**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




**ý**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934**


**For
      the Quarterly Period Ended September 30, 2008**





**o**
            **TRANSITION
                REPORT PURSUANT TO 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.**




(Exact
      name of registrant as specified in its charter)




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





**1798
      Technology Drive**


**Suite
      178**


**San
      Jose, California 95110**


*(Address
      of principal executive offices, Zip code)*





**408-436-9888
      ext. 207**


*(Registrant’s
      telephone number, including area code)*





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 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 whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or smaller reporting company. See
      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
      number of shares of Common Stock outstanding as of November 7, 2008 was
      18,443,770.








**SPECIAL
      NOTE ON FORWARD LOOKING STATEMENTS**





This
      Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis
      of Financial Condition and Results of Operations" in Item 2 of Part I of this
      report include 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
      Quarterly 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
      Quarterly Report to conform these statements to actual results.


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          2
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**DOCUMENT
      CAPTURE TECHNOLOGIES, INC**





**FORM 10-Q**




**FOR
      THE QUARTER ENDED SEPTEMBER 30, 2008**





**INDEX**





**PART
                I – FINANCIAL INFORMATION**
            **Page**Item
                1
            Financial
                Statements
            4Item
                2
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            19Item
                3
            Quantitative
                and Qualitative Disclosures about Market Risk
            27Item
                4
            Controls
                and Procedures
            27**PART
                II – OTHER INFORMATION**Item
                1
            Legal
                Proceedings
            28Item
                1A
            Risk
                Factors
            28Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            28Item
                3
            Defaults
                Upon Senior Securities
            28Item
                4
            Submission
                of Matters to a Vote of Security Holders
            28Item
                5
            Other
                Information
            28Item
                6
            Exhibits
            29Signatures
            30





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          3
          -


**PART
      I. FINANCIAL INFORMATION**





**Item
      1 - Financial Statements**


**DOCUMENT
      CAPTURE TECHNOLOGIES, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


*(in
      thousands)*





**September 30,**
            
            **December 31,****2008**
            
            **2007****ASSETS**
            
            
            (Unaudited)
            
            
            (Audited)Current assets:Cash
                and cash equivalents
            
            **$**
            **761**
            
            $
            1,770Trade
                receivables
            
            
            **1,141**
            
            
            2,464Inventories,
                net
            
            
            **1,023**
            
            
            1,400Prepaid
                expenses and other current assets
            
            
            **105**
            
            
            32**Total
                current assets**
            
            
            **3,030**
            
            
            5,666Fixed
                assets, net
            
            
            **97**
            
            
            127**Total
                assets**
            
            **$**
            **3,127**
            
            $
            5,793**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)**Current
                liabilities:Notes
                payable
            
            **$**
            **-**
            
            $
            989Trade
                payables to related parties
            
            
            **560**
            
            
            578Trade
                payables and other current liabilities
            
            
            **278**
            
            
            658Deferred
                revenue and customer deposits
            
            
            **234**
            
            
            -Fair
                value of warrant liability
            
            
            **432**
            
            
            399Accrued
                dividends on Series A 5% cumulative convertible preferred
                stock
            
            
            **-**
            
            
            178**Total
                current liabilities**
            
            
            **1,504**
            
            
            2,802Long-term
                bank line of credit
            
            
            **-**
            
            
            2,021Liability
                under derivative contracts
            
            
            **536**
            
            
            255**Total
                liabilities**
            
            
            **2,040**
            
            
            5,078Commitments
                and contingencies (Note 10)Convertible
                preferred stock, $.001 par value, 2,000 authorized:Series
                A 5% cumulative convertible preferred stock, 0 and 11.5 sharesissued
                and outstanding at September 30, 2008 and December 31, 2007,respectively;
                liquidation value of $0 and $1,150 at September 30, 2008and
                December 31, 2007, respectively
            
            
            **-**
            
            
            1,074Series
                B convertible preferred stock, 1.5 shares issued andoutstanding
                at September 30, 2008 and December 31, 2007; liquidationvalue
                of $150 at September 30, 2008 and December 31, 2007
            
            
            **107**
            
            
            70Stockholders’
                equity (deficit):Common
                stock $.001par value, 50,000 authorized, 18,444 shares
                issuedand
                outstanding at September 30, 2008 and 15,904 shares issuedand
                15,404 outstanding at December 31, 2007 (500 shares held in
                escrow)
            
            
            **18**
            
            
            15Additional
                paid-in capital
            
            
            **32,211**
            
            
            30,174Accumulated
                deficit
            
            
            **(31,249**
            **)**
            
            (30,618
            )**Total
                stockholders’ equity (deficit)**
            
            
            **980**
            
            
            (429
            )**Total
                liabilities and stockholders’ equity (deficit)**
            
            **$**
            **3,127**
            
            $
            5,793


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**DOCUMENT
      CAPTURE TECHNOLOGIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**


*(in
      thousands, except per share amounts)*





**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Net
                sales**
            
            **$**
            **3,019**
            
            **$**
            **3,296**
            
            **$**
            **8,560**
            
            $
            11,119**Cost
                of sales**
            
            
            **1,986**
            
            
            **1,975**
            
            
            **5,811**
            
            
            6,609**Gross
                profit**
            
            
            **1,033**
            
            
            **1,321**
            
            
            **2,749**
            
            
            4,510Operating
                expenses:Selling,
                general and administrative
            
            
            **836**
            
            
            920
            
            
            **2,308**
            
            
            3,210Research
                and development
            
            
            **166**
            
            
            526
            
            
            **539**
            
            
            2,052**Total
                operating expenses**
            
            
            **1,002**
            
            
            1,446
            
            
            **2,847**
            
            
            5,262**Operating
                income (loss)**
            
            
            **31**
            
            
            (125
            )
            
            **(98**
            **)**
            
            (752
            )**Non-operating
                income (expense), net:**Change
                in fair value of derivative instruments andwarrant
                liability
            
            
            **(425**
            **)**
            
            (464
            )
            
            **(314**
            **)**
            
            (501
            )Gain
                on sale of assets
            
            
            **-**
            
            
            -
            
            
            **550**
            
            
            -Interest
                expense and other
            
            
            **(157**
            **)**
            
            13
            
            
            **(409**
            **)**
            
            33**Total
                non-operating income (expense), net**
            
            
            **(582**
            **)**
            
            (451
            )
            
            **(173**
            **)**
            
            (468
            )Net
                loss before income taxes
            
            
            **(551**
            **)**
            
            (576
            )
            
            **(271**
            **)**
            
            (1,220
            )Income
                tax expense
            
            
            **-**
            
            
            2
            
            
            **2**
            
            
            4Net
                loss
            
            
            **(551**
            **)**
            
            (578
            )
            
            **(273**
            **)**
            
            (1,224
            )Dividend
                on Series A and accretion of Series A and SeriesB
                preferred stock redemption value
            
            
            **(13**
            **)**
            
            (237
            )
            
            **(127**
            **)**
            
            (721
            )Deemed
                dividend on Series A preferred stock maturity andConversion
            
            
            **-**
            
            
            -
            
            
            **(231**
            **)**
            
            -**Net
                loss available to common stockholders**
            
            **$**
            **(564**
            **)**
            $
            (815
            )
            **$**
            **(631**
            **)**
            $
            (1,945
            )**Loss
                per common share - basic and diluted**
            
            **$**
            **(0.03**
            **)**
            $
            (0.04
            )
            **$**
            **(0.04**
            **)**
            $
            (0.09
            )**Weighted
                average common shares outstanding – basic****and
                diluted**
            
            
            **18,444**
            
            
            21,717
            
            
            **17,784**
            
            
            22,445


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**DOCUMENT
      CAPTURE TECHNOLOGIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**


*(in
      thousands)*





**Nine Months Ended**
              **September 30,****2008**
            
            **2007****Operating activities**Net
                loss available to common stockholders
            
            **$**
            **(631**
            **)**
            $
            (1,945
            )Adjustments
                to reconcile net loss available to common stockholders tonet
                cash provided by operating activities:Depreciation
                expense
            
            
            **37**
            
            
            32Stock-based
                compensation cost – options
            
            
            **391**
            
            
            1,272Fair
                value of warrants issued for services rendered
            
            
            **69**
            
            
            14Interest
                expense attributable to amortization of debt issuance
                costs
            
