TABLE OF CONTENTS




|                                                     |  |  |  |  |  |  |  | 
|---------------------------------------------------- |  |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS               
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|SIGNATURES                                          
|Exhibit Index                                       



---



##### Table of Contents



Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the Quarterly Period Ended September 30, 2001

Commission file number 000-20699

DATATRAK International, Inc.(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Ohio                                                           |  | 34-1685364                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                              
|20600 Chagrin Boulevard
Cleveland, Ohio                        |  | 44122                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

(216) 921-6505
(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)


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

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date.

The number of Common Shares, without par value, outstanding as of October 31,
2001 was 3,291,322.





---



##### Table of Contents



Part 1. Financial Information
Item 1  Financial Statements




DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |              |            |  |  | 
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ----------- | --------- | ------------- | --------- | ------------ | ---------- |  |  | 
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           | (Unaudited)   |           | (Note A)    
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           | September 30, |           | December 31,
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           | 2001          |           | 2000        
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      | ASSETS      |           |               |           |              |            |  |  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Current assets:                                                                  |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Cash and cash equivalents                                                                                                                                                                                           |                                            | $                                    | 2,001,714   |           |               | $         | 2,383,244    |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Short-term investments                                                                                                                                                                                              |                                            |                                      | 4,967,268   |           |               |           | 9,656,852    |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Accounts receivable, less allowances                                                                                                                                                                                |                                            |                                      | 343,156     |           |               |           | 609,351      |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Prepaid expenses and other current assets                                                                                                                                                                           |                                            |                                      | 368,309     |           |               |           | 377,212      |           
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     | Total current assets                       |                                      |             | 7,680,447 |               |           |              | 13,026,659 | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Property and equipment, at cost
net of accumulated depreciation and amortization |                                                                                                                                                                                                                     |                                            | 1,732,543                            |             |           |               | 1,374,352 |             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Other assets                                                                     |                                                                                                                                                                                                                     |                                            | 13,677                               |             |           |               | 84,989    |             
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     | Total assets                               |                                      | $           | 9,426,667 |               |           | $            | 14,486,000 | 
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |             |           |               |           |              |            |  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Current liabilities:                                                             |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Accounts payable                                                                                                                                                                                                    |                                            | $                                    | 165,041     |           |               | $         | 129,038      |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Current portion of capital lease obligation                                                                                                                                                                         |                                            |                                      | 127,267     |           |               |           |             |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Accrued expenses                                                                                                                                                                                                    |                                            |                                      | 698,912     |           |               |           | 914,114      |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Deferred revenue                                                                                                                                                                                                    |                                            |                                      | 411,887     |           |               |           | 338,879      |           
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     | Total current liabilities                  |                                      |             | 1,403,107 |               |           |              | 1,382,031  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Capital lease obligation, less current portion                                   |                                                                                                                                                                                                                     |                                            | 195,539                              |             |           |               |          |             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Shareholders equity:                                                            |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Serial preferred shares, without par value, 1,000,000 shares
authorized, none issued                                                                                                                                |                                            |                                      |            |           |               |           |             |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Common shares, without par value, authorized 15,000,000
shares; issued 6,590,322 shares as of December 31, 2000
and September 30, 2001; outstanding 3,290,322 shares as of
December 31, 2000 and September 30, 2001 |                                            |                                      | 50,367,746  |           |               |           | 50,356,667   |           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Accumulated deficit                                                                                                                                                                                                 |                                            |                                      | (22,281,394 | )         |               |           | (16,987,206  | )         
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Treasury shares, 3,300,000 shares at cost                                                                                                                                                                           |                                            |                                      | (20,188,308 | )         |               |           | (20,188,308  | )         
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Foreign currency translation                                                                                                                                                                                        |                                            |                                      | (70,023     | )         |               |           | (77,184      | )         
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     | Total shareholders equity                 |                                      |             | 7,828,021 |               |           |              | 13,103,969 | 
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             
|                                                                                 |                                                                                                                                                                                                                     | Total liabilities and shareholders equity |                                      | $           | 9,426,667 |               |           | $            | 14,486,000 | 
|                                                                                 |                                                                                                                                                                                                                     |                                            |                                      |             |           |               |           |             

|        |  |                                                                                                                                                                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note A: |  | The balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date,
but does not include all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.

