,514
            
            
            
            16.4Michael
      Xirinachs(4)
            
            
            1,520,293
            
            
            
            7.8Directors
      and Executive Officers:Edward
      Straw(5)
            
            
            250,000
            
            
            
            1.3William
      Hawkins(6)
            
            
            1,598,850
            
            
            
            7.8David
      Clark(7)
            
            
            1,443,465
            
            
            
            7.1M.
      Carolyn Ellis(8)
            
            
            275,000
            
            
            
            1.4Darwin
      Hu(9)
            
            
            1,612,183
            
            
            
            7.9Jody
      Samuels(10)
            
            
            16,667
            
            
            
            *All
      Directors and Officers as a group (6 persons)
            
            
            5,196,165
            
            
            
            22.4







*Less than one percent.





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





(2)
Includes (i) 4,800,000 shares of common stock, (ii) 3,173,514 shares of common
stock issuable upon the exercise of an option granted to Mr. Dietl by Syscan
Imaging Ltd. to purchase all of the remaining shares held by Syscan Imaging
Ltd., which is currently exercisable, and (iii) 118,750 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 356,250 shares of common stock
underlying options that are not exercisable within the next 60 days. The address
for Mr. Dietl is One Penn Plaza, 50th  Floor, New York, NY 10119.





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





(4)Includes 1,520,293 shares of common stock.  The address for Mr.
Xirinachs is 425 Broadhollow Road, Melville, NY 11747.





(5)Includes 250,000 shares of common stock issuable upon the exercise of
options that are either vested or will vest within 60 days from the date hereof.
Does not include 850,000 shares of common stock underlying options granted to
Mr. Straw that are not exercisable within the next 60 days.





(6)Includes(i) 400,000 shares of common stock and
(ii) 1,198,850 shares of common stock issuable upon the exercise of options that
are either vested or will vest within 60 days from the date
hereof.  Does not include 700,000 shares of common stock underlying
options that are not exercisable within the next 60
days.





(7)
Includes (i) 500,000 shares of common stock and (ii) 943,465 shares of common
stock issuable upon the exercise of options that are either vested or will vest
within 60 days from the date hereof. Does not include 750,000 shares of common
stock underlying options that are not exercisable within the next 60
days.




-38-





(8)
Includes 275,000 shares of common stock issuable upon the exercise of options
that are either vested or will vest within 60 days from the date
hereof.  Does not include 375,000 shares of common stock underlying
options granted to Ms. Ellis that are not exercisable within the next 60
days.




(9)
Includes (i) 500,000 shares of common stock and (ii) 1,112,183 shares of common
stock issuable upon the exercise of options that are either vested or will vest
within 60 days from the date hereof.  Does not include 100,000 shares
of common stock underlying options that are not exercisable within the next 60
days.





(10)
Does not include: (i) 250,000 shares of common stock underlying options that are
not exercisable within the next 60 days, or (ii) 150,000 shares of common stock
owned by Mr. Samuels’ wife which he disclaims beneficial ownership of pursuant
to Section 13d-4 of the Securities Exchange Act of 1934, as
amended.




-39-




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





During
the year ended December 31, 2009, we entered into the following transactions
required to be reported under Item 404 of Regulation S-K (“Item
404”):





Certain
Relationships and Related Transactions





Related-Party
Purchases and Manufacturing of our Product





We
purchase the majority of our finished scanner imaging products from Shenzhen
Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH").  SST was our majority shareholder until July
2008.  As of December 31, 2009, SST held less than 20% of our
outstanding common stock.





Purchases
from SST totaled $6,546,000 and $6,816,000 for the years ended December 31, 2009
and 2008, respectively.  All purchases from SST were carried out in
the normal course of business. As a result of these purchases, we were liable to
SST for $341,000 and $393,000 at December 31, 2009 and 2008,
respectively.





Related-Party
Net Sales





During
the year ended December 31, 2009 and 2008, we recorded net sales totaling
$72,000 and $57,000, respectively, for finished scanners sold to SST, a
wholly-owned subsidiary of STH.  The related cost of goods sold was
$39,000 and $41,000 for the years ended December 31, 2009 and 2008,
respectively.  All sales to SST contained similar terms and conditions
as for other transactions of this nature entered into by us.





Revised
Consulting Agreement




In August
2009, we amended an existing consulting contract, originally entered in July
2008, with one of our shareholders who owns more than 5% of our outstanding
stock. The amendment called for us to make a one-time cash payment of $30,000,
and for the consultant to return to us 275,000 of non-qualified stock options,
at an exercise price of $0.30 per share, to purchase shares of our common stock.
Stock options were originally granted to the shareholder in July 2008. All other
terms of the original contract remain in effect.





Legal
Services Agreement





On
September 15, 2009, we entered into a legal services agreement with Jody R.
Samuels, a director of the Company.  Pursuant to the agreement, Mr. Samuels
will provide certain legal services to us, which will consist of assisting the
Company in (i) the preparation of its periodic and other filings with the
Securities and Exchange Commission (“SEC”), including proxy statements, special
and annual meetings of shareholders, (ii) the negotiation of financing and
corporate development transactions, (iii) preparation and review of
documentation related to financing arrangements and corporate development
transactions, (iv) preparing registration statements, and responding to any SEC
inquiries/comment letters, (v) documenting corporate governance policies and
procedures, and (vi) any other legal matters reasonably within the legal
expertise of Mr. Samuels.





Pursuant
to the Agreement, Mr. Samuels is paid $4,000 per month and for the year ended
December 31, 2009 was paid a total of $14,000.  The Agreement may be
cancelled by either party with 30 days prior written notice.





DirectorIndependence





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





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





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





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




-40-





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





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




Fee
      Category
            
            Year
      Ended December 31, 2009
            
            
            Year
      Ended December 31, 2008Audit
      fees
            
            $
            105,510
            
            
            $
            159,675Audit-related
      fees
            
            
            -
            
            
            
            -Tax
      fees
            
            
            14,448
            
            
            
            4,350All
      other fees
            
            
            -
            
            
            
            -





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





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





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





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





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





During
the years ended December 31, 2009 and 2008, our Board of Directors had a policy
of pre-approving all audit and permissible non-audit services provided by the
independent auditors.  These services may include audit services,
audit-related services, tax services, and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to the Board of Directors regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. The Board of Directors may also
pre-approve particular services on a case-by-case basis.





-41-




ITEM
15.  EXHIBITS





Exhibit
      Number
            
            Description
      of Exhibit
            
            Method
      of Filing2.1
            
            Share
      Exchange Agreement by and among Bankengine Technologies, Inc., Michael
      Xirinachs, Syscan Inc. and Syscan Imaging Limited
            
            Incorporated
      by reference to Exhibit 99.1 to Form 8-K as filed April 19,
      20043.1
            
            Certificate
      of Incorporation, dated February 15, 2002
            
            Incorporated
      by reference to Exhibit 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 to Exhibit 3.2 to Form 10-KSB as filed March 31,
      20053.4
            
            Amended
      and Restated Bylaws
            
            Incorporated
      by reference to Exhibit 3.4 to Form 10-KSB as filed March 31,
      20053.5
            
            Certificate
      of Amendment to the Company's Certificate of Incorporation dated June 23,
      2006
            
            Incorporated
      by reference to Exhibit 3.5 to Form 10-QSB as filed August 21,
      20063.6
            
            Certificate
      of Designation of Preferences, Rights and Limitations of Series B Stock as
      filed with the Secretary of State of the State of Delaware on June 10,
      2006
            
            Incorporated
      by reference to Exhibit 10.4 to Form 8-K as filed August 14,
      200610.1
            
            Form
      of Series B Convertible Preferred Stock and Common Stock Warrant Purchase
      Agreement entered into by and between the Company and the
      purchasers
            
            Incorporated
      by reference to Exhibit 10.1 to Form 8-K as filed August 14,
      200610.2
            
            Form
      of Common Stock Purchase Warrant
            
            Incorporated
      by reference to Exhibit 10.2 to Form 8-K as filed August 14,
      200610.3
            
            Form
      of Registration Rights Agreement
            
            Incorporated
      by reference to Exhibit 10.3 to Form 8-K as filed August 14,
      200610.4
            
            Loan
      and Security Agreement by and among Silicon Valley Bank, the Company and
      Syscan Inc. dated September 13, 2007
            
            Incorporated
      by reference to Exhibit 10.1 to Form 8-K as filed September 19,
      200710.5
            
            Cross
      Corporate Continuing Guarantee by the Company and Syscan Inc. in favor of
      Silicon Valley Bank dated September 13, 2007
            
            Incorporated
      by reference to Exhibit 10.2 to Form 8-K as filed September 19,
      200710.6
            
            Shares
      Buy-back Agreement between the Company and Syscan Imaging
      Limited
            
            Incorporated
      by reference to Exhibit 10.1 to Form 10-QSB as filed November 14,
      200710.7
            
            Loan
      Agreement entered into by and between the Company and Montage Capital, LLC
      on September 27, 2007
            
            Incorporated
      by reference to Exhibit 10.2 to Form 10-QSB as filed November 14,
      200710.8
            
            Warrant
      to Purchase Stock to Montage Capital, LLC
            
            Incorporated
      by reference to Exhibit 10.3 to Form 10-QSB as filed November 14,
      200710.9
            
            Warrant
      to Purchase Stock to North Atlantic Resources Limited
            
            Incorporated
      by reference to Exhibit 10.4 to Form 10-QSB as filed November 14,
      200710.10
            
            2002
      Amended and Restated Stock Option Plan
            
            Incorporated
      by reference to Exhibit 10.4 to Form 10-KSB as filed March 31,
      200510.11
            
            2006
      Stock Option Plan
            
            Incorporated
      by reference to Exhibit 10.8 to Form 10-QSB as filed August 21,
      200610.12
            
            2009
      Stock Option Plan
            
            Filed
      herewith10.13
            
            Form
      of Loan and Security Agreement dated September 14, 2009 by and between
      Bridge Bank, National Association, Document Capture Technologies, Inc. and
      Syscan, Inc.
            
