**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 June 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)*





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








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 August 12, 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.




-
          2 -


**DOCUMENT
      CAPTURE TECHNOLOGIES, INC**




**FORM 10-Q**




**FOR
      THE QUARTER ENDED JUNE 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
            28Item
                4
            Controls
                and Procedures
            28**PART
                II - OTHER INFORMATION**Item
                1
            Legal
                Proceedings
            29Item
                1A
            Risk
                Factors
            29Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            29Item
                3
            Defaults
                Upon Senior Securities
            29Item
                4
            Submission
                of Matters to a Vote of Security Holders
            29Item
                5
            Other
                Information
            29Item
                6
            Exhibits
            29Signatures
            30





-
          3-




**PART
      I. FINANCIAL INFORMATION**





**Item
      1 - Financial Statements**


**DOCUMENT
      CAPTURE TECHNOLOGIES, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


*(in
      thousands)*





**June
                30,**
            
            **December
                31,****2008**
            
            **2007****ASSETS**
            
            
            (Unaudited)
            
            
            (Audited)Current
                assets:Cash
                and cash equivalents
            
            **$**
            **1,150**
            
            $
            1,770Trade
                receivables
            
            
            **1,838**
            
            
            2,464Inventories,
                net
            
            
            **989**
            
            
            1,400Prepaid
                expenses and other current assets
            
            
            **56**
            
            
            32**Total
                current assets**
            
            
            **4,033**
            
            
            5,666Fixed
                assets, net
            
            
            **101**
            
            
            127**Total assets**
            
            **$**
            **4,134**
            
            $
            5,793**LIABILITIES
                AND STOCKHOLDERS’****EQUITY (DEFICIT)**Current
                liabilities:Notes
                payable and related warrant liability
            
            **$**
            **806**
            
            $
            1,239Trade
                payables to related parties
            
            
            **668**
            
            
            578Trade
                payables and other current liabilities
            
            
            **276**
            
            
            658Deferred
                revenue
            
            
            **213**
            
            
            -Accrued
                dividends on Series A 5% cumulative convertible preferred
                stock
            
            
            **-**
            
            
            178**Total
                current liabilities**
            
            
            **1,963**
            
            
            2,653Long-term
                bank line of credit
            
            
            **534**
            
            
            2,021Liability
                under derivative contracts
            
            
            **144**
            
            
            255**Total
                liabilities**
            
            
            **2,641**
            
            
            4,929Commitments
                and contingencies (Note 10)Convertible
                preferred stock, $.001 par value, 2,000 authorized:Series
                A 5% cumulative convertible preferred stock, 0 and 11.5
                shares
              issued
                and outstanding at June 30, 2008 and December 31, 2007,
              respectively;
                liquidation value of $0 and $1,150 at June 30, 2008
              and
                December 31, 2007, respectively
            
            
            **-**
            
            
            1,074Series
                B convertible preferred stock, 1.5 shares issued and
              outstanding
                at June 30, 2008 and December 31, 2007; liquidation
              value
                of $150 at June 30, 2008 and December 31, 2007
            
            
            **95**
            
            
            70Stockholders’
                equity (deficit):Common
                stock $.001par value, 50,000 authorized, 18,444 shares issued
              and
                outstanding at June 30, 2008 and 15,904 shares issued
              and
                15,404 outstanding at December 31, 2007 (500 shares held in
                escrow)
            
            
            **18**
            
            
            15Additional
                paid-in capital
            
            
            **32,065**
            
            
            30,323Accumulated
                deficit
            
            
            **(30,685**
            **)**
            
            (30,618
            )**Total
                stockholders’ equity (deficit)**
            
            
            **1,398**
            
            
            (280
            )**Total
                liabilities and stockholders’ equity (deficit)**
            
            **$**
            **4,134**
            
            $
            5,793





-
          4-


**DOCUMENT
      CAPTURE TECHNOLOGIES, INC.**


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


*(in
      thousands, except per share amounts)*




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Net
                sales**
            
            **$**
            **3,003**
            
            $
            3,696
            
            **$**
            **5,541**
            
            $
            7,823**Cost
                of sales**
            
            
            **2,020**
            
            
            2,150
            
            
            **3,825**
            
            
            4,634**Gross
                profit**
            
            
            **983**
            
            
            1,546
            
            
            **1,716**
            
            
            3,189Operating
                expenses:Selling,
                general and administrative
            
            
            **511**
            
            
            974
            
            
            **1,472**
            
            
            2,289Research
                and development
            
            
            **170**
            
            
            749
            
            
            **373**
            
            
            1,526**Total
                operating expenses**
            
            
            **681**
            
            
            1,723
            
            
            **1,845**
            
            
            3,815**Operating
                income (loss)**
            
            
            **302**
            
            
            (177
            )
            
            **(129**
            **)**
            
            (626
            )**Other
                income (expense)**Change
                in fair value of derivative instruments
            