See notes to condensed consolidated financial statements.

2



---



##### Table of Contents






DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |         | 
|-------------------------------------------- | ---------------------- | - | ------------------ | ------ | ----------------- | - | ---------- | ------- | ---- | - | ---------- | ------- | - | - | ---------- | ------- | 
|                                             |                        |   | Three Months Ended |        | Nine Months Ended
|                                             |                        |   | September 30,      |        | September 30,    
|                                             |                        |   |                    |        |                  
|                                             |                        |   | 2001               |        | 2000              |   | 2001       |         | 2000
|                                             |                        |   |                    |        |                   |   |            |         |     
|Revenue                                      |                        | $ | 476,509            |        |                   | $ | 517,491    |         |      | $ | 1,549,689  |         |   | $ | 1,449,413  |        
|                                            
|                                            
|                                            
|                                            
|Direct costs                                 |                        |   | 431,749            |        |                   |   | 476,457    |         |      |   | 1,290,210  |         |   |   | 1,194,084  |        
|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        
|Gross profit                                 |                        |   | 44,760             |        |                   |   | 41,034     |         |      |   | 259,479    |         |   |   | 255,329    |        
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |                        |   | 1,833,100          |        |                   |   | 1,398,060  |         |      |   | 5,144,753  |         |   |   | 4,148,803  |        
|                                            
|                                            
|                                            
|                                            
|Depreciation and amortization                |                        |   | 238,569            |        |                   |   | 221,204    |         |      |   | 711,127    |         |   |   | 627,134    |        
|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        
|Loss from operations                         |                        |   | (2,026,909         | )      |                   |   | (1,578,230 | )       |      |   | (5,596,401 | )       |   |   | (4,520,608 | )      
|                                            
|                                            
|                                            
|                                            
|Other income (expense):                      |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        
|                                            
|                                            
|                                            
|                                            
|                                             | Interest income        |   |                    | 66,138 |                   |   |            | 222,409 |      |   |            | 328,320 |   |   |            | 687,543 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Other income (expense) |   |                    | (5,932 | )                 |   |            | 9,402   |      |   |            | (26,107 | ) |   |            | 19,611  | 
|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        
|Net loss                                     |                        | $ | (1,966,703         | )      |                   | $ | (1,346,419 | )       |      | $ | (5,294,188 | )       |   | $ | (3,813,454 | )      
|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        
|Basic and diluted net loss per share         |                        | $ | (0.60              | )      |                   | $ | (0.41      | )       |      | $ | (1.61      | )       |   | $ | (1.16      | )      
|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        
|Weighted average common shares outstanding   |                        |   | 3,290,322          |        |                   |   | 3,290,322  |         |      |   | 3,290,322  |         |   |   | 3,290,322  |        
|                                             |                        |   |                    |        |                   |   |            |         |      |   |            |         |   |   |            |        

See notes to condensed consolidated financial statements.