            Incorporated
      by reference to Exhibit 10.1 to Form 8-K as filed September 16,
      200910.14
            
            Form
      of Warrant dated September 14, 2009 between Document Capture Technologies,
      Inc. and Bridge Bank, National Association
            
            Incorporated
      by reference to Exhibit 10.2 to Form 8-K as filed September 16,
      2009




-42-




Exhibit
      Number
            
            Description
      of Exhibit
            
            Method
      of Filing10.15
            
            Form
      of Loan and Security Agreement dated March 10, 2010 by and between Bridge
      Bank, National Association, Document Capture Technologies, Inc. and
      Syscan, Inc.
            
            Filed
      herewith10.16
            
            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,
    200510.17
            
            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,
    200510.18
            
            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 as filed November 7,
      200710.19
            
            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 as filed January 23,
      200810.20
            
            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,
      200810.21
            
            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,
      200810.22
            
            Addendum
      to Employment Agreement dated February 26, 2008 by and between the
      Document Capture Technologies, Inc. and David Clark
            
            Incorporated
      by reference to Exhibit 10.3 to form 8-K as filed March 3,
      200810.23
            
            Addendum
      to Employment Agreement entered between the Company and William Hawkins
      dated July 15, 2008
            
            Incorporated
      by reference to Exhibit 10.3 to  Form 8-K as filed July 21,
      200910.24
            
            Addendum
      to Employment Agreement entered between the Company and David P. Clark
      dated July 15, 2008
            
            Incorporated
      by reference to Exhibit 10.2 to  Form 8-K as filed July 21,
      200910.25
            
            Addendum
      to Employment Agreement entered between the Company and M. Carolyn Ellis
      dated July 15, 2008
            
            Incorporated
      by reference to Exhibit 10.4 to  Form 8-K as filed July 21,
      200910.26
            
            Stock
      Option Agreement between the Company and William M. Hawkins dated April
      26, 2005
            
            Incorporated
      by reference to Exhibit 10.21 to Form 10-K as filed April 15,
      200910.27
            
            Stock
      Option Agreement between the Company and David P. Clark dated April 26,
      2005
            
            Incorporated
      by reference to Exhibit 10.22 to Form 10-K as filed April 15,
      200910.28
            
            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 as filed November 7,
      200710.29
            
            Stock
      Option Agreement between the Company and Edward Straw dated July 15,
      2008
            
            Incorporated
      by reference to Exhibit 10.24 to Form 10-K as filed April 15,
      200910.30
            
            Lease
      Agreement by and between the Company and Airport II Property Management,
      LLC most recently amended on March 24, 2008
            
            Incorporated
      by reference to Exhibit 10.25 to Form 10-K as filed April 15,
      200914.1
            
            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,
      2008




-43-




Exhibit
      Number
            
            Description
      of Exhibit
            
            Method
      of Filing21
            
            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
      herewith99.1
            
            Audit
      Committee Charter of Document Capture Technologies as adopted March 31,
      2009
            
            Incorporated
      by reference to Exhibit 99.1 to form 10-K as filed April 15,
      200999.2
            
            Compensation
      Committee Charter of Document Capture Technologies as adopted December 17,
      2009
            
            Filed
      herewith





-44-




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 31,
      2010David
      P. Clark
                
                (Principal
      Executive Officer)




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





Signature
              
              Title
              
              Date/s/ David P.
      Clark
              
              Chief
      Executive Officer and Director
              
              March 31,
      2010David
      P. Clark
              
              (Principal
      Executive Officer)/s/ William
      Hawkins                                           .
              
              President,
      Chief Operating Officer,
              
              March 31,
      2010William
      Hawkins
              
              Secretary
      and Director/s/Edward
      Straw
              
              Chairman
              
              March 31,
      2010Edward
      Straw/s/ Jody R.
      Samuels
              
              Director
              
              March 31,
      2010Jody
      R. Samuels/s/Darwin
      Hu
              
              Director
              
              March 31,
      2010Darwin
      Hu/s/M.
      Carolyn Ellis
              
              Chief
      Financial Officer
              
              March 31,
      2010M.
      Carolyn Ellis
              
              (Principal
      Financial Officer)





-45-




Item
8.  FINANCIAL STATEMENTS





Index to Consolidated
Financial Statements





PageFinancial
      Statements:Report
      of Independent Registered Public Accounting Firm
            
            F-2Consolidated
      Balance Sheets
            
            F-3Consolidated
      Statements of Operations
            
            F-4Consolidated
      Statements of Stockholders’ Equity (Deficit)
            
            F-5Consolidated
      Statements of Cash Flows.
            
            F-6Notes
      to the Consolidated Financial Statements
            
            F-7





F-1




Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders


Document
Capture Technologies, Inc.





We have
audited the accompanying consolidated balance sheets of Document Capture
Technologies, Inc. and subsidiary as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity (deficit),
and cash flows for the years then ended.  These consolidated 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.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





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





We were
not engaged to examine management’s assessment of the effectiveness of Document
Capture Technologies, Inc.’s internal control over financial reporting as of
December 31, 2009, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting and, accordingly, we do not express an
opinion thereon.




HEIN
& ASSOCIATES LLP




Irvine,
California


March 31,
2010





F-2




DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(in
thousands)





December
      31,
                2009
            
            
            December
      31,
                2008ASSETSCurrent assets:Cash
      and cash equivalents
            
            $
            328
            
            
            $
            405Trade
      receivables
            
            
            1,497
            
            
            
            1,366Inventories,
      net
            
            
            1,674
            
            
            
            1,353Income
      tax receivable
            
            
            65
            
            
            
            -Prepaid
      expenses and other current assets
            
            
            67
            
            
            
            99Total
      current assets
            
            
            3,631
            
            
            
            3,223Restricted
      cash
            
            
            5
            
            
            
            -Fixed
      assets, net
            
            
            176
            
            
            
            98Total
    assets
            
            $
            3,812
            
            
            $
            3,321LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Line
      of credit
            
            $
            202
            
            
            $
            -Trade
      payables to related parties
            
            
            341
            
            
            
            393Trade
      payables and other accrued expenses
            
            
            440
            
            
            
            276Accrued
      compensation and benefits
            
            
            124
            
            
            
            122Income
      taxes payable
            
            
            -
            
            
            
            75Deferred
      revenue and customer deposits
            
            
            111
            
            
            
            187Fair
      value of warrant liability
            
            
            -
            
            
            
            350Total
      current liabilities
            
            
            1,218
            
            
            
            1,403Liability
      under derivative contracts
            
            
            -
            
            
            
            9Total
      liabilities
            
            
            1,218
            
            
            
            1,412Commitments
      and contingencies (Note 11)Series
      B convertible preferred stock, $.001 par value, 2,000 authorized,0
      and 1.5 shares issued and outstanding at December 31, 2009 and
      2008,respectively;
      liquidation value of $0 and $150 at December 31, 2009 and2008,
      respectively
            
            
            -
            
            
            
            120Stockholders’
      equity:Common
      stock $.001par value, 50,000 authorized, 19,406 and 18,444
      sharesissued
      and outstanding at December 31, 2009 and 2008,
respectively
            
            
            19
            
            
            
            18Additional
      paid-in capital
            
            
            35,697
            
            
            
            34,602Accumulated
      deficit
            
            
            (33,122
            )
            
            
            (32,831
            )Total
      stockholders’ equity
            
            
            2,594
            
            
            
            1,789Total
      liabilities and stockholders’ equity
            
            $
            3,812
            
            
            $
            3,321




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




F-3





DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except per share amounts)





Years
      Ended December 31,2009
            
            
            2008Net
      sales
            
            $
            11,529
            
            
            $
            11,643Cost
      of sales
            
            
            6,936
            
            
            
            7,696Gross
      profit
            
            
            4,593
            
            
            
