##### 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 EndedJune 30, 2008
 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)
  
 
  þ o
   Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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TABLE OF CONTENTS  Part I. Financial InformationItem 1  Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity 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-3.1EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 Part I. Financial Information
 
 Item 1  Financial Statements
 DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note A)ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,971,550
    
    
    $
    1,919,316Short-term investments
    
    
    1,506,986
    
    
    
    6,595,045Accounts receivable, net
    
    
    1,181,244
    
    
    
    1,070,688Deferred tax asset  current
    
    
    74,400
    
    
    
    71,200Prepaid expenses and other current assets
    
    
    410,826
    
    
    
    451,222Total current assets
    
    
    6,145,006
    
    
    
    10,107,471Property and equipmentEquipment
    
    
    2,569,334
    
    
    
    2,663,021Software
    
    
    6,327,163
    
    
    
    6,325,496Leasehold improvements
    
    
    665,460
    
    
    
    696,5719,561,957
    
    
    
    9,685,088Less accumulated depreciation and software impairment loss
    
    
    8,426,589
    
    
    
    6,150,2891,135,368
    
    
    
    3,534,799Other assetsRestricted cash
    
    
    
    
    
    
    87,021Deferred tax asset
    
    
    90,000
    
    
    
    1,327,800Deposit
    
    
    39,549
    
    
    
    39,549Other intangible assets, net of accumulated amortization
    
    
    3,451
    
    
    
    520,458Goodwill
    
    
    
    
    
    
    10,856,113133,000
    
    
    
    12,830,941Total assets
    
    $
    7,413,374
    
    
    $
    26,473,211LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    686,233
    
    
    $
    415,415Notes payable
    
    
    376,131
    
    
    
    246,627Current portion of long-term debt
    
    
    3,000,000
    
    
    
    425,304Accrued expenses
    
    
    1,957,580
    
    
    
    1,607,261Deferred revenue
    
    
    1,197,037
    
    
    
    1,277,276Total current liabilities
    
    
    7,216,981
    
    
    
    3,971,883Long-term liabilitiesLong-term debt
    
    
    110,730
    
    
    
    3,252,962Deferred revenue  long-term
    
    
    1,470,000
    
    
    
    1,680,000Deferred tax liability
    
    
    164,400
    
    
    
    999,000Total long-term liabilities
    
    
    1,745,130
    
    
    
    5,931,962Shareholders equitySerial Preferred Shares, without par value, 1,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common Shares, without par value, authorized 25,000,000 shares; issued 17,016,901
shares as of June 30, 2008 and 17,016,901 shares as of December 31, 2007;
outstanding 13,716,901 shares as of June 30, 2008 and 13,716,901 shares as of
December 31, 2007
    
    
    79,766,118
    
    
    
    79,618,366Treasury Shares, 3,300,000 shares at cost
    
    
    (20,188,308
    )
    
    
    (20,188,308
    )Common Share warrants
    
    
    1,191,284
    
    
    
    1,191,284Accumulated deficit
    
    
    (62,001,609
    )
    
    
    (43,769,201
    )Foreign currency translation
    
    
    (316,222
    )
    
    
    (282,775
    )Total shareholders equity
    
    
    (1,548,737
    )
    
    
    16,569,366Total liabilities and shareholders equity
    
    $
    7,413,374
    
    
    $
    26,473,211
 
 Note A:
    
    The condensed consolidated balance sheet at December 31, 2007 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    2,248,905
    
    
    $
    3,064,710
    
    
    $
    4,337,134
    
    
    $
    6,606,805Direct costs
    
    
    898,763
    
    
    
    1,219,298
    
    
    
    1,832,643
    
    
    
    2,556,769Gross profit
    
    
    1,350,142
    
    
    
    1,845,412
    
    
    
    2,504,491
    
    
    
    4,050,036Selling, general and administrative expenses
    
    
    3,078,459
    
    
    
    3,621,138
    
    
    
    5,909,217
    
    
    
    7,043,809Severance expense
    
    
    579,206
    
    
    
    337,061
    
    
    
    605,049
    
    
    
    337,061Depreciation and amortization
    
    
    501,864
    
    
    
    886,641
    
    
    
    1,024,289
    
    
    