3



---



##### Table of Contents






DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |             |          |          |  
|------------------------------------------------ | --------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ----------- | ------------------------------- | -------- | --------- | ----------- | -------- | -------- | -
|                                                 |                                                                             |                                              |                                       |             | Nine Months Ended September 30,
|                                                 |                                                                             |                                              |                                       |             |                                
|                                                 |                                                                             |                                              |                                       |             | 2001                            |          | 2000     
|                                                 |                                                                             |                                              |                                       |             |                                 |          |          
|Operating Activities                             |                                                                             |                                              |                                       |             |                                 |          |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Net loss                                                                    |                                              | $                                     | (5,294,188  | )                               |          | $         | (3,813,454  | )       
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net loss to net cash
used in operating activities: |                                              |                                       |             |                                 |          |           |             |         
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                             | Depreciation and amortization                |                                       |             | 711,127                         |          |           |             | 627,134  |         
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                             | Other                                        |                                       |             | (253,695                        | )        |           |             | (419,779 | )       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                             | Changes in operating assets and liabilities: |                                       |             |                                 |          |           |             |          |         
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                             |                                              | Accounts receivable                   |             |                                 | 252,695  |           |             |          | (235,551 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                             |                                              | Accounts payable and accrued expenses |             |                                 | (179,191 | )         |             |          | (210,147 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                             |                                              | Other                                 |             |                                 | 125,452  |           |             |          | (65,996  | )
|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |            
|                                                 | Net cash used in operating activities                                       |                                              |                                       | (4,637,800  | )                               |          |           | (4,117,793  | )       
|                                                
|                                                
|                                                
|                                                
|Investing activities                             |                                                                             |                                              |                                       |             |                                 |          |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchases of property and equipment                                         |                                              |                                       | (626,682    | )                               |          |           | (745,431    | )       
|                                                 | Maturities of short term investments                                        |                                              |                                       | 24,321,000  |                                 |          |           | 40,098,000  |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchases of short term investments                                         |                                              |                                       | (19,353,143 | )                               |          |           | (35,518,930 | )       
|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |            
|                                                 | Net cash provided by investing activities                                   |                                              |                                       | 4,341,175   |                                 |          |           | 3,833,639   |         
|                                                
|                                                
|                                                
|                                                
|Financing activities                             |                                                                             |                                              |                                       |             |                                 |          |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Payments under capital lease obligation                                     |                                              |                                       | (70,294     | )                               |          |           |            |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Repayment (issuance) of notes receivable                                    |                                              |                                       | 27,771      |                                 |          |           | (7,938      | )       
|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |            
|                                                 | Net cash used in financing activities                                       |                                              |                                       | (42,523     | )                               |          |           | (7,938      | )       
|                                                
|                                                
|                                                
|                                                
|Effect of exchange rate on cash                  |                                                                             |                                              | (42,382                               | )           |                                 |          | (58,991   | )          
|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |            
|Decrease in cash and cash equivalents            |                                                                             |                                              | (381,530                              | )           |                                 |          | (351,083  | )          
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                             |                                              | 2,383,244                             |             |                                 |          | 2,961,403 |            
|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |            
|Cash and cash equivalents at end of period       |                                                                             | $                                            | 2,001,714                             |             |                                 | $        | 2,610,320 |            
|                                                 |                                                                             |                                              |                                       |             |                                 |          |           |            

See notes to condensed consolidated financial statements.

4



---



##### Table of Contents






DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of
DATATRAK International, Inc. and subsidiaries (DATATRAK or the Company)
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Companys Form 10-K for the year ended December 31, 2000 (File No. 000-20699).

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that might affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.

2. Net Loss per Share

The following table sets forth the computation of basic and diluted
earnings per share.

|                                                                                                                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                      |  | Three Months Ended |            | Nine Months Ended
|                                                                                                                                                      |  | September 30,      |            | September 30,    
|                                                                                                                                                      |  |                    |            |                  
|                                                                                                                                                      |  | 2001               |            | 2000              |  | 2001 |            | 2000
|                                                                                                                                                      |  |                    |            |                   |  |      |            |     
|Net loss used in the calculation of basic and
diluted earnings per share                                                                              |  | $                  | (1,966,703 | )                 |  | $    | (1,346,419 | )    |  | $ | (5,294,188 | ) |  | $ | (3,813,454 | )
|                                                                                                                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Denominator for basic and diluted net loss
per share  weighted average Common
Shares outstanding                                                     |  |                    | 3,290,322  |                   |  |      | 3,290,322  |      |  |   | 3,290,322  |   |  |   | 3,290,322  |  
|                                                                                                                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                                                                                                                  |  | $                  | (0.60      | )                 |  | $    | (0.41      | )    |  | $ | (1.61      | ) |  | $ | (1.16      | )
|                                                                                                                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Common Share options excluded from the
computation of diluted net loss per share
because they would have an antidilutive
effect on net loss per share |  |                    | 1,075,487  |                   |  |      | 881,820    |      |  |   | 1,075,487  |   |  |   | 881,820    |  
|                                                                                                                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  

