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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 September 30, 2005
 Commission file number 000-20699
 DATATRAK International, Inc.
  Ohio
    
    34-1685364(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)6150 Parkland Boulevard
Mayfield Heights, Ohio
    
    44124(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 
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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-31.1 302 Certification for CEOEX-31.2 302 Certification for CFOEX-32.1 906 Certification for CEOEX-32.2 906 Certification for CFO    Table of Contents  
 Part I. Financial Information
 
 Item 1  Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Note A)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,762,027
    
    
    $
    2,232,276Short-term investments
    
    
    5,712,561
    
    
    
    5,686,957Accounts receivable, less allowances
    
    
    2,643,281
    
    
    
    1,989,948Prepaid expenses and other current assets
    
    
    685,058
    
    
    
    488,505Total current assets
    
    
    12,802,927
    
    
    
    10,397,686Property and equipment, at cost
net of accumulated depreciation and amortization
    
    
    1,639,501
    
    
    
    1,422,764Other assetsRestricted cash
    
    
    71,181
    
    
    
    80,611Deposit
    
    
    39,549
    
    
    
    39,549110,730
    
    
    
    120,160Total assets
    
    $
    14,553,158
    
    
    $
    11,940,610LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    193,176
    
    
    $
    185,974Accrued expenses
    
    
    942,756
    
    
    
    1,052,301Deferred revenue
    
    
    1,106,917
    
    
    
    584,857Total current liabilities
    
    
    2,242,849
    
    
    
    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 13,605,597 shares as of September 30, 2005 and
13,223,791 shares as of December 31, 2004; outstanding
10,305,597 shares as of September 30, 2005 and 9,923,791 shares
as of December 31, 2004
    
    
    61,737,627
    
    
    
    60,584,110Treasury shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Accumulated deficit
    
    
    (29,758,139
    )
    
    
    (30,963,636
    )Foreign currency translation
    
    
    (192,743
    )
    
    
    (26,560
    )Total shareholders equity
    
    
    12,310,309
    
    
    
    10,117,478Total liabilities and shareholders equity
    
    $
    14,553,158
    
    
    $
    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.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    4,055,914
    
    
    $
    2,974,536
    
    
    $
    11,415,338
    
    
    $
    7,892,329Direct costs
    
    
    899,306
    
    
    
    682,873
    
    
    
    2,740,840
    
    
    
    1,820,390Gross profit
    
    
    3,156,608
    
    
    
    2,291,663
    
    
    
    8,674,498
    
    
    
    6,071,939Selling, general and administrative expenses
    
    
    2,603,859
    
    
    
    1,764,272
    
    
    
    7,024,825
    
    
    
    5,214,310Depreciation and amortization
    
    
    198,272
    
    
    
    140,854
    
    
    
    574,953
    
    
    
    474,148Income from operations
    
    
    354,477
    
    
    
    386,537
    
    
    
    1,074,720
    
    
    
    383,481Interest income, net
    
    
    62,272
    
    
    
    11,099
    
    
    
    159,430
    
    
    
    26,244Income before income taxes
    
    
    416,749
    
    
    
    397,636
    
    
    
    1,234,150
    
    
    
    409,725Income tax expense
    
    
    4,095
    
    
    
    
    
    
    
    28,653
    
    
    
    18,000Net income
    
    $
    412,654
    
    
    $
    397,636
    
    
    $
    1,205,497
    
    
    $
    391,725Net income per share:Basic:Net income per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.04Weighted average shares outstanding
    
    
    10,284,219
    
    
    
    9,143,564
    
    
    
    10,168,126
    
    
    
    9,109,089Diluted:Net income per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.04Weighted average shares outstanding
    
    
    11,457,454
    
    
    
    10,222,360
    
    
    
    11,383,493
    
    
    
    10,180,640
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004Operating ActivitiesNet income
    
    $
    1,205,497
    
    
    $
    391,725Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    574,953
    
    
    
    474,148Other
    
    
    (40,352
    )
    
    
    47,129Changes in operating assets and liabilities:Accounts receivable
    
    
    (653,333
    )
    
    
    (707,820
    )Prepaid expenses and other current assets
    
    
    (196,553
    )
    
    
    (167,971
    )Accounts payable and accrued expenses
    
    
    782
    
    
    
    304,635Deferred revenue
    
    
    522,060
    
    
    
    (105,738
    )Net cash provided by operating activities
    
    
    1,413,054
    
    
    
    236,108Investing activitiesDecrease in restricted cash
    
    
    
    
    
    
    23,979Purchases of property and equipment
    
    
    (807,842
    )
    
    
    (579,456
    )Maturities of short-term investments
    
    
    6,500,000
    
    
    
    6,786,021Purchases of short-term investments
    
    
    (6,405,314
    )
    
    
    (6,222,157
    )Net cash (used in) provided by investing activities
    
    
    (713,156
    )
    
    
    8,387Financing activitiesProceeds from issuance of common shares and stock option exercises
    
    
    1,073,936
    
    
    
    326,018Share issuance costs
    
    
    (103,125
    )
    
    
    Payments under capital lease obligation
    
    
    
    
    
    
    (23,979
    )Repayment of notes receivable, net
    
    
    
    
    
    
    803Net cash provided by financing activities
    
    
    970,811
    
    
    