    1,509,044Impairment loss
    
    
    12,763,145
    
    
    
    
    
    
    
    12,763,145
    
    
    
    Loss from operations
    
    
    (15,572,532
    )
    
    
    (2,999,428
    )
    
    
    (17,797,209
    )
    
    
    (4,839,878
    )Interest income
    
    
    29,266
    
    
    
    151,513
    
    
    
    89,006
    
    
    
    221,705Interest expense
    
    
    (54,561
    )
    
    
    (95,825
    )
    
    
    (121,127
    )
    
    
    (194,494
    )Other loss
    
    
    (16,696
    )
    
    
    (1,700
    )
    
    
    (18,078
    )
    
    
    (1,700
    )Loss before income taxes
    
    
    (15,614,523
    )
    
    
    (2,945,440
    )
    
    
    (17,847,408
    )
    
    
    (4,814,367
    )Income tax expense
    
    
    385,000
    
    
    
    20,300
    
    
    
    385,000
    
    
    
    46,600Net loss
    
    $
    (15,999,523
    )
    
    $
    (2,965,740
    )
    
    $
    (18,232,408
    )
    
    $
    (4,860,967
    )Net loss per share:Basic:Net loss per share
    
    $
    (1.17
    )
    
    $
    (0.22
    )
    
    $
    (1.33
    )
    
    $
    (0.38
    )Weighted-average shares outstanding
    
    
    13,681,901
    
    
    
    13,584,037
    
    
    
    13,681,901
    
    
    
    12,726,259Diluted:Net loss per share
    
    $
    (1.17
    )
    
    $
    (0.22
    )
    
    $
    (1.33
    )
    
    $
    (0.38
    )Weighted-average shares outstanding
    
    
    13,681,901
    
    
    
    13,584,037
    
    
    
    13,681,901
    
    
    
    12,726,259
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007Operating activitiesNet loss
    
    $
    (18,232,408
    )
    
    $
    (4,860,967
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,024,289
    
    
    
    1,509,044Impairment loss
    
    
    12,763,145
    
    
    
    Stock-based compensation
    
    
    147,752
    
    
    
    193,705Accretion of discount on investments
    
    
    (51,516
    )
    
    
    (157,405
    )Other
    
    
    18,077
    
    
    
    1,700Changes in operating assets and liabilities:Accounts receivable
    
    
    (106,888
    )
    
    
    388,274Prepaid expenses and other current assets
    
    
    190,825
    
    
    
    (183,175
    )Deferred taxes, net
    
    
    400,000
    
    
    
    46,600Accounts payable and accrued expenses
    
    
    582,778
    
    
    
    474,496Deferred revenue
    
    
    (290,239
    )
    
    
    315,350Net cash used in operating activities
    
    
    (3,554,185
    )
    
    
    (2,272,378
    )Investing activitiesDecrease in restricted cash
    
    
    90,424
    
    
    
    Purchases of property and equipment
    
    
    (26,604
    )
    
    
    (99,744
    )Maturities of short-term investments
    
    
    27,100,000
    
    
    
    11,500,000Purchases of short-term investments
    
    
    (21,960,426
    )
    
    
    (18,788,759
    )Net cash provided by (used in) investing activities
    
    
    5,203,394
    
    
    
    (7,388,503
    )Financing activitiesProceeds from exercise of stock option and warrants
    
    
    
    
    
    
    76,492Proceeds from issuance of common shares, net of paid issuance costs
    
    
    
    
    
    
    8,667,852Payments of long-term debt
    
    
    (586,575
    )
    
    
    (726,485
    )Net cash provided by (used in) financing activities
    
    
    (586,575
    )
    
    
    8,017,859Effect of exchange rate changes on cash
    
    
    (10,400
    )
    
    
    (39,386
    )Increase (decrease) in cash and cash equivalents
    
    
    1,052,234
    
    
    
    (1,682,408
    )Cash and cash equivalents at beginning of period
    
    
    1,919,316
    
    
    
    3,019,184Cash and cash equivalents at end of period
    
    $
    2,971,550
    
    
    $
    1,336,776Unpaid share issuance costs
    
    $
    
    
    
    $
    20,000
 See notes to condensed consolidated financial statements.
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DATATRAK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
 1. Basis of Presentation
   2. Risks and Uncertainties
    3. Fair Value Measurements
 Fair Value Measurements
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
    
    Level 1 (the highest priority)  inputs to the valuation methodology are quoted market
prices (unadjusted) for identical financial assets or liabilities in active markets.
    