5



---



##### Table of Contents



DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)

3. Capital Lease Obligation

During March 2001, the Company entered into an agreement with an
unaffiliated third party to lease certain computer equipment. The lease has
been recorded as a capital lease. Terms of the lease agreement require the
Company to maintain a restricted cash balance equal to the outstanding balance
payable on the lease ($322,806 at September 30, 2001). Future minimum lease
payments under the capital lease obligation as of September 30, 2001 are as
follows:

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|Twelve months ending September 30, |  |   |         | 
|                                   |  |   |         | 
|2002                               |  | $ | 145,089 | 
|                                  
|                                  
|                                  
|                                  
|2003                               |  |   | 145,089 | 
|                                  
|                                  
|                                  
|                                  
|2004                               |  |   | 60,453  | 
|                                   |  |   |         | 
|                                   |  |   | 350,631 | 
|                                  
|                                  
|                                  
|                                  
|Less amounts representing interest |  |   | 27,825  | 
|                                   |  |   |         | 
|                                   |  | $ | 322,806 | 
|                                   |  |   |         | 

4. Comprehensive loss

The following table sets forth comprehensive loss.

|                             |  |                                 |            |      |  |   |            |  
|---------------------------- |  | ------------------------------- | ---------- | ---- |  | - | ---------- | -
|                             |  | Nine Months Ended September 30,
|                             |  |                                
|                             |  | 2001                            |            | 2000
|                             |  |                                 |            |     
|Net loss                     |  | $                               | (5,294,188 | )    |  | $ | (3,813,454 | )
|                            
|                            
|                            
|                            
|Foreign currency translation |  |                                 | 7,161      |      |  |   | (73,916    | )
|                             |  |                                 |            |      |  |   |           
|                            
|                            
|                            
|                            
|Comprehensive loss           |  | $                               | (5,287,027 | )    |  | $ | (3,887,370 | )
|                             |  |                                 |            |      |  |   |           

5. Reclassification

Certain prior year amounts have been reclassified to conform to the
current year presentation.

6



---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and
Financial Condition

The information set forth and discussed below for the three and nine month
periods ended September 30, 2001 is derived from the Condensed Consolidated
Financial Statements included elsewhere herein. The financial information set
forth and discussed below is unaudited, but in the opinion of management,
reflects all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of such information. The Companys results of
operations for a particular quarter may not be indicative of results expected
during the other quarters or for the entire year.

General

DATATRAK is an application service provider (ASP) that uses the software
known as DATATRAK EDC to provide electronic data capture (EDC) and other
services, which assist companies in the clinical pharmaceutical, biotechnology,
contract research organization (CRO) and medical device research industries,
to accelerate the completion of clinical trials. Approximately 74% of the
Companys assets, or approximately $7.0 million, are held in cash, cash
equivalents and short-term investments. The Company has experienced
significant losses and negative cash flow from operations since commencing EDC
operations in 1997. The Company is continuing to develop and commercialize the
DATATRAK EDC software and anticipates that its operating results will
fluctuate significantly from period to period. There can be no assurance of
the Companys long-term future prospects.

The Companys contracts provide a fixed price for each component or
service to be delivered. Services provided by DATATRAK that are in addition to
those provided for in its contracts are billed on a fee for service basis for
services completed. Generally, these contracts range in duration from several
months to several years. The ultimate contract value is dependent upon the
length of the customers use of DATATRAK EDC and the services provided by
DATATRAK. As services are performed over the life of the contract, revenue is
recognized under the percentage of completion method utilizing units of
delivery. Costs associated with contract revenues are recognized as incurred.
These contracts can be terminated by the customer with or without cause.
DATATRAK is entitled to payment for all work performed through the date of
notice of termination and for recovery of some or all costs incurred to
terminate a contract. The termination of a contract will not result in a
material adjustment to revenue or costs previously recognized.