            
            **311**
            
            
            2Change
                in fair value of derivative instruments
            
            
            **281**
            
            
            501Change
                in fair value of warrant liability
            
            
            **33**
            
            
            -Accretion
                of Series A and Series B preferred stock redemption value
            
            
            **113**
            
            
            657Deemed
                dividend on Series A preferred stock
            
            
            **231**
            
            
            -Changes
                in operating assets and liabilities:Trade
                receivables
            
            
            **1,323**
            
            
            (118
            )Inventories
            
            
            **377**
            
            
            286Prepaid
                expenses and other current assets
            
            
            **(73**
            **)**
            
            (13
            )Accrued
                dividends on Series A 5% cumulative convertible stock
            
            
            **13**
            
            
            64Trade
                payables to related parties
            
            
            **(18**
            **)**
            
            (350
            )Deferred
                revenue and customer deposits
            
            
            **234**
            
            
            -Trade
                payables and other current liabilities
            
            
            **(380**
            **)**
            
            (18
            )**Cash
                provided by operating activities**
            
            
            **2,311**
            
            
            384**Investing
                activities**Capital
                expenditures
            
            
            **(7**
            **)**
            
            (67
            )**Cash
                used by investing activities**
            
            
            **(7**
            **)**
            
            (67
            )**Financing
                activities******Net****(payments)
                advances on bank line of credit
            
            
            **(2,021**
            **)**
            
            487****Payments
                on notes payable
            
            
            **(1,300**
            **)**
            
            -****Proceeds
                from exercise of employee stock options
            
            
            **8**
            
            
            -**Cash
                (used) provided by financing activities**
            
            
            **(3,313**
            **)**
            
            487**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(1,009**
            **)**
            
            804**Cash
                and cash equivalents at beginning of period**
            
            
            **1,770**
            
            
            1,333**Cash
                and cash equivalents at end of period**
            
            **$**
            **761**
            
            $
            2,137**Non-cash
                investing and financing activities:**Restricted
                common stock acquired from related party
            
            **$**
            **-**
            
            $
            2Conversion
                of convertible preferred stock to common stock
            
            **$**
            **1,339**
            
            $
            525Issuance
                of preferred stock warrants in connection with debt
                financing
            
            **$**
            **-**
            
            $
            399Purchase
                of restricted common stock for retirement
            
            **$**
            **-**
            
            $
            2,000


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          6
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**DOCUMENT
      CAPTURE TECHNOLOGIES, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


***Note
      1 – Background and Basis of Presentation***





*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
      offices-home offices (“SOHO”), professional practices as well as consumers
      (referred to herein collectively as “Enterprises”). DCT is a market-leader in
      providing USB-powered scanning solutions to a wide variety of industries and
      market applications. DCT’s patented and proprietary page-imaging devices
      facilitate the way information is stored, shared and managed for both business
      and personal use.





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





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





· Document
      and information management;


· Identification
      card scanners;


· Passport
      security scanners;


· Bank
      note
      and check verification;


· Business
      card readers;


· Barcode
      scanning; and


· Optical
      mark readers used in lottery terminals.





In
      addition, during the past several years, DCT has engaged in the research and
      development of certain technologies related to the field of high definition
      (“HD”) display. During that time, DCT expanded its HD display initiative through
      acquisition, exclusive licensing and the addition of key personnel and expended
      significant resources to develop its HD display technology. However, in November
      2007, DCT terminated its HD display research and development efforts. All
      HD-related expenses, including employees and contractors, were terminated by
      December 31, 2007. See Note 3.





*Basis
      of Presentation*





The
      accompanying unaudited condensed consolidated financial statements of DCT have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States for interim financial information and the instructions to Form
      10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
      information and disclosures necessary for a presentation of the Company’s
      financial position, results of operations, and cash flows in conformity with
      accounting principles generally accepted in the United States (“GAAP”).





In
      the
      opinion of management, all adjustments ( which
      include only normal recurring adjustments) necessary to present fairly the
      financial position, results of operations and cash flows for all periods
      presented have been made. Preparing financial statements requires management
      to
      make estimates and assumptions that affect the reported amounts of assets,
      liabilities, revenue and expenses. Actual results may differ from these
      estimates. The results of operations for the period ended September 30, 2008
      are
      not necessarily indicative of the operating results that may be expected for
      the
      entire year ending December 31, 2008. The interim financial statements should
      be
      read in conjunction with the financial statements in the Company’s Annual Report
      on Form 10-KSB for the year ended December 31, 2007, filed with the Securities
      and Exchange Commission (“SEC”) on March 5, 2008.




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          7
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**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


The
      consolidated financial statements include the accounts of DCT and its
      subsidiaries. All significant intercompany transactions and balances have been
      eliminated.





Certain
      accounts have been reclassified to conform to the current period
      presentation.  Such reclassifications did not affect total assets, total
      liabilities and stockholders’ equity, total net sales, operating loss or net
      loss available to common stockholders. Specifically, at December 31, 2007,
      $149,000, which related to the fair value classification of warrants, was
      reclassed from additional paid-in capital to current liabilities. See “Note 10 -
      Commitments and Contingencies: Notes Payable and Related Warrant Liability” for
      further discussion of the accounting for warrants. This reclass did not affect
      the Company’s financial position or liquidity at December 31, 2007.





***Note
      2 – New Accounting Pronouncements and Accounting Treatment of New Financial
      Transactions***





*New
      Accounting Pronouncements Adopted During the Current Reporting
      Period*





DCT
      did
      not adopt any new accounting pronouncements during the three months ended
      September 30, 2008.





*New
      Accounting Pronouncements to be Adopted in Future Reporting
      Periods*





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“ *Business
      Combinations* ”
(“SFAS
      141R”). SFAS 141R will significantly change the accounting for business
      combinations in a number of areas including the treatment of contingent
      consideration, contingencies, acquisition costs, in-process research and
      development and restructuring costs. In addition, under SFAS 141R, changes
      in
      deferred tax asset valuation allowances and acquired income tax uncertainties
      in
      a business combination after the measurement period will impact income taxes.
      SFAS 141R is effective for fiscal years beginning after December 15, 2008 and,
      as such, DCT will adopt this standard on January 1, 2009. DCT is currently
      evaluating the potential impact this standard may have on its consolidated
      financial position, cash flows and results of operations.





In
      March
      2008, the FASB issued SFAS No. 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities-an amendment of FASB
      Statement No. 133* ”
(“SFAS
      161”). SFAS 161 requires enhanced disclosure related to derivatives and hedging
      activities and thereby seeks to improve the transparency of financial reporting.
      Under SFAS 161, entities are required to provide enhanced disclosures relating
      to: (a) how and why an entity uses derivative instruments; (b) how derivative
      instruments and related hedge items are accounted for under SFAS No. 133,
“ *Accounting
      for Derivative Instruments and Hedging Activities* ”
(“SFAS
      133”), and its related interpretations; and (c) how derivative instruments and
      related hedged items affect an entity’s financial position, financial
      performance, and cash flows.





SFAS
      161
      must be applied prospectively to all derivative instruments and non-derivative
      instruments that are designated and qualify as hedging instruments and related
      hedged items accounted for under SFAS 133 for all financial statements issued
      for fiscal years and interim periods beginning after November 15, 2008, and,
      as
      such, DCT will adopt this standard on January 1, 2009. DCT is currently
      evaluating the potential impact this standard may have on its consolidated
      financial position, cash flows and results of operations.





In
      May
      2008, the FASB issued SFAS No. 162, " *The
      Hierarchy of Generally Accepted Accounting Principles* "
      ("SFAS 162"). SFAS 162 identifies the sources of accounting principles
      and the framework for selecting the principles used in the preparation of
      financial statements of nongovernmental entities that are presented in
      conformity with generally accepted accounting principles (the
      GAAP hierarchy). SFAS 162 will become effective 60 days following the
      SEC's approval of the Public Company Accounting Oversight Board amendments
      to
      AU Section 411, "The Meaning of Present Fairly in Conformity With
      Generally Accepted Accounting Principles." We do not expect the adoption of
      SFAS 162 to have a material effect on our consolidated financial
      position, cash flows and results of operations.