            3,947Operating
      expenses:Selling,
      general and administrative
            
            
            3,880
            
            
            
            3,465Research
      and development
            
            
            1,013
            
            
            
            712Total
      operating expenses
            
            
            4,893
            
            
            
            4,177Operating
      loss
            
            
            (300
            )
            
            
            (230
            )Non-operating
      income (expense):Change
      in fair value of derivative instruments and warrant
    liability
            
            
            9
            
            
            
            131Gain
      on sale of assets
            
            
            -
            
            
            
            550Interest
      income
            
            
            1
            
            
            
            3Interest
      expense
            
            
            (54
            )
            
            
            (432
            )Other
            
            
            9
            
            
            
            3Total
      non-operating income (expense)
            
            
            (35
            )
            
            
            255Net
      income (loss) before income taxes
            
            
            (335
            )
            
            
            25Provision
      (benefit) for income taxes
            
            
            (74
            )
            
            
            77Net
      loss
            
            
            (261
            )
            
            
            (52
            )Accretion
      of preferred stock redemption value
            
            
            (30
            )
            
            
            (126
            )Preferred
      stock dividends
            
            
            -
            
            
            
            (13
            )Deemed
      dividend on preferred stock
            
            
            -
            
            
            
            (231
            )Net
      loss available to common stockholders
            
            $
            (291
            )
            
            $
            (422
            )Net
      loss available to common stockholders per common share –basic
      and diluted
            
            $
            (0.02
            )
            
            $
            (0.02
            )Weighted
      average common shares outstanding – basic and diluted
            
            
            18,775
            
            
            
            17,950





The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4





DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


(in
thousands)




Common
      Stock
            
            
            Additional
              Paid-in
            
            
            Accumulated
            
            
            Total
              Stockholders’
              EquityShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            (Deficit)Balances
      at December 31, 2007
            
            
            15,404
            
            
            $
            15
            
            
            $
            32,129
            
            
            $
            (32,409
            )
            
            $
            (265
            )Issuance
      of common stock upon conversion of preferred stock
            
            
            1,844
            
            
            
            2
            
            
            
            1,339
            
            
            
            -
            
            
            
            1,341Deemed
      dividend on Series A preferred stock maturity and conversion to common
      stock
            
            
            -
            
            
            
            -
            
            
            
            231
            
            
            
            (231
            )
            
            
            -Stock
      based compensation cost options
            
            
            -
            
            
            
            -
            
            
            
            602
            
            
            
            -
            
            
            
            602Issuance
      of common stock upon cashless exercise of stock options
            
            
            646
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of common stock upon exercise of stock options
            
            
            800
            
            
            
            1
            
            
            
            7
            
            
            
            -
            
            
            
            8Cancellation
      of common stock for non-performance of contract
            
            
            (250
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Fair
      value of common stock warrants issued for services
rendered
            
            
            -
            
            
            
            -
            
            
            
            294
            
            
            
            -
            
            
            
            294Accretion
      of preferred stock redemption value
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (126
            )
            
            
            (126
            )Preferred
      stock dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (13
            )
            
            
            (13
            )Comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (52
            )
            
            
            (52
            )Balances
      at December 31, 2008
            
            
            18,444
            
            
            
            18
            
            
            
            34,602
            
            
            
            (32,831
            )
            
            
            1,789Fair
      value of common stock and common stock warrants issued for services
      rendered
            
            
            25
            
            
            
            -
            
            
            
            111
            
            
            
            -
            
            
            
            111Stock
      based compensation cost options
            
            
            -
            
            
            
            -
            
            
            
            525
            
            
            
            -
            
            
            
            525Accretion
      of preferred stock redemption value
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (30
            )
            
            
            (30
            )Conversion
      of common stock warrants to common stock
            
            
            750
            
            
            
            1
            
            
            
            349
            
            
            
            -
            
            
            
            350Conversion
      of preferred stock to common stock
            
            
            187
            
            
            
            -
            
            
            
            75
            
            
            
            -
            
            
            
            75Issuance
      of common stock warrants in connection with debt
            
            
            -
            
            
            
            -
            
            
            
            35
            
            
            
            -
            
            
            
            35Comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (261
            )
            
            
            (261
            )Balances
      at December 31, 2009
            
            
            19,406
            
            
            $
            19
            
            
            $
            35,697
            
            
            $
            (33,122
            )
            
            $
            2,594





The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5





DOCUMENT CAPTURE TECHNOLOGIES, INC. AND
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)




Years
      Ended December 31,2009
            
            
            2008Operating
      activitiesNet
      loss
            
            $
            (261
            )
            
            $
            (52
            )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
            
            
            58
            
            
            
            47Fair
      value of common stock and common stock warrants issued forservices
      rendered
            
            
            111
            
            
            
            294Stock
      based compensation cost options
            
            
            525
            
            
            
            602Change
      in fair value of derivative instruments and warrant
    liability
            
            
            (9
            )
            
            
            (131
            )Interest
      expense attributable to amortization of debt issuance
costs
            
            
            18
            
            
            
            311Gain
      on sale of assets
            
            
            -
            
            
            
            (550
            )Loss
      on disposal of assets and other non-cash non-operating
      expenses
            
            
            -
            
            
            
            13Changes
      in operating assets and liabilities:Trade
      receivables
            
            
            (131
            )
            
            
            1,098Inventories
            
            
            (321
            )
            
            
            47Prepaid
      expenses and other
            
            
            (69
            )
            
            
            (67
            )Trade
      payables to related parties
            
            
            (52
            )
            
            
            (185
            )Trade
      payables and other accrued expenses
            
            
            164
            
            
            
            (293
            )Accrued
      compensation and benefits
            
            
            2
            
            
            
            33Income
      taxes payable
            
            
            (75
            )
            
            
            75Deferred
      revenue and customer deposits
            
            
            (76
            )
            
            
            187Cash
      (used) provided by operating activities
            
            
            (116
            )
            
            
            1,429Investing
      activitiesCash
      proceeds from sale of assets
            
            
            -
            
            
            
            550Capital
      expenditures
            
            
            (91
            )
            
            
            (31
            )Cash
      (used) provided by investing activities
            
            
            (91
            )
            
            
            519Financing
      activitiesNet
      advances(payments) on bank line of credit
            
            
            225
            
            
            
            (2,021
            )Deferred
      financing costs
            
            
            (20
            )
            
            
            -Principal
      payments on notes payable
            
            
            -
            
            
            
            (1,300
            )Cash
      paid upon the maturity of preferred stock
            
            
            (75
            )
            
            
            -Proceeds
      from exercise of common stock options
            
            
            -
            
            
            
            8Cash
      provided (used) by financing activities
            
            
            130
            
            
            
            (3,313
            )Decrease
      in cash and cash equivalents
            
            
            (77
            )
            
            
            (1,365
            )Cash
      and cash equivalents at beginning of year
            
            
            405
            
            
            
            1,770Cash
      and cash equivalents at end of year
            
            $
            328
            
            
            $
            405Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            31
            
            
            $
            137Income
      taxes, net of refunds
            
            $
            67
            
            
            $
            2Non-cash
      investing and financing activities:Conversion
      of warrants to common stock
            
            $
            350
            
            
            $
            -Conversion
      of convertible preferred stock to common stock
            
            $
            75
            
            
            $
            1,341Issuance
      of common stock warrants in connection with debt
            
            $
            35
            
            
            $
            -Transfer
      of tooling equipment deposits to fixed assets
            
            $
            45
            
            
            $
            -





The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6




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


Note
1 – Organization and Significant Accounting Policies





Organization





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





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





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





·
            Bank
      note and check verification (remote capture deposit or
    “RDC”);


·
            Document
      and information management;


·
            Identification
      card scanners;


·
            Passport
      security scanners;


·
            Business
      card readers;


·
            Barcode
      scanning; and


·
            Optical
      mark readers used in lottery
terminals.





Basis
of Financial Statements





The
consolidated financial statements include the accounts of DCT and its one
subsidiary, Syscan.  All significant intercompany transactions and
balances have been eliminated.  DCT’s functional currency is the
United States (U.S.) dollar.  As such, DCT does not have any
translation adjustments.  Monetary accounts denominated in non-U.S.
currencies, such as cash or payables to vendors, have been re-measured to the
U.S. dollar.  Gains and losses resulting from foreign currency
transactions are included in the results of operations.  To date, DCT
has not entered into hedging activities to offset the impact of foreign currency
fluctuations.




The
Company has evaluated subsequent events up through the date of the filing of
this report with the SEC.  See Note 14.





Use
of Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes its best estimate of the ultimate outcome for
these items based on historical trends and other information available when the
financial statements are prepared. Changes in estimates are recognized in
accordance with the accounting rules for the estimate, which is typically in the
period when new information becomes available to management.  Actual
results could differ from those estimates.





Cash
and Cash Equivalents





Cash and
cash equivalents consist of cash and highly liquid investments.  DCT
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.  DCT had no cash equivalents at
December 31, 2009 or 2008.