            
            **425**
            
            
            330
            
            
            **111**
            
            
            (38
            )Gain
                on sale of assets
            
            
            **150**
            
            
            -
            
            
            **550**Other
            
            
            **(119**
            **)**
            
            11
            
            
            **(252**
            **)**
            
            20**Total
                other income (expense)**
            
            
            **456**
            
            
            341
            
            
            **409**
            
            
            (18
            )Net
                income (loss) before income taxes
            
            
            **758**
            
            
            164
            
            
            **280**
            
            
            (644
            )Provision
                for income taxes
            
            
            **-**
            
            
            2
            
            
            **2**
            
            
            2Net
                income (loss)
            
            
            **758**
            
            
            162
            
            
            **278**
            
            
            (646
            )Dividend
                on Series A and accretion of Series A and Series
              B
                preferred stock redemption value
            
            
            **(12**
            **)**
            
            (243
            )
            
            **(114**
            **)**
            
            (484
            )Deemed
                dividend on Series A preferred stock maturity and
              Conversion
            
            
            **-**
            
            
            -
            
            
            **(231**
            **)**
            
            -**Net
                income (loss) available to common stockholders**
            
            **$**
            **746**
            
            $
            (81
            )
            **$**
            **(67**
            **)**
            $
            (1,130
            )**Basic
                income (loss) per common share**
            
            **$**
            **0.04**
            
            $
            0.00
            
            **$**
            **0.00**
            
            $
            (0.05
            )**Diluted
                income (loss) per common share**
            
            **$**
            **0.04**
            
            $
            0.00
            
            **$**
            **0.00**
            
            $
            (0.05
            )**Weighted
                average common shares outstanding**
            
            
            **18,444**
            
            
            21,805
            
            
            **17,488**
            
            
            22,815**Weighted
                average common shares outstanding,**
              **assuming
                dilution**
            
            
            **20,784**
            
            
            21,805
            
            
            **17,488**
            
            
            22,815





-
          5-




**DOCUMENT
      CAPTURE TECHNOLOGIES** **,
      INC.**


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


*(in
      thousands)*





**Six
                Months Ended**
              **June
                30,****2008**
            
            **2007****Operating
                activities**Net
                loss available to common stockholders
            
            **$**
            **(67**
            **)**
            $
            (1,130
            )Adjustments
                to reconcile net loss to net cash used by
              operating
                activities:Depreciation
                expense
            
            
            **26**
            
            
            21Stock-based
                compensation cost - options
            
            
            **214**
            
            
            1,080Fair
                value of warrants issued for services rendered
            
            
            **51**
            
            
            8Interest
                expense attributable to amortization of debt issuance
                costs
            
            
            **167**
            
            
            -Change
                in fair value of derivative instruments
            
            
            **(111**
            **)**
            
            38Accretion
                of Series A and Series B preferred stock redemption value
            
            
            **101**
            
            
            440Deemed
                dividend on Series A preferred stock
            
            
            **231**
            
            
            -Changes
                in operating assets and liabilities:Trade
                receivables
            
            
            **626**
            
            
            (1,099
            )Inventories
            
            
            **411**
            
            
            165Prepaid
                expenses and other current assets
            
            
            **(24**
            **)**
            
            (44
            )Accrued
                dividends on Series A 5% cumulative convertible stock
            
            
            **13**
            
            
            44Trade
                payables to related parties
            
            
            **90**
            
            
            (588
            )Deferred
                revenue
            
            
            **213**
            
            
            -Trade
                payables and other current liabilities
            
            
            **(382**
            **)**
            
            71**Cash
                provided (used) by operating activities**
            
            
            **1,559**
            
            
            (994
            )**Investing
                activities**Capital
                expenditures
            
            
            **-**
            
            
            (67
            )**Cash
                used by investing activities**
            
            
            **-**
            
            
            (67
            )**Financing
                activities******Net**(**payments)
                advances on bank line of credit
            
            
            **(1,487**
            **)**
            
            500****Payments
                on notes payable
            
            
            **(700**
            **)**
            
            -****Proceeds
                from exercise of employee stock options
            
            
            **8**
            
            
            -**Cash
                (used) provided by financing activities**
            
            
            **(2,179**
            **)**
            
            500**Net
                decrease in cash and cash equivalents**
            
            
            **(620**
            **)**
            
            (561
            )**Cash
                and cash equivalents at beginning of period**
            
            
            **1,770**
            
            
            1,333**Cash
                and cash equivalents at end of period**
            
            **$**
            **1,150**
            
            $
            772**Non-cash
                investing and financing activities:**Restricted
                common stock acquired from related party
            
            **$**
            **-**
            
            $
            2Conversion
                of convertible preferred stock to common stock
            
            **$**
            **1,339**
            
            $
            26Increase
                to the warrant liability of common stock warrants
              in
                connection with debt financing
            
            **$**
            **100**
            
            $
            -





-
          6-


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




-
          7-


**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 net sales, operating loss or net
      loss available to common stockholders.