DATATRAK is also a seller and licenser of software. Generally, revenue is
recognized upon delivery of sold software. Licensing revenue is recognized
ratably over the life of the license. To date, DATATRAK has not recognized any
revenue from software sales.

At September 30, 2001, DATATRAKs backlog was $7.1 million. Backlog
includes a $2.4 million contract, which is currently on hold. Due to
DATATRAKs early stage of development and its low level of backlog, there can
be no assurance as to its future levels of revenue. The Company is continuing
its efforts to attract new business. However, there can be no assurance that
the Company will be able to attract new business, or when revenue associated
with new or existing backlog will be recognized, if at all.

Results of Operations

Three months ended September 30, 2001 compared with three months ended
September 30, 2000

Revenue for the three months ended September 30, 2001 decreased 7.7% to
$480,000, as compared to $520,000 for the three months ended September 30,
2000. The lack of growth was due to the slower than expected development and
conversion of backlog into revenue during 2001. The Company is continuing to
increase its sales and marketing staff in order to attract new business and
grow backlog.

7



---



##### Table of Contents



Direct costs of revenue, mainly personnel costs, were $430,000 and
$480,000 during the three months ended September 30, 2001 and 2000,
respectively. The 10.4% decrease in direct costs was mainly the result of a
$40,000 decrease in other direct costs, mainly travel expenses and other costs,
which are passed through to the Companys customers.

Selling general and administrative expenses (SG&A) include all
administrative personnel costs, business and software development costs, and
all other expenses not directly chargeable to a specific contract. SG&A
expenses increased by 28.6 % to $1.8 million from $1.4 million for the three
months ended September 30, 2001 and 2000, respectively. During the three
months ended September 30, 2001, there was a $380,000 increase in personnel
costs caused by an increase in sales and marketing and software development
personnel.

Depreciation and amortization expense increased to $240,000 during the
three months ended September 30, 2001 from $220,000 during the three months
ended September 30, 2000. The increase was the result of depreciating capital
expenditures associated with the building of DATATRAKs information technology
infrastructure.

Other income decreased to $60,000 during the three months ended September
30, 2001 from $230,000 during the three months ended September 30, 2000. Other
income includes interest income which decreased $160,000 for the three months
ended September 30, 2001, compared to September 30, 2000, due to the Companys
use of cash to fund its operating losses and other working capital needs and
decreasing interest rates on the Companys short-term investments.

Nine months ended September 30, 2001 compared with nine months ended
September 30, 2000

Revenue for the nine months ended September 30, 2001 increased 7.1% to
$1.5 million, as compared to $1.4 million for the nine months ended September
30, 2000. The low level of growth was due to the slower than expected
development and conversion of backlog into revenue during 2001. The Company is
continuing to increase its sales and marketing staff in order to attract new
business and grow backlog.

Direct costs of revenue, mainly personnel costs, were $1.3 million and
$1.2 million during the nine months ended September 30, 2001 and 2000,
respectively. The 8.3% increase in direct costs was mainly the result of
increased personnel costs of $170,000 caused by the addition of employees, in
anticipation of increases in backlog and revenue, to assure the quality
delivery of the Companys services. These additional personnel costs were
offset by a $90,000 decrease in other direct costs, mainly travel expenses and
other costs, which are passed through to the Companys customers.

SG&A expenses increased by 24.4% to $5.1 million from $4.1 million for the
nine months ended September 30, 2001 and 2000, respectively. During the nine
months ended September 30, 2001, there was a $990,000 increase in personnel
costs caused by an increase in sales and marketing and software development
personnel. This increase was offset by the absence of a non-cash charge of
$110,000 recorded during the nine months ended September 30, 2000, related to
compensation expense on stock options, which have exercise prices below the
market value of the Companys Common Shares on the date such stock options were
approved by the Companys shareholders.

Depreciation and amortization expense increased to $710,000 during the
nine months ended September 30, 2001 from $630,000 during the nine months ended
September 30, 2000. The increase was the result of depreciating capital
expenditures associated with the building of DATATRAKs information technology
infrastructure.