F-7
 
 DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Deferred Financing
Costs





Deferred
financing costs, which are included in other current assets, are costs incurred
to obtain debt financing, including all related fees, and are amortized as
interest expense over the term of the related financing using the straight-line
method which approximates the interest rate method.  See Note
9.





Restricted
Cash





As of
December 31, 2009, the Company had $5,000 of restricted cash held at a
commercial bank, which is collateral for the Company’s customer credit card
acceptance program.  The cash collateral account is restricted until
DCT closes its credit card acceptance account.





Fair
Value of Financial Instruments





Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability in the principal or most advantageous market in an
orderly transaction between market participants at the measurement
date.





According
to the Fair Value Topic of the FASB Accounting Standards Codification, there are
three levels of inputs that may be used to measure fair value:




Level 1. Quoted
prices in active markets for identical assets or liabilities.  DCT had
no Level 1 assets or liabilities during any period presented.





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





Level 3.  Unobservable
inputs to the valuation methodology that are significant to the measurement of
the fair value of assets or liabilities.  DCT had no Level 3
assets.  Level 3 liabilities include (i) warrant and (ii) derivative
contracts liabilities.  DCT estimates the fair value of Level 3
liabilities using the Black-Scholes valuation model.  During the year
ended December 31, 2009, DCT’s Level 3 liabilities either matured or converted
to equity.  As such, DCT had no Level 3 liabilities at December 31,
2009.




The
carrying value of cash and cash equivalents, trade receivables and payables,
prepaid expenses and other current assets, amounts due to related parties, and
other payables and liabilities approximates fair value due to the short period
of time to maturity.





Concentration
of Credit Risk and Major Customers





Financial
instruments that subject DCT to credit risk are cash balances maintained in
excess of federal depository insurance limits and trade
receivables.





Cash and Cash
Equivalents.  DCT
maintains cash balances at several banks. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As
of December 31, 2009, DCT had consolidated balances of approximately $98,000,
which were not guaranteed by FDIC. DCT has not experienced any losses in such
accounts and believes the exposure is minimal.





F-8
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Major Customers and Trade
Receivables.  A relatively small number of customers account
for a significant percentage of DCT’s sales.  The percentage of sales
derived from significant customers is as follows:





Year
      Ended December 31,2009
            
            
            2008Customer
      A
            
            
            19
            %
            
            
            19
            %Customer
      B
            
            
            19
            
            
            
            11Customer
      C
            
            
            16
            
            
            
            13Customer
      D
            
            
            10
            
            
            
            27Customer
      E
            
            
            **
            
            
            
            12




**Represents
less than 10% of sales.





Trade
receivables from these customers totaled $830,000 at December 31,
2009.  As of December 31, 2009 all DCT’s trade receivables were
unsecured.  The risk with respect to trade receivables is mitigated by
credit evaluations performed on customers and the short duration of payment
terms extended to customers.





Concentration
of Supplier Risk





Manufacturing.  Historically,
DCT has purchased substantially all its finished scanner imaging products from
one vendor that is also a wholly-owned subsidiary of the parent company of DCT’s
former majority stockholder.  See Notes 3 and 14.  If this
vendor became unable to provide materials in a timely manner and DCT was unable
to find alternative vendors, DCT’s business, operating results and financial
condition would be materially adversely affected.





Components.  DCT
purchases some controller chips that are sole-sourced, as they are specialized
devices.  To date, DCT has been able to obtain adequate component
supplies from existing sources.  If in the future DCT became unable to
obtain sufficient quantities of required materials, components or subassemblies,
or if such items do not meet quality standards, delays or reductions in product
shipments could occur, which could harm DCT’s business, operating results and
financial condition.





Inventories





Inventories
consist of finished goods and components, which are stated at the lower of cost
or net realizable value, with cost computed on a first-in, first-out basis.
Provision is made for obsolete, slow-moving or defective items where
appropriate. The amount of any provision is recognized as a component of cost of
sales in the period the provision occurs.  DCT had no material
inventory write offs during the years ended December 31, 2009 or
2008.





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.





Impairment
of Long-Lived Assets





In
accordance with the Accounting for the Impairment or Disposal of Long-Lived
Assets of the FASB Accounting Standards Codification, 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’ fair value.  DCT had no impairment
losses during the years ended December 31, 2009 and 2008.





F-9
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Preferred
Stock Accounting Treatment





Preferred Stock
Classification.   DCT’s series A 5% cumulative convertible
redeemable preferred stock (“Series A Stock”), which matured March 15, 2008, and
series B convertible redeemable preferred stock (“Series B Stock”), which
matured August 7, 2009, were reported as temporary equity.





The
difference between the initial recorded value of the Series A Stock and Series B
Stock and the minimum redemption value was accreted, on a straight-line basis,
from the respective issuance date through the maturity date with the offset
booked to DCT’s accumulated deficit.  The accretion of DCT’s Series A
Stock and Series B Stock redemption value is disclosed as a reconciling item and
adjusts DCT’s reported net income (loss), together with the Series A Stock
dividends and deemed dividends, to net income (loss) available to common
stockholders.





Embedded
Derivative.  As required by the Derivative Instruments and
Hedging Topic of the FASB Accounting Standards Codification, the conversion
features of DCT’s Series A Stock and Series B Stock were derivative instruments
(referred to collectively as “Derivative Instruments”) that required bifurcation
from the host contract.  Accordingly, the fair value of DCT’s
outstanding Derivative Instruments was recorded in DCT’s Balance Sheet as a
liability.  The fair value of the Derivative Instruments was adjusted
at each reporting date.  Decreases in the estimated fair value of
DCT’s Derivative Instruments were recorded as non-operating income on DCT’s
Statements of Operations.





DCT
estimated the fair value of these derivatives using the Black-Scholes valuation
model. The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. The Black-Scholes valuation model requires the input of highly
subjective assumptions, including the expected stock price volatility. DCT’s
Derivative Instruments have characteristics significantly different from traded
options, and the input assumptions used in the model can materially affect the
fair value estimate.   As of December 31, 2009, all of the host
contracts had matured and DCT had no outstanding Derivative
Instruments.  As of December 31, 2008, the fair value of DCT’s
Derivative Instruments was determined under the following
assumptions:





Series
      B Stock remaining contractual term (years)
            
            
            0.6Expected
      volatility
            
            
            111
            %Expected
      dividend yield
            
            
            -Risk
      free interest rate
            
            
            0.3
            %





See
further discussion and disclosure of fair value at Note 7.





Revenue
Recognition, Allowance for Doubtful Accounts and Returns Allowances





Revenues.  Revenues
consist of product sales including the sale of optical image capturing devices,
modules of optical image capturing devices, and chips and other optoelectronic
products. Revenue is recognized when the product is shipped and the risks and
rewards of ownership have transferred to the customer. Shipping charges billed
to customers are included in net sales and the related shipping costs are
included in cost of sales, separately, in the period of shipment.





Allowance for doubtful
accounts.  DCT presents trade receivables, net of allowances
for doubtful accounts and returns, to ensure trade receivables are not
overstated due to uncollectible accounts. Allowances, when required, are
calculated based on a detailed review of certain individual customer accounts
and an estimation of the overall economic conditions affecting DCT’s customer
base. DCT reviews a customer’s credit history before extending credit. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. DCT had no allowance for doubtful accounts as of December 31, 2009 or
2008 and no material trade receivable write offs during any period
presented.





Returns
allowances.  Historically, sales returns have not been
significant.  As such, DCT does not record a reduction to revenue for
estimated product returns in the same period that the related revenue is
recorded.  DCT’s returns were immaterial for all periods
presented.





F-10
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Sales
Incentives





In
certain instances, DCT offers sales incentives whereby DCT gives customers
additional product for certain volume-related purchases.  DCT records
the cost of the product-related sales incentives as a cost of sales during the
period the incentive is earned.





Product
Warranty





As
previously discussed, DCT purchases the majority of its finished scanner imaging
product from one vendor, who warrants the products it manufactures for us
against defects in material and workmanship for a period of 18 months after the
completion of manufacture. As a result of such product warranty, DCT does not
record a product warranty reserve.DCT’s
warranty-related expenses were immaterial for all periods
presented.





Research
and Development Expenses





Research
and development costs are expensed as incurred.





Advertising
Costs





Advertising
costs are expensed as incurred and were immaterial for all periods
presented.





Employee
Equity Incentive Programs





DCT has
employee equity incentive plans, which are described more fully in “Note 4:
Employee Equity Incentive Plans.”  The straight-line attribution
method is used to recognize share-based compensation over the service period of
the award.