***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 June
      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 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). Statement 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.




-
          8-


**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 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 three months ended June 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 three months ended June 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 payments and related overhead (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. See Note
      12.
      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 Office, 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 $400,000 and $150,000 were recorded as a gain on sale of assets
      during the three months ended March 31, 2008 and the three months ended June
      30,
      2008, respectively.





***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. Darwin Hu, a current member of DCT’s board of directors, who also
      served as Chairman of the Board until July 15, 2008, was formerly the CEO of
      STH. He resigned from STH effective December 2004.





Purchases
      from SLL totaled $1,829,000 and $3,209,000 for the three and six months ended
      June 30, 2008, respectively, and $2,143,000 and $4,321,000 for the three and
      six
      months ended June 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 $668,000 and $578,000 at June 30, 2008 and
      December 31, 2007, respectively.





-
          9-


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





***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.
      As
      of June 30, 2008, DCT had consolidated balances of approximately $1,065,000,
      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**
              **June
                30,**
            
            **Six
                months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Customer
                A
            
            
            **35**%****
            
            
            24%
            
            
            **32**%****
            
            
            28%Customer
                B
            
            
            **13**
            
            
            11
            
            
            *****
            
            
            *Customer
                C
            
            
            **12**
            
            
            12
            
            
            **18**
            
            
            14Customer
                D
            
            
            **11**
            
            
            12
            
            
            *****
            
            
            *Customer
                E
            
            
            *****
            
            
            13
            
            
            **11**
            
            
            18Customer
                F
            
            
            *****
            
            
            13
            
            
            *****
            
            
            11





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




Trade
      receivables from all significant customers at June 30, 2008 totaled $1,431,000.
      As of June 30, 2008, all the Company's trade receivables were
      unsecured.





***Note
      6 - Concentration of Supplier Risk***





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.





***Note
      7 - Employee Equity Incentive Plans***





*Stock-Based
      Compensation*





DCT
      has
      several 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
      123R,
“ *Share-Based
      Payments”* (“SFAS
      123R”), using the modified prospective application method. Under this transition
      method, compensation cost recognized for the three and six months ended June
      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”) 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).




-
          10-


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


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





**Three
                months Ended**
              **June
                30,**
            
            **Six
                months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Selling,
                general and administrative
            
            **$**
            **79**
            
            $
            149
            
            **$**
            **165**
            
            $
            730Research
                and development
            
            
            **25**
            
            
            117
            
            
            **49**
            
            
            350Total
            
            **$**
            **104**
            
            $
            266
            
            **$**
            **214**
            
            $
            1,080





At
      June
      30, 2008, the Company had approximately $268,000 of total unrecognized
      compensation cost related to stock options. This cost is expected to be
      recognized over a weighted average period of approximately six
      months.





*Stock
      Options*





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





**Options**
            
            **Weighted
                Average Exercise Price**Outstanding
                at December 31, 2007
            
            
            6,847,550
            
            $
            0.18Granted
            
            
            -
            
            
            -Exercised
            
            
            (1,446,000
            )
            
            (0.01
            )Cancelled
            
            
            (953,885
            )
            
            (0.78
            )Outstanding
                at June 30, 2008
            
            
            4,447,665
            
            $
            0.35





The
      following table summarizes all options outstanding and exercisable by price
      range as of June 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
            
            
            3.82
            
            $
            0.01
            
            
            2,241,165
            
            $
            0.01$0.65
                - $0.70
            
            
            2,206,500
            
            
            8.58
            
            $
            0.70
            
            
            1,371,000
            
            $
            0.70




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





Basic
      net
      income (loss) per share is computed by dividing net income (loss) by the
      weighted average number of shares of common stock outstanding during the period.
      Diluted net income (loss) per share is computed by dividing net income (loss)
      by
      the weighted average number of shares of common stock and common stock
      equivalents outstanding during the period.




-
          11-


**DOCUMENT
        CAPTURE TECHNOLOGIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
        (Unaudited)**
  Common
        stock equivalents were not considered in calculating diluted net loss per
        common
        share for the six months ended June 30, 2008 or for the three and six months
        ended June 30, 2007 as their effect would be anti-dilutive. Common stock
        equivalents were taken into consideration in calculating diluted net income
        per
        common share for the three months ended June 30, 2008, but the impact did
        not
        change net income per share. As a result, for all periods presented, DCT’s basic
        and diluted net income (loss) per share is the same.





The
      computation of DCT’s basic and diluted earnings per share for the three months
      ended June 30, 2008 is as follows ( *in
      thousands, except per share amounts* ):





Net
                income available to common shareholders (A)
            
            $
            746Impact
                of convertible preferred stock
            
            
            12Net
                income available to common shareholders used in diluted share calculation
                (B)
            
            $
            758Weighted
                average common shares outstanding (C)
            
            
            18,444Dilutive
                effect of convertible preferred stock
            
            
            150Dilutive
                effect of employee equity incentive plans
            
            
            2,190Weighted
                average common shares outstanding, assuming dilution (D)
            
            
            20,784Basic
                earnings per common share (A)/(C)
            
            $
            0.04Diluted
                earnings per common share (B)/(D)
            
            $
            0.04





Potentially
      dilutive common shares consist primarily of (1) employee stock options where
      the
      exercise price is less than the average market price, and (2) 150,000 shares
      of
      DCT’s convertible preferred Series B stock (“Series B Stock”), which is
      convertible at anytime by the security holder.





