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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 March 31, 2005 Commission file number 000-20699 DATATRAK International, Inc. 
  Ohio
    
    34-1685364(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)6150 Parkland BoulevardMayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
 (440) 443-0082 
     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. þ Yes o No Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). o Yes þ 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 April 30, 2005 was 6,773,148.




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TABLE OF CONTENTS  Part I. Financial InformationItem 1 - Financial StatementsItem 2. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-31.1 Rule 13A-14(A)/15(D)-14(A) Certification of CEOEX-31.2 Rule 13A-14(A)/15(D)-14(A) Certification of CFOEX-32.1 Section 1350 Certification of CEOEX-32.2 Section 1350 Certification of CFO    Table of Contents  
 Part I. Financial Information 
 Item 1 - Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Note A)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,257,980
    
    
    $
    2,232,276Short-term investments
    
    
    5,699,240
    
    
    
    5,686,957Accounts receivable, less allowances
    
    
    2,623,456
    
    
    
    1,989,948Prepaid expenses and other current assets
    
    
    705,451
    
    
    
    488,505Total current assets
    
    
    11,286,127
    
    
    
    10,397,686Property and equipment, at cost
net of accumulated depreciation and amortization
    
    
    1,404,606
    
    
    
    1,422,764Other assetsRestricted cash
    
    
    76,310
    
    
    
    80,611Deposit
    
    
    39,549
    
    
    
    39,549115,859
    
    
    
    120,160Total assets
    
    $
    12,806,592
    
    
    $
    11,940,610LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    117,221
    
    
    $
    185,974Accrued expenses
    
    
    849,056
    
    
    
    1,052,301Deferred revenue
    
    
    640,674
    
    
    
    584,857Total current liabilities
    
    
    1,606,951
    
    
    
    1,823,132Shareholders equity:Serial preferred shares, without par value, 1,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common share warrants
    
    
    711,872
    
    
    
    711,872Common shares, without par value, authorized 25,000,000
shares; issued 10,070,148 shares as of March 31, 2005 and
9,915,895 shares as of December 31, 2004; outstanding
6,770,148 shares as of March 31, 2005 and 6,615,895 shares
as of December 31, 2004
    
    
    61,193,615
    
    
    
    60,584,110Treasury shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Accumulated deficit
    
    
    (30,431,526
    )
    
    
    (30,963,636
    )Foreign currency translation
    
    
    (86,012
    )
    
    
    (26,560
    )Total shareholders equity
    
    
    11,199,641
    
    
    
    10,117,478Total liabilities and shareholders equity
    
    $
    12,806,592
    
    
    $
    11,940,610
  Note A:
    The balance sheet at December 31, 2004 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




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Revenue
    
    $
    3,635,352
    
    
    $
    2,288,458Direct costs
    
    
    914,768
    
    
    
    533,624Gross profit
    
    
    2,720,584
    
    
    
    1,754,834Selling, general and administrative expenses
    
    
    2,045,303
    
    
    
    1,658,567Depreciation and amortization
    
    
    175,640
    
    
    
    194,932Income (loss) from operations
    
    
    499,641
    
    
    
    (98,665
    )Interest income (expense), net
    
    
    44,742
    
    
    
    7,859Income (loss) before income taxes
    
    
    544,383
    
    
    
    (90,806
    )Income tax expense
    
    
    12,273
    
    
    
    3,700Net income (loss)
    
    $
    532,110
    
    
    $
    (94,506
    )Net income (loss) per share:Basic:Net income (loss) per share
    
    $
    0.08
    
    
    $
    (0.02
    )Weighted average shares outstanding
    
    
    6,689,789
    
    
    
    6,043,722Diluted:Net income (loss) per share
    
    $
    0.07
    
    
    $
    (0.02
    )Weighted average shares outstanding
    
    
    7,521,663
    
    
    
    6,043,722
 See notes to condensed consolidated financial statements. 3




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Operating ActivitiesNet income (loss)
    
    $
    532,110
    
    
    $
    (94,506
    )Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    175,640
    
    
    
    194,932Other
    
    
    (18,942
    )
    
    
    10,757Changes in operating assets and liabilities:Accounts receivable
    
    
    (633,508
    )
    