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          8
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**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


In
      May
      2008, the FASB issued a FASB Staff Position (“FSP”) Accounting Principles Board
      ("APB") 14-1 " *Accounting
      for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)"* ("FSP
      APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible
      debt instruments that may be settled in cash (or other assets) on conversion
      to
      separately account for the liability (debt) and equity (conversion option)
      components of the instrument in a manner that reflects the issuer's
      non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal
      years beginning after December 15, 2008 on a retroactive basis. DCT
      is
      currently evaluating the potential impact this standard may have on its
      consolidated financial position, cash flows and results of operations.





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force (“EITF”)), the American Institute of Certified Public
      Accountants (“AICPA”), and the SEC did not or are not believed by management to
      have a material impact on the Company's present or future financial
      statements.





*Accounting
      Treatment of New Financial Transaction Entered During the Current Reporting
      Period*





During
      the nine months ended September 30, 2008, DCT entered a new type of financial
      transaction whereby it sold, and the customer immediately paid for, “end of
      life” parts. The associated revenue is recognized when the finished scanner is
      shipped to the customer. During the nine months ended September 30, 2008, DCT
      recognized revenue of $17,000 and deferred revenue of $213,000 associated with
      this financial transaction. DCT anticipates shipping all completed scanners
      within 12 months. As such, the $213,000 deferred revenue is classified as a
      current liability.





***Note
      3 – Sale of HD Display-Related Assets***





In
      December 2007, DCT entered 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 its
      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
      nine months ended September 30, 2008.




***Note
      4 – Related-Party Transactions***





*Related-Party
      Purchases*





The
      Company purchases the majority of its finished scanner imaging products from
      Syscan Lab Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology
      Holdings Limited ("STH"), the parent company of DCT’s former majority
      stockholder.





Purchases
      from SLL totaled $1,903,000 and $5,111,000 for the three and nine months ended
      September 30, 2008, respectively, and $1,780,000 and $6,101,000 for the three
      and nine months ended September 30, 2007, respectively. All purchases from
      SLL
      were carried out in the normal course of business. As a result of these
      purchases, the Company was liable to SLL for $560,000 at September 30,
      2008.





-
          9
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


*Related-Party
      Net Sales*





During
      the three months ended September 30, 2008, DCT recorded net sales totaling
      $57,000 for finished scanners sold to Shenzen Syscan Technology, Co. Ltd.,
      a
      wholly-owned subsidiary of STH. The related cost of goods sold was $41,000.
      This
      transaction contained similar terms and conditions as for other transactions
      of
      this nature entered into by DCT.





***Note
      5 – Concentration of Credit Risk and Major Customers***





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





*Cash
      and Cash Equivalents*





DCT
      maintains cash balances at several banks. Accounts at each institution are
      insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000
      until October 2, 2008. Effective October 3, 2008 the FDIC insures accounts
      at
      each institution up to $250,000. As of October 3, 2008, DCT had consolidated
      balances of approximately $511,000, which were not guaranteed by the FDIC.
      DCT
      has not experienced any losses in such accounts and believes the exposure is
      minimal.





*Major
      Customers and Trade Receivables*





A
      relatively small number of customers account for a significant percentage of
      DCT’s sales. Customers that exceeded 10% of total revenues and accounts
      receivable were as follows:





**Three months Ended**
              **September 30,**
            
            **Nine months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Customer A
            
            
            **28**
            **%**
            
            26
            %
            
            **30**
            **%**
            
            28
            %Customer
                B
            
            
            **20**
            
            
            19
            
            
            **18**
            
            
            15Customer
                C
            
            
            **19**
            
            
            *
            
            
            **14**
            
            
            14Customer
                D
            
            
            **11**
            
            
            23
            
            
            *****
            
            
            13Customer
                E
            
            
            *****
            
            
            11
            
            
            *****
            
            
            *





*
      Customer accounted for less than 10% for the period indicated.




Trade
      receivables from all significant customers at September 30, 2008 totaled
      $1,029,000. As of September 30, 2008, all the Company's trade receivables were
      unsecured.





***Note
      6 – Concentration of Supplier Risk***





*Manufacturing*





DCT
      purchases substantially all finished scanner imaging products from one vendor
      that is also a wholly-owned subsidiary of the parent company of its former
      majority stockholder. See Note 4. If this vendor became unable or unwilling
      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.





-
          10
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


*Components*





Additionally,
      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.





***Note
      7 – Employee Equity Incentive Plans***





*Stock-Based
      Compensation*





DCT
      has
      two stock-based employee compensation plans, which are more fully described
      in
      the 2007 Annual Report on Form 10-KSB.





Effective
      January 1, 2006, DCT adopted the fair value recognition provisions of SFAS
      No.123R, “ *Share-Based
      Payments”* (“SFAS
      123R”), using the modified prospective application method. Under this transition
      method, compensation cost recognized for the three and nine months ended
      September 30, 2008 and 2007, includes the applicable amounts of: (a)
      compensation expense of all stock-based payments granted prior to, but not
      yet
      vested as of January 1, 2006 (based on the grant-date fair value estimated
      in
      accordance with the original provisions of SFAS 123 and the Accounting
      Principles Board (“APB”) No. 25, “ *Accounting
      for Stock Issued to Employees”* (“APB
      25”)), and (b) compensation expense for all stock-based payments granted
      subsequent to January 1, 2006 (based on the grant-date fair value estimated
      in
      accordance with the new provisions of SFAS 123R).





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





**Three months Ended**
              **September 30,**
            
            **Nine months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Selling, general
                and administrative
            
            **$**
            **147**
            
            $
            86
            
            **$**
            **312**
            
            $
            816Research
                and development
            
            
            **30**
            
            
            106
            
            
            **79**
            
            
            456Total
            
            **$**
            **177**
            
            $
            192
            
            **$**
            **391**
            
            $
            1,272





The
      weighted average assumptions used to value options granted during the three
      months ended September 30, 2008 are as follows:





Weighted
                average estimated values per share
            
            $
            0.24Expected
                option life in years
            
            
            2.0Weighted
                average expected volatility
            
            
            175
            %Expected
                dividend yield
            
            
            0
            %Weighted
                average risk free interest rate
            
            
            2.9
            %





At
      September 30, 2008, the Company had approximately $1,295,000 of total
      unrecognized compensation cost related to stock options. This cost is expected
      to be recognized over a weighted average period of approximately 2.9
      years.





-
          11
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


*Stock
      Options*





The
      following table summarizes stock option activity and related information for
      the
      nine months ended September 30, 2008:





**Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding at December 31,
                2007
            
            
            6,847,550
            
            $
            0.18Granted
            
            
            5,105,000
            
            
            0.30Exercised
            
            
            (1,446,000
            )
            
            (0.01
            )Cancelled
            
            
            (1,069,385
            )
            
            (0.77
            )Outstanding
                at September 30, 2008
            
            
            9,437,165
            
            $
            0.32





The
      following table summarizes all options outstanding and exercisable by price
      range as of September 30, 2008:





**Options Outstanding**
            
            **Options Exercisable****Range of**
              **Exercise**
              **Prices**
            
            **Number**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life (Years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$0.01
            
            
            2,241,165
            
            
            3.57
            
            $
            0.01
            
            
            2,241,165
            
            $
            0.01$0.30
            
            
            5,105,000
            
            
            9.79
            
            $
            0.30
            
            
            -
            
            
            -$0.60
                - $0.70
            
            
            2,091,000
            
            
            8.32
            
            $
            0.69
            
            
            1,304,000
            
            $
            0.70





***Note
      8 – Basic and Diluted Net Loss Per Common Share***





Basic
      net
      loss per common share is computed by dividing net loss by the weighted average
      number of shares of common stock outstanding during the period. Diluted net
      loss
      per common 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. Common stock equivalents were not considered in calculating DCT’s
      diluted net loss per common share for the three and nine months ended September
      30, 2008 and 2007 as their effect would be anti-dilutive. As a result, for
      all
      periods presented, DCT’s basic and diluted net loss per common share is the
      same.





***Note
      9 – Equity***





***Common
      Stock Activity***





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





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.





-
          12
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


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 5% cumulative
      convertible preferred stock (“Series A Stock”) and the related accrued dividend
      shares.





***Preferred
      Stock Activity***





*Series
      A 5% Cumulative Convertible Preferred Stock Maturity*





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





*Series
      A Stock Dividends*





Through
      maturity, DCT’s Series A Stock accrued cumulative dividends at a rate of 5% per
      year, 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 and DCT opted to pay all dividends in
      shares of common stock. From January 1, 2008 through the Series A Stock
      Redemption Date, DCT recorded Series A Stock dividends of $14,000. During the
      three and nine months ended September 30, 2007, Series A Stock dividends were
      approximately $20,000 and $64,000, respectively.