The
      diluted earnings per share calculation for the three months ended June 30,
      2008
      excludes the potential dilutive effect of 4,851,000 of DCT’s options and
      warrants as the exercise prices of these stock options and warrants were greater
      than or equal to the average market value of the common shares.





***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.





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.




-
          12-


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


***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. During both the three and six months ended June 30,
      2008, Series A Stock dividends were approximately $14,000. During the three
      and
      six months ended June 30, 2007, Series A Stock dividends were approximately
      $23,000 and $44,000, respectively.





*Series
      A Stock Deemed Dividends*





In
      accordance with EITF Issue 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 three months ended March 31, 2008 totaling
      $231,000. This non-cash dividend was recorded to reflect the implied economic
      value to the preferred stockholder of converting Series A shares into common
      stock at a 15% discount of the common stock price at the time of conversion.
      The
      fair value was calculated using the difference between the agreed-upon
      conversion price of the Series A Preferred Stock into shares of common stock
      and
      the fair market value of DCT's common stock on the conversion date. This amount
      was charged to accumulated deficit with the offsetting credit to additional
      paid-in-capital.





DCT
      treated the deemed dividend on Series A Stock as a reconciling item to adjust
      its reported net income (loss), together with Series A Stock dividends recorded
      during the applicable period, to the net income (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 the FASB’s Emerging Issues Task Force (“EITF”) EITF 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 amount of the Series A Stock
      and Series B Stock for the three and six months ended June 30, 2008 was $12,000
      and $100,000, respectively. The increases in the carrying amount of the Series
      A
      Stock and Series B Stock for the three and six months ended June 30, 2007 was
      $220,000 and $440,000, 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 income (loss), together with the Series A Stock dividends, to
      net income (loss) available to common stockholders.





Likely
      Embedded Derivative. Under
      the provisions of SFAS 133, *Accounting
      for Derivative Instruments and Hedging Activities* (“SFAS
      133”) and EITF 00-19, the redemption feature 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 June 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 as follows
      ( *in
      thousands, except per share price* ):





**June
                30, 2008**
            
            **December
                31, 2007****Host
                Contract**
            
            
            **Expiration/**
              **Maturity
                Date**
            
            
            $
            
            
            Shares
            
            
            **Fair
                Value**
            
            
            **Shares**
            
            
            **Fair
                Value**Warrants
                issued with Series A Stock
            
            
            March
                15, 2010
            
            
            1.00
            
            
            186.5
            
            $
            26
            
            
            186.5
            
            $
            160Warrants
                issued with Series A Stock
            
            
            March
                15, 2010
            
            
            2.00
            
            
            932.5
            
            
            70
            
            
            932.5
            
            
            32Warrants
                issued with Series B Stock
            
            
            August
                7, 2009
            
            
            1.50
            
            
            675.0
            
            
            35
            
            
            675.0
            
            
            41Series
                A Stock
            
            
            March
                15, 2008
            
            
            1.00
            
            
            -
            
            
            -
            
            
            1,150.0
            
            
            -Series
                B Stock
            
            
            August
                7, 2009
            
            
            1.00
            
            
            150.0
            
            
            13
            
            
            150.0
            
            
            22Total
            
            
            
            
            
            
            
            
            
            
            $
            144
            
            
            
            
            $
            255





-
          14-


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




The
      fair
      value of the above Derivative Instruments was determined under the following
      assumptions:





**June
                30, 2008**
            
            **December
                31, 2007**Remaining
                contractual term, Series A Stock Warrants (years)
            
            
            1.7
            
            
            2.2Remaining
                contractual term, Series B Stock Warrants (years)
            
            
            1.1
            
            
            1.6Remaining
                contractual term, Series A Stock (years)
            
            
            -
            
            
            0.2Remaining
                contractual term, Series B Stock (years)
            
            
            1.1
            
            
            1.6Expected
                volatility
            
            
            102
            %
            
            49
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Risk
                free interest rate
            
            
            3
            %
            
            4
            %




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




*Operating
      Leases*




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




**Year
                Ending**
              **June
                30,**
            
            
            **Future
                Minimum Lease Payments**2009
            
            $
            2132010
            
            
            2132011
            
            
            2Total
            
            $
            428




*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 accounts receivable and 40% of eligible
      inventory, as defined in the LOC agreement. The LOC bears an annual interest
      rate of prime (5.0% at June 30, 2008) plus 1.25% for advances drawn against
      accounts receivables and prime plus 2.25% for advances drawn against inventory.
      Interest payments are due monthly and all unpaid interest and principal is
      due
      in full on September 13, 2009. Upon certain events of default, the default
      variable interest rate increases to prime plus 5%. DCT had an available
      borrowing capacity of $59,000 on its LOC at June 30, 2008.