    
    (246,448
    )Accounts payable and accrued expenses
    
    
    (184,844
    )
    
    
    41,390Deferred revenue
    
    
    55,817
    
    
    
    165,874Other
    
    
    (216,946
    )
    
    
    (71,633
    )Net cash (used in) provided by operating activities
    
    
    (290,673
    )
    
    
    366Investing ActivitiesDecrease in restricted cash
    
    
    
    
    
    
    23,979Purchases of property and equipment
    
    
    (164,864
    )
    
    
    (146,666
    )Maturities of short term investments
    
    
    1,750,000
    
    
    
    2,536,021Purchases of short term investments
    
    
    (1,726,814
    )
    
    
    (2,493,180
    )Net cash used in investing activities
    
    
    (141,678
    )
    
    
    (79,846
    )Financing ActivitiesProceeds from issuance of common shares and stock option exercises
    
    
    592,978
    
    
    
    192,074Share Issuance costs
    
    
    (87,154
    )
    
    
    Payments under capital lease obligation
    
    
    
    
    
    
    (23,979
    )Repayment of notes receivable
    
    
    
    
    
    
    803Net cash provided by financing activities
    
    
    505,824
    
    
    
    168,898Effect of exchange rate on cash
    
    
    (47,769
    )
    
    
    (27,960
    )Increase in cash and cash equivalents
    
    
    25,704
    
    
    
    61,458Cash and cash equivalents at beginning of period
    
    
    2,232,276
    
    
    
    1,727,335Cash and cash equivalents at end of period
    
    $
    2,257,980
    
    
    $
    1,788,793
 See notes to condensed consolidated financial statements. 4




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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-month period ended March 31,
2005 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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, 2004 (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. Recently Issued Accounting Standards On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(revised 2004), Share-Based Payment, which is a
revision of SFAS No.123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supercedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
amends SFAS No. 95, Statement of Cash Flows. Generally the approach in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share
based payments to employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer an alternative. On
April 14, 2005, the U.S. Securities and Exchange Commission (SEC) announced a deferral of the
effective date of SFAS 123(R) for calendar year-end companies until January 1, 2006. As permitted by SFAS No. 123, the Company currently accounts for share based payments to
employees using APB No. 25, and as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)s fair value method may have a significant
impact on the Companys results of operations, although it will have no impact on its overall
financial position. DATATRAK will adopt SFAS No. 123(R) on January 1, 2006. Because the effective
date changed and methods for the adoption of SFAS 123(R) were clarified by the SEC in April, the
Company is currently re-evaluating its determinations of which valuation and transition option to
select when adopting SFAS 123(R). Accordingly, the full impact of adoption of SFAS No. 123(R)
cannot be predicted at this time. 5




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited) 3. Net income (loss) per Share The following table sets forth the computation of basic and diluted income (loss) per share. Three Months Ended March 31,2005
    
    
    2004Net income (loss) used in the calculation of basic and
diluted earnings per share
    
    $
    532,110
    
    
    $
    (94,506
    )Denominator for basic net income (loss) per share 
weighted average common shares outstanding
    
    
    6,689,789
    
    
    
    6,043,722Effect of dilutive common share options and warrants
    
    
    831,874
    
    
    
    Denominator for diluted net income (loss) per share
    
    
    7,521,663Basic net income (loss) per share
    
    $
    0.08
    
    
    $
    (0.02
    )Diluted net income (loss) per share
    
    $
    0.07
    
    
    $
    (0.02
    )Weighted average common share options and warrants
excluded from the computation of diluted net
income (loss) per share because they would have an
antidilutive effect on net income (loss) per share
    
    
    11,655
    
    
    
    1,300,751
 4. Comprehensive Income (Loss) The following table sets forth comprehensive income (loss). Three Months Ended March 31, Three Months Ended March 31,2005
    
    
    2004Net income (loss)
    
    $
    532,110
    
    
    $
    (94,506
    )Foreign currency translation
    
    
    (59,452
    )
    
    
    (33,825
    )Comprehensive income (loss)
    
