**SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 
 
 
 **FORM
10-Q**
   (MARK
      ONE)x
    
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2005*OR*o
    
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE TRANSITION PERIOD FROM __________ TO
__________
 COMMISSION
FILE NUMBER: 1-13861
 MED-EMERG
INTERNATIONAL INC.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 PROVINCE
OF ONTARIO, CANADA
 (State or
Other Jurisdiction of Incorporation or Organization)
 
 6711
      Mississauga Road, Suite 404Mississauga,
      Ontario, Canada
    L5N
      2W3(Address
      of Principal Executive Offices)
    (Zip
      Code)
 
 Registrant’s
telephone number, including area code: (905) 858-1368
 
 Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
 (Title
      of each class)
    (Name
      of each exchange on which registered)COMMON
      STOCK, NO PAR VALUE
    OTC
      Bulletin BoardREDEEMABLE
      COMMON STOCKPURCHASE
      WARRANTS
    OTC
      Bulletin Board
 Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
 
 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. Yes [X] No [ ]
 
 Indicate
by check mark whether registrant is an accelerated filer (as defined in Exchange
Act Rule 12(b)-2). Yes [ ] No [X]
 
 The
aggregate market value of the shares of Common Stock (based upon the closing
sales price of the Company’s Common Stock as reported on the OTC Bulletin Board
on March 31, 2005) of the registrant held by non-affiliates was approximately
US$ 23,311,000.
 
 As of
March 31, 2005, 58,277,696 shares of the registrant’s Common Stock were
outstanding.
 
 (All
figures in US dollars unless otherwise indicated.)
 
  1
  **MED-EMERG
INTERNATIONAL INC.**
 
 MARCH
31, 2005 QUARTERLY REPORT ON FORM 10-Q
   TABLE
OF CONTENTS
 
 
 PART
I:  FINANCIAL INFORMATION
  Item
      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 Procedures
  PART
II:  OTHER INFORMATION
 
 Item
      5.
    Exhibits
      and Reports on Form 8-K(a)
      Exhibits(b)
      Reports on Form 8-KSignatures
 
 
   2
  **SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS**
 
 This
Quarterly Report on Form 10-Q contains forward-looking statements as defined by
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements, which are
other than statements of historical facts. These statements are subject to
uncertainties and risks including, but not limited to, product and service
demand and acceptance, changes in technology, economic conditions, the impact of
competition and pricing, government regulation, and other risks defined in this
document and in statements filed from time to time with the Securities and
Exchange Commission. All such forward-looking statements are expressly qualified
by these cautionary statements and any other cautionary statements that may
accompany the forward-looking statements. In addition, Med Emerg International
Inc. (“MEII” or the “Company”) disclaims any obligations to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
 
 **PART
I: FINANCIAL INFORMATION**
 ****
 **ITEM
1.**  **CONDENSED FINANCIAL STATEMENTS**
  Consolidated
Balance Sheets as at March 31, 2005 (unaudited) and December 31, 2004 (audited)
 
 Consolidated
Statement of Operations and Deficit for the three months ended March 31, 2005
and 2004 (unaudited)
 
 Consolidated
Statement of Cash Flows for the three months ended March 31, 2005 and 2004
(unaudited)
 
 Notes to
Unaudited Consolidated Financial Statements
  3
  **Med-Emerg
      International Inc.****Consolidated
      Balance Sheet****As
      at March 31, 2005 (Unaudited) and December 31, 2004
      (Audited)****(in
      US$)**March
      31
    
    December
      312005
    
    
    2004**Assets****Current
      assets**Cash
    
    $
    1,470,116
    
    $
    2,312,156Accounts
      receivable
    
    
    1,808,251
    
    
    1,452,586Prepaid
      expenses and other
    
    
    137,008
    
    
    72,557Discontinued
      operations (note 4 )
    
    
    2,818,528
    
    
    2,655,0986,233,903
    
    
    6,492,397Long-term
      investment
    
    
    83,195
    
    
    83,195Property,
      plant and equipment
    
    
    446,751
    
    
    470,243Goodwill
    
    
    237,596
    
    
    237,596Discontinued
      operations (note 4 )
    
    
    33,853
    
    
    38,596$
    7,035,298
    
    $
    7,322,027**Liabilities
      and Shareholders' Equity****Current
      liabilities**Accounts
      payable and accrued liabilities
    
    $
    1,726,673
    
    $
    1,661,794Discontinued
      operations (note 4 )
    
    
    3,386,025
    
    
    3,606,4765,112,698
    
    
    5,268,270**Long-term
      liabilities**Notes
      payable
    
    
    599,991
    
    
    599,991Discontinued
      operations (note 4 )
    
    
    815,074
    
    
    894,5176,527,763
    
    
    6,762,778Contingent
      liabilities (note 11)**Shareholders'
      Equity**Capital
      stock (note 5)
    
    
    1,361,280
    
    
    1,361,280Contributed
      surplus (note 6)
    
    
    318,197
    
    
    67,080Deficit
    
    
    (365,223
    )
    
    (68,320
    )(Accumulated
      deficit of $17,152,785 has been eliminatedby
      applying it against contributed surplus and capital stock)Cumulative
      translation adjustment
    
    
    (806,719
    )
    
    (800,791
    )507,535
    
    
    559,249$
    7,035,298
    
    $
    7,322,027The
      accompanying notes are an integral part of these consolidated financial
      statements.
   4
  **Med-Emerg
      International Inc.****Consolidated
      Statement of Operations and Deficit****Three
      months ended March 31, 2005 and 2004
  (Unaudited)****(in
      US$)**March
      31
    