*Series
      A Stock Deemed Dividends*





In
      accordance with EITF Issue No. 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios* (“EITF
      98-5”), and EITF Issue No. 00-27, *Application
      of Issue 98-5 to Certain Convertible Instruments* (“EITF
      00-27”), DCT’s Series A Stock had an embedded contingent beneficial conversion
      feature because the conversion price was less than the fair value of DCT’s
      common stock on the maturity and conversion of the Series A Stock into common
      stock. Additionally, the embedded beneficial conversion feature was considered
      contingent because it was based on two variables: (i) how much of the Series
      A
      Stock Redemption Price was paid in DCT’s common stock, and (ii) the fifteen-day
      volume weighted average price of the common stock on the Series A Redemption
      Date.





Under
      EITF 98-5, a contingent beneficial conversion feature should be recognized
      in
      earnings when all contingencies are resolved. DCT recorded a deemed dividend
      on
      its Series A Stock during the first quarter of 2008 totaling $231,000. This
      non-cash dividend was recorded to reflect the implied economic value to the
      preferred stockholder of converting Series A shares into common stock at a
      15%
      discount of the common stock price at the time of conversion. The fair value
      was
      calculated using the difference between the agreed-upon conversion price of
      the
      Series A Preferred Stock into shares of common stock and the fair market value
      of DCT's common stock on the conversion date. This amount was charged to
      accumulated deficit with the offsetting credit to additional paid-in-capital.





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





-
          13
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


*Preferred
      Stock Accounting Treatment*





Preferred
      Stock Classification. Pursuant
      to EITF Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* (“EITF
      00-19”), and EITF Topic D-98, *Classification
      and Measurement of Redeemable Securities* (“Topic
      D-98”), DCT’s Series A Stock (until its maturity on March 15, 2008) and Series B
      Stock were classified as temporary equity, as the stock is conditionally
      redeemable on the redemption date.





The
      difference between the initial recorded value of the Series A Stock redemption
      value was accreted, on a straight-line basis, from the issuance date through
      the
      maturity date of March 15, 2008. The difference between the initial recorded
      value of the Series B Stock and the minimum redemption value is being accreted,
      on a straight-line basis, from the issuance date through the earliest redemption
      of August 7, 2009. The increases in the carrying amounts of the Series A Stock
      and Series B Stock for the three and nine months ended September 30, 2008 were
      $13,000 and $113,000, respectively. The increases in the carrying amounts of
      the
      Series A Stock and Series B Stock for the three and nine months ended September
      30, 2007 were $217,000 and $657,000, respectively. The accretion of DCT’s Series
      A Stock and Series B Stock redemption value is disclosed as a reconciling item
      and adjusts DCT’s reported net loss, together with the Series A Stock dividends,
      to net loss available to common stockholders.





Likely
      Embedded Derivative. Under
      the provisions of SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* (“SFAS
      133”) and EITF 00-19, the redemption feature and registrations rights feature of
      DCT’s (i) Series A Stock (until the March 15, 2008 maturity date), (ii) Series
      A
      Stock warrants, (iii) Series B Stock, and (iv) Series B Stock warrants (referred
      to collectively as “DCT’s Derivative Instruments”) are all likely derivative
      instruments that require bifurcation from the host contract. Accordingly, the
      fair value of DCT’s outstanding Derivative Instruments have been recorded in
      DCT’s balance sheet as a liability as of September 30, 2008. Increases in the
      estimated fair value of DCT’s Derivative Instruments are recorded as
      non-operating expense on DCT’s Statements of Operations. Decreases in the
      estimated fair value of DCT’s Derivative Instruments are recorded as
      non-operating revenue on DCT’s Statements of Operations.





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





Significant
      terms and estimated fair values of DCT’s Derivative Instruments are stated below
      ( *in
      thousands, except per share price* ):





**September 30, 2008**
            
            **December 31, 2007****Host Contract**
            
            **Expiration/**
              **Maturity Date**
            
            **Price**
              **$**
            
            **Shares**
            
            **Fair**
              **Value**
            
            **Shares**
            
            **Fair**
              **Value**Warrants issued with Series A Stock
            
            
            March 15, 2010
            
            
            1.00
            
            
            186.5
            
            $
            75
            
            
            186.5
            
            $
            160Warrants issued with
                Series A Stock
            
            
            March
                15, 2010
            
            
            2.00
            
            
            932.5
            
            
            296
            
            
            932.5
            
            
            32Warrants
                issued with Series B Stock
            
            
            August
                7, 2009
            
            
            1.50
            
            
            675.0
            
            
            127
            
            
            675.0
            
            
            41Series
                A Stock
            
            
            March
                15, 2008
            
            
            1.00
            
            
            -
            
            
            -
            
            
            1,150.0
            
            
            -Series
                B Stock
            
            
            August
                7, 2009
            
            
            1.00
            
            
            150.0
            
            
            38
            
            
            150.0
            
            
            22Total
            
            
            
            
            
            
            
            
            
            
            $
            536
            
            
            
            
            $
            255





-
          14
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


The
      fair
      value of DCT’s Derivative Instruments was determined under the following
      assumptions:





**September**
              **30, 2008**
            
            **December**
              **31, 2007**Remaining contractual term, Series A Stock
                Warrants (years)
            
            
            1.5
            
            
            2.2Remaining
                contractual term, Series B Stock Warrants (years)
            
            
            0.9
            
            
            1.6Remaining
                contractual term, Series A Stock (years)
            
            
            -
            
            
            0.2Remaining
                contractual term, Series B Stock (years)
            
            
            0.9
            
            
            1.6Average
                expected volatility
            
            
            149.0
            %
            
            49.0
            %Expected
                dividend yield
            
            
            -
            
            
            -Risk
                free interest rate
            
            
            1.8
            %
            
            4.0
            %




***Note
      10 – Commitments and Contingencies***




*Operating
      Leases*




The
      Company is committed under various non-cancelable operating leases which extend
      through June 2011. Future minimum rental commitments as of September 30, 2008
      are listed below ( *in
      thousands* ):




**Year Ending**
              **September 30,**
            
            **Future**
              **Minimum**
              **Lease**
              **Payments**2009
            
            $
            2422010
            
            
            1612011
            
            
            1Total
            
            $
            404




*Bank
      Line of Credit*




DCT
      has a
      $3,000,000 line of credit (“LOC”) at a commercial bank. Borrowings under the LOC
      are limited to 80% of eligible trade receivables and 40% of eligible
      inventories, as defined in the LOC agreement. The LOC bears an annual interest
      rate of prime (5.0% at September 30, 2008) plus 1.25% for advances drawn against
      trade receivables and prime plus 2.25% for advances drawn against inventories.
      Interest payments are due monthly and all unpaid interest and principal is
      due
      in full on September 13, 2009. Upon certain events of default, the default
      variable interest rate increases to prime plus 5%. DCT had an available
      borrowing capacity of $1,141,000 on its LOC at September 30, 2008.




As
      of
      September 30, 2008, DCT was in compliance with all LOC debt
      covenants.




*Notes
      Payable and Related Warrant Liability*




On
      September 27, 2007, the Company entered into a $1,500,000 term loan agreement
      ("Loan Agreement") with Montage Capital, LLC ("Lender") in an arm’s length
      transaction. The loan called for monthly principal and interest payments, at
      an
      annual interest rate of 15%, and originally matured on November 30, 2008. DCT
      paid the loan in full in September 2008. There was no prepayment penalty
      associated with the early pay-off.




In
      connection with the Loan Agreement, DCT issued warrants (“Loan Warrants”) to
      purchase up to 650,000 shares of DCT’s common stock at an initial exercise price
      of $0.60 per share. The Loan Warrants vested immediately and expire September
      2012. From the initial funding of the Loan Agreement through March 31, 2008,
      the
      warrant holders had the right to require DCT to purchase the warrant for a
      maximum of $250,000. On March 31, 2008, the Loan Warrant repurchase price
      increased to a maximum of $350,000. The Loan Warrant repurchase feature expires
      September 2012.