    $
    472,658
    
    
    $
    (128,331
    )
 5. Shareholders Equity During the three months ended March 31, 2005, the holders of 154,253 common share options, at
a weighted average exercise price of $3.84 per share, exercised the options and purchased 154,253
common shares. 6. Income Taxes During the three months ended March 31, 2005, the Company had U.S. federal alternative minimum
tax of $12,273 due to income earned by its U.S. based operations. Due to its U.S. and non-U.S.
income tax loss carryforwards, the Company had no other income tax expense during the three months
ended March 31, 2005. 6




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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited) 7. Stock Based Compensation The Company accounts for stock based compensation in accordance with APB No. 25 for stock
options granted to employees and directors. The Company follows the alternative fair value
accounting provided for under SFAS No. 123 for stock options granted to non-employees. To comply
with the requirements of SFAS No. 123, the Company has chosen to use the Black-Scholes option
valuation model in valuing its employee stock options. Option valuation models require the input
of highly subjective assumptions including the expected stock price volatility. SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, requires disclosure of
compensation expense under both APB No. 25 and SFAS No. 123. SFAS No. 123 requires that stock
compensation be determined as if the Company has accounted for its stock options granted subsequent
to December 31, 1994 under the fair value method of SFAS 123. For purposes of pro forma
disclosures, the estimated value of the options is amortized to expense over the options vesting
period. The pro forma results are not necessarily indicative of what would have occurred had the
Company adopted SFAS No. 123. The following table sets forth stock based compensation and pro forma information for each
period presented. Three Months ended March 31,2005
    
    
    2004Net income (loss) recorded
    
    $
    532,000
    
    
    $
    (95,000
    )Plus: stock compensation expense recognized
    
    
    17,000
    
    
    
    6,000Less: stock compensation expense that would have
been recognized under SFAS No. 123
    
    
    275,000
    
    
    
    157,000Pro forma net income (loss)
    
    $
    274,000
    
    
    $
    (246,000
    )Pro forma basic income (loss) per share
    
    $
    0.04
    
    
    $
    (0.04
    )Pro forma diluted income (loss) per share
    
    $
    0.04
    
    
    $
    (0.04
    )
 7




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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition The information set forth and discussed below for the three months ended March 3l, 2005 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 a provider of software and other related services, commonly referred to as an
application service provider, or ASP. DATATRAKs customers use the software known as DATATRAK EDC(R)
to collect and transmit clinical trial data, commonly referred to as electronic data capture, or
EDC. The Companys services assist companies in the clinical pharmaceutical, biotechnology,
contract research organization and medical device research industries, in accelerating the
completion of clinical trials. Approximately 62% of the Companys assets, or approximately
$7,957,000, is held in cash, cash equivalents and short-term investments. The Company is
continuing to enhance and commercialize its business and the DATATRAK EDC(R) software, and
anticipates that its operating results may fluctuate significantly from period to period. There
can be no assurance of the Companys long-term future prospects. The Companys standard contracts provide a fixed unit price for each component or service to
be delivered, and revenue is recognized as these components or services are delivered. Services
provided by DATATRAK that are in addition to those provided for in its contracts are billed on a
fee for service basis as services are completed. Generally, these contracts range in duration from
one to three years. The ultimate contract value is dependent upon the length of the customers use
of DATATRAK EDC(R) and the services DATATRAK provides. As services are performed over the life of
the contract, revenue is recognized per the specific terms of each contract. Costs associated with
contract revenue are recognized as incurred. Pass-through costs that are paid directly by
DATATRAKs customers, and for which the Company does not bear the risk of economic loss, are
excluded from revenue. The termination of a standard contract will not result in a material
adjustment to the revenue or costs previously recognized. In some instances, DATATRAK offers volume discounts to customers over multiple contracts.
DATATRAK estimates the volume discounts to be earned over the life of the contracts to which the
discount applies. As contracts progress, revenue is recorded using rates that reflect the
anticipated volume discount to be achieved by the customer. The termination of a contract subject
to a volume discount could result in a material adjustment to revenue previously recognized, in
order to reflect the true economic value of the contract at the time of cancellation. At December
31, 2004, DATATRAK had deferred $69,000 of revenue as a result of its contracts subject to volume
discounts. During the three months ended March 31, 2005, an additional $17,000 of revenue was
deferred as a result of the Companys contracts subject to volume discounts. Backlog consists of anticipated revenue from authorization letters to commence services and
signed contracts yet to be completed. Potential contracts or authorization letters that have
passed the verbal stage, but have not yet been signed, are excluded from backlog. At March 31,
2005, DATATRAKs backlog was $13,559,000. DATATRAKs contracts can be cancelled or delayed at
anytime and, therefore, the Companys backlog, at any point in time, is not an accurate predictor
of future levels of revenue. 8