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




*Long-Term
      Loan*




On
      September 27, 2007, the Company entered into a $1,500,000 term loan agreement
      ("Loan Agreement") with Montage Capital, LLC ("Lender") in an arm’s length
      transaction. DCT granted the Lender a continuing security interest, and pledged
      to the Lender, all of its assets to secure payment and performance of its
      obligations under the Loan Agreement. The Loan Agreement and the security
      interest are subordinate to DCT’s LOC.




DCT
      is
      currently making monthly principal payments of $100,000 and interest payments
      at
      an annual interest rate of 15%. All outstanding principal and accrued interest
      is due at the time the loan matures on November 30, 2008. However, if DCT sells
      any assets outside the ordinary course of business and receives cash proceeds
      from such sale, the Lender must be paid 20% of such proceeds as pre-payment
      of
      the outstanding principal. Under this portion of the agreement, DCT made an
      additional $100,000 principal payment during the three months ended June 30,
      2008 as a result of selling its HD related assets as previously discussed.
      Additionally, under certain circumstances defined in the Loan Agreement, the
      Lender has the right to declare all of the amounts due under the Loan Agreement
      immediately due and payable. No such circumstances have occurred to date.




-
          15-


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




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 warrant repurchase price increased to a maximum of $350,000. The
      warrant repurchase feature expires September 2012.





Under
      the
      Black-Scholes pricing model, the fair value of the Loan Warrants on the issuance
      date was $399,000 using the following assumptions: contractual term of five
      years, 5.3% risk-free interest rate, expected volatility of 90% and expected
      dividend yield of 0%. Because the warrants were immediately redeemable for
      $250,000 cash at the warrant holder’s request, DCT accounted for the original
      $250,000 warrant redemption value as a current liability and the $149,000 excess
      fair value over the warrant redemption value as additional paid-in capital.
      On
      March 31, 2008, DCT accounted for the warrant repurchase price increased maximum
      by increasing the related current liability from $250,000 to $350,000 with
      the
      offset recorded to additional paid in capital.





DCT
      is
      accreting the entire $399,000 debt discount to interest expense over the life
      of
      the Loan Agreement. In connection with the Loan Warrants, DCT recorded non-cash
      interest expense for the three and six months ended June 30, 2008 of $83,000
      and
      $167,000, respectively.





Future
      annual repayment obligations as of June 30, 2008 were as follows ( *in
      thousands* ):





Principal
                payments due less than 12 months
            
            $
            600Loan
                Warrants redemption value
            
            
            350Total
                obligations
            
            
            950Less
                unamortized debt discount
            
            
            (144
            )Total
                notes payable and related warrant liability
            
            $
            806





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 June 30, 2008, termination payments
      totaling $389,000 are in effect. On July 15, 2008, termination payments
      increased to $769,000 as a result of amending employment agreements with
      executive officers. See Note 12.




-
          16-


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


*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 their 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 $51,000 was charged to general and administrative expense and
      credited to additional paid-in capital during the three and six months ended
      June 30, 2008, respectively.




*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
      six
      months ended June 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
      131, *Disclosures
      about Segments of an Enterprise and Related Information* (“SFAS
      131”).





*Geographic
      Information*





During
      the three and six months ended June 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**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**U.S.
            
            **$**
            **2,724**
            
            $
            3,538
            
            **$**
            **5,076**
            
            $
            7,539Asia
            
            
            **22**
            
            
            -
            
            
            **22**
            
            
            -Europe
                and other
            
            
            **257**
            
            
            158
            
            
            **443**
            
            
            284**$**
            **3,003**
            
            $
            3,696
            
            **$**
            **5,541**
            
            $
            7,823




-
          17-


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


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




**June
                30, 2008**
            
            **December
                31, 2007**U.S.
            
            **$**
            **3,900**
            
            $
            5,574Asia
            
            
            **90**
            
            
            110Europe
            
            
            **144**
            
            
            109**$**
            **4,134**
            
            $
            5,793




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





***Note
      12 - Subsequent Events***




*Changes
      to DCT Board of Directors*




Effective
      July 15, 2008, Mr. Lawrence Liang resigned from the Board of Directors of DCT.




Effective
      July 15, 2008, Mr. Darwin Hu stepped down as Chairman of DCT's Board of
      Directors. Mr. Hu will continue to serve as a director of DCT until its next
      annual meeting of stockholders.




On
      July
      15, 2008, DCT's Board of Directors unanimously voted to elect Mr. Edward M.
      Straw to serve as Chairman of DCT's Board of Directors, effective immediately,
      until DCT's next annual meeting of stockholders. Mr. Straw filled the vacancy
      on
      DCT's Board of Directors created by the aforementioned resignation of Mr. Liang.