    March
      312005
    
    
    2004**Revenue**
    
    $
    3,079,432
    
    $
    2,445,213**Physician
      fees and other direct costs**
    
    
    2,271,559
    
    
    1,901,824807,873
    
    
    543,389**Expenses**Salaries
      and benefits
    
    $
    665,107
    
    $
    416,427General
      and administration
    
    
    227,968
    
    
    191,556Occupancy
      costs and supplies
    
    
    120,297
    
    
    91,166Travel
      and marketing
    
    
    73,884
    
    
    67,1961,087,256
    
    
    766,345**Income
      (loss) before under noted items**
    
    
    (279,383
    )
    
    (222,956
    )Interest
      income
    
    
    (5,390
    )
    
    -Interest
      and financing expenses
    
    
    -
    
    
    45,571Amortization
      of property, plant, and equipment
    
    
    42,657
    
    
    8,171Stock
      compensation expense
    
    
    251,117
    
    
    40,370288,384
    
    
    94,112**Net
      loss before discontinued operations**
    
    
    (567,767
    )
    
    (317,068
    )**Discontinued
      operations**Income
      from discontinued operations (note 4 )
    
    
    270,864
    
    
    203,252**Net
      loss**
    
    
    (296,903
    )
    
    (113,816
    )Preferred
      share dividends
    
    
    -
    
    
    (33,750
    )**Net
      loss attributable to common shareholders**
    
    
    (296,903
    )
    
    (147,566
    )**Deficit,
      beginning of the period**
    
    
    (68,320
    )
    
    (16,425,309
    )**Deficit,
      end of the period**
    
    $
    (365,223
    )
    $
    (16,572,875
    )**Basic
      loss per common share**Continuing
      operations
    
    $
    (0.01
    )
    $
    (0.04
    )Discontinued
      operations
    
    $
    0.00
    
    $
    0.02**Weighted
      average common shares outstanding**
    
    
    58,277,696
    
    
    9,569,424The
      accompanying notes are an integral part of these consolidated financial
      statements.
   5
  **Med-Emerg
      International Inc.****Consolidated
      Statement of Cash Flows****Three
      months ended March 31, 2005 and 2004
  (Unaudited)****(in
      US$)**March
      31
    
    March
      312005
    
    
    2004**Cash
      Flows from Operating Activities**Net
      loss before discontinued operations
    
    $
    (567,767
    )
    $
    (317,068
    )Adjustments
      for:Amortization
      of property, plant and equipment
    
    
    42,657
    
    
    8,171Stock
      compensation expense
    
    
    251,117
    
    
    40,370(273,993
    )
    
    (268,527
    )Decrease
      in non-cash working capital components
    
    
    (355,237
    )
    
    (60,410
    )Discontinued
      operations (note 4)
    
    
    (188,024
    )
    
    (396,501
    )(817,254
    )
    
    (725,438
    )**Cash
      Flows from Investing Activities**Additions
      to property, plant, and equipment
    
    
    (19,165
    )
    
    (6,963
    )Discontinued
      operations (note 4)
    
    
    307
    
    
    (11,770
    )(18,858
    )
    
    (18,733
    )**Cash
      Flows from Financing Activities**Demand
      loan
    
    
    -
    
    
    773,429-
    
    
    773,429Effect
      of foreign currency exchange rate changes
    
    
    (5,928
    )
    
    31,913**Increase
      (decrease) in cash**
    
    
    (842,040
    )
    
    61,171Cash,
      beginning of the period
    
    
    2,312,156
    
    
    380,310**Cash,
      end of the period**
    
    $
    1,470,116
    
    $
    441,481The
      accompanying notes are an integral part of these consolidated financial
      statements.
   6
  **MED-EMERG
INTERNATIONAL INC**
 **Notes
to Unaudited Consolidated Financial Statements**
 **Three
months ended March 31, 2005 and 2004**
 
 **1.
ORGANIZATION AND DESCRIPTION OF BUSINESS**
 
 Med-Emerg
International Inc. (“MEII” or the “Company”) is a private sector provider of
quality healthcare management services to the Canadian healthcare industry.
 
 The
Company is publicly traded and listed on the OTC Bulletin Board. The Company
completed its initial public offering in February 1998.
 
 The
Company’s operations were divided into four units during the 2004 fiscal year.
The contract with the Department of National Defence (“DND”) expired on March
31, 2005. MEII’s three remaining business units are: Staffing Solutions, Medical
Services and Healthcare Consulting.
 
 For
Staffing Solutions, the Company provides emergency department physician and
nurse recruitment, staffing and administrative support services to hospitals and
federal corrections facilities, on a contractual basis, and physician and nurse
practitioners to select long-term facilities in Ontario, British Columbia and
Nova Scotia. At March 31, 2005, the Company had 34 physician and nurse staffing
contracts.
  The
Medical Services division provides special access Remicade ’ infusion
services to patients suffering from Crohn’s disease and rheumatoid arthritis at
clinic locations across Ontario. In November 2004, the Company acquired a pain
management clinic and commenced offering services to Canadians who experience
chronic pain.
  
 MEII
provides Healthcare Consulting services to select Canadian private and public
institutions on issues related to a variety of healthcare topics.
 
 **2.
BASIS OF PRESENTATION**
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP). These
financial statements consolidate the accounts of MEII and its wholly owned
subsidiaries 927563 Ontario Inc., 927564 Ontario Inc., Med-Emerg Inc., Med-Emerg
Health Centres Inc., YFMC Healthcare Inc., YFMC Healthcare (Alberta) Inc.,
Doctors on Call Ltd, and CPM Health Centres Inc.
 
 Significant
intercompany accounts and transactions have been eliminated on
consolidation.
 
 The
consolidated financial statements are expressed in U.S. dollars. Differences
between Canadian and United States accounting principles are described in note
9.
 
 In the
opinion of management, the unaudited interim consolidated financial statements
follow the same accounting policies and methods of application as the most
recent audited annual financial statements.
 
 Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the year ended December 31, 2005.
 