DCT
estimates the fair value of the options on the grant date using the
Black-Scholes valuation model under the following assumptions:





Year
      Ended December 31,2009
            
            
            2008Weighted
      average expected option life in years
            
            
            3.0
            
            
            
            3.5Weighted
      average expected volatility
            
            
            298
            %
            
            
            259
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %Weighted
      average risk free interest rate
            
            
            1.49
            %
            
            
            2.8
            %





Income
Taxes





DCT
accounts for income taxes under the liability method of accounting for income
taxes in accordance with the FASB Accounting Standards
Codification.  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.





Net
Loss Per Share





Basic net
loss per share is computed by dividing net loss available to common shareholders
by the weighted average number of shares of common stock outstanding during the
period.  Diluted net loss per share is computed by dividing net loss
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.  As DCT incurred net losses
for all periods presented, common stock equivalents of 2,461,000 and 2,569,000
for the years ended December 31, 2009 and 2008, respectively, were excluded from
diluted net loss per share as their effect would be anti-dilutive.  As
a result, for all periods presented, DCT’s basic and diluted net loss per share
is the same.




F-11


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


Note
2 – Recent Accounting Pronouncements





In March
2008, the FASB issued amended standards for disclosures about derivative
instruments and hedging activities, which requires enhanced disclosure related
to derivatives and hedging activities and thereby seeks to improve the
transparency of financial reporting. Under the amended standards, entities are
required to provide enhanced disclosures relating to: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedge
items are accounted for; and (c) how derivative instruments and related hedge
items affect an entity’s financial position, financial performance, and cash
flows.  These amended standards were adopted by DCT on January 1,
2009.   The adoption had no impact on DCT’s consolidated
financial statements as of or for the reporting period ending December 31,
2009.





In May
2008, the FASB issued amended standards for the accounting for convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement).  The amended standards require the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. These amended standards were adopted by DCT
on January 1, 2009.   The adoption had no impact on DCT’s
consolidated financial statements as of or for the reporting period ending
December 31, 2009.





In June
2008, the FASB issued amended standards for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity’s own stock,
and mandates a two-step evaluation process.   DCT adopted the
amended standards on January 1, 2009.   The adoption had no
impact on DCT’s consolidated financial statements as of or for the reporting
period ending December 31, 2009.





In
August 2009, the FASB issued amended standards for the fair value
measurement of liabilities. These amended standards clarify that, in
circumstances in which a quoted price in an active market for the identical
liability is not available, DCT is required to use one of the following: the
quoted price of the identical liability when traded as an asset, quoted prices
for similar liabilities, or quoted prices for similar liabilities when traded as
assets. If these quoted prices are not available, DCT will be required to use
another valuation technique, such as an income approach or a market
approach.  DCT adopted these amended standards during the fourth quarter of
fiscal year 2009.  The adoption had no impact on DCT’s consolidated
financial statements as of or for the reporting period ending December 31,
2009.





In
October 2009, the FASB issued new standards for revenue recognition with
multiple deliverables. These new standards impact the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration.  These new standards are effective
for fiscal years beginning on or after June 15, 2010; however, early adoption is
permitted.  DCT does not expect these new standards to significantly impact
its consolidated financial statements.





In
October 2009, the FASB issued new standards for the accounting for certain
revenue arrangements that include software elements. These new standards amend
the scope of pre-existing software revenue guidance by removing from the
guidance non-software components of tangible products and certain software
components of tangible products. These new standards are required to be adopted
in the first quarter of 2011; however, early adoption is permitted. DCT does not
expect these new standards to significantly impact its consolidated financial
statements.





In
January 2010, the FASB issued amended standards that require additional fair
value disclosures. These amended standards require disclosures about inputs and
valuation techniques used to measure fair value as well as disclosures about
significant transfers, beginning in the first quarter of 2010. Additionally,
these amended standards require presentation of disaggregated activity within
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), beginning in the first quarter of 2011. DCT does not expect
these new standards to significantly impact its consolidated financial
statements.





F-12
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Note
3 – Related-Party Transactions





Related-Party
Purchases





Historically,
the Company has purchased the majority of its finished scanner imaging products
from Shenzhen Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan
Technology Holdings Limited (“STH”).  SST was DCT’s majority
shareholder until July 2008.  As of December 31, 2009, SST held less
than 20% of DCT’s outstanding common stock.





Purchases
from SST totaled $6,546,000 and $6,816,000 for the years ended December 31, 2009
and 2008, respectively.  All purchases from SST were carried out in
the normal course of business. As a result of these purchases, DCT was liable to
SST for $341,000 and $393,000 at December 31, 2009 and 2008,
respectively.





Related-Party
Net Sales





During
the year ended December 31, 2009 and 2008, DCT recorded net sales totaling
$72,000 and $57,000, respectively, for finished scanners sold to SST, a
wholly-owned subsidiary of STH.  The related cost of goods sold was
$39,000 and $41,000 for the years ended December 31, 2009 and 2008,
respectively.  All sales to SST contained similar terms and conditions
as for other transactions of this nature entered into by DCT.





Revised
Consulting Agreement




In August
2009, DCT amended an existing consulting contract, originally entered in July
2008, with one of its shareholders who owns more than 5% of DCT’s outstanding
stock. The amendment called for DCT to make a one-time cash payment of $30,000,
and for the consultant to return to DCT 275,000 of non-qualified stock options,
at an exercise price of $0.30 per share, to purchase shares of DCT common stock.
Stock options were originally granted to the shareholder in July 2008. All other
terms of the original contract remain in effect.





Legal
Services Agreement





On
September 15, 2009, DCT entered into a legal services agreement with Jody R.
Samuels, a director of the Company.  Pursuant to the agreement Mr. Samuels
will provide certain legal services to us which will consist of assisting the
Company in (i) the preparation of its periodic and other filings with the
Securities and Exchange Commission (“SEC”), including proxy statements, special
and annual meetings of shareholders, (ii) the negotiation of financing and
corporate development transactions, (iii) preparation and review of
documentation related to financing arrangements and corporate development
transactions, (iv) preparing registration statements, and responding to any SEC
inquiries/comment letters, (v) documenting corporate governance policies and
procedures, and (vi) any other legal matters reasonably within the legal
expertise of Mr. Samuels.





Pursuant
to the Agreement, Mr. Samuels is paid $4,000 per month for a total of $14,000
for the year ended December 31, 2009.  The Agreement may be cancelled by
either party with 30 days prior written notice.





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


Stock
Options





DCT
issues options under three different stock option plans (all 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).  Options generally vest over three years from the date of
grant and expire seven years from the date of grant





The
following table sets forth, by the respective option plan, certain aspects of
DCT’s stock options as of December 31, 2009:





Option
      Approval Method
            
            
            Options
      Outstanding and Options AvailableDescription
            
            Board
      of Directors
            
            
            Board
      of Directors and Shareholders
            
            
            Total
            
            
            Outstanding
            
            
            Available
      For Future Grant
            
            
            Total2002
      Amended and
              Restated
      Stock Option
              Plan
            
            
            -
            
            
            
            3,200,000
            
            
            
            3,200,000
            
            
            
            3,200,000
            
            
            
            -
            
            
            
            3,200,0002006
      Stock Option Plan
            
            
            -
            
            
            
            2,500,000
            
            
            
            2,500,000
            
            
            
            2,500,000
            
            
            
            -
            
            
            
            2,500,0002009
      Stock Option Plan (1)
            
            
            -
            
            
            
            1,500,000
            
            
            
            1,500,000
            
            
            
            1,039,333
            
            
            
            460,667
            
            
            
            1,500,000Key
      Personnel Option Grants
            
            
            6,375,000
            
            
            
            -
            
            
            
            6,375,000
            
            
            
            4,616,165
            
            
            
            -
            
            
            
            4,616,1656,375,000
            
            
            
            7,200,000
            
            
            
            13,575,000
            
            
            
            11,355,498
            
            
            
            460,667
            
            
            
            11,816,165


(1)Approved
at DCT’s 2009 Annual Shareholders’ Meeting held on September 14,
2009.





Stock-Based
Compensation





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





Year
      Ended December 31,2009
            
            
            2008Selling,
      general and administrative
            
            $
            450
            
            
            $
            486Research
      and development
            
            
            75
            
            
            
            116$
            525
            
            
            $
            602





At
December 31, 2009, DCT had approximately $1,566,000 of total unrecognized
compensation cost related to unvested stock options. This cost is expected to be
recognized over a weighted-average period of approximately 2.5
years.





Stock
Option Activity and Outstanding





Additional
information with respect to stock option activity is as follows:





Options
            
            
            Weighted-Average
      Exercise PriceOutstanding
      at December 31, 2007
            
            
            6,847,550
            
            
            $
            0.34Granted
            
            
            5,105,000
            
            
            
            0.30
            *Exercised
            
            
            (1,446,000
            )
            
            
            0.01Cancelled
            
            
            (1,211,052
            )
            
            
            0.74Outstanding
      at December 31, 2008
            
            
            9,295,498
            
            
            $
            0.32Granted
            
            
            2,635,000
            
            
            
            0.34
            *Cancelled
            
            
            (575,000
            )
            
            
            0.38Outstanding
      at December 31, 2009
            
            
            11,355,498
            
            
            $
            0.32Vested
      or expected to vest at
              December
      31, 2009
            
            
            11,355,498
            
            
            $
            0.32


*
Approximates the weighted-average fair value.