*Employment
      Agreement Amendments*




On
      July
      15, 2008, the DCT's Board of Directors approved addenda to the employment
      agreements for certain DCT executive officers. The addenda were a result of
      title changes, added responsibilities and realignment of financial and
      operational responsibilities.




*Stock
      Option Grants*





On
      July
      15, 2008, the DCT's Board of Directors approved an aggregate of 5,168,750 stock
      options, which were granted to key employees, directors and consultants. Compensation
      cost related to the stock option grant totaled approximately $1,200,000, which
      is expected to be recognized over a weighted average period of 3.5
      years.





-
          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 six months ended June 30, 2008 compared to the three and
                six
                months ended June 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 six months ended June 30, 2008 as compared
                to the
                six months ended June 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 our 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 six months
      ended June 30, 2008 are not directly comparable to our operating expenses for
      the three and six months ended June 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 decreased value of the
      U.S.
      dollar, all our product is purchased in the Chinese Yuan. This has significantly
      increased the cost of our product, which has not been passed through to our
      customers. We expect this trend to continue throughout the remainder of
      2008.




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 a 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 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 six months ended June 30, 2008 compared to the three and six months
      ended June 30, 2007 ( *in
      thousands* ):





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2008**
            
            **2007**
            
            **.****$**
            
            **.****%**
            
            **2008**
            
            **2007**
            
            **.****$**
            
            **.****%****.**Net
                sales
            
            $
            3,003
            
            $
            3,696
            
            $
            (693
            )
            
            (19
            )%
            $
            5,541
            
            $
            7,823
            
            $
            (2,282
            )
            
            (29
            )%Cost
                of sales
            
            
            2,020
            
            
            2,150
            
            
            (130
            )
            
            (6
            )
            
            3,825
            
            
            4,634
            
            
            (809
            )
            
            (17
            )As
                a percentage of sales
            
            
            67
            %
            
            58
            %
            
            
            
            
            
            
            
            69
            %
            
            59
            %Selling,
                general and administrative expense
            
            
            511
            
            
            974
            
            
            (463
            )
            
            (48
            )
            
            1,472
            
            
            2,289
            
            
            (817
            )
            
            (36
            )Research
                and development expense
            
            
            170
            
            
            749
            
            
            (579
            )
            
            (77
            )
            
            373
            
            
            1,526
            
            
            (1,153
            )
            
            (76
            )Total
                other income (expense)
            
            
            456
            
            
            341
            
            
            NM
            
            
            NM
            
            
            409
            
            
            (18
            )
            
            NM
            
            
            NMDividend
                and deemed dividend on
              5%
                convertible preferred stock and
              accretion
                of preferred stock
              redemption
                value
            
            
            (12
            )
            
            (243
            )
            
            NM
            
            
            NM
            
            
            (345
            )
            
            (484
            )
            
            NM
            
            
            NMNM
                = Not Meaningful





*Net
      Sales*





The
      decrease in net sales during both the three and six months ended June 30, 2008
      as compared to the same periods in 2007 was attributable to the following
      conditions:





·
            The
                overall slowdown of the general economic and market conditions in
                the U.S.
                economy and the related slowdown of information technology (“IT”)
                spending.





·
            Decreased
                demand from the banking and financial sectors of our market. This
                sector
                has been more focused on regulatory actions and financial hardships
                rather
                than investing in transaction system infrastructure, of which we
                are a key
                supplier. Sales to this particular sector decreased $497,000 and
                $828,000
                during the three and six months ended June 30, 2008, respectively,
                as
                compared to the same periods in
                2007.





Historically,
      international sales have been immaterial to our results of operations. However,
      during the three and six months ended June 30, 2008, our European sales were
      $257,000 and $443,000, or 9% and 8%, respectively, of our total net sales.
      During the three and six months ended June 30, 2007, our European sales were
      $158,000 and $284,000, respectively, which represented only 4% of our sales
      for
      both periods. The European markets for our products continue to show strong
      growth as we have nearly doubled our distribution network within this market
      during the six months ended June 30, 2008 as compared to the six months ended
      June 30, 2007. We expect this trend to continue as we have improved our ability
      to deliver all channel products from our Netherlands based warehouse and improve
      our time-to-market and reduce our logistics costs, including but not limited
      to
      shipping costs.





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. And 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.




-
          21-




Although
      we continue to concentrate on expanding our significant customer base, our
      revenue is dependent on a small number of significant customers. During the
      three months ended June 30, 2008, 60% of sales were generated from three
      customers as compared to 51% of sales generated from three customers during
      the
      same period in fiscal 2007. During the six months ended June 30, 2008, 61%
      of
      our sales were generated from three customers as compared to 60% of sales
      generated from three customers during the same period in fiscal 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.