 These
unaudited consolidated financial statements are condensed, and do not include
all disclosures required for annual financial statements, which are contained in
the notes to the Company’s audited consolidated financial statements filed as
part of the Company’s December 31, 2004 Form 10K. These unaudited consolidated
financial statements, footnote disclosures and other information should be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2004.
  7
  **3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  a)  **Use
of estimates**
  The
preparation of consolidated financial statements in conformity with Canadian
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities during the reporting period. Significant
areas requiring the use of estimates relate to: 1) the reported amounts of
revenues and expenses, 2) the disclosure of contingent liabilities, 3) the
carrying value of property, plant, and equipment and the rate of amortization
related thereto. Actual results could differ from those estimates. When
adjustments become necessary, those adjustments are reported in earnings in the
period in which they become known.
 
 b)  **Long-term
investments**
 
 Investments
are accounted for at cost when the conditions for equity accounting are not
present, and on the equity basis when significant influence exists. Declines in
market values of investments are expensed when such declines are considered to
be other than temporary.
 
 **(c)**  **Property,
plant, and equipment**
 
 Property,
plant, and equipment are recorded at cost and are amortized over their estimated
useful lives at the undernoted rates and methods:
 
 Furniture
      and fixtures
    20%
    Declining
      balanceComputer
      software
    100%
    Declining
      balanceComputer
      hardware
    30%
    Declining
      balanceLeasehold
    improvements3-5
      years
    Straight-line
 
 **(d)**  **Goodwill**
 
 Goodwill
is the excess of the purchase price of assets over the fair value of the
underlying net identifiable assets. The Company has adopted CICA Handbook
Section 3062 “Goodwill and Other Intangible Assets”, which states that goodwill
and indefinite life intangible assets should no longer be amortized, but should
be tested for impairment at least on an annual basis. The Company has determined
that there was no permanent decline in the value of the goodwill as at the year
end.
 
 **(e)**  **Impairment
charges**
 
 At least
annually and when events and circumstances warrant a review, the Company
evaluates the carrying
value of its assets for potential impairment. An impairment loss is recognized
when the estimated net realizable value of any asset is less than its carrying
value. Any impairment in assets is written down and charged to earnings in the
year.
 
 **(f)**  **Revenue
recognition**
 
 The
company has adopted the provisions of Emerging Issues Committee (“EIC”) - 123,
issued by the Canadian Institute of Chartered Accountants (CICA) which became
effective on January 1, 2002. EIC -123 addresses the reporting of revenue on a
gross basis as a principal versus on a net basis as an agent.
 
 The
following is a description of MEII’s revenue recognition policies for each of
the significant business units.
  8
  **(1)
Staffing Solutions:**
 
 Revenue
is reported on a gross basis.
 
 MEII acts
as a principal in providing these services. MEII contracts with emergency room
physician and nursing personnel to provide services to hospitals and
correctional facilities in Ontario, British Columbia and Nova Scotia, a mix of
rural and urban facilities including tertiary care centres.
 
 **(2)
Medical Services:**
 
 Revenue
is reported on a gross basis.
 
 Under
contracts with Schering-Plough Canada and Novartis Pharmaceuticals Canada Inc,
MEII acts as the coordinator for the community-based infusion of certain
medications for the treatment of patients with rheumatoid arthritis, Chron’s
disease and certain cancers.
 
 The
Company acts as the principal in providing pain management treatments to
patients in its Toronto-based clinics.
 
 **(3)
Healthcare Consulting:**
 
 Revenue
is reported on a gross basis.
 
 MEII is
involved with several provincial governments, advising on a variety of issues
related to primary care staffing, training and integrated service delivery
models. MEII also advises several aboriginal communities with regards to
healthcare infrastructure service delivery issues.
 
 **(4)
Government Healthcare Services (Includes Department of National Defence
(“DND”))- Discontinued Operations:**
 
 Revenue
is reported on a gross basis.
 
 MEII had
an administrative management contract with Public Works and Government Services
Canada (“PWGSC”) to provide personnel to Canadian armed forces across Canada on
behalf of the Minister of National Defence.
 
 Under the
terms of the contract, MEII had the responsibility to hire medical personnel and
support staff and where necessary provide appropriate training and supervision
of the work performed at the respective bases across Canada. MEII billed DND for
the work performed by these individuals and in turn paid the medical personnel
and support staff based on the terms of the respective contracts signed with
them. This contract expired on March 31, 2005.
 
 **(g)**  **Future
income taxes**
 
 The
Company accounts for income taxes using the asset and liability method. Future
tax assets and liabilities are recognized for the future taxes attributable to
the temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax carrying values. Future
tax assets and liabilities are measured using enacted or substantially enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A valuation
allowance against future tax assets is provided to the extent that the
realization of these future tax assets is not “more likely than
not”.
 
 **(h)**  **Cash**
 
 Cash
consists of cash on hand and in banks.
  9
  **(i)**  **Foreign
currency translation**
 
 The
Company maintains its books and records in Canadian dollars. The consolidated
financial statements are converted to U.S. dollars as the Company is a reporting
issuer in the United States of America. The translation method used is the
current rate method. Under the current rate method all assets and liabilities
are translated at the current rate prevailing at the balance sheet date,
shareholders’ equity (deficit) is translated at historical rates and all income
and expense items are translated at average rates for the year. Due to the fact
that items in the consolidated financial statements are being translated at
different rates according to their nature, a translation adjustment is created.
This translation adjustment has been included in the cumulative translation
adjustment.
 
 **(j)**  **Stock
compensation expenses**
 
 The
Company has adopted section 3870 issued by the CICA in respect of stock based
compensation and other stock based payments. This section requires that a fair
value based method of accounting be applied to all stock based payments to
non-employees and to direct awards of stock to employees. The standard requires
the recognition of a compensation expense for grants of stock, stock options,
and other equity instruments to employees based on the estimated fair value of
the instruments at the grant date.
 