-
          15
          -
 
 **DOCUMENT
          CAPTURE TECHNOLOGIES, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


The
      Company accounted for the issuance of the Loan Warrants under the provisions
      of
      FASB Staff Position (“FSP”) No. 150-5, *Issuer’s
      Accounting Under Statement No. 150 for Freestanding Warrants and Other
      Similar Instruments on Shares That Are Redeemable”* (“FSP
      150-5”) *,* an
      interpretation of SFAS No. 150, *Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity* (“SFAS
      150”). Pursuant to FSP 150-5, freestanding warrants for shares that are either
      puttable or warrants for shares that are redeemable are classified as
      liabilities on the consolidated balance sheet at fair value with the offset
      recorded to debt discount. The Company amortized the debt discount to interest
      expense from the loan origination date through the early pay-off date. At each
      reporting period, the Company will remeasure the fair value of the Loan Warrant
      liability with any gains or losses recorded as a component of non-operating
      income (expense), net.





The
      total
      initial fair value of the Loan Warrants was approximately $399,000 as
      calculated using the Black-Scholes pricing model with the following assumptions:
      contractual term of five years, 5.3% risk-free interest rate, expected
      volatility of 90% and expected dividend yield of 0%. In
      connection with the Loan Warrants, DCT recorded non-cash interest expense for
      the three and nine months ended September 30, 2008 of $144,000 and $311,000,
      respectively. The debt discount was fully amortized as of September 30, 2008.





As
      of
      September 30, 2008, the fair value of the warrants was approximately $432,000
      as
      calculated using the Black-Scholes pricing model with the following assumptions:
      contractual term of four years, 3.1% risk-free interest rate, expected
      volatility of 258% and expected dividend yield of 0%. The Company recorded
      a
      non-cash loss of approximately $33,000 during the three and nine months ended
      September 30, 2008 to account for the increase in the fair value of all
      outstanding Loan Warrants as of September 30, 2008.




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




*Employment
      Agreements*




The
      Company maintains employment agreements with its executive officers, which
      extend through 2008. The agreements provide for a base salary, annual bonus
      to
      be determined by the Board of Directors, termination payments, stock options,
      non-competition provisions, and other terms and conditions of employment. In
      addition, the Company maintains employment agreements with other key employees
      with similar terms and conditions. As of September 30, 2008, termination
      payments totaling $1,026,000 are in effect.




*Consulting
      Agreement*




DCT
      entered into an investor relations consulting agreement dated January 25, 2008,
      for a term of one year beginning January 1, 2008, payable at a monthly rate
      of
      $5,000. Additionally, DCT agreed to pay the consultant 110,000 warrants with
      an
      exercise price of $0.65 per share, with the following vesting schedule: (i)
      50%
      upon signing the agreement, (ii) 25% on June 30, 2008, and (iii) 25% on
      September 30, 2008. The warrants expire three years after the respective vesting
      dates (January 1, 2011, June 30, 2011, and September 30, 2011). Each warrant
      includes a cashless exercise provision. The warrants will not be registered
      under federal or state securities laws. The fair value of these warrants, as
      determined by the Black-Scholes valuation model, totaled approximately $68,000
      and is amortized ratably over the vesting period. As such, $17,000 and $68,000
      was charged to general and administrative expense and credited to additional
      paid-in capital during the three and nine months ended September 30, 2008,
      respectively.




-
          16
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


*Registration
      Rights Agreements*




In
      connection with the issuance of multiple equity instruments, DCT executed
      registration rights agreements with the purchasers thereof under which DCT
      agreed to register the common shares underlying the equity instrument. All
      registration rights agreements provide for liquidated damages in the event
      the
      registration statement is not maintained continuously effective. During the
      nine
      months ended September 30, 2008, DCT maintained continuously effective
      registration statements for all equity instruments that require effective
      registration statements.




*Litigation,
      Claims and Assessments*




The
      Company experiences routine litigation in the normal course of its business
      and
      does not believe that any pending litigation will have a material adverse effect
      on DCT’s financial condition, results of operations or cash flows.




***Note
      11 – Segment and Geographic Information***




*Segment
      Information*





DCT
      currently operates in one segment: the design, development and delivery of
      various imaging technology solutions, most notably scanners, as defined by
      SFAS
      No. 131, “ *Disclosures
      about Segments of an Enterprise and Related Information”* (“SFAS
      131”).





*Geographic
      Information*





During
      the three and nine months ended September 30, 2008 and 2007, DCT recorded net
      sales throughout the U.S., Asia and Europe as determined by the final
      destination of the product. The following table summarizes total net sales
      attributable to significant countries ( *in
      thousands* ):





**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**U.S.
            
            **$**
            **2,775**
            
            $
            3,103
            
            **$**
            **7,845**
            
            $
            10,642Asia
            
            
            **57**
            
            
            7
            
            
            **101**
            
            
            7Europe
                and other
            
            
            **187**
            
            
            186
            
            
            **614**
            
            
            470**$**
            **3,019**
            
            $
            3,296
            
            **$**
            **8,560**
            
            $
            11,119





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




**September**
              **30, 2008**
            
            **December**
              **31, 2007**U.S.
            
            **$**
            **3,013**
            
            $
            5,574Asia
            
            
            **81**
            
            
            110Europe
            
            
            **33**
            
            
            109**$**
            **3,127**
            
            $
            5,793





Assets
      located in Asia relate to tooling equipment required to manufacture DCT’s
      product. Assets located in Europe relate to DCT’s field service, sales,
      distribution and inventory management in the Netherlands.





-
          17
          -


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)**


***Note
      12 – Subsequent Event***





At
      DCT’s
      Annual Stockholders’ Meeting held on October 3, 2008, stockholders voted for the
      increase in the number of shares of common stock authorized for issuance under
      DCT’s 2006 Stock Option Plan from 1,500,000 to 2,500,000.


-
          18
          -


**Item
      2 - Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**




The
      following discussion should be read in conjunction with Document Capture
      Technologies, Inc.’s (“DCT” or “Company”) unaudited condensed consolidated
      financial statements and notes included herein. The results described below
      are
      not necessarily indicative of the results to be expected in any future period.
      Certain statements in this discussion and analysis, including statements
      regarding our strategy, financial performance and revenue sources, are
      forward-looking statements based on current expectations and entail various
      risks and uncertainties that could cause actual results to differ materially
      from those expressed in the forward-looking statements. Readers are referred
      to
      DCT’s Annual Report on Form 10-KSB for the year ended December 31, 2007 as filed
      with the Securities and Exchange Commission on March 5, 2008. We undertake
      no
      duty to update any forward-looking statement to conform the statement to actual
      results or changes in our expectations.




Management's
      discussion and analysis of financial condition and results of operations
      ("MD&A") is provided as a supplement to the accompanying unaudited condensed
      consolidated financial statements and notes 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
                the results of operations and to anticipate future trends in those
                operations.




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




·
            ***Results
                of operations.***This section provides an analysis of our results of operations for
                the
                three and nine months ended September 30, 2008 compared to the three
                and
                nine months ended September 30, 2007. A brief description of certain
                aspects, transactions and events is provided, including related-party
                transactions that impact the comparability of the results being
                analyzed.




·
            ***Liquidity
                and capital resources.***This section provides an analysis of our financial condition and
                cash
                flows as of and for the nine months ended September 30, 2008 as compared
                to the nine months ended September 30,
                2007.




***Overview***




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




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




Although
      our 2008 sales have been affected by the general economic slowdown of the U.S.
      economy, we have reduced our expenses by concentrating on our core business
      and
      focusing our resources toward revenue-generating activities. The successful
      reduction of our operating expenses has somewhat mitigated the negative impact
      of reduced sales to our financial condition. The most significant reduction
      to
      our operating expenses was a result of terminating our high definition (“HD”)
      display research and development efforts during November 2007. All HD
      display-related expenses, including employees and contractors were terminated
      by
      December 31, 2007. As such, our operating expenses for the three and nine months
      ended September 30, 2008 are not directly comparable to our operating expenses
      for the three and nine months ended September 30, 2007. We never generated
      any
      sales from our HD display research and development efforts.




-
          19
          -




While
      substantially all our revenues and operating expenses have historically been
      denominated in the U.S. dollar and unaffected by the fluctuating value of the
      U.S. dollar, all our products are purchased in the Chinese Yuan. This has
      significantly increased the cost of our products, which has not been passed
      through to our customers.