    Level 2  inputs to the valuation methodology include quoted market prices for similar
assets and liabilities in active markets, and inputs that are observable for an asset or
liability, either directly or indirectly, for substantially the full term of a financial
instrument.
    
    Level 3 (the lowest priority)  inputs to the valuation methodology are unobservable and
significant to the fair value measurement. These inputs reflect managements own assumptions
about the assumptions a market participant would use in pricing a financial instrument.
   Cash equivalents
 Short-term investments 
  Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantDescription
    
    June 30, 2008
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash Equivalents -
Money Market Funds
    
    $
    2,003,000
    
    
    $
    2,003,000
    
    
    $
    
    
    
    $
    Short-term
Investments -
Corporate
Obligations
(Commercial Paper)
and Corporate Stock
    
    
    1,507,000
    
    
    
    1,507,000
    
    
    
    
    
    
    
    Total
    
    $
    3,510,000
    
    
    $
    3,510,000
    
    
    $
    
    
    
    $
    
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4. Net Loss Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss used in the calculation of basic and
diluted earnings per share
    
    $
    (15,999,523
    )
    
    $
    (2,965,740
    )
    
    $
    (18,232,408
    )
    
    $
    (4,860,967
    )Denominator for basic net loss per share 
weighted-average common shares outstanding
    
    
    13,681,901
    
    
    
    13,584,037
    
    
    
    13,681,901
    
    
    
    12,726,259Effect of dilutive common share options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted net loss per share
    
    
    13,681,901
    
    
    
    13,584,037
    
    
    
    13,681,901
    
    
    
    12,726,259Basic net loss per share
    
    $
    (1.17
    )
    
    $
    (0.22
    )
    
    $
    (1.33
    )
    
    $
    (0.38
    )Diluted net loss per share
    
    $
    (1.17
    )
    
    $
    (0.22
    )
    
    $
    (1.33
    )
    
    $
    (0.38
    )Weighted-average common share options and warrants
excluded from the computation of diluted net loss
per share because they would have an anti-dilutive
effect on net loss per share
    
    
    1,504,191
    
    
    
    1,811,469
    
    
    
    1,495,562
    
    
    
    1,680,937
 5. Comprehensive Loss
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (15,999,523
    )
    
    $
    (2,965,740
    )
    
    $
    (18,232,408
    )
    
    $
    (4,860,967
    )Foreign currency translation
    
    
    (28,440
    )
    
    
    (15,034
    )
    
    
    (33,447
    )
    
    
    (33,498
    )Comprehensive loss
    
    $
    (16,027,963
    )
    
    $
    (2,980,774
    )
    
    $
    (18,265,855
    )
    
    $
    (4,894,465
    )
 6. Shareholders Equity
     7




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7. Operating Leases
  Twelve Months ended June 30,
    
    Amount2009
    
    $
    859,0002010
    
    
    593,0002011
    
    
    580,0002012
    
    
    593,0002013
    
    
    198,000Subsequent to June 30, 2013
    
    
    $
    2,823,000
 8. Income Taxes
  Six Months Ended June 30,2008
    
    
    2007Current  U.S.
    
    $
    
    
    
    $
    Deferred  foreign
    
    
    385,000
    
    
    
    47,000$
    385,000
    
    
    $
    47,000
  Six Months Ended June 30,2008
    
    
    2007Income tax benefit at the United States statutory rate
    
    $
    (6,068,000
    )
    
    $
    (1,636,000
    )Change in valuation allowance
    
    
    2,885,000
    
    
    
    1,619,000Goodwill impairment
    
    
    3,691,000
    
    
    
    Foreign tax credit
    
    
    (115,000
    )
    
    
    Change in FIN No. 48 liability
    
    
    (15,000
    )
    
    
    Foreign taxes
    
    
    (5,000
    )
    
    
    5,000Non-deductible permanent differences
    
    
    12,000
    
    
    