 **(k)**  **Loss
per share attributable to common shareholders**
 
 Basic
loss per share attributable to common shareholders is computed by dividing the
net loss attributable to common shareholders before discontinued operations over
the weighted average number of common shares outstanding, including contingently
issuable shares where the contingency has been resolved. Due to the loss for all
periods presented, all potential common shares outstanding are considered
anti-dilutive and are excluded from the calculation of diluted loss per
share.
 
 
 **4.
DISCONTINUED OPERATIONS**
 
 The
contract with DND, to provide personnel to Canadian armed forces across Canada,
expired on March 31, 2005. This was a significant contract generating separate
identifiable cash flows, and hence it has been classified as a discontinued
operation, and accounted for accordingly.
  10
 The
      summarized statements of income for the Discontinued Business for the
      three months ended March 31, 2005 and 2004 are as follows:2005
    
    2004Revenue
    
    $
    10,972,289
    
    $
    10,108,387Physician
      fees and other direct costs
    
    
    10,299,918
    
    
    9,468,043Gross
      margin
    
    
    672,371
    
    
    640,344Operating,
      general and administrativeexpenses
    
    
    336,196
    
    
    341,630Depreciation
    
    
    4,435
    
    
    11,678Interest
      and financing
    
    
    60,876
    
    
    83,784Income
      from discontinued operations
    
    $
    270,864
    
    $
    203,252
 
 The
      summarized balance sheets for the Discontinued Business as at March 31,
      2005 and December 31, 2004 are as follows:Mar-05
    
    Dec-04Current
      assetsCash
    
    ($
    10,893
    )
    $
    800Accounts
      receivable
    
    
    2,829,101
    
    
    2,652,044Prepaid
      expenses and other
    
    
    320
    
    
    2,2542,818,528
    
    
    2,655,098Property,
      plant and equipment
    
    
    33,853
    
    
    38,596$
    2,852,381
    
    $
    2,693,694Current
      liabilitiesAccounts
      payable and accrued liabilities
    
    $
    3,386,025
    
    $
    3,606,4763,386,025
    
    
    3,606,476Long-term
      liabilitesAccounts
      payable and accrued liabilities
    
    
    815,074
    
    
    894,517$
    4,201,099
    
    $
    4,500,993Net
      assets
    
    ($
    1,348,718
    )
    ($
    1,807,299
    )
 11
 **5.
CAPITAL STOCK**
  On June
15, 2004, the Company issued 39,360,272 common shares for $4,500,000. As a
condition of the transaction, Preferred Shares, 50% of which were indirectly
held by Dr. Zacharias, the CEO of MEII, were converted into 9,348,000 common
shares; and unpaid preferred share dividends, in the amount of $ 579,582, were
forgiven.
  The
investment resulted from the previously announced letter of intent signed by
MEII and Global Healthcare Workforce Limited (“GHW”) of London, UK.
  The
Investors received 43,708,272 common shares of MEII, of which 39,360,272 were
purchased from the Company for $4,500,000 and 4,348,000 were purchased directly
from the Preferred Shareholder for $500,000. Closing costs including legal,
travel and due diligence costs for the equity financing amounted to $609,214,
and were expensed during the second quarter of 2004.
  In
addition to issuing the common shares, MEII also issued to the Investors and the
former Preferred Shareholder, anti-dilution warrants (the “New Warrants”) to
purchase common shares of MEII at prices of either $0.50 per common share or
$1.00 per common share. The exercise of the New Warrants is directly tied to the
exercise of existing options and warrants at $0.50 per common share and $1.00
per common share that are currently outstanding. The exercise of the New
Warrants is intended to allow the Investors’ and former Preferred Shareholder to
maintain their pro rata share of their equity position.
  **6.
CONTRIBUTED SURPLUS**
 
 During
the first quarter of 2005, the terms of the common stock purchase warrants were
amended, extending the expiry of these warrants from February 11, 2005 to
February 11, 2006. As a result of this, stock compensation expense of $225,442
was recorded. In addition, an amount of $25,675 has been recorded as stock
compensation expense for options granted to an employee in 2004 for the portion
that vested in the first quarter of 2005. These amounts have been credited to
contributed surplus.
 
 During
the first quarter of 2004, 100,000 options were granted with an exercise price
of $0.50 per option. The options vested immediately and are available for a term
of five years expiring on January 30, 2009. Due to the issuance of new options
the fair value amounting to $40,876 has been determined using an option pricing
model (Black Scholes) as per section 3870 of the CICA handbook. This amount has
been credited to contributed surplus.
 
 During
the second quarter of 2004, 250,000 options were granted to an employee with an
exercise price of $0.115 per option. 125,000 options vest every year. Options
for 125,000 shares were exercisable on the first anniversary and options for the
remaining 125,000 would be exercisable on the second anniversary of the
employment agreement. Due to the issuance of new options, the fair value
amounting to $57,746 has been determined using an option pricing model (Black
Scholes) as per section 3870 of the CICA handbook. This amount has been credited
to contributed surplus.
 
 Options
amounting to 1,000,000 each were granted to two employees, and 150,000 each to
two other employees, at an exercise price of $0.115 per option. The vesting of
these options is subject to a future earnings hurdle test. Since the earnings
test is in a future period, no expense is recognized in the current
quarter.
 
 During
the fourth quarter of 2004, 100,000 options were granted in connection with the
acquisition of the Scarborough pain clinic. An amount of $39,938 has been
credited to contributed surplus.
  ****
  12
 7. ELIMINATION OF DEFICIT
 
 On August
18, 2004, at the Company’s Annual and Special meeting of shareholders,
shareholders adopted a resolution to reduce the stated capital account of the
common shares, by the amount of the deficit as at the end of the fiscal quarter
following the shareholders’ meeting. Accordingly, the Company’s accumulated
deficit of $16,892,002 as at September 30, 2004 has been eliminated by applying
$2,469,329 against contributed surplus and the balance of $14,422,673 against
the capital stock of the Company.
 