F-14
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


The
following table summarizes all options outstanding and exercisable by price
range as of December 31, 2009:





Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise Prices
            
            Number
      Outstanding
            
            Weighted-Average
      Remaining Contractual Life (Years)
            
            Weighted-Average
      Exercise Price
            
            Number
      Exercisable
            
            Weighted-Average
      Exercise Price$0.01
            
            2,241,165
            
            2.32
            
            $0.01
            
            2,241,165
            
            $0.01$0.30-$0.35
            
            7,028,333
            
            9.02
            
            $0.31
            
            1,384,583
            
            $0.30$0.51
            
            150,000
            
            9.05
            
            $0.51
            
            -
            
            -$0.60
      - $0.70
            
            1,936,000
            
            7.05
            
            $0.69
            
            1,936,000
            
            $0.6911,355,498
            
            
            
            
            
            5,561,748





The
“intrinsic value” of options is the excess of the value of DCT stock over the
exercise price of such options.  The total intrinsic value of options
outstanding (of which all are expected to vest) was approximately $788,000 and
$4,369,000 at December 31, 2009 and 2008, respectively. The total intrinsic
value for exercisable options was $722,000 and $1,723,000 at December 31, 2009
and 2008, respectively. No options were exercised during the year ended December
31, 2009.  The total intrinsic value for stock options exercised was
approximately $965,000 for the year ended December 31, 2008.





Note
5 – Composition of Certain Financial Statement Captions





Inventories
are summarized as follows (in
thousands):





December
      31,2009
            
            
            2008Raw
      materials
            
            $
            726
            
            
            $
            135Finished
      goods
            
            
            948
            
            
            
            1,2381,674
            
            
            
            1,373Less:  Allowance
      for slow-moving inventory
            
            
            -
            
            
            
            (20
            )$
            1,674
            
            
            $
            1,353





Fixed
assets are summarized as follows (in thousands):





December
      31,2009
            
            
            2008Computer
      and office equipment
            
            $
            69
            
            
            $
            51Tooling
      and product design
            
            
            270
            
            
            
            166339
            
            
            
            217Less:
      Accumulated depreciation
            
            
            (163
            )
            
            
            (119
            )$
            176
            
            
            $
            98




Fixed
asset depreciation expense totaled $58,000 and $47,000 for the years ended
December 31, 2009 and 2008, respectively.




F-15


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





Deferred
revenue and customer deposits are summarized as follows (in thousands):





December
      31,2009
            
            
            2008Deferred
      revenue
            
            $
            85
            
            
            $
            148Customer
      deposits
            
            
            26
            
            
            
            39$
            111
            
            
            $
            187





In
certain instances, DCT requires advance payments from
customers.  Revenue from advanced payments is recognized when the
finished product is shipped.





Deferred
revenue consists of non-recurring engineering fees and other pre-payments
received from customers that have been deferred when one or more revenue
recognition criteria have not been met. Once the revenue recognition criteria
have been fully met, the revenue will be recognized.





Note
6 – Sale of HD Display-Related Assets





In
December 2007, DCT entered into an asset purchase agreement with Sky Glory
Enterprise Investment Co., Ltd (“Sky Glory”), whereby Sky Glory agreed to
purchase certain HD display-related assets, subject to certain terms and
conditions, for a total of $600,000 cash.  On March 31, 2008, DCT
received an initial $400,000 cash payment.  A second cash payment of
$150,000 was received on May 2, 2008.  On June 26, 2008, DCT entered
an agreement with Darwin Hu to assign and transfer DCT’s rights to the final
$50,000 owed by Sky Glory to Mr. Hu in lieu of any additional severance
compensation (approximately $72,000) owed to Mr. Hu as of June 26,
2008.





Darwin Hu
is a current member of DCT’s board of directors and was the Chairman of DCT’s
board of directors until his resignation, effective July 15,
2008.  Mr. Hu was instrumental in negotiating and closing the sale of
the HD display-related assets.  Until March 1, 2008, Mr. Hu was DCT’s
President and Chief Executive Officer, at which time he resigned from DCT to
become an executive at a subsidiary of Sky Glory.





There
were no costs associated with the sale of HD related assets.  As such,
the entire cash proceeds of $550,000 were recorded as a gain on sale of assets
during the year ended December 31, 2008.





Note
7 – Fair Value





As
discussed in Note 1, DCT had only Level 3 liabilities during the current
reporting period.  During the year ended December 31, 2009, DCT’s
Level 3 liabilities either matured or converted to equity.  As such,
DCT had no Level 3 liabilities at December 31, 2009.





The
following table summarizes the changes in Level 3 liabilities measured at fair
value on a recurring basis for the years ended December 31, 2009 and 2008 (in thousands):





Fair
      Value of Warrant Liability
            
            
            Liability
      under Derivative Contracts
            
            
            TotalBalance
      at December 31, 2007
            
            $
            399
            
            
            $
            91
            
            
            $
            490Unrealized
      gain included in net loss (1)
            
            
            (49
            )
            
            
            (82
            )
            
            
            (131
            )Balance
      at December 31, 2008
            
            
            350
            
            
            
            9
            
            
            $
            359Unrealized
      gain included in net loss (1)
            
            
            -
            
            
            
            (9
            )
            
            
            (9
            )Conversion
      of warrants to common stock
            
            
            (350
            )
            
            
            -
            
            
            
            (350
            )Maturity
      of host contract (2)
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at December 31, 2009
            
            $
            -
            
            
            $
            -
            
            
            $
            -


(1)
Included as a component of non-operating income (expense).


(2) Series
B Stock.





F-16
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Note
8 – Equity





Common
Stock Activity





During
the first quarter of 2009, DCT’s Board of Directors approved the issuance of
25,000 restricted common shares to a consultant for investor relations
services.  The common shares have piggyback registration rights to the
next registration statement filed by DCT.  DCT amortized the estimated
fair value of the common shares ratably over the service
period.  Accordingly, $11,000 was charged to selling, general and
administrative expense and credited to additional paid-in capital during the
year ended December 31, 2009.





During
the third quarter of 2009, DCT issued 750,000 shares of common stock in exchange
for warrants to purchase 650,000 shares of the Company’s common stock and the
related put option of $350,000.  In connection with the exchange, DCT
de-recognized the $350,000 warrant put option liability and recorded the offset
to additional paid in capital.  There was no gain or loss associated
with the exchange.





During
the third quarter of 2009, DCT issued 187,500 shares of common stock in
connection with the maturity of DCT’s Series B Stock.  See further
discussion below.





During
the first quarter of 2008, DCT cancelled 750,000 shares of its common stock (of
which 500,000 shares were never released from escrow) as a result of terminating
its HD display-related research and development
efforts.    The shares were originally issued in
anticipation of reaching research and development milestones and
conditions.  However, the milestones and performance criteria were not
met before the project was terminated.





During
the first quarter of 2008, DCT issued 1,446,000 shares of common stock upon the
exercise of stock options by DCT’s principal officers, employees and
consultants.  Of the options exercised, 646,000 shares were completed
through a cashless exercise.





During
the first quarter of 2008, DCT issued 1,844,016 shares of common stock resulting
from the maturity of $1,150,000 (11,500 shares) of Series A Stock and the
related accrued dividend shares.





Preferred
Stock Activity





Series
B Stock Maturity





On August
7, 2009 (the “Series B Stock Redemption Date”), all of DCT’s outstanding Series
B Stock was redeemed for a per share redemption price equal to the principal
value on the Series B Stock Redemption Date (the “Series B Stock Redemption
Price”).  The Series B Stock Redemption Price was payable either in
cash or in shares of common stock at DCT’s sole discretion.  DCT
elected to pay the Series B Stock Redemption Price as follows:





Cash
            
            $
            75,000Common
      stock (1)
            
            
            75,000Series
      B Stock Redemption Price
            
            $
            150,000


(1)
187,500 shares of common stock valued at the adjusted closing price, $0.40, of
the stock on the Series B Stock Redemption Date.





Series
A Stock Maturity





On March
15, 2008 (the “Series A Stock Redemption Date”), all of DCT’s outstanding Series
A Stock was redeemed for a per share redemption price equal to the stated value
on the Series A Stock Redemption Date (the “Series A Stock Redemption
Price”).  The Series A Stock Redemption Price included principal and
accrued dividends.  The Series A Stock Redemption Price was payable
either in cash or in shares of common stock at DCT’s sole
discretion.  DCT elected to pay all of the Series A Stock Redemption
Price in shares of common stock.  According to the terms of the Series
A Stock agreement, the shares of common stock that were delivered to holders of
the Series A Stock were valued at 85% of the fifteen-day volume weighted average
price of the common stock on the Series A Redemption Date.





