**SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 
 
 **FORM
10-K**
 
 FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO
 SECTIONS
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 (MARK
      ONE)x
    
    ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2004*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(b) of the
      Act.(Title
      of each class)
    (Name
      of each exchange on which registered)COMMON
      STOCK, NO PAR VALUE
    OTC
      Bulletin BoardREDEEMABLE
      COMMON STOCK PURCHASE WARRANTS
    OTC
      Bulletin Board
 
 Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act.COMMON
      STOCK, NO PAR VALUE
    OTC
      Bulletin BoardREDEEMABLE
      COMMON STOCK PURCHASE WARRANTS
    OTC
      Bulletin BoardSecurities
      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.
 
 Yesx
    No ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
 
 Indicate
by check mark whether registrant is an accelerated filer (as defined in Exchange
Act Rule 126-2).
 
 Yes ̈
    Nox
 
 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 on December 31, 2004
was approximately $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 noted.)
  
   PART I
  **ITEM
      1:**
    **BUSINESS**
 
 **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 26 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 four units: Staffing Solutions, Medical
Services, Government Healthcare 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 30 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.
  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 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.
 
 **GOVERNMENT
HEALTHCARE SERVICES**
  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 will accordingly end on March 31 st ,
2005.
 
 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:
  Ø
    Awarded
      the contract to a bidder that did not meet the mandatory requirements of
      the bid;Ø
    Introduced
      unpublished evaluation criteria to the evaluation process,
    andØ
    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.
 **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 New Foundland 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.
 
 **FACTORS
AFFECTING MEII’S BUSINESS**
 
 **REGULATION
OF HEALTHCARE IN CANADA**
 
 The
provision of medical services in Canada is, for the most part, under provincial
jurisdiction. Currently provincial governments are responsible for paying
physicians for the provision of insured services to residents of their province.
Any changes in reimbursement regulations, policies, practices, interpretations
or statutes that place material limitations on reimbursement amounts or
practices could adversely affect the operations of the Company, absent, or prior
to, satisfactory renegotiations of contracts with clients and arrangements with
contracted physicians.
  
  Under a
combination of statutory provisions, both federal and provincial, physicians are
prohibited from billing their patients for fees in excess of those payable for
services listed in the Provincial Schedule of Benefits. The Canada Health Act
allows for cash contributions by the federal government in respect of insured
health services provided under provincial healthcare insurance plans. In order
for a province to qualify for a full cash contribution, there is a requirement
that the provincial healthcare insurance plan satisfy the criteria set out in
the Canada Health Act. In addition, the provincial plan must ensure that no
payments are permitted in respect of insured health services that have been
subject to extra billing.
 
 Continuing
budgetary constraints at both the federal and provincial level and the rapidly
escalating costs of healthcare and reimbursement programs have led, and may
continue to lead, to significant reductions in government and other third party
reimbursements for certain medical charges. The Company's independent contracted
physicians as well as the Company are subject to periodic audits by government
reimbursement programs to determine the adequacy of coding procedures and
reasonableness of charges.
 
 Business
corporations are legally prohibited from providing, or holding themselves out as
providers of, medical care in many provinces. While the Company will seek to
structure its operations to comply with the provincial laws relating to the
corporate practice, given varying and uncertain interpretations of such laws,
the Company could be found in non-compliance with restrictions on the corporate
practice of medicine in all provinces. A determination that the Company is in
violation of applicable restrictions on the practice of medicine in any province
in which it operates or could operate could have a material adverse effect on
the Company if the Company were unable to restructure its operations to comply
with the requirements of such province.
 
 **COMPETITION**
 
 The
Company competes with a variety of healthcare service providers. These include
the following by MEII business unit:
   •
    Staffing
      Solutions: Third party staffing agencies (nursing); Small groups of
      physicians that provide competitive services to local hospitals
      (physicians)•
    Medical
      Services: Public hospitals; Homecare agencies; and Physician practice
      management companies•
    Government
      Healthcare Services: Regional players that provide services for only one
      or two regulated health professions and national staffing
      agencies•
    Healthcare
      Consulting: Independent consulting
companies.
   **EMPLOYEES**
 As of
December 2004, the Company had 495 active full-time employees, 24 were employed
in administration, 10 were involved in staffing solutions, 22 were active in
medical services, 3 were in the consulting division and, and 436 were employed
to carry out the contract with the DND. The Company believes its relations with
its employees to be good. The Company’s employees do not belong to a union and
there is no collective bargaining agreement covering the employees. The Company
also has approximately 560 contractors engaged on a full and part-time basis, of
which about 300 are involved in the DND contract.
 