 Capital
      Stock
    
    Contributed
      SurplusBalance
      at December 31, 2003
    
    $
    11,544,736
    
    $
    2,397,849Stock
      compensation expense for 2004
    
    
    0
    
    
    98,622Fair
      value of options in connection with
      acquisition of a clinic
    
    
    
    
    
    39,93811,544,736
    
    
    2,536,409Shares
      issued to new investors
    
    
    4,500,000
    
    
    016,044,736
    
    
    2,536,409Elimination
      of Sept 30, 2004 deficit
    
    
    (14,422,673
    )
    
    (2,469,329
    )Elimination
      of Dec 31, 2004 deficit*
    
    
    (260,783
    )
    
    0Balance
      at December 31, 2004
    
    
    1,361,280
    
    
    67,080Stock
      compensation expense for 2005
    
    
    0
    
    
    251,117Balance
      at March 31, 2005
    
    $
    1,361,280
    
    $
    318,197
 
 * In
December 2004 the Company changed its accounting policy regarding its promissory
notes, as required by section 3860 of the CICA Handbook. Had this change been
made in September 2004, the amount of the deficit eliminated would have been
higher. To capture the essence of this change in accounting policy, we have
modified the calculation of deficit elimination accordingly.
 
 **8.
RELATED PARTY TRANSACTIONS**
 
 Consulting
fees of approximately $ 14,262 (Cdn 17,500) were paid to each of two directors,
who have been retained as consultants.
 
 **9.
CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES**
 
 These
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (“Canadian GAAP”), which conform in all
material respects with those
 in the
United States (“U.S. GAAP”) during the periods presented, except with respect to
the following:
 
 (a)
Shareholders’ equity (deficit)
 
 Under
Canadian GAAP, the purchase price of an acquisition is determined based on the
share price on the date the transaction is consummated. Under U.S. GAAP, the
purchase price of an acquisition where shares are issued is determined based on
the share price for the period surrounding the announcement date of the
  13
  acquisition.
The share price used for the YFMC Healthcare Inc. acquisition under Canadian
GAAP was $1.25. The share price used for the YFMC Healthcare Inc. acquisition
under U.S. GAAP was $1.859.
 
 Under
U.S. GAAP, detachable stock purchase warrants are given separate recognition
from the primary security issued. Upon initial recognition, the carrying amount
of the two securities is allocated based on the relative fair values at the date
of issuance. Under Canadian GAAP, the detachable stock purchase warrants issued
in conjunction with the private stock offering on January 22, 1996 and
subsequently surrendered, have been given no recognition in the financial
statements. Under U.S. GAAP, based on an ascribed fair value of $ 0.364 for each
of the 1,000,000 share warrants issued, share capital would be lower by $ 36,406
and, given that the stock purchase warrants were cancelled, the carrying amount
of contributed surplus would be increased by $ 36,406.
 
 Under
U.S. GAAP the effect on shareholders’ equity (deficit) would be adjusted as
follows:
  March
      2005
    
    December
      2004Capital
      stock (as previously shown)
    
    $
    1,361,280
    
    $
    1,361,280Capital
      stock issued on purchase of YFMC Healthcare Inc.
    
    
    1,087,872
    
    
    1,087,872Ascribed
      fair value of share purchase warrants issued
    
    
    (36,406
    )
    
    (36,406
    )Capital
      stock - U.S. GAAP
    
    
    2,412,746
    
    
    2,412,746Contributed
      surplus (as previously shown)
    
    
    318,197
    
    
    67,080Share
      purchase warrants
    
    
    36,406
    
    
    36,406Paid-in-capital
      - U.S. GAAP
    
    
    354,603
    
    
    103,486Deficit
      (as previously shown)
    
    
    (365,223
    )
    
    (68,320
    )Cumulative
      translation adjustment
    
    
    (806,719
    )
    
    (800,791
    )Shareholders’
      equity - U.S. GAAP
    
    $
    1,595,407
    
    $
    1,647,121
 (b)
Comprehensive loss
 
 Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
(SFAS 130), establishes standards for reporting and display of comprehensive
loss and its components in the financial statements. Under U.S. GAAP, the
comprehensive loss for the three months ended March 31, 2005 and 2004 would be
adjusted as follows:
  **March**
    
    **March****2005**
    
    **2004**Net
      loss - U.S. GAAP
    
    
    ($296,903
    )
    
    ($147,566
    )Foreign
      currency translation adjustment
    
    
    (5,928
    )
    
    30,389Comprehensive
      loss
    
    
    ($302,831
    )
    
    ($117,177
    )
 14
  **10.
CONTINGENT LIABILITIES**
 
 (i)
    YFMC
      HealthCare Inc (“YFMC”), a wholly owned subsidiary of the Company, is in
      receipt of a letter from CCRA dated April 30, 2001, adjusting YFMC’s Goods
      and Services Tax returns for the period from December 31, 1992, to
      December 31, 1996. The total amount claimed by CCRA for this period is
      $249,000. In the event that YFMC is ultimately found liable, the Company
      intends to claim an indemnity for such amount against the directors and
      certain named principals of YFMC pursuant to the Company’s rights under
      the purchase agreement for YFMC executed on August 10, 1999. 1292363
      Ontario Ltd, a subsidiary of YFMC, is in receipt of a letter from CCRA
      dated February 4, 2005 for YFMC’s Goods and Services Tax, and the total
      amount claimed is $50,828. The Company’s legal counsel has advised that
      CCRA does not intend to pursue YFMC for these amounts, and accordingly no
      provision has been made in these consolidated financial
      statements.
 