We
      have
      and will continue to explore and evaluate a range of strategic opportunities
      to
      enhance shareholder value, including, but not limited to, combinations,
      partnerships, sales or mergers of our operations or assets with another entity
      and/or recapitalization. As of the date of this filing, we continue to evaluate
      different strategic opportunities.




***Critical
      Accounting Policies***




Our
      MD&A is based upon our unaudited condensed consolidated financial
      statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States. The preparation of these financial
      statements requires us to make estimates and judgments that affect the reported
      amounts of assets, liabilities, revenues and expenses, and related disclosure
      of
      contingent assets and liabilities. On an on-going basis, we evaluate our
      estimates, including those related to our derivative financial instruments,
      revenue recognition, trade receivables and the related allowance, inventories
      and the related allowance, and income taxes. We base our estimates on historical
      experience and on various other assumptions that we believe are reasonable
      under
      the circumstances, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these estimates
      under different assumptions or conditions.




An
      accounting policy is deemed to be critical if it requires an accounting estimate
      to be made based on assumptions about matters that are highly uncertain at
      the
      time the estimate is made, and if different estimates that reasonably could
      have
      been used or changes in the accounting estimate that are reasonably likely
      to
      occur could materially change the financial statements.




Our
      disclosures of critical accounting policies in our Annual Report on Form 10-KSB
      for the year ended December 31, 2007 have not materially changed since that
      report was filed.


-
          20
          -


***Results
      of Operations***





The
      following table summarizes certain aspects of our results of operations for
      the
      three and nine months ended September 30, 2008 compared to the three and nine
      months ended September 30, 2007 ( *in
      thousands* ):





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **$**
            
            **%**
            
            **2008**
            
            **2007**
            
            **$**
            
            **%**Net
                sales
            
            $
            3,019
            
            $
            3,296
            
            $
            (277
            )
            
            (8
            )%
            $
            8,560
            
            $
            11,119
            
            $
            (2,559
            )
            
            (23
            )%Cost
                of sales
            
            
            1,986
            
            
            1,975
            
            
            11
            
            
            1
            
            
            5,811
            
            
            6,609
            
            
            (798
            )
            
            (12
            )As
                a percentage of sales
            
            
            66
            %
            
            60
            %
            
            
            
            
            
            
            
            68
            %
            
            59
            %Selling,
                general and administrative expense
            
            
            836
            
            
            920
            
            
            (84
            )
            
            (9
            )
            
            2,308
            
            
            3,210
            
            
            (902
            )
            
            (28
            )Research
                and development expense
            
            
            166
            
            
            526
            
            
            (360
            )
            
            (68
            )
            
            539
            
            
            2,052
            
            
            (1,513
            )
            
            (74
            )Total
                non-operating income (expense), net
            
            
            (582
            )
            
            (451
            )
            
            NM
            
            
            NM
            
            
            (173
            )
            
            (468
            )
            
            NM
            
            
            NMDividend
                and deemed dividend on5%
                convertible preferred stock andaccretion
                of preferred stockredemption
                value
            
            
            (13
            )
            
            (237
            )
            
            NM
            
            
            NM
            
            
            (358
            )
            
            (721
            )
            
            NM
            
            
            NMNM
                = Not Meaningful





*Net
      Sales*





The
      decrease in net sales during both the three and nine months ended September
      30,
      2008 as compared to the same periods in 2007 is attributable to the overall
      slowdown of the general economic and market conditions in the U.S. economy
      and
      the related slowdown of information technology (“IT”) spending. Additionally,
      the decrease in net sales during the nine months ended September 30, 2008
      compared to the nine months ended September 30, 2007 was a result of the
      decreased demand within the banking and financial sectors of our market. These
      sectors have been more focused on regulatory actions and financial hardships
      than on investing in transaction system infrastructure, of which we are a key
      supplier. Sales to these particular sectors decreased $828,000 during the nine
      months ended September 30, 2008 as compared to the nine months ended September
      30, 2007. We had no sales to customers in the banking and financial sectors
      during either the three months ended September 30, 2008 or 2007.





Our
      international sales have continued to grow as a result of (i) the European
      markets for our products continue to show strong growth, and (ii) we nearly
      doubled our distribution network within this market during 2008. During the
      three and nine months ended September 30, 2008, our European sales were $171,000
      and $614,000, or 6% and 7%, respectively, of our total net sales. During the
      three and nine months ended September 30, 2007, our European sales were $186,000
      and $470,000, or 6% and 4%, respectively, of our sales. We expect our European
      sales to continue to increase as we continue to improve our ability to deliver
      all channel products from our Netherlands-based warehouse and improve our
      time-to-market.





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





Although
      we continually concentrate on expanding our significant customer base, our
      revenue remains dependent on a small number of significant customers. During
      the
      three months ended September 30, 2008, 67% of sales were generated from three
      customers as compared to 68% of sales generated from three customers during
      the
      same period in 2007. During the nine months ended September 30, 2008, 62% of
      our
      sales were generated from three customers as compared to 57% of sales generated
      from three customers during the same period in 2007. The identities of our
      largest customers and their respective contributions to our net sales have
      varied in the past and will likely continue to vary from period to
      period.





-
          21
          -




*Cost
      of Sales, Including Gross Profit*




Cost
      of
      sales includes all direct costs related to the purchase of scanners, imaging
      modules and services related to the delivery of those items manufactured in
      China, and to a lesser extent, engineering services and software royalties.
      Cost
      of sales as a percentage of net sales increased during both the three and nine
      months ended September 30, 2008 as compared to the same periods in 2007 as
      a
      direct result of the devaluation of the U.S. dollar against the Chinese Yuan.
      This increase was somewhat offset by the following factors during the second
      and
      third quarters of 2008:




·
            The
                negotiated price reduction of our finished
                product;




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




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





We
      expect
      our cost of sales as a percentage of net sales to fluctuate somewhat during
      the
      remainder of 2008 as (i) we experience changes in our product mix, (ii) the
      value of the U.S. dollar remains volatile and (iii) we implement further product
      cost reduction strategies.





*Selling,
      General and Administrative Expenses*




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




The
      decrease in selling, general and administrative expense during both the three
      and nine months ended September 30, 2008 as compared to the same periods in
      2007
      was primarily attributable to the termination of our HD display-related
      activities, which added approximately $83,000 and $290,000 of product promotion
      and marketing expense during the three and nine months ended September 30,
      2007,
      respectively. Subsequent to January 1, 2008, we have not incurred any HD
      display-related expenses.




Additionally,
      the decrease during the nine months ended September 30, 2008 as compared to
      the
      nine months ended September 30, 2007 was attributable to lower stock-based
      compensation costs (a non-cash charge) as a result of granting stock options
      to
      key employees and accounting for such options under Statement of Financial
      Accounting Standards (“SFAS”) No.123R, “ *Share-Based
      Payments”* (“SFAS
      123R”). See “Note 7: Employee Equity Incentive Plans” in Part I, Item 1 of this
      Form 10-Q. Stock-based compensation cost was $312,000 and $816,000 for the
      nine
      months ended September 30, 2008 and 2007, respectively.




During
      the three months ended September 30, 2008, we issued new stock options to
      directors and key employees. This caused an increase in our stock-based
      compensation costs to $147,000 from $86,000 during the three months ended
      September 30, 2008 and 2007, respectively.




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





*Research
      and Development Expense*





Research
      and development expense consists primarily of salaries and related costs,
      including stock-based compensation costs of employees engaged in product
      research, design and development activities, compliance testing, documentation,
      prototypes and expenses associated with transitioning the product to production.
      The decrease during the three and nine months ended September 30, 2008 as
      compared to the three and nine months ended September 30, 2007 was a result
      of
      terminating our HD display-related product development during November 2007.
      During the three and nine months ended September 30, 2007, salaries, expensed
      equipment and contractors related to our HD display product was approximately
      $300,000 and $1,274,000, respectively. Subsequent to January 1, 2008, we have
      not incurred any HD display-related expenses.





-
          22
          -




To
      a
      lesser extent, research and development expenses decreased as a result of
      reduced stock-based compensation cost (a non-cash charge) attributable to
      granting stock options to key employees and accounting for such option grants
      under SFAS 123R. See “Note 7: Employee Equity Incentive Plans” in Part I, Item 1
      of this Form 10-Q. Stock-based compensation cost was $30,000 and $79,000 for
      the
      three and nine months ended September 30, 2008, respectively. Stock-based
      compensation cost was $106,000 and $456,000 for the three and nine months ended
      September 30, 2007, respectively.