Other income decreased to $300,000 during the nine months ended September
30, 2001 from $710,000 during the nine months ended September 30, 2000.
Interest income decreased $360,000 for the

8



---



##### Table of Contents



nine months ended September 30, 2001
compared to September 30, 2000, due to the Companys use of cash to fund its
operating losses and other working capital needs and decreasing interest rates
on the Companys short-term investments. For the nine months ended September
30, 2001, there was a $30,000 decrease in foreign currency transaction
adjustments compared to the nine months ended September 30, 2000.

Liquidity and Capital Resources

Since its inception, the Companys principal sources of cash have been
cash flow from operations and proceeds from the sale of equity securities.
During 1999, the Company also generated $15.6 million in cash through the sale
of its Clinical Business and $1.3 million in cash from a favorable legal
settlement. The Companys investing activities primarily reflect capital
expenditures and net purchases of short-term investments.

The Companys contracts usually require a portion of the contract amount
to be paid at the time the contract is initiated. Additional payments are
generally received upon completion of negotiated performance milestones
throughout the life of the contract. All amounts received are recorded as a
liability (deferred revenue) until work has been completed and revenue is
recognized. Cash receipts do not necessarily correspond to costs incurred or
revenue recognized. The Company typically receives a low volume of
large-dollar receipts. Accounts receivable will fluctuate due to the timing
and size of cash receipts. Accounts receivable (net of allowance for doubtful
accounts) was $340,000 at September 30, 2001 and $610,000 at December 31, 2000.
Deferred revenue was $410,000 at September 30, 2001 and $340,000 at December
31, 2000.

Cash and cash equivalents decreased $380,000 during the nine months ended
September 30, 2001. This was the result of $4.3 million provided by investing
activities, offset by $4.7 million used in operating and financing activities.
Investing activities included net proceeds of $5.0 million from purchases and
maturities of short-term investments offset by $630,000 used to purchase
property and equipment. A capital lease obligation of $390,000 is excluded
from financing and investing activities on the Condensed Consolidated Statement
of Cash Flows, entered into during the nine months ended September 30, 2001.
Cash used for operating activities resulted from the funding of net operating
losses and other working capital needs.

At September 30, 2001, the Company had working capital of $6.3 million,
and its cash, cash equivalents and short-term investments totaled $7.0 million.
The Companys working capital decreased by $5.4 million since December 31,
2000. The decrease was primarily the result of the $5.1 million decrease in
cash, cash equivalents and short-term investments for funding operations.

The Company is responsible for funding the future development and testing
of the DATATRAK EDC software. The Company will continue to invest in the
development of the DATATRAK® process. The Companys operations and the EDC
market are still in a developmental stage. Although DATATRAK has experienced
marginal revenue growth, the Company anticipates negative cash flow from
operations during the remainder of 2001 and during 2002 as it continues to
build its operational and business development infrastructure. The Company
anticipates capital and related expenditures of approximately $2.5 million over
the next twelve months for continued commercialization and product development
of DATATRAK EDC, which the Company expects to fund from existing cash and cash
equivalents, maturities of short-term investments and cash flow from
operations. The Company believes that its cash and cash equivalents,
maturities of short-term investments and cash flow from operations, together
with its existing sources of equity, may not be sufficient to meet its working
capital and capital expenditure requirements for the next year. The Company
anticipates that it will need to raise additional funds for working capital by
selling debt or equity securities or through other arrangements. To that end,
the Company has begun discussions with potential investors in order to raise
capital through a private sale of

9



---



##### Table of Contents



its equity securities. However, there can be
no assurance that additional capital may be available on acceptable terms, if
at all.

Inflation

To date, the Company believes the effects of inflation have not had a
material adverse effect on its results of operations or financial condition.