 (ii)
    There
      is uncertainty with respect to the Company’s liability for Goods and
      Services tax pertaining to certain services that it provides, and with
      respect to the Company’s liability for Workers Safety and Insurance Board
      premiums pertaining to its contract with PWGSC. The measurement of this
      uncertainty is not determinable and accordingly no provision has been made
      in respect thereof in these consolidated financial
    statements.
 
 (iii)
    Claims
      have been made against the Company for general damages for breach of
      contract and in tort. A claim for approximately $423,000 has been made
      against the company for wrongful termination of a person working on a
      third party contract. The Company’s lawyers are of the opinion that the
      amount claimed grossly exceeds what a court would award in light of the
      current law. Another claim of approximately $ 1,833,000 plus interest and
      costs has been made against the Company, for amongst other things,
      defamation and economic loss in regards to a healthcare provider working
      on a third-party contract. The Company’s lawyers are of the opinion that
      the amounts claimed are excessive and that if there is any liability on
      the Company, then the third-party contractor should be responsible to
      indemnify the Company. Since the Company’s lawyers are of the opinion that
      these claims are unlikely to succeed, no provision has been made in
      respect thereof in these consolidated financial statements.
 
 
 Any
liability resulting from the above will be reflected as a charge to income in
the year incurred.
 
 
 **11.
COMPARATIVE FIGURES**
 
 Certain
figures in the 2004 financial statements have been reclassified and restated to
conform with the basis of presentation in 2005.
  15
 ****
 **ITEM
2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND**
 **RESULTS
OF OPERATIONS**
 
 Forward-looking
statements of Med-Emerg International Inc. ("MEII" or the "Company) included
herein or incorporated by reference including, but not limited to, those
regarding future business prospects, the acquisition of additional clinics, the
adequacy of capital resources and other statements regarding trends relating to
various revenue and expense items, could be affected by a number of
uncertainties and other factors beyond management’s control
 
 **BACKGROUND**
 
 Based in
Ontario, Canada, Med Emerg International Inc (“MEII”) is an established health
care solutions provider. Founded in 1983, initially to provide contract staffing
of emergency room physicians and nurses, the Company has expanded to offer a
wide variety of healthcare staffing solutions and medical services to
governments, communities and facilities across Canada.
 
 In these
times, with the Canadian Healthcare system facing continuous challenges on
several fronts, opportunities exist for a company like MEII to deliver
innovative solutions within the confines of the Canada Health Act. Demand for
more complex services from an ageing population, the capital and human resource
requirements of new lifesaving technology and the need to retrofit existing
ageing facilities all place strain on the system. The situation is exacerbated
by burn-out in the workplace caused by declining enrolments in health
professions and increased levels of retirement by the existing practitioners.
The increasing severity of the condition now manifests itself in daily headlines
announcing long waiting lists for elective surgery, shortages of family
physicians and the governments struggle to keep pace with the ever increasing
costs of a publicly funded, universally available healthcare system.
 ******
 The
Company currently employs staff covering several categories of healthcare
professionals including physicians, dentists, pharmacists and nurses.
 
 As a
healthcare solutions provider, MEII in addition to its staffing business
provides medical services such as chronic pain management and intravenous
infusion services for pharmaceutical companies in conveniently located
community-based clinics.
 
 As a
result of its many years of healthcare experience, MEII has developed a
comprehensive understanding of primary care renewal, project evaluation, and
healthcare human resource planning.
 
 The
recent equity investment from a group of Canadian and International investors
provides MEII with an international recruiting expertise and capability in
addition to its Canadian healthcare operations.
 
 The
Company's operations are divided into three units: Staffing Solutions, Medical
Services and Healthcare Consulting Services.
 
 **STAFFING
SOLUTIONS**
  Hospitals
are increasingly turning to third-party experts to devise and implement
improvements to the recruitment and management of their clinical staff. We
provide physician staffing services to approximately 34 healthcare facilities in
various provinces, including rural and urban facilities as well as tertiary care
centers. In 2004 the company introduced Primary Health Care Nurse Practitioners
to our mix of healthcare providers in hospitals.
  16
  MEII has
developed a unique integrated staffing solution as a result of an approach by
the Whitby Mental Health Centre to recruit primary care physicians. Reviewing
the patient population, the nature of the cases being treated, and the total
cost of the current system, MEII pioneered an integrated health care model
combining Primary Care Physicians with Primary Care Nurse Practitioners. This
was the first time a nurse practitioner function was introduced into a mental
health setting. The program, now in its ninth year of operation, has received
high satisfaction ratings from both staff and patients, resulting in the Whitby
Mental Health Centre receiving the ACE award from the Ministry of Health for
Innovation in Health Care Delivery Design. In June 2002, the Centre for
Addiction and Mental Health awarded MEII a similar contract for primary care
services.
  Since
1990, the Company has been involved in the provision of healthcare services in
some of the most difficult environments. The Company currently provides after
hours physician coverage to 8 federal penitentiaries in Ontario, and has
developed a unique delivery model in a provincial penitentiary in Nova Scotia,
using Physician Assistants supported telephonically by emergency
physicians.
  In March
2005, MEII reached an understanding with a provincial pharmacist association, to
create a program to provide temporary placement of pharmacists in pharmacies
across the province. MEII will be responsible for the recruitment,
credentialing, placement and monitoring of the pharmacists.
  **MEDICAL
SERVICES**
  In
addition to its healthcare staffing solutions, MEII provides innovative medical
services directly to healthcare consumers.
  *Infusion
Services*
 In March
2001, Med-Emerg entered into an agreement with Schering-Plough Canada to become
a coordinator for the community-based infusion of RemicadeTM, in Ontario. 
This contract capitalizes on the Company's access to clinics for the treatment
of patients with disabling rheumatoid arthritis and Crohn's disease. The Company
has established over 20 infusion sites to-date and delivered over 6,000
infusions in 2004. MEII is expecting continued growth for this service, as the
trend seems to be to move infusion services from institution settings into
community based settings.
 