*Total
      Non-Operating Income (Expense)*





The
      most
      significant component of our non-operating income (expense) was a $550,000
      gain
      on sale of assets during the nine months ended September 30, 2008. In December
      2007, DCT entered into an asset purchase agreement with Sky Glory Enterprise
      Investment Co., Ltd (“Sky Glory”), whereby Sky Glory agreed to purchase certain
      HD display-related assets, subject to certain terms and conditions. There were
      no costs associated with the sale of HD related assets. As such, the entire
      cash
      proceeds of $550,000 were recorded as a gain on sale of assets during the nine
      months ended September 30, 2008. See “Note 3: Sale of HD Display-Related
      Assets”in Part I, Item 1 of this Form 10-Q.





Another
      significant component of our non-operating income (expense) was the change
      in
      the fair value of our liability for derivative contracts, as calculated by
      the
      Black-Scholes valuation model, associated with our Series A Stock and related
      warrants and Series B Stock and related warrants. During the three and nine
      months ended September 30, 2008, the fair value of our liability for derivative
      contracts increased $425,000 and $314,000 respectively. During the three and
      nine months ended September 30, 2007, the fair value of our liability for
      derivative contracts increased $464,000 and increased $501,000, respectively.
      Pursuant SFAS 133, “ *Accounting
      for Derivative Instruments and Hedging Activities* ”
(“SFAS
      133”) and the Emerging Issues Task Force (“EITF”) No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* (“EITF
      00-19”), the increase in the fair value of our liability for derivative
      contracts is included as non-operating expense in our consolidated statements
      of
      operations.





Non-operating
      income (expense) was also impacted by our increased debt, which resulted in
      an
      increase in interest expense to $159,000 and $427,000 during the three and
      nine
      months ended September 30, 2008, respectively, from $37,000 and $97,000 during
      the three and nine months ended September 30, 2007, respectively. Of the
      interest expense recorded during the three and nine months ended September
      30,
      2008, $144,000 and $311,000, respectively, was non-cash interest expense
      attributable to amortization of debt discount resulting from debt issuance
      costs. Non-cash interest expense during both the three and nine months ended
      September 30, 2007 was $2,000.





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





During
      the three and nine months ended September 30, 2008, the total accretion on
      our
      preferred stock was $13,000 and $113,000, respectively. During the three and
      nine months ended September 30, 2007, the total accretion on our preferred
      stock
      was $217,000 and $657,000, respectively. The decrease during both periods was
      attributable to the conversion of both our Series A Stock and Series B Stock
      and
      the maturity of our Series A Stock on March 15, 2008.





We
      had no
      dividends during the three months ended September 30, 2008, as a result of
      the
      maturity of our Series A Stock, as compared to $20,000 during the three months
      ended September 30, 2007. During the nine months ended September 30, 2008 and
      2007, Series A Stock dividends accrued were approximately $14,000 and $64,000,
      respectively. We do not pay dividends on our Series B Stock.





DCT
      recorded a deemed dividend on its Series A Stock during the first quarter of
      2008 totaling $231,000. This non-cash dividend was recorded to reflect the
      implied economic value to the preferred stockholder of converting Series A
      shares into common stock at a 15% discount of the common stock price at the
      time
      of conversion. The fair value was calculated using the difference between the
      agreed-upon conversion price of the Series A Preferred Stock into shares of
      common stock and the fair market value of DCT's common stock on the conversion
      date. See “Note 9: Equity” in Part I, Item 1 of this Form 10-Q.





-
          23
          -




***Liquidity
      and Capital Resources***





At
      September 30, 2008, our principal sources of liquidity included cash and cash
      equivalents of $761,000 and an available borrowing capacity of $1,141,000 on
      our
      bank line of credit. Except for the additional principal payments and early
      pay-off of our notes payable, we had no other significant cash outlays during
      the current reporting period.





A
      summary
      of our cash flow activities is show below ( *in
      thousands* ):





**Nine Months Ended**
              **September 30,****2008**
            
            **2007**Net cash provided by operating
                activities
            
            $
            2,311
            
            $
            384Net
                cash used by investing activities
            
            
            (7
            )
            
            (67
            )Net
                cash (used) provided by financing activities
            
            
            (3,313
            )
            
            487**Net
                increase (decrease) in cash and cash equivalents**
            
            **$**
            **(1,009**
            **)**
            **$**
            **804**





Operating
      activities :
      During
      the nine months ended September 30, 2008, our operating activities provided
      $2,311,000 of cash. This amount was comprised of our $631,000 net loss available
      to common shareholders, $1,466,000 of net non-cash expenses, and $1,476,000
      net
      cash provided by changes in operating assets and liabilities. Our net loss
      available to common shareholders for the nine months ended September 30, 2008
      included a $550,000 gain on the sale of our HD display-related assets, which
      positively impacted our cash position. Additionally, during the second quarter
      of 2008, we sold, and our customer immediately paid for, “end of life” parts,
      which totaled $230,000. Although we don’t recognize revenue associated with the
      sale until the finished scanner is shipped to the customer, the entire
      transaction had a positive impact on our cash flow from operations.





During
      the nine months ended September 30, 2007, our operating activities provided
      $384,000 of cash. This amount was comprised of our $1,945,000 net loss available
      to common shareholders, $2,478,000 of net non-cash expenses and $149,000 net
      cash used by changes in operating assets and liabilities.





Non-cash
      items included in net loss available to common shareholders 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, amortization of debt discount, and accretion
      of
      our Series A and Series B preferred stock redemption value. Changes in our
      operating assets and liabilities are indicative of the decrease in the sales
      of
      our product during the nine months ended September 30, 2008 compared to the
      nine
      months ended September 30, 2007.





We
      expect
      future cash provided (used) by operating activities to fluctuate 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 :
      Our
      investing activities for both the nine months ended September 30, 2008 and
      2007
      were minimal and consisted of computer and general equipment purchases during
      the normal course of business.




Financing
      activities :
      During
      the nine months ended September 30, 2008, our financing activities consisted
      of
      (i) paying off our bank line of credit, (ii) normal recurring monthly principal
      payments according to the terms of our notes payable agreement, which totaled
      $900,000, and (3) additional principal payments and early pay off of our notes
      payable, which totaled $400,000 During the nine months ended September 30,
      2007,
      our financing activities consisted of a $487,000 net draw against our bank
      line
      of credit to meet short-term obligations, including payments for product
      purchases.





-
          24
          -





*Cash
      and Working Capital Requirements*





As
      previously discussed, we terminated our HD display research and development
      efforts during November 2007. With the termination of the HD display portion
      of
      our business, our operating expenses during the three and nine months ended
      September 30, 2008 were more aligned with our net sales. Additionally, our
      anticipated future operating expenses will be more aligned with our projected
      net sales. If we successfully manage our projected net sales and realigned
      operating expenses, of which there can be no assurance, management believes
      that
      current cash and other sources of liquidity are sufficient to fund normal
      operations through the next 12 months.





*Contractual
      Obligations*





The
      following table summarizes our contractual obligations at September 30, 2008,
      and the effect such obligations are expected to have on our liquidity and cash
      flows in future periods ( *in
      thousands* ):





**Less Than**
            
            **One – Three**
            
            **Three – Five****Total**
            
            **One Year**
            
            **Years**
            
            **Years**Bank
                line of credit**(1)**
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Warrant
                repurchase liability**(2)**
            
            
            350
            
            
            350
            
            
            -
            
            
            -Series
                B Stock principal**(3)**
            
            
            150
            
            
            -
            
            
            150
            
            
            -Operating
                lease obligations
            
            
            404
            
            
            242
            
            
            162
            
            
            -Consulting
                agreement
            
            
            15
            
            
            15
            
            
            -
            
            
            -Total
                contractual cash obligations
            
            $
            919
            
            $
            607
            
            $
            312
            
            $
            -





**(1)** DCT
      has a
      $3,000,000 line of credit (“LOC”) at a commercial bank. Borrowings under the LOC
      are limited to 80% of eligible trade receivable and 40% of eligible inventories,
      as defined in the LOC agreement. The LOC bears an annual interest rate of prime
      (5.0% at September 30, 2008) plus 1.25% for advances drawn against trade
      receivables and prime plus 2.25% for advances drawn against inventories.
      Interest payments are due monthly and all unpaid interest and principal is
      due
      in full on September 13, 2009. Upon certain events of default, the default
      variable interest rate increases to prime plus 5%. DCT had an available
      borrowing capacity of $1,141,000 on its LOC at September 30, 2008.