 **ITEM
      2:**
    **PROPERTIES**
 
 Our
principal executive office is located at 6711 Mississauga Road, Suite 404,
Mississauga, Ontario. The principal office occupies approximately 9,000 square
feet of space under lease agreements that expire December 31, 2007, at an
average annual rental rate of approximately $156,000 (CDN$202,000). We believe
that our current office space is adequate for our future needs.
 
 **ITEM
      3:**
    **LEGAL
      PROCEEDINGS**
 
 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.
 
  
  YFMC
HealthCare Inc. (“YFMC”), a wholly owned subsidiary of the Company, is in
receipt of a letter from Canada Revenue Agency ("CRA") 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 CRA for this period is
$249,000. In the event that YFMC becomes liable to pay any such amount to CRA,
the Company will claim an indemnity for such amount against the directors and
certain named principals of YFMC pursuant to the Company’s rights under the
Business Combination Agreement executed on August 10, 1999. The Company’s legal
counsel has advised that CRA does not intend to pursue YFMC for these amounts.
 
 On
January 25, 2005, MEII filed a statement of claim against Calian Limited
(“Calian”) and a former employee of MEII, seeking Cdn$100,000,000 in damages, in
regards to the recent contract award by Public Works and Government Services
Canada (“PWGSC”) to provide services to the Canadian Forces, Department of
National Defence. This contract would have been an extension of a current
contract which expires March 31, 2005. We have been advised that Calian intends
to defend the claim.
  On
February 8, 2005, the Canadian International Trade Tribunal (“CITT”) announced
that it would conduct an inquiry into the award by PWGSC, of a medical staffing
contract, to Calian. MEII filed a complaint with the CITT on January 31, 2005
alleging that PWGSC:
  •
    Awarded
      the contract to a bidder that did not meet the mandatory requirements of
      the bid;•
    Introduced
      unpublished evaluation criteria to the evaluation process;
    and•
    Failed
      to properly apply the published evaluation
criteria.
 
 If the
CITT determines that the complaint by MEII is valid, it could recommend that the
contract award to Calian be terminated and a contract awarded to MEII, that the
proposals be re-evaluated or that a new solicitation should take place, in no
particular order of probability. In certain circumstances, MEII may be able to
seek compensation for the lost opportunity.
  Other
than the above, the Company is not a party in any material legal
proceedings.
 
 **ITEM
      4:**
    **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS**
 
 There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended, December 31, 2004.
 
 **PART
II**
 
 **ITEM
      5:**
    **MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**
 
 The
common shares and redeemable common stock purchase warrants are listed for
trading under the symbols “MDER” and “MDERW”, respectively, on the OTC Bulletin
Board. From February 12, 1998 to April 16, 2001 the Company’s common shares and
redeemable common stock purchase warrants were listed on the NASDAQ Small Cap
Market. Since April 16, 2001, the Company’s common shares have been listed on
the OTC Bulletin Board.
 
 The
following table sets forth the range of high and low sales prices from First
Quarter of 2003:
 
 **COMMON
      SHARES****HIGH**
    
    **LOW**Fourth
      Quarter, 2004
    
    $
    .55
    
    $
    .40Third
      Quarter, 2004
    
    $
    .57
    
    $
    .32Second
      Quarter, 2004
    
    $
    .65
    
    $
    .34First
      Quarter, 2004
    
    $
    .69
    
    $
    .33Fourth
      Quarter, 2003
    
    $
    .58
    
    $
    .29Third
      Quarter, 2003
    
    $
    .57
    
    $
    .37Second
      Quarter, 2003
    
    $
    .68
    
    $
    .40First
      Quarter, 2003
    
    $
    .77
    
    $
    .53
 
  
  The
Company has never paid or declared cash or stock dividends on its common stock.
The payment of cash dividends, if any, is at the discretion of the Board of
Directors and will depend upon the Company’s earnings, capital requirements,
financial condition and other relevant factors. The Company intends, for the
foreseeable future, to retain any future earnings for use in its
business.
 
 In
early 2004, 5,092 shares of common stock were issued to an investor pursuant to
the acquisition of YMFC Healthcare Inc. on November 4, 1999 by
MEII.
 
 Effective
June 15, 2004, the Company issued 39,360,272 common shares as part of an equity
financing (the “Financing”). As a condition of the Financing, Preferred Shares,
50% of which were indirectly held by Dr. Zacharias, the CEO of MEII, were
converted into 9,348,000 common shares and preferred share dividends, in the
amount of $579,582, were forgiven. The preferred shares were redeemable in 2006,
for common shares then valued at $4,500,000. In addition to issuing the common
shares, MEII also issued, 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 new investors and former preferred shareholder
to maintain their pro rata share of their equity position.
  During
the first quarter of 2005 the terms of the 1,437,500 common stock purchase
warrants issued in February 1998 were amended, extending the expiry of these
warrants from February 11, 2005 to February 11, 2006. MEII has also amended the
terms of the warrants to provide that if the common stock of MEII, closes at
$.70 or greater for thirty consecutive trading days, MEII has the right to
redeem the Warrants at $.01 per Warrant upon ten days prior notice.
 