 *Pain
Management Services*
 Med-Emerg’s
chronic pain management service, CPM Health Centres (“CPM”), was launched in
November 2004 with the acquisition of the Scarborough Pain Clinic. A second
location, in downtown Toronto, was opened in December 2004. CPM has developed a
standardized approach to the treatment of chronic pain, using an integrated
multi-disciplinary approach including anesthetists, ER physicians,
physiotherapists and chiropractors, amongst others.
 
 It is
estimated that more than 10% of Canadians suffer from chronic pain (unexplained
pain lasting more than 6 months). This equates to more than 800,000 people
living in southern Ontario who would potentially access medical services for the
treatment of pain. Existing facilities in the region are backlogged with waiting
times of 4-6 months. Due to the large demand, existing facilities in the rural
areas are backlogged with waiting times of between 4-12 months.
 
 With the
objective of reducing these waiting times, the Company has created a two-pronged
approach to improving service availability to that require professional chronic
pain management care. The Company developed and launched a training program
specifically designed to educate
  17
  emergency
room physicians in chronic pain management. The first group has completed the
didactic portion of the training program. Med-Emerg is now scheduling these
doctors in our Toronto-area clinics to complete the clinical portion of their
training.
 
 Preliminary
plans have been completed to increase the capacity and throughput of the
Scarborough clinic by doubling the number of clinical pain providers and
increasing the hours and days of operation of the facility. This clinic is
currently receiving approximately 50 new referrals per week with a waiting time
of almost three months to book initial assessment appointments. The volume of
referrals will more than satisfy the increased capacity, once the clinic has
been modified and the new providers are in place.
 
 Plans are
underway to open additional sites in 2005.
  **HEALTHCARE
CONSULTING**
  Over the
years, MEII has developed significant experience in international and domestic
healthcare consulting. Currently the Company is involved with several provincial
governments, advising on a variety of issues related to primary care staffing,
training and integrated service delivery models. The Company is currently
working with the four Atlantic Provinces (New Brunswick, Nova Scotia, PEI and
Newfoundland and Labrador) and has created an innovative health human resource
planning tool which is focused on a needs based model as opposed to the
traditional supply based design. The Atlantic project has received wide
recognition in the marketplace, and it is reasonable to expect new business
opportunities as a result of this. The Company was recently awarded a contract
by the Canadian Nurses Association to develop the standard of practice for nurse
practitioners across Canada. In addition, the Company is working on other
smaller healthcare consulting projects.
  **GOVERNMENT
HEALTHCARE SERVICES - DISCONTINUED OPERATIONS**
  In March
of 2001, the Company was awarded an administrative management services contract,
the largest of its kind, to provide medical staffing for military bases of the
Department of National Defence (DND) across Canada. The contract had an initial
period of three years ending on March 31, 2004, but the contract was amended and
extended until March 31, 2005. As the service administrator, the Company
recruits, credentials, schedules and pays physicians, nurses, dentists,
physiotherapists and other regulated healthcare professionals as required by the
local health authority resident on each base.  As of January 2005,
Med-Emerg was supplying more than 750 healthcare providers to DND under this
contract. The Company is paid a monthly administrative management fee by the DND
that is linked to the number of providers being managed.
 
 The
primary benefit to DND from this contract is the creation of a “one stop
shopping” arrangement for the military base. As part of a national organization,
the Company’s recruiters source health service providers from all regions of
Canada.  Because of its long-term relationships with its employees and
sub-contractors, and its ability to react quickly to changing local conditions,
the Company provides stability in the workforce and enhances continuity in the
delivery of patient care for the DND.
 
 In May
2004, Public Works and Government Services Canada (PWGSC) re-tendered the
Contract, which was set to expire March 31, 2005. Med-Emerg responded to the
tender proposal and its bid was one of three considered by PWGSC. In December
2004 Med-Emerg learned that it was not successful in its bid to win a follow-on
contract with DND. Its contractual relationship with the Canadian government for
DND medical staffing services ended on March 31 st ,
2005.
  18
  After
learning that its bid had not been successful, in January 2005 the Company
launched a Cdn.$100,000,000 lawsuit against the winning bidder and a former
employee of the Company.  Med-Emerg believes that the successful bidder
used confidential information obtained through the hiring of a former Med-Emerg
employee to win the contract, and that the former Med-Emerg employee retained by
the successful bidder breached his legal obligations by disclosing financial and
other information confidential to Med-Emerg.  On January 31, 2005, the
Company filed a complaint with the Canadian International Trade Tribunal
(CITT).  The CITT is the
administrative tribunal in Canada with the jurisdiction to conduct inquiries
into complaints by potential suppliers concerning procurement by the federal
government departments and agencies, including DND and PWGSC.. In its
submission to the CITT, Med-Emerg questioned the manner in which the Government
of Canada’s procurement for the DND medical staffing contract, valued at
$448,810,965, was conducted, including the evaluation of its proposal submitted
in response to the Request for Proposal (RFP). Specifically, Med-Emerg alleges
that PWGSC:
 
 Þ
    Awarded
      the contract to a bidder that did not meet the mandatory requirements of
      the bid;
 Þ
    Introduced
      unpublished evaluation criteria to the evaluation process,
    and
 Þ
    Failed
      to properly apply the published evaluation
criteria.
  In filing
the complaint, Med-Emerg seeks to terminate the contract award to the winning
bidder, to have Med-Emerg awarded the contract, or in the alternative, to have a
new bid process conducted.  In the further alternative, the Company asks
that it be compensated for lost profit on the contract and the costs associated
with the filing of the complaint. . The CITT accepted the complaint for
inquiry on February 8, 2005.  Subsequent to the commencement of the
inquiry, PWGSC filed a motion to have the complaint dismissed on the grounds
that the CITT did not have jurisdiction over a health services contract. The
motion was denied. The CITT has until June 15, 2005 to rule on the
complaint.
  **RESULTS
OF OPERATIONS**
 