As
      of
      September 30, 2008, DCT was in compliance with all LOC debt
      covenants.





**(2)** On
      September 27, 2007, we entered into a $1,500,000 term loan agreement ("Loan
      Agreement") with Montage Capital, LLC ("Lender"). The loan was fully paid off
      at
      September 30, 2008. In connection with the Loan Agreement, we issued warrants
      (“Loan Warrants”) to purchase up to 650,000 shares of our common stock at an
      initial exercise price of $0.60 per share. The Loan Warrants vested immediately
      and expire September 2012. From the initial funding of the Loan Agreement
      through March 31, 2008, the warrant holders had the right to require DCT to
      purchase the warrant for a maximum of $250,000. On March 31, 2008, the warrant
      repurchase price increased to a maximum of $350,000. The warrant repurchase
      feature expires September 2012.





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





*Off-Balance
      Sheet Arrangements*





At
      September 30, 2008, we did not have any relationship with unconsolidated
      entities or financial partnerships, which other companies have established
      for
      the purpose of facilitating off-balance sheet arrangements or other
      contractually narrow or limited purposes. Therefore, we are not materially
      exposed to any financing, liquidity, market or credit risk that could arise
      if
      we had engaged in such relationships.





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          25
          -




***Trends***





We
      expect
      the recent devaluation of the U.S. dollar against the Chinese Yuan to continue
      to negatively impact our business for the foreseeable future. To the best of
      our
      knowledge, except for the devaluation of the U.S. dollar against the Chinese
      Yuan and commitments described in “Note 10: Commitments and Contingencies” in
      Part I, Item 1 of this Form 10-Q, there are no other known trends or demands,
      commitments, events or uncertainties **** that
      existed at September 30, 2008, which are likely to have a material effect on
      our
      future liquidity.


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          26
          -


**Item
      3 – Quantitative and Qualitative Disclosure about Market
      Risk**





We
      are
      exposed to market risk related to fluctuations in interest rates and in foreign
      currency exchange rates as follows:




***Interest
      Rate Exposure***




DCT’s
      exposure to market risk for changes in interest rates is limited to our LOC,
      which varies with the prime lending rate. We only draw on our LOC when needed
      for short-term working capital needs and we maintain a low or zero balance
      when
      possible. As such, the interest expense on our variable rate debt is a minimal
      part of our operations. Although we cannot predict market fluctuations in
      interest rates and their impact on our variable rate debt, management believes
      the exposure is minimal. For example, a 10% increase in the prime lending rate
      during the three and nine months ended September 30, 2008 would have only
      increased our interest expense approximately $9,000 and $43,000, respectively.
      Both amounts are immaterial to our consolidated financial position, cash flows
      and results of operations.





***Foreign
      Currency Exchange Rate Exposure***





We
      operate in the United States, manufacture in China,
      and greater than 95% of our sales to date have been made in U.S. dollars.
      However, we purchase our finished scanner imaging products from a manufacturer
      located in China and the purchase price is denominated in the Chinese Yuan.
      As a
      result, currency fluctuations between the U.S. dollar and the Chinese Yuan
      have
      historically caused, and could continue to cause in the future, the purchase
      price of our finished scanner product to increase significantly. Such
      fluctuation has negatively impacted our historical results of operations, cash
      flows and financial position and could continue to negatively impact us in
      the
      future. For example, our cost of sales would have increased more than $221,000
      and $645,000 during the three and nine months ended September 30, 2008,
      respectively, if the Chinese Yuan appreciated 10% against the U.S. dollar.





We
      expect
      to purchase our finished scanner imaging products from China for the near future
      and expect such purchases to be denominated in the Chinese Yuan. As a result,
      we
      anticipate that we may experience increased exposure to the risks of fluctuating
      currencies and may choose to engage in currency hedging activities to reduce
      these risks. Despite these measures, we cannot be certain that any such hedging
      activities will be effective, or available to us at commercially reasonable
      rates.





**Item
      4 – Controls and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*





Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the
      period covered by this report (the “Evaluation Date”). Based upon the
      evaluation, our principal executive officer and principal financial officer
      concluded as of the Evaluation Date that our disclosure controls and procedures
      were effective. Disclosure controls are controls and procedures designed to
      reasonably ensure that information required to be disclosed in our reports
      filed
      under the Exchange Act, such as this report, is recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and forms.
      Disclosure controls include controls and procedures designed to reasonably
      ensure that such information is accumulated and communicated to our management,
      including our principal executive officer and principal financial officer,
      as
      appropriate to allow timely decisions regarding required disclosure.





*Changes
      in Internal Controls Over Financial Reporting*





During
      the quarterly period covered by this report, no changes in our internal controls
      over financial reporting occurred that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.


-
          27
          -


**PART
      II. OTHER INFORMATION**





**Item
      1 - Legal Proceedings**





We
      are
      subject to various legal proceedings from time to time in the ordinary course
      of
      business, none of which is required to be disclosed under this Item 1.





**Item
      1A – Risk Factors**





There
      have been no changes to the risk factors included in our Annual Report on Form
      10-KSB for the year ended December 31, 2007 as filed with the Securities and
      Exchange Commission on March 5, 2008.





**Item
      2 - Unregistered Sales of Equity Securities and Use of Proceeds**





None.





**Item
      3 - Defaults Upon Senior Securities**





None.





**Item
      4 - Submission of Matters to a Vote of Security Holders**





At
      DCT’s
      Annual Stockholders’ Meeting held on October 3, 2008, the stockholders holding
      the requisite number of votes to approve each of the following actions: (1)
      elected each of the director nominees, (2) approved the increase in the number
      of shares of common stock authorized for issuance under DCT’s 2006 Stock Option
      Plan from 1,500,000 to 2,500,000, and (3) ratified the appointment of our
      independent registered public accounting firm.





**Number of Shares****Voted For**
            
            **Withheld****(1)**
            
            To elect a board of directors
                to hold office until the next annual stockholders’ meeting or until their
                respective successors have been elected or appointed:Edward
                Straw
            
            
            11,757,523
            
            
            100,000David
                Clark
            
            
            11,757,523
            
            
            100,000William
                Hawkins
            
            
            11,757,523
            
            
            100,000Frank
                Musso
            
            
            11,757,523
            
            
            100,000Darwin
                Hu
            
            
            11,857,523
            
            
            -





**Number of Shares****For**
            
            **Against**
            
            **Abstain****(2)**
            
            To
                approve the increase in the number of shares of common stock authorized
                for issuance under DCT’s 2006 Stock Option Plan from 1,500,000 to
                2,500,000.
            
            
            8,236,200
            
            
            224,005
            
            
            -**(3)**
            
            To
                ratify the appointment of independent registered public accounting
                firm,
                Clancy and Co., P.L.L.C.
            
            
            11,817,523
            
            
            40,000
            
            
            -





**Item
      5 - Other Information**





None.





-
          28
          -




**Item
      6 - Exhibits**





**Exhibit
                Number**
            
            **Description
                of Exhibit**
            
            **Method
                of Filing**31.1
            
            Certification
                Pursuant to Section 302 of the Sarbanes-Oxley Act – David P.
                Clark
            
            Filed
                herewith31.2
            
            Certification
                Pursuant to Section 302 of the Sarbanes-Oxley Act – M. Carolyn Ellis
            
            Filed
                herewith32.1
            
            Certifications
                Pursuant to Section 906 of the Sarbanes-Oxley Act – David P.
                Clark
            
            Filed
                herewith32.2
            
            Certifications
                Pursuant to Section 906 of the Sarbanes-Oxley Act – M. Carolyn
                Ellis
            
            Filed
                herewith


-
          29
          -




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, Document Capture
      Technologies, Inc. has duly caused this report to be signed on its behalf by
      the
      undersigned thereunto duly authorized.





**Document
                Capture Technologies, Inc.**Date:
                November 14, 2008/s/
David
              P. ClarkDavid
                P. Clark, Chief Executive OfficerDate:
                November 14, 2008/s/
M.
              Carolyn EllisM.
                Carolyn Ellis, Chief Financial
                Officer


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          30
          -