 
 
 
 
 
 
  
  
 
 **ITEM
      6:**
    **SELECTED
      FINANCIAL DATA**
 
 The
following selected consolidated financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements, related notes thereto, other financial data, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere herein.
 
 **US
      $****YEAR
      ENDED DECEMBER 31,****2004**
    
    **2003**
    
    **2002****Statement
      of Operations Data:**Revenue
    
    
    48,447,687
    
    
    54,335,558
    
    
    37,428,043Physician fees
      and other direct costs
    
    
    43,693,380
    
    
    49,217,416
    
    
    34,382,752Gross
      profit
    
    
    4,754,307
    
    
    5,118,142
    
    
    3,045,291Operating
      expenses before under noted items
    
    
    4,810,341
    
    
    4,678,665
    
    
    2,704,529Depreciation
      and amortization
    
    
    182,399
    
    
    120,924
    
    
    102,345Other
      expenses
    
    
    1,102,772
    
    
    1,730,587
    
    
    827,3366,095,512
    
    
    6,530,176
    
    
    3,634,210Loss
      before income taxes
    
    
    (1,341,205
    )
    
    (1,412,034
    )
    
    (588,919
    )Income
      taxes (recovery)
    
    
    0
    
    
    (2,458
    )
    
    0Minority
      interest
    
    
    0
    
    
    (2,095
    )
    
    (2,211
    )Discontinued
      operations
    
    
    0
    
    
    (167,169
    )
    
    (16,956
    )Net
      loss
    
    
    (1,341,205
    )
    
    (1,574,650
    )
    
    (603,664
    )Preferred share
      dividends
    
    
    (34,173
    )
    
    (135,006
    )
    
    (134,983
    )Forgiveness of
      preferred share dividends
    
    
    579,582
    
    
    0
    
    
    0Net
      loss attributable to common shareholders
    
    
    (795,796
    )
    
    (1,709,656
    )
    
    (738,647
    )Basic
      loss per common share (1)Continuing
      operations
    
    
    (0.02
    )
    
    (0.16
    )
    
    (0.08
    )Discontinued
      operations
    
    
    (0.00
    )
    
    (0.02
    )
    
    (0.00
    )**Balance
      Sheet Data:**Working
      capital surplus (deficit)
    
    
    1,224,127
    
    
    (3,169,692
    )Total
      assets
    
    
    7,322,027
    
    
    4,044,225Shareholders'
      equity (deficit)
    
    
    559,249
    
    
    (3,448,142
    )
 
 (1)
    Basic
      loss per common share reflects net loss available to common shareholders
      divided by the weighted average number of common shares
      outstanding.
 
  
  
 **ITEM
      7:**
    **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**
 
 Forward-looking
statements of MEII, included herein or incorporated by reference including, but
not limited to, those regarding future business prospects, 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.
 
 **FINANCIAL
OVERVIEW**
 
 The
Company reported a net loss of approximately $1.3 million for the year ended
December 31, 2004 compared to a net loss of $1.6 million for the year ended
December 31, 2003. The loss amounted to $ 0.02 per share for continuing
operations and a $0.00 loss for discontinued operations for the year ended
December 31, 2004 compared with a loss of $ 0.16 per share for continuing
operations and a $0.02 loss for discontinued operations for the previous year.
The main reason for the decrease in the net loss during 2004 is the result of
the non-cash stock compensation expenses that the Company had to record in 2003
as a result of re-pricing the outstanding warrants and the issuance of stock
options. The Interest and financing expenses are also lower. These cost
reductions were largely offset by reduced gross margins of about $360 thousand
and closing costs associated with an equity financing of about $609 thousand.
Furthermore, the Company implemented their strategic plan of realigning the
business units and the consolidation and closure of non-performing medical
clinics. MEII continues to pursue profitable contracts that are consistent with
the current operating strategy. The net loss attributable to common shareholders
is approximately $796 thousand for the year ended December 31, 2004 compared to
a net loss of $1.7 million for the year ended December 31, 2003. This decrease
is mainly due to forgiveness of preferred share dividends of
$579,582.
 
 **REVENUE**
 
 The
Company's revenue for the year ended December 31, 2004 decreased to $48.5
million, compared to $ 54.3 million for the year ended December 31, 2003, a
decrease of approximately 11%. This revenue decline was mainly attributable to
the non-recurrence of the SARS crisis which caused a one-time increase in 2003
revenues.
 