 NET
LOSS
 
 The
Company reported a net loss of $296,903 for the three months ended March 31,
2005 compared to a net loss of $147,566 for the three months ended March 31,
2004. The loss amounted to $0.01 per share for continuing operations for the
three months ended March 31, 2005 compared with a loss of $0.04 per share for
continuing operations for the three months ended March 31, 2004. The main
reasons for the increase in loss is the higher amount of non-cash Stock
compensation expense recorded due to the extension of warrants, and the lower
amounts of Interest and financing expenses. Furthermore, the Company continues
to implement its strategic plan of realigning the business units and pursuing
profitable opportunities that are consistent with its current operating
strategy.
 
 REVENUE
 
 The
Company’s revenue for the three months ended March 31, 2005 increased to
$3,079,432, compared to $ 2,445,213 for the three months ended March 31, 2004 or
by 26%.
 
 This
revenue increase was mainly attributable to the Medical Services Division where
increases were experienced in both the Infusion Services and the Pain Management
segments of the business.
 
 Revenue
from the Institutional Staffing Division decreased slightly to $1,987,634 for
the three months ended March 31, 2005 compared to $2,025,745 for the three
months ended March 31, 2004 a decrease of approximately 2%.
  19
  Revenue
from the Infusion Services Division increased significantly to $438,725 for the
three months ended March 31, 2005 compared to $266,621 for the three months
ended March 31, 2004 an increase of approximately 65%. This increase results
from a similar increase in the number of Remicade infusions.
 
 Revenue
from the Healthcare Consulting division increased to $307,718 for the three
months ended March 31, 2005 compared to $152,384 for the corresponding period in
the prior year, an increase of approximately 102%.
 
 Revenue
from the Pain Management segment was $231,279 for the three months ended March
31, 2005 as compared to $NIL for the corresponding period last year. The Pain
Management division commenced operations in November 2004.
 
 GROSS
MARGIN
 
 Gross
Margin (revenue less direct costs) for the three months ended March 31, 2005
increased to $807,873 compared to $543,389 for the three months ended March 31,
2004, an increase of approximately 49%. This increase in gross margin was due to
the Medical Services Division and the Healthcare Consulting division, both of
which enjoyed increased gross margins associated with growth in the respective
divisions.
 
 OPERATING
EXPENSES
 
 Operating
expenses from continuing operations totaled $1,087,256 for the three months
ended March 31, 2005 compared to $766,345 for the three months ended March 31,
2004, an increase of approximately 42%. There was an increase in salaries and
benefits and general and administration expenses as compared to the prior
period.
 
 AMORTIZATION
AND INTEREST
 
 Interest
and financing costs were eliminated in the period, decreasing from $45,571 for
the three months ended March 31, 2004 to a positive balance of $5,390 for the
three months ended March 31, 2005. This is due to the fact that, with the recent
equity financing, the Company has reduced its reliance on banks and other
financial institutions.
 
 INCOME
TAXES
 
 The
Company has loss carry forwards of approximately $8.5 million to be applied
against future corporate income taxes. This benefit has not been reflected in
these statements.
   **ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK**
 
 There are
no financial instruments that are sensitive to changes in interest rates or
exposed to foreign currency exchange gains/losses.
 
 **ITEM
4: CONTROLS AND PROCEDURES**
 
 Included
on the signature page of this report is the Certification that is required under
Section 302 of the Sarbanes-Oxley Act of 2002. This section of the report
contains information concerning the controls evaluation referred to in the
Section 302 Certifications and the information contained herein should be read
in conjunction with the Certification.
  20
  Internal
controls are designed with the objective of ensuring that assets are
safeguarded, transactions are authorized, and financial reports are prepared on
a timely basis in accordance with generally accepted accounting principles in
the United States. The disclosure procedures are designed to comply with the
regulations established by the Securities and Exchange Commission.
 
 Internal
controls, no matter how designed, have limitations. It is the Company's intent
that the internal controls be conceived to provide adequate, but not absolute,
assurance that the objectives of the controls are met on a consistent basis.
Management plans to continue its review of internal controls and disclosure
procedures on an ongoing basis.
 
 The
Company's chief executive officer and chief financial officer, after supervising
and participating in an evaluation of the effectiveness of the Company's
internal and disclosure controls and procedures during the three months ended
March 31, 2005 (the "Evaluation Date"), have concluded that as of the Evaluation
Date, the Company's internal and disclosure controls and procedures were
effective.
 
 There
were no significant changes in the Company's internal and disclosure controls or
in other factors that could significantly affect such internal and disclosure
controls subsequent to the date of their evaluation.
  21
  **PART
II: OTHER INFORMATION**
 
 **ITEM
5. EXHIBITS AND REPORTS OF FORM 8-K**
 
 (a)
Exhibits
 
 Exhibit
31 Rule 13a-14(a)/15d-14(a) Certifications.
 Exhibit
32.1 Certification by the Chief Executive Officer Relating to a Periodic Report
Containing Financial Statements.*
 Exhibit
32.2 Certification by the Chief Financial Officer Relating to a Periodic Report
Containing Financial Statements.*
  22
  (b)
Reports on Form 8-K
 
 Attached
 * The
Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or
otherwise subject to liability under that section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933, as
amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
 
  23
  **SIGNATURES**
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
   MED-EMERG
      INTERNATIONAL INC.By:/s/
      Ramesh ZachariasRamesh
      ZachariasChief
      Executive OfficerDate:  
      May 13, 2005