Interest Rate Risk

The Company has fixed income investments consisting of cash equivalents
and short-term investments, which may be affected by changes in market interest
rates. The Company does not use derivative financial instruments in its
investment portfolio. The Company places its cash equivalents and short-term
investments with high-quality financial institutions, limits the amount of
credit exposure to any one institution and has established investment
guidelines relative to diversification and maturities designed to maintain
safety and liquidity. Investments are reported at amortized cost, which
approximates fair value.

Foreign Currency Risk

The Companys foreign sales and results of operations are subject to the
impact of foreign currency fluctuations. Approximately 22% of the Companys
revenue for the nine months ended September 30, 2001 was earned in Germany.
The Company manages its risk to foreign currency exchange rates by maintaining
foreign currency bank accounts in currencies which it regularly transacts
business. The Company does not currently hedge against the risk of exchange
rate fluctuations.

Information About Forward-Looking Statements

Certain statements made in this Form 10-Q, other SEC filings or written
materials or orally by the Company or its representatives may constitute
forward-looking statements that are based on managements current beliefs,
estimates and assumptions concerning the operations, future results and
prospects of the Company and the clinical pharmaceutical research industry in
general. All statements that address operating performance, events or
developments that management anticipates will occur in the future, including
statements related to future revenue, profits, expenses, income and earnings
per share or statements expressing general optimism about future results, are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 (Exchange Act). In addition, words such as expects,
anticipates, intends, plans, believes, estimates, variations of such
words, and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to the safe harbors created
in the Exchange Act. Factors that may cause actual results to differ
materially from those in the forward-looking statements include the ability of
the Company to absorb corporate overhead and other fixed costs in order to
successfully market the DATATRAK EDC software; the Companys ability to raise
capital; the development and fluctuations in the market for electronic data
capture technology; the degree of the Companys success in obtaining new
contracts; the timing of payments from customers and the timing of clinical
trial sponsor decisions to conduct new clinical trials or cancel or delay
ongoing trials; dependence on key personnel; governmental regulation; the early
stage of the Companys ASP operations; and general economic conditions such as
the rate of employment, inflation, interest rates and the condition of capital
markets. Under no circumstances should the factors listed above be construed
as an exhaustive list of all factors that could cause actual results to differ
materially from those expressed in forward-looking statements made by the
Company. In addition, the Companys success depends on the outcome of various
strategic initiatives it has undertaken, all of which are based on assumptions
made by the Company concerning trends in the clinical research market and the
health care industry.

10



---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates since it funds its operations through long-and
short-term investments and has business transactions in German Deutschmarks.

Part II. Other Information

|        |  |                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | Legal Proceedings                                                                                                                                       
|       
|       
|       
|       
|        |  | None.                                                                                                                                                   
|       
|Item 2. |  | Changes in 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                                                                                                                                       
|       
|       
|       
|       
|        |  | None.                                                                                                                                                   
|       
|       
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                        
|       
|       
|       
|       
|        |  | (a) Exhibits                                                                                                                                            
|       
|       
|       
|       
|        |  | See the Exhibit Index at page E  1 of this Form 10  Q.                                                                                                
|       
|       
|       
|       
|        |  | (b) Reports on Form 8-K                                                                                                                                 
|       
|       
|       
|       
|        |  | No reports were filed on form 8-K during the three months ended
September 30, 2001, other than the following:                                           
|       
|       
|       
|       
|        |  | Current Report on Form 8-K, dated August 7, 2001, reporting under
item 9 the announcement of an making available a White Paper on
the Companys website.

11



---



##### Table of Contents






SIGNATURES

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

|      |  |          |  |                                                                                                                                                       | 
|----- |  | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- | 
|      |  |          |  | DATATRAK International, Inc.Registrant                                                                                                               
|     
|Date: |  | 11/13/01 |  | /s/ Jeffrey A. GreenJeffrey A. Green,
President and Chief Executive Officer and a Director
(Principal Executive Officer)                             
|     
|Date: |  | 11/13/01 |  | /s/ Terry C. BlackTerry C. Black,
Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)