F-17
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Series
A Stock Dividends





Through
the Series A Stock Redemption Date, DCT’s Series A Stock called for cumulative
dividends at a rate of five percent per annum, payable semiannually on July 1
and January 1.  Dividends were payable in cash, by accretion of the
stated value or in shares of common stock. Subject to certain terms and
conditions, the decision whether to accrete dividends to the stated value of the
Series A Stock or to pay for dividends in cash or in shares of common stock, was
at DCT’s discretion.  DCT did not pay any cash dividends on its Series
A Stock.  During the year ended December 31, 2008, Series A Stock
dividends totaled $13,000 and were recorded as a reconciling item adjusting
reported net loss to net loss available to common stockholders.





Series
A Stock Deemed Dividends





In
accordance with the Convertible Securities with Beneficial Conversion
FeaturesTopic of
the FASB Accounting Standards Codification, DCT’s Series A Stock had an embedded
contingent beneficial conversion feature because the conversion price was less
than the fair value of DCT’s common stock on the maturity and conversion of the
Series A Stock into common stock.  The embedded beneficial conversion
feature was considered contingent because it was based on how much of the Series
A Stock Redemption Price was paid in DCT’s common stock versus
cash.





Under the
FASB Accounting Standards Codification, a contingent beneficial conversion
feature should be recognized in earnings when all contingencies are
resolved.  DCT recorded a deemed dividend on its Series A Stock during
the year ended December 31, 2008 totaling $231,000.  This non-cash
dividend was recorded to reflect the implied economic value to the preferred
stockholder of converting Series A shares into common stock at a 15% discount of
the common stock price at the time of conversion.  The fair value was
calculated using the difference between the agreed-upon conversion price of the
Series A Preferred Stock into shares of common stock and the fair market value
of DCT’s common stock on the conversion date. This amount was charged to
accumulated deficit with the offsetting credit to additional
paid-in-capital.





DCT
treated the deemed dividend on Series A Stock as a reconciling item to adjust
its reported net loss, and together with Series A Stock dividends recorded
during the applicable period, to adjust the net loss available to common
stockholders line item on the Statements of Operations.





Common
Stock Warrants





Common
Stock Warrants Issued for Consulting Services





In
certain instances, DCT issues warrants to consultants for consulting
services.  DCT issued 0 and 750,000 (of which 25,000 subsequently
cancelled), during the years ended December 31, 2009 and 2008,
respectively.  The initial value of such warrants was calculated using
the Black-Scholes valuation model using the following assumptions during the
year ended December 31, 2008:





Contractual
      Term
            
            3.0Expected
      volatility
            
            260%-266%Expected
      dividend yield
            
            0%Risk
      free interest rate
            
            1.6%-2.8%





DCT
amortizes the fair value of the warrants ratably over the consulting
agreement.  Accordingly, $100,000 and $294,000 and was charged to
selling, general and administrative expense and credited to additional paid-in
capital during the years ended December 31, 2009 and 2008,
respectively.





F-18
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Common
Stock Warrants Issued for Debt




On
September 27, 2007, the Company entered into a $1,500,000 term loan agreement
(“Loan Agreement”), which was paid in full in during September
2008.  In connection with the Loan Agreement, DCT issued warrants
(“Loan Warrants”), which vested immediately, to purchase up to 650,000 shares of
DCT’s common stock at an initial exercise price of $0.60 per
share.  From the initial funding of the Loan Agreement through March
31, 2008, the warrant holders had the right to require DCT to purchase the
warrant for a maximum of $250,000.  On March 31, 2008, the Loan
Warrant repurchase price increased to a maximum of $350,000.




As
required by the Freestanding Warrants and Other Similar Instruments on Shares
That Are Redeemable Topic of the FASB Accounting Standards Codification,
freestanding warrants for shares that are either puttable or warrants for shares
that are redeemable are classified as liabilities on the Balance Sheet at fair
value with the offset recorded to debt discount.  The Company
amortized the debt discount to interest expense from the loan origination date
through the early pay-off date.  At each reporting period, the fair
value of the Loan Warrant liability was remeasured with any gains or losses
recorded as a component of non-operating income (expense),
net.   See Note 7.





The total
initial fair value of the Loan Warrants was approximately $399,000 as calculated
using the Black-Scholes valuation 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%.  In connection
with the Loan Warrants, DCT recorded non-cash interest expense of $0 and
$311,000 for the years ended December 31, 2009 and 2008,
respectively.





As of
December 31, 2008, the fair value of the warrants was less than the Loan Warrant
repurchase price as calculated using the Black-Scholes valuation model with the
following assumptions: remaining contractual term of 3.75 years, 1% risk-free
interest rate, expected volatility of 318% and expected dividend yield of
0%.  As such, the warrant liability is valued at the Loan Warrant
repurchase price.  DCT recorded a non-cash gain of $49,000 during the
year ended December 31, 2008 to account for the decrease in the fair value of
all outstanding Loan Warrants as of December 31, 2008.





As
discussed above, DCT issued 750,000 shares of common stock in exchange for the
Loan Warrants during the third quarter of 2009.





Common
Stock Warrant Activity and Outstanding





DCT had
the following common stock warrant activity during the years ended December 31,
2009 and 2008:





Number
      of SharesOutstanding
      at December 31, 2007
            
            
            2,534,000Issued
            
            
            750,000Outstanding
      at December 31, 2008
            
            
            3,284,000Issued
      (Note 9)
            
            
            68,027Converted
      to common stock
            
            
            (650,000
            )Cancelled
            
            
            (25,000
            )Expired
      (Series B Stock maturity)
            
            
            (675,000
            )Outstanding
      at December 31, 2009
            
            
            2,002,027





The
following table summarizes certain aspects of DCT’s outstanding warrants as of
December 31, 2009:





Warrants
      Issued in Connection with:
            
            Number
      of Shares
            
            
            Number
      of Shares Vested
            
            
            Exercise
      Price
            
            Issuance
      Date
            
            Expiration
      DateSeries
      A Stock
            
            
            186,500
            
            
            
            186,500
            
            
            $
            1.00
            
            3/15/05
            
            3/15/10Series
      A Stock
            
            
            932,500
            
            
            
            932,500
            
            
            
            2.00
            
            3/15/05
            
            3/15/10Consulting
      agreement
            
            
            90,000
            
            
            
            90,000
            
            
            
            0.65
            
            1/1/07
            
            1/1/10Consulting
      agreement
            
            
            110,000
            
            
            
            110,000
            
            
            
            0.65
            
            1/1/08
            
            1/1/11Consulting
      agreement
            
            
            615,000
            
            
            
            615,000
            
            
            
            0.60
            
            11/6/08
            
            11/6/11Bank
      line of credit
            
            
            68,027
            
            
            
            68,027
            
            
            
            0.588
            
            9/2/09
            
            9/2/162,002,027
            
            
            
            2,002,027





F-19
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Note
9 – Bank Line of Credit





Bank
Line of Credit - 2007





As of
December 31, 2008, DCT had a $3,000,000 line of credit at a commercial bank,
which was originally entered into during 2007 (“2007 LOC”).  Borrowings
under the 2007 LOC were limited to 80% of eligible accounts receivable and 40%
of eligible inventory, as defined in the 2007 LOC agreement.  The 2007 LOC
interest rate was prime (3.25% at December 31, 2008) plus 1.25% for advances
drawn against accounts receivables, with a minimum interest rate of 9%, and
prime plus 2.25% for advances drawn against inventory, with a minimum interest
rate of 10%.  Interest payments were due monthly and all unpaid interest
and principal was due in full on September 13, 2009.





Bank
Line of Credit - 2009





During
September 2009, DCT replaced its 2007 LOC with a similar $2,000,000 line of
credit (“2009 LOC”) at a different commercial bank.  Borrowings under
the 2009 LOC are limited to 75% of eligible accounts receivable less the
aggregate face amount of all outstanding letters of credit, cash management
services, and foreign exchange contracts (all as defined in the 2009 LOC
agreement).  Subsequent to December 31, 2009, DCT negotiated an increased
borrowing base.  See Note 14.  The 2009 LOC bears an annual
interest rate of prime (3.25% at December 31, 2009) plus 2.00% for advances
drawn against accounts receivables, with a minimum interest rate of
6%.  Interest payments are due monthly and all unpaid interest and
principal is due in full on September 2, 2010.  Upon certain events of
default (as defined in the 2009 LOC agreement), the default variable interest
rate increases five percentage points above the interest rate applicable
immediately prior to the default.  Additionally, the lender has the
right to declare all of the amounts due under the 2009 LOC immediately due and
payable upon an event of default.  As of December 31, 2009, DCT had
unused borrowing capacity of $862,000 on its 2009 LOC.




As of
December 31, 2009, DCT was in compliance with all 2009 LOC debt
covenants.