    59,000$
    385,000
    
    
    $
    47,000
   8




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9. Long-Term Debt
  June 30,
    
    
    December 31,2008
    
    
    2007Notes payable  the ClickFind Notes
    
    $
    3,000,000
    
    
    $
    3,425,000Financing agreement with Oracle Credit Corporation (the Oracle Agreement)
    
    
    95,000
    
    
    
    143,000Capital lease agreements with Dell Financial Services (the Dell Agreements)
    
    
    272,000
    
    
    
    357,000Insurance Notes payable
    
    
    120,000
    
    
    
    3,487,000
    
    
    
    3,925,000Less current maturities
    
    
    3,376,000
    
    
    
    672,000$
    111,000
    
    
    $
    3,253,000
         9




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10. Employee Terminations
  Accrued Severance ReconciliationDescription
    
    2008
    
    
    2007Accrued severance at January 1
    
    $
    523,000
    
    
    $
    7,000First half charges
    
    
    605,000
    
    
    
    337,000First half payments
    
    
    (467,000
    )
    
    
    (57,000
    )Accrued severance at June 30
    
    $
    661,000
    
    
    $
    287,000
  11. Restricted Cash
  12. Software Development Costs
   13. Goodwill and Finite-Lived Tangible and Intangible Assets
  10




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14. Reclassification
  15. Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
      11




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Revenue
Recognition Revenue Arrangements with
Multiple Deliverables.
 
    
    Enterprise license revenue is recognized ratably over the life of the license
agreement.
    
    Project management and data management (design, report and export) service revenue
is recognized proportionally over the life of a contract as services are performed,
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 our 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 or
site under the contract.
   12




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Critical Accounting Policies
   Results of Operations
 Three months ended June 30, 2008 compared with three months ended June 30, 2007
     13




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Six months ended June 30, 2008 compared with six months ended June 30, 2007
  14




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15




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Liquidity and Capital Resources
     16




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17




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®
 ®
   Fair Value Measurements
 Fair Value Measurements. Fair Value Measurements
 18




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Inflation
  Information About Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Foreign Currency Risk
  19




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our common shares
could be delisted. If delisting occurs, it would adversely affect the market liquidity of our
common shares and harm our businesses.
  
    
    a $1.00 minimum closing bid price;
    
    shareholders equity of $2.5 million, market value of publicly-held shares of
$35 million, or net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three most recently completed fiscal years;
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
    
    500,000 shares of publicly-held common stock with a market value of at least $1 million;
    
    300 round-lot shareholders; and
    
    compliance with Nasdaqs corporate governance requirements, as well as additional or
more stringent criteria that may be applied in the exercise of Nasdaqs discretionary
authority.
     If we do not continue to attract and retain key personnel, we will be unable to effectively conduct
our business.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  21




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Item 4. Submission of Matters to a Vote of Security Holders
  Dr. Jeffrey A. Green
    
    
    Seth B. Harris
    
    
    Dr. Jerome H. KaiserFor
    
    
    9,197,345
    
    
    
    9,489,335
    
    
    
    9,489,760Withheld
    
    
    2,938,475
    
    
    
    2,646,485
    
    
    
    2,646,060
  For
    
    Against
    
    Abstain5,342,815
    
    3,150,689
    
    8,800
  For
    
    Against
    
    Abstain8,690,984
    
    3,422,548
    
    22,292
 
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    Amendment to the Third Amended and Restated Code of Regulations of the Company10.1
    
    Employment Agreement between the Company and G. Matthew Delaney effective May 15, 200810.2
    
    Amendment No. 1 to the 2005 Omnibus Equity Plan10.3
    
    Separation Agreement and Release of Claims dated July 7, 2008 between DATATRAK International,
Inc. and Terry C. Black which is incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K as filed with the Securities and Exchange Commission on
July 10, 200831.1
    
    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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DATATRAK
International, Inc.
RegistrantDate: August 11, 2008
    /s/ Jeffrey A. GreenJeffrey A. Green,Chief Executive Officer and a Director
     (Principal Executive Officer)Date: August 11, 2008
    /s/ Raymond J. MerkRaymond J. MerkVice President of Finance, Chief
Financial Officer     and Treasurer
     (Principal Financial and Accounting Officer) 23