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Critical Accounting Policies In response to the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure About
Critical Accounting Policies, the Company has identified the most critical accounting principles
upon which its financial status depends. Critical principles were determined by considering
accounting policies that involve the most complex or subjective decisions or assessments. The most
critical accounting policies were identified to be those related to revenue recognition, software
development costs and stock based compensation. A summary of these critical accounting policies can be found in the Companys Annual Report on
Form 10-K, filed on March 11, 2005, under the heading Critical Accounting Policies in
Managements Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Three months ended March 31, 2005 compared with three months ended March 31, 2004 Revenue for the three months ended March 31, 2005 increased 58.9% to $3,635,000 as compared to
$2,288,000 for the three months ended March 31, 2004. During the first three months of 2005,
DATATRAK recorded revenue related to 60 contracts compared to 47 contracts during 2004. For the
three months ended March 31, 2005, $3,471,000 of revenue was the result of contracts that were in
backlog at December 31, 2004 and $164,000 was the result of new business. For the first quarter of
2004, $2,242,000 of revenue was generated from contracts that were in backlog at December 31, 2003
and $46,000 of revenue was the result of new business. Direct costs of revenue, mainly personnel costs, were $915,000 and $534,000 during the three
month periods ended March 31, 2005 and 2004, respectively. Additional staff and other payroll cost
increases accounted for $178,000 of this increase. Third party license fees, as a result
of the Companys license agreements with Microsoft and SAS Institute Inc. (SAS), were $147,000
during the three months ended March 31, 2005. The Company did not incur any third party license
fees during the three months ended March 31, 2004. As a reseller of Microsoft software, the
Company entered into a Microsoft Volume Licensing Services (MVLS) in 2004. The license agreement
with SAS was entered into by the Company in connection with an alliance between DATATRAK and SAS
that was formed in December 2004. The increase in staff was necessitated by the growth in revenue
and the increase in the number of contracts DATATRAK has been managing over the past year.
DATATRAKs gross margin decreased to 74.8% for the three months ended March 31, 2005 compared to
76.7% in the first quarter of 2004. Selling, general and administrative expenses (SG&A) include all administrative personnel
costs, business development costs, and all other expenses not directly chargeable to a specific
contract. SG&A expenses increased by 23.3% to $2,045,000 from $1,659,000 for the three months
ended March 31, 2005 and 2004, respectively. Personnel and payroll cost increases, and the
Companys sales incentive and corporate bonus plans accounted for $210,000 of the $386,000
increase. Expenses related to equipment maintenance and software licensing increased $59,000
compared to the prior year. These expenses are necessary to ensure that DATATRAKs information
technology environment is properly maintained. The Companys fees related to accounting and
auditing services increased $45,000 during the three months ended March 31, 2005, due to the
Companys Sarbanes-Oxley compliance efforts. Outlook Primarily due to our growth in revenue, we reported operating income for the first time in our
EDC history during 2004. Backlog at March 31, 2005 of $13,559,000 was less than backlog reported
at December 31, 2004 of $14,057,000. Backlog has continued to decline for the past several
reporting periods because new contract signings have been less than anticipated, and have not kept
pace with
revenue recognized on existing contracts. The Company recently completed a reorganization of its
sales and 9