*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 six
      months ended June 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 three months
      ended June 30, 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 we experience changes in our product mix, as the value
      of
      the U.S. dollar remains volatile and as 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. T o
      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 six months ended June 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 $100,000 and $207,000 of product promotion and
      marketing expense during the three and six months ended June 30, 2007,
      respectively. Subsequent to January 1, 2008, we have not incurred any HD
      display-related expenses.




To
      a
      lesser extent, the decrease was attributable to lower stock-based
      compensation costs (a non-cash charge) as a result of granting stock options
      to
      key employees as accounted for 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 $79,000 and $165,000 for the three and six months ended June 30, 2008,
      respectively. Stock-based compensation cost was $149,000 and $730,000 for the
      three and six months ended June 30, 2007, respectively.




The
      decrease in our selling, general and administrative expenses caused by the
      termination of our HD display related activities and the reduction of
      stock-based compensation cost was somewhat offset by our increased personnel
      costs to support our public company status, including the costs of complying
      with the Sarbanes-Oxley Act.





*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 six months ended June 30, 2008 as compared to
      the
      three and six months ended June 30, 2007 was a result of terminating our HD
      display related product development during November 2007. During the three
      and
      six months ended June 30, 2007, salaries, expensed equipment and contractors
      related to our HD display product was approximately $536,000 and $974,000,
      respectively. Subsequent to January 1, 2008, we have not incurred any HD display
      related expenses. 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 during the first quarter of fiscal 2007 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 $25,000
      and
      $49,000 for the three and six months ended June 30, 2008, respectively.
      Stock-based compensation cost was $117,000 and $350,000 for the three and six
      months ended June 30, 2007, respectively.




-
          22-




*Total
      Other Income (Expense)*





The
      most
      significant component of our other income (expense) was a $150,000 and $400,000
      gain on sale of assets during the three and six months ended June 30, 2008,
      respectively. 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 payments and related overhead (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. See Part
      II,
      Item 5 of this Form 10-Q. 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 Office, 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 $400,000 and $150,000 were recorded as a gain on sale of assets
      during the three months ended March 31, 2008 and the three months ended June
      30,
      2008, respectively.





Also
      included in our other income (expense) is the change in the fair value of our
      liability for derivative contracts (associated with our Series A Stock and
      related warrants and Series B Stock and related warrants). During the three
      and
      six months ended June 30, 2008, the fair value of our liability for derivative
      contracts decreased $425,000 and $111,000 respectively. During the three and
      six
      months ended June 30, 2007, the fair value of our liability for derivative
      contracts decreased $330,000 and increased $38,000, respectively. Pursuant
      to
      SFAS 133 and EITF 00-19, the increase in the fair value of our liability for
      derivative contracts is included as other expense in our consolidated statements
      of operations while the decrease in the fair value of our liability for
      derivative contracts is included as other income in our consolidated statements
      of operations.





Other
      income (expense) was also impacted by our increased debt, which resulted in
      an
      increase in interest expense to $121,000 and $268,000 during the three and
      six
      months ended June 30, 2008, respectively, from $44,000 and $60,000 during the
      three and six months ended June 30, 2007, respectively. Of the interest expense
      recorded during the three and six months ended June 30, 2008, $83,000 and
      $167,000, respectively, was non-cash interest expense attributable to
      amortization of debt issuance costs. We had no non-cash interest expense during
      the three and six months ended June 30, 2007.





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





During
      the three and six months ended June 30, 2008, the total accretion on our
      preferred stock was $12,000 and $100,000, respectively. During the three and
      six
      months ended June 30, 2007, the total accretion on our preferred stock was
      $220,000 and $440,000, 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 June 30, 2008, as a result of the
      maturity of our Series A Stock, as compared to $23,000 during the three months
      ended June 30, 2007. During the six months ended June 30, 2008 and 2007, Series
      A Stock dividends were approximately $14,000 and $44,000, respectively. We
      do not
      pay dividends on our Series B Stock.




-
          23-




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.





***Liquidity
      and Capital Resources***





At
      June
      30, 2008, our principal sources of liquidity included cash and cash equivalents
      of $1,150,000 and an available borrowing capacity of $59,000 on our bank line
      of
      credit. We had no significant cash outlays, except as part of our normal
      operations and contractual agreements, during the three months ended June 30,
      2008.





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





**Six
                Months Ended**
              **June
                30,****2008**
            
            **2007**Net
                cash provided (used) by operating activities
            
            $
            1,559
            
            $
            (994
            )Net
                cash used by investing activities
            
            
            -
            
            
            (67
            )Net
                cash (used) provided by financing activities
            
            
            (2,179
            )
            
            500**Net
                decrease in cash and cash equivalents**
            
            **$**
            **(620**
            **)**
            **$**
            **(561**
            **)**





Operating
      activities: During the six months ended June 30, 2008, our operating activities
      provided $1,559,000 of cash. This amount was comprised of our $67,000 net loss
      available to common shareholders, $679,000 of net non-cash expenses, and
      $947,000 net cash provided by changes in operating assets and liabilities.
      Our
      net loss available to common shareholders for the six months ended June 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. And 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 six months ended June 30, 2007, our operating activities used $994,000
      of
      cash. This amount was comprised of our $1,130,000 net loss, $1,587,000 of net
      non-cash expenses and $1,451,000 net cash used by changes in operating assets
      and liabilities.