12



---



##### Table of Contents






Exhibit Index

|            |             |                                                                                                                                                             |      |     |  |  |  |  |  |  |  | 
|----------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --- |  |  |  |  |  |  |  | 
|Exhibit No. | Description |                                                                                                                                                             | Page |     | 
|            |             |                                                                                                                                                            
|4.1         |             | Specimen Certificate of the Companys Common Shares, without par value                                                                                      |      | (B)
|           
|           
|           
|           
|4.2         |             | Second Amended and Restated Registration Agreement, dated July 15,1994,
as amended on June 1, 1995 and February 5, 1996                                     |      | (A)
|           
|           
|           
|           
|10.1        |             | Amended and Restated 1994 Directors Share Option Plan*                                                                                                     |      | (C)
|           
|           
|           
|           
|10.2        |             | Amended and Restated 1996 Outside Directors Stock Option Plan*                                                                                             |      | (C)
|           
|           
|           
|           
|10.3        |             | Amendment No. 2 to the Amended and Restated 1996 Outside Directors Stock
Option Plan*                                                                      |      | (F)
|           
|           
|           
|           
|10.4        |             | Amended and Restated 1992 Share Incentive Plan*                                                                                                             |      | (C)
|           
|           
|           
|           
|10.5        |             | Amended and Restated 1996 Key Employees and Consultants
Stock Option Plan*                                                                                 |      | (C)
|           
|           
|           
|           
|10.6        |             | Amendment No. 2 to the Amended and Restated 1996 Key Employees
and Consultants Stock Option Plan*                                                          |      | (G)
|           
|           
|           
|           
|10.7        |             | Form of Indemnification Agreement*                                                                                                                          |      | (A)
|           
|           
|           
|           
|10.8        |             | Employment Agreement between the Company and Jeffrey A. Green, dated
February 5, 2001*                                                                      |      | (H)
|           
|           
|           
|           
|10.9        |             | Employment Agreement between the Company and Terry C. Black,
dated February 5, 2001*                                                                        |      | (H)
|           
|           
|           
|           
|10.10       |             | Separation Agreement between the Company and Terry C. Black,
dated December 22, 1998*                                                                       |      | (E)
|           
|           
|           
|           
|10.11       |             | Employment Agreement between the Company and Marc J. Shlaes
dated July 2, 1998*                                                                             |      | (B)
|           
|           
|           
|           
|10.12       |             | Employment Agreement between the Company and Wolfgang Summa,
dated December 29, 2000*                                                                       |      | (H)
|           
|           
|           
|           
|10.13       |             | DATATRAK International, Inc. Retirement Savings Plan*                                                                                                       |      | (D)
|           
|           
|           
|           
|10.14       |             | 1999 Outside Director Stock Option Plan*                                                                                                                    |      | (G)
|           
|           
|           
|           
|           
|           
|           
|*           |             | Management compensatory plan or arrangement.                                                                                                                |      |    
|           
|(A)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Registration Statement on Form S-1 (Registration statement No.
333-2140)       |      |    
|           
|           
|           
|           
|           
|(B)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Form 10-K for the year ended December 31, 1999 (Commission file No.
000-20699) |      |    

E-1





---



##### Table of Contents



Exhibit Index

|            |             |                                                                                                                                                             |  |  |  |  |  |  |  | 
|----------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Exhibit No. | Description | Page                                                                                                                                                       
|            |             |                                                                                                                                                            
|(C)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Registration Statement on Form S-8 (Registration statement No.
333-16061)     
|           
|           
|           
|           
|(D)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Registration Statement on Form S-8 (Registration statement No.
333-26251)     
|           
|           
|           
|           
|(E)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Form 10-K for the year ended December 31, 1998 (Commission file No.
000-20699)
|           
|           
|           
|           
|(F)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Schedule 14A dated March 17, 1999 (Commission File No. 000-20699)             
|           
|           
|           
|           
|(G)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Schedule 14A dated May 3, 2000 (Commission File No. 000-20699)                
|           
|           
|           
|           
|(H)         |             | Incorporated herein by reference to the appropriate exhibit to the
Companys Form 10-K for the year ended December 31, 2000 (Commission file No.
000-20699)

E-2