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marketing department and expects that this reorganization, along with its SAS alliance
and increased acceptance of EDC, will lead to increased contract signings and backlog growth in
2005. Assuming that there are no contract delays or cancellations to current projects, and that
DATATRAK meets its goals for attracting new business, the Companys management believes that it
will achieve its earlier reported guidance of approximately 50% revenue growth for the year ending
December 31, 2005 compared to 2004. The Company expects revenue to grow gradually on a quarter to
quarter basis. The Company expects to convert approximately $8,200,000 of its March 31, 2005
backlog into revenue during the final nine months of 2005. Management still expects DATATRAKs
gross margin to be at the 75% level for 2005. Because the required adoption date for SFAS 123(R)
has been delayed until January 1, 2006, management believes that SG&A expenses will increase by
approximately 35% for the year ended December 31, 2005 as compared to 2004, compared to
managements previous guidance of a 35% to 40% increase. The Company expects its effective tax
rate for the year ended December 31, 2005 to be approximately 3% due to the use of its net
operating loss carry-forwards. 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. The Companys investing activities
primarily reflect capital expenditures and net purchases of short-term investments. In December
2004 the Company received approximately $4,376,000 in net proceeds from the completion of a private
placement of its common shares. 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 monthly as work on the
contract progresses. 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. DATATRAKs accounts receivable will fluctuate due to the timing and size of cash
receipts. Contracting and collection practices are designed to maintain an average collection
period for accounts receivable of one to three months. Any increase in the Companys normal
collection period for accounts receivable could negatively impact its cash flow from operations and
our working capital. At March 31, 2005, the average collection period for accounts receivable was
52 days compared to 45 days at December 31, 2004. Accounts receivable (net of allowance for
doubtful accounts) was $2,623,000 at March 31, 2005 and $1,990,000 at December 31, 2004.
DATATRAKs increased revenue has caused the accounts receivable balance to increase during 2005.
Deferred revenue was $641,000 at March 31, 2005 compared to $585,000 at December 31, 2004. Cash and cash equivalents increased $26,000 during the three months ended March 31, 2005.
This was the result of $506,000 provided by financing activities, offset by $290,000 and $142,000
used by operating and investing activities, respectively. Foreign currency fluctuations caused a
$48,000 decrease in cash and cash equivalents. Cash used in operating activities was the result of
the Companys net income of $532,000, plus non cash operating items of $157,000. This $689,000
increase was offset by the $634,000 increase in accounts receivable, caused by the Companys growth
in revenue during the first quarter of 2005, and the $216,000 increase in prepaid expenses
primarily resulting from the Companys license agreement with SAS. Changes in current liabilities
caused cash from operating activities to decrease by $129,000, primarily as a result of 2004
corporate performance bonuses paid during 2005. Investing activities included $165,000 used to
purchase property and equipment, offset by net maturities of investments totaling $23,000.
Financing activities consist of net proceeds from the issuance of common shares resulting from
exercises of common share options offset by costs associated with the Companys private placement
of common shares and warrants to purchase its common shares. At March 31, 2005, the Company had working capital of $9,679,000 and its cash, cash
equivalents and short-term investments totaled $7,957,000. The Companys working capital increased
by $1,104,000 since December 31, 2004. The increase was primarily the result of a
$634,000 increase in accounts 10




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receivable and a $216,000 increase in prepaid
expenses. A decrease in current liabilities also caused working capital to increase by $216,000. The Company is party to a lease agreement that requires it to maintain a restricted cash
balance. DATATRAKs restricted cash balance was $76,000 at March 31, 2005. The Company is responsible for funding the future enhancement and testing of the DATATRAK EDC(R)
software. The Companys operations and the EDC market are still in a developmental stage.
DATATRAK has experienced revenue growth, and anticipates recording net income and positive cash
flow from operations for the year ended December 31, 2005, as it continues to build its customer
base, increase its backlog and convert existing backlog into revenue. During the three months ended March 31, 2005, the Company expended $165,000 for capital
expenditures, and had expenditures totaling $167,000 for equipment maintenance and related items.
The Company anticipates capital and related expenditures of approximately $1,370,000 through the
end of 2005 for continued commercialization, product development and maintenance of DATATRAK EDC(R)
and the anticipated growth of DATATRAKs business and information technology infrastructure. A
portion of these anticipated expenditures are dependent on the Companys growth, and are therefore
discretionary in nature. During the three months ended March 31, 2005, the Company expended $325,000 for research and
development expenditures The Company anticipates research and development expenditures of
approximately $1,510,000 through the end of 2005. DATATRAKs 2005 research and development
expenditures have been and will continue to be for the continued enhancement and modifications to
the DATATRAK EDC(R) software, the integration of DATATRAK EDC(R) with SAS(R) Drug Development software
and the development of the DataUnifyer product. DATATRAK expects to fund its working capital requirements, from existing cash and cash
equivalents, maturities of short-term investments and cash flow from operations. The Company
believes that, with its continued anticipated growth in revenue, its cash and cash equivalents,
maturities of short-term investments and cash flow from operations will be sufficient to meet its
working capital and capital expenditure requirements for the foreseeable future. However, DATATRAK
may need to raise additional funds to offset delays or cancellations of contracts, support
expansion, respond to competitive pressures, acquire complementary businesses or technology or take
advantage of unanticipated opportunities. Additional funds may be raised by selling debt or equity
securities, by entering into strategic relationships or through other arrangements. Additional
capital may not be available on acceptable terms, if at all. To the extent that additional equity
capital is raised, it could have a dilutive effect on existing shareholders. 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. 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, as amended
(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 11