For
      both
      the six months ended June 30, 2008 and 2007, non-cash items in net loss
      available to common shareholders include depreciation expense, stock-based
      compensation cost of options, fair value of warrants issued for services
      rendered, change in fair value of derivative instruments and the accretion
      of
      our Series A and Series B preferred stock redemption value. Changes in our
      operating assets and liabilities are indicative of the decrease in the sales
      of
      our product during the six months ended June 30, 2008 compared to the six months
      ended June 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: We had no investing activities during the six months ended June
      30,
      2008. Our investing activities for the three months ended June 30, 2007 were
      minimal and consisted of computer and general equipment purchases during the
      normal course of business.




Financing
      activities: During the six months ended June 30, 2008, our financing activities
      consisted of (i) paying down our bank line of credit, (ii) making normal
      recurring monthly principal payments according to the terms of our notes payable
      agreement, which totaled $600,000, and (3) making an additional $100,000
      principal payment on our notes payable. During the six months ended June 30,
      2007, our financing activities consisted of a $500,000 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 six months ended
      June
      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.





-
          25-


*Contractual
      Obligations*





The
      following table summarizes our contractual obligations at June 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**Long-term
                bank line of credit**(1)**
            
            $
            534
            
            $
            -
            
            $
            534
            
            $
            -Term
                loan principal payments**(2)**
            
            
            600
            
            
            600
            
            
            -
            
            
            -Term
                loan warrant liabilities**(3)**
            
            
            350
            
            
            350
            
            
            -
            
            
            -Series
                B Stock principal**(4)**
            
            
            150
            
            
            -
            
            
            150
            
            
            -Operating
                lease obligations
            
            
            428
            
            
            213
            
            
            215
            
            
            -Consulting
                agreement
            
            
            30
            
            
            30
            
            
            -
            
            
            -Total
                contractual cash obligations
            
            $
            2,092
            
            $
            1,193
            
            $
            899
            
            $
            -




**(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 accounts receivable and 40% of eligible
      inventory, as defined in the LOC agreement. The LOC bears an annual interest
      rate of prime (5.0% at June 30, 2008) plus 1.25% for advances drawn against
      accounts receivables and prime plus 2.25% for advances drawn against inventory.
      Interest payments are due monthly and all unpaid interest and principal is
      due
      in full on September 13, 2009. Upon certain events of default, the default
      variable interest rate increases to prime plus 5%. DCT had an available
      borrowing capacity of $59,000 on its LOC at June 30, 2008.





As
      of
      June 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") and used the funds to
      repurchase 8,000,000 shares of our restricted common stock. We granted the
      Lender a continuing security interest, and pledged to the Lender, all of our
      assets to secure payment and performance of its obligations under the Loan
      Agreement. The Loan Agreement and the security interest are subordinate to
      our
      LOC.




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




**(3)** 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.





**(4)**  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.





-
          26-





*Off-Balance
      Sheet Arrangements*





At
      June
      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.





***Trends***





We
      expect
      the 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 June 30, 2008, which are likely to have a material effect on our
      future liquidity.




-
          27-


**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 six months ended June 30, 2008 would have only increased
      our interest expense approximately $14,000 and $34,000, 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, a 10% appreciation in the Chinese Yuan against the U.S.
      dollar would have increased our cost of sales over $224,000 and $424,000 during
      the three and six months ended June 30, 2008.




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 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
      chief executive officer and chief 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.





-
          28-


**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**





None.





**Item
      5 - Other Information**




*Changes
      to DCT Board of Directors*




Effective
      July 15, 2008, Mr. Lawrence Liang resigned from the Board of Directors of DCT.




Effective
      July 15, 2008, Mr. Darwin Hu stepped down as Chairman of DCT's Board of
      Directors. Mr. Hu will continue to serve as a director of DCT until its next
      annual meeting of stockholders.




On
      July
      15, 2008, DCT's Board of Directors unanimously voted to elect Mr. Edward M.
      Straw to serve as Chairman of DCT's Board of Directors, effective immediately,
      until DCT's next annual meeting of stockholders. Mr. Straw filled the vacancy
      on
      DCT's Board of Directors created by the aforementioned resignation of Mr. Liang.




*Employment
      Agreement Amendments*




On
      July
      15, 2008, the DCT's Board of Directors approved addenda to the employment
      agreements for certain DCT executive officers. The addenda were a result of
      title changes, added responsibilities and realignment of financial and
      operational responsibilities.




**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:
              August 13, 2008/s/ David P. ClarkDavid
              P. Clark, Chief Executive
              Officer




Date:
              August 13, 2008/s/ M. Carolyn EllisM.
              Carolyn Ellis, Chief Financial
              Officer




-
          30-