In
connection with the 2009 LOC, DCT paid the lender a loan origination fee and
legal fees which totaled approximately $20,000, and issued a warrant to purchase
68,027 shares of the Company’s Common Stock at $0.588 per
share.   The loan origination fees and legal fees are recorded as
deferred financing costs included in other current assets and are being
amortized over the life of the loan to interest expense.  The $35,000
fair value of the warrants was determined using the Black-Scholes valuation
model with the following assumptions: remaining contractual term of 7 years,
2.9% risk-free interest rate, expected volatility of 406% and expected dividend
yield of 0%.  The fair value of the warrants was initially recorded as
debt discount, with an offset to additional paid in capital, and is being
amortized over the life of the loan to interest expense.





DCT’s LOC
balance at December 31, 2009 was comprised of the following (in thousands):




Total
      principal due
            
            $
            225Less
      unamortized debt discount
            
            
            (23
            )$
            202




Interest
Expense Related to Amortization of Warrant Fair Values and Loan Origination
Fee





The
Company recorded non-cash interest expense of $12,000 and $6,000 in connection
with the 2009 LOC warrants and amortization of the LOC origination fee,
respectively, during the year December 31, 2009.





Note
10 – Income Tax





DCT’s
provision (benefit) for income taxes are summarized as follows (in thousands):





Year
      Ended December 31,2009
            
            
            2008Current
      taxes:Federal
      taxes
            
            $
            (11
            )
            
            $
            10State
      taxes
            
            
            (63
            )
            
            
            67$
            (74
            )
            
            $
            77





F-20
 
  DOCUMENT
CAPTURE TECHNOLOGIES, INC. AND SUBSIDIARY
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


DCT’s
income tax expense for the year ended December 31, 2008 was based on an
estimate.  DCT’s actual tax returns calculated a tax loss for the year
ended December 31, 2008.  The benefit for income taxes during the year
ended December 31, 2009 reflects the reversal of the estimate and overpayment of
income taxes for the year ended December 31, 2008.  DCT has an
estimated tax loss for the year ended December 31, 2009.





As of
December 31, 2009 DCT has estimated available net operating loss carryforwards
of approximately $8,788,000 and $5,041,000 for federal and state income tax
purposes, respectively, which begin to expire in 2011 and 2012, respectively.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization
of net operating losses (“NOL”) and other tax attributes may be subject to
substantial limitations if certain ownership changes occur during a three-year
testing period (as defined). During the year ended December 31, 2008 management
analyzed changes to DCT’s ownership and estimated the impact of such changes to
DCT’s NOLs.  The aforementioned NOLs are based on management’s
estimates and are limited to an annual limitation of approximately $500,000 per
year.  During the year ended December 31, 2009, DCT did not have any
ownership changes that limit NOLs.





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 increased by approximately
$49,000 for the year ended December 31, 2009 and decreased by approximately
$6,308,000 during the year ended December 31, 2008.





A
reconciliation of the differences between the United States statutory federal
income tax rate and the effective tax rate as provided in the consolidated
statements of operations is as follows:




Year
      Ended December 31,2009
            
            
            2008U.S.  Federal
      statutory rate (%)
            
            
            (35
            )%
            
            
            35
            %State
      income taxes, net of federal income taxes
            
            
            (18
            )
            
            
            265Effect
      of permanent differences and other
            
            
            66
            
            
            
            (1,462
            )Alternative
      minimum tax (reversal)
            
            
            (3
            )
            
            
            40Change
      in valuation allowance
            
            
            (32
            )
            
            
            1,427(22
            )%
            
            
            305
            %




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





December
      31,2009
            
            
            2008Deferred
      tax assetsFederal
      net operating loss carryforwards
            
            $
            2,988
            
            
            $
            2,791State
      net operating loss carryforwards
            
            
            446
            
            
            
            442Capitalized
      R&D expenses and tax credits
            
            
            39
            
            
            
            167Other
            
            
            24
            
            
            
            483,497
            
            
            
            3,448Less:
      valuation allowance
            
            
            (3,497
            )
            
            
            (3,448
            )$
            -
            
            
            $
            -




Effective at the beginning
of 2007,DCTadopted standards that
changed the accounting for uncertain tax positions.The implementation of these
standards did not result in a cumulative effect adjustment to the
Company’s accumulated deficit.  As of the date of adoption, the
Company had no unrecognized income tax benefits. Accordingly, the annual
effective tax rate was not affected.  Should the Company incur
interest and penalties relating to tax uncertainties, such amounts would be
classified as a component of interest expense and operating expense,
respectively.




At
December 31, 2009, the Company had no increase or decrease in unrecognized
income tax benefits for the year. There was no accrued interest or penalties
relating to tax uncertainties at December 31, 2009. Unrecognized tax benefits
are not expected to increase or decrease within the next twelve
months.




F-21




The
Company is subject to income tax in the U.S. federal jurisdiction and
California.  DCT is no longer subject to U.S. federal or state income
tax examination by tax authorities for tax returns filed for the years
ended on or before December 31, 2005 and December 31, 2004,
respectively.  DCT has not filed its U.S. federal or state return for
the year ended December 31, 2009.  These returns are considered open
tax years as of the date of these consolidated financial statements.  No
tax returns are currently under examination by any tax authorities.




Note
11 – Commitments and Contingencies




Operating
Leases




DCT is
committed under various non-cancelable operating leases which extend through
November 2011. As of December 31, 2009, future minimum rental commitments are as
follows (in
thousands):





Year
      Ending
              December
      31,
            
            Future
      Minimum Lease Payments2010
            
            $
            1082011
            
            
            1$
            109




Rent
expense was $222,000 and $268,000 for the years ended December 31, 2009 and
2008, respectively.




Employment
Agreements




DCT
maintains employment agreements with its executive officers which extend through
2010. The agreements provide for a base salary and annual bonus to be determined
by the Board of Directors.  The agreements also provide for
termination payments, stock options, non-competition provisions, and other terms
and conditions of employment. In addition, DCT maintains employment agreements
with other key employees with similar terms and conditions.  As of
December 31, 2009 termination payments totaling $1,030,000 remain in
effect.





Research
and Development Agreement




During
the second quarter of 2009, the Company entered into an agreement with a
customer to develop a scanner to meet the customer’s specific product
requirements. The customer has the right to terminate the contract at any time
without cause upon giving DCT two weeks’ notice. If terminated, the customer
shall pay DCT for all work-in-progress or work completed up to the date of
termination. Each party shall retain its rights in any intellectual property
rights owned or licensed to it prior to commencement of development. All
intellectual property developed by DCT will be owned exclusively by the customer
and DCT will not distribute the developed product to any other customer (unless
DCT receives prior written approval from the customer).  During the
first 12 months following the initial product shipment, the customer is
committed to buying a certain minimum number of scanners developed under this
agreement.





In
connection with the agreement, the Company deferred $36,000 of revenue, which
will be recognized upon shipment of the developed product.




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
12 – 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 $52,000 and $43,000 for the years ended December 31, 2009
and 2008, respectively.




F-22





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


Note
13 – Segment and Geographic Information





Segment
Information





DCT
operates in one segment: the design, development and delivery of various imaging
technology solutions, most notably scanners.





Geographic
Information





During
the years ended December 31, 2009 and 2008, DCT recorded net sales throughout
the U.S., Asia and Europe as determined by the final destination of the
product.  The following table summarizes total net sales attributable
to significant countries (in
thousands):





Years
      Ended December 31,2009
            
            
            2008U.S.
            
            $
            10,664
            
            
            $
            10,817Europe
      and other
            
            
            779
            
            
            
            758Asia
            
            
            86
            
            
            
            68$
            11,529
            
            
            $
            11,643





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




December
      31,2009
            
            
            2008U.S.
            
            $
            3,574
            
            
            $
            3,093Europe
      and other
            
            
            110
            
            
            
            169Asia
            
            
            128
            
            
            
            59$
            3,812
            
            
            $
            3,321





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
14 – Subsequent Event





Relocation of
Manufacturing.





At the
end of January 2010, SST announced a relocation of its primary manufacturing
facility, currently located in Shenzhen China, to Wuhan, Hubei China. The
purpose of the relocation relates directly to an opportunity for SST to reduce
its direct and overhead costs.  As of the date of this filing and
based on information provided to it by SST, DCT anticipates the new
manufacturing facility to be fully functional by April 2011 and that the
relocation will have minimal impact to the manufacturing process and DCT’s
operations.





Bank Line of
Credit.





During
March 2010, DCT negotiated an increase to its existing LOC borrowing base to (1)
increase borrowings against eligible accounts receivable from 75% to 80%, and
(2) include 40% of eligible inventory. The interest rate was amended to prime
plus 2.75% for advances drawn against accounts receivables, with a minimum
interest rate of 6%, and prime plus 3.75% for advances drawn against inventory,
with a minimum interest rate of 7%. In addition, the amended agreement revised
certain financial covenants.  The loan origination fee totaled
$6,000.  All other terms of the original LOC remain in
effect.





F-23