    302,842Effect of exchange rate on cash
    
    
    (140,958
    )
    
    
    (38,085
    )Increase in cash and cash equivalents
    
    
    1,529,751
    
    
    
    509,252Cash and cash equivalents at beginning of period
    
    
    2,232,276
    
    
    
    1,727,335Cash and cash equivalents at end of period
    
    $
    3,762,027
    
    
    $
    2,236,587
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
 1. Basis of Presentation
    
    
    Project management and data management (design, report and export) services are
recorded as revenue as hours are worked on the contract based on the contractual
billing rate per hour for those services
    
    Data items revenue is earned based on a price per data unit as data items are
entered into DATATRAKs hosting facility
    
    Classroom training services revenue is recognized as classroom training is
completed, at rates based on the length of the training program
    
    Internet-based training services revenue is recognized on a per user basis as
self-study courses are completed
    
    Help desk revenue is recognized based on a monthly price per registered user
under the contract
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
  2. Recently Issued Accounting Standards
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
 3. Net Income per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income used in the calculation
of basic and diluted loss per share
    
    $
    412,654
    
    
    $
    397,636
    
    
    $
    1,205,497
    
    
    $
    391,725Denominator for basic net income
per share  weighted average common
shares outstanding
    
    
    10,284,219
    
    
    
    9,143,564
    
    
    
    10,168,126
    
    
    
    9,109,089Effect of dilutive common share options
and warrants
    
    
    1,173,235
    
    
    
    1,078,796
    
    
    
    1,215,367
    
    
    
    1,071,551Denominator for diluted net income per share
    
    
    11,457,454
    
    
    
    10,222,360
    
    
    
    11,383,493
    
    
    
    10,180,640Basic net income per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.12
    
    
    $
    0.04Diluted net income per share
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.04Weighted average common share options and
warrants excluded from the computation of
diluted net income per share because
they would have an antidilutive effect on
net income per share
    
    
    9,450
    
    
    
    70,125
    
    
    
    12,128
    
    
    
    59,660
 4. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    412,654
    
    
    $
    397,636
    
    
    $
    1,205,497
    
    
    $
    391,725Foreign currency translation
    
    
    (11,359
    )
    
    
    (240
    )
    
    
    (166,183
    )
    
    
    (42,072
    )Comprehensive income
    
    $
    401,295
    
    
    $
    397,396
    
    
    $
    1,039,314
    
    
    $
    349,653
 5. Shareholders Equity
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
   6. Income Taxes
  7. Stock Based Compensation
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income recorded
    
    $
    413,000
    
    
    $
    398,000
    
    
    $
    1,205,000
    
    
    $
    392,000Plus: stock compensation expense
recognized
    
    
    16,000
    
    
    
    14,000
    
    
    
    49,000
    
    
    
    26,000Less: stock compensation expense that
would have been recognized under SFAS No.
123
    
    
    175,000
    
    
    
    213,000
    
    
    
    740,000
    
    
    
    524,000Pro forma net income (loss)
    
    $
    254,000
    
    
    $
    199,000
    
    
    $
    514,000
    
    
    $
    (106,000
    )Pro forma basic income (loss) per share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    (0.1
    )Pro forma diluted income (loss) per share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    (0.1
    )
 8. Reclassification
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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  General
    Critical Accounting Policies
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
    
    Project management and data management (design, report and export) services are
recorded as revenue as hours are worked on the contract based on the contractual
billing rate per hour for those services
    
    Data items revenue is earned based on a price per data unit as data items are
entered into DATATRAKs hosting facility
    
    Classroom training services revenue is recognized as classroom training is
completed, at rates based on the length of the training program
    
    Internet-based training services revenue is recognized on a per user basis as
self-study courses are completed
    
    Help desk revenue is recognized based on a monthly price per registered user
under the contract
  Results of Operations
 Three months ended September 30, 2005 compared with three months ended September 30, 2004
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Nine months ended September 30, 2005 compared with nine months ended September 30, 2004
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Outlook
     Liquidity and Capital Resources
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Inflation
  Information About Forward-Looking Statements
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Foreign Currency Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
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Changes in Internal Controls
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Changes in Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Approval of the
    
    
    Approval of theVotes
    
    Proposal to Adjourn
    
    
    Omnibus PlanFor
    
    
    4,643,773
    
    
    
    2,301,964Against
    
    
    688,096
    
    
    
    1,004,888Abstain
    
    
    582,676
    
    
    
    3,992Non-votes
    
    
    
    
    
    
    2,603,701
   Votes
    
    Timothy G. Biro
    
    
    Robert M. Stote
    
    
    Jerome H. KaiserFor
    
    
    5,694,192
    
    
    
    5,846,545
    
    
    
    5,769,426Withheld
    
    
    220,353
    
    
    
    68,000
    
    
    
    145,119
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Item 5. Other Information
  
 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
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SIGNATURES
  DATATRAK International, Inc.RegistrantDate: November 14, 2005
    
    /s/ Jeffrey A. GreenJeffrey A. Green,President and Chief Executive Officer and a Director(Principal Executive Officer)Date: November 14, 2005
    
    /s/ Terry C. BlackTerry C. Black,Vice President of Finance, Chief Financial Officer,Treasurer and Assistant Secretary(Principal Financial and Accounting Officer)
 19