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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(R) software; the development of
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;
governmental regulation; the early stage of the Companys ASP operations; changing government
regulations and general economic conditions such as the rate of employment, inflation, interest
rates and the condition of capital markets. This list of factors is not all inclusive. 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. Any forward-looking statement speaks only
as of the date on which such statement is made and the Company does not undertake any obligation to
update any statements whether as a result of new information, future events or otherwise. 
 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 short-term investments and has business
transactions in Euros. A summary of the Companys market risk exposures is presented below. Interest Rate Risk DATATRAK 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. A 1.0% change in interest rates during the three
months ended March 31, 2005, would have resulted in an $20,000 change in DATATRAKs interest income
during the quarter. Foreign Currency Risk DATATRAKs foreign results of operations are subject to the impact of foreign currency
fluctuations through both foreign currency transaction and foreign currency translation
adjustments. The Company manages its risk to foreign currency transaction adjustments by
maintaining foreign currency bank accounts in currencies in which we regularly transact business.
DATATRAK does not currently hedge against the risk of exchange rate fluctuations. DATATRAKs financial position and results of operations are impacted by translation
adjustments caused by the conversion of foreign currency accounts and operating results into U.S.
dollars for financial reporting purposes. A 1.0% fluctuation in the exchange rate between the U.S.
dollar and the Euro at March 31, 2005, would have resulted in a $26,000 change in the foreign
currency translation amount recorded on the Companys balance sheet, due to foreign currency
translations. A 1.0% fluctuation in the average exchange rate between the U.S. dollar and the Euro
for the three months ended March 31, 2005 would have resulted in a $12,000 change in the Companys
net income for the three months ended March 31, 2005 due to foreign currency translations. During
the three months ended
March 31, 2005 the average exchange rate between the Euro and the U.S. dollar by increased by
approximately 5% compared to the three months ended March 31, 2004, and increased by approximately
1% compared to the three months ended December 31, 2004. The conversion of our foreign operations
into U.S. dollars upon consolidation resulted in net income which was approximately $56,000 lower
than would have been recorded had the exchange rate between the Euro and the U.S. dollar remained
consistent with first quarter 2004 rates. 12




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Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the chief executive officer and chief financial officer, of the
design and operation of the Companys disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-14(e)) as of the end of the period covered by this report. Based upon
that evaluation the Companys management, including the chief executive officer and chief financial
officer, have concluded that, as of March 31, 2005, the Companys disclosure controls and
procedures were effective to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those entities, so that
information required to be disclosed by the Company in the reports it files and submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms. Changes in Internal Controls There were no changes in the Companys internal controls over financial reporting that
occurred during the fiscal quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Companys internal controls over financial reporting. 
 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  31.1
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    Section 1350 Certification of Chief Executive Officer32.2
    Section 1350 Certification of Chief Financial Officer 13




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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.RegistrantDate: 5/13/05
    
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer(Principal Executive Officer)Date: 5/13/05
    
    /s/ Terry C. BlackTerry C. Black,Vice President of Finance, Chief Financial Officer,Treasurer and Assistant Secretary(Principal Financial Officer)
 14