 Revenue
from the DND contract amounted to approximately $39 million during the year
ended December 31, 2004 compared to $ 40.3 million for the prior year, a
decrease of 3%. Because a large part of this revenue is a direct flow through,
the decreased revenue did not impact gross margins.
 
 Revenue
from the Staffing Solutions division decreased to $7.5 million during the year
ended December 31, 2004 compared to $13 million for the prior year, a decrease
of 42%. This is due to the loss of the one-time revenue generated in 2003 due to
the SARS outbreak.
 
 Revenue
from the Medical Services division amounted to $1.2 million for the 2004 fiscal
year compared to $0.9 million for 2003. The 33% increase in revenues is the
result of MEII growing this new business line by supplying infusion services to
more patients in the 2004 year.
 
 Revenue
from Healthcare Consulting division amounted to approximately $790 thousand
during the year ended December 31, 2004 compared to $155 thousand for the prior
year, an increase of 410%. This is mainly due to revenue generated by the
Atlantic Health and Human resources project.
 
 **GROSS
MARGIN**
 
 Gross
Margin (revenue less physician and other direct costs) reduced to $4.8 million
compared to approximately $5.1 million for the year ended December 31, 2003 due
to lower revenue.
 
 Physician
fees and direct costs, primarily fees paid to contract physicians as a
percentage of total revenues declined to about 90.1% in 2004 versus 90.6% in
2003. Gross margin percentages increased in the Staffing Solutions and
Government Health Services divisions, the divisions that generate our greatest
revenue.
 
 
  
  **OPERATING
EXPENSES**
 
 Operating
expenses totaled $4.8 million for the year ended December 31, 2004 compared to
$4.7 million in the prior year, an increase of 2%. There was an increase in
salaries and benefits and travel and marketing as compared to the prior period,
which was largely offset by a reduction in General and administration
costs.
 
 **AMORTIZATION
AND INTEREST**
 
 Amortization
increased from approximately $121 thousand to $182 thousand due to additions to
computer hardware, software and leasehold improvements for new office
premises.
 
 Interest
and financing costs decreased to approximately $337 thousand during the year
ended December 31, 2004 compared to $569 thousand in the prior year, a reduction
of 41% **.** This is
due to the fact that the company negotiated lower borrowing rates on its loan
facilities, and repaid the secured debenture. Further, with the recent equity
financing, the Company has reduced its reliance on banks and other financial
institutions.
 
 **OTHER
EXPENSES**
 
 There
was a one-time impact of the closing costs of $609,214 associated with the
equity financing. Also associated with the equity financing, the Company
recognized a one-time benefit of $579,582, due to the forgiveness of unpaid
accrued preferred share dividends. Stock compensation expenses were
significantly lower at $98,622 as compared to $1,161,262 during the prior year.
There has also been an impairment to the long-term investment of $57,626 during
the year.
 
 **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.
 
 **LIQUIDITY
AND CAPITAL RESOURCES**
 
 As at
December 31, 2004, the Company's working capital surplus totaled $1.2 million
compared to a working capital deficit of $3.2 million for the prior year.
 
 Effective
June 15, 2004, the Company issued 39,360,272 common shares as part of an equity
financing (the “Financing”). As a condition of the Financing, Preferred Shares,
50% of which were indirectly held by Dr. Zacharias, the CEO of MEII, were
converted into 9,348,000 common shares and preferred share dividends, in the
amount of $579,582, were forgiven. The preferred shares were redeemable in 2006,
for common shares then valued at $4,500,000. In addition to issuing the common
shares, MEII also issued, 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 new investors and former preferred shareholder
to maintain their pro rata share of their equity position.
  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. The terms of the warrants were amended such that if the
common stock of MEII, closes at $0.70 or greater for thirty consecutives trading
days, MEII has the right to redeem the Warrants at $0.01 per Warrant upon ten
days prior notice.
 
 **OFF
BALANCE SHEET ARRANGEMENTS**
 
 The
Company is not a party to any off-balance sheet arrangements.
 
 Contractual
Obligations and Commercial Commitments
 
  
  The
Company is committed to payments under operating leases of its premises and
equipment totaling $1,295,430. The Company has not engaged in off-balance sheet
financing, commodity contract trading or significant related party transactions.
Annual payments under the operating leases are as follows:
 
 2005
    
    $
    288,3092006
    
    
    293,2762007
    
    
    293,6792008
    
    
    135,3422009
    
    
    113,3522010
      and thereafter
    
    
    171,472$
    1,295,430
  **ITEM
      7A:**
    **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
      8:**
    **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**
 
 The
Company’s consolidated financial statements and the related notes, together with
the report of Schwartz Levitsky Feldman LLP thereon, are set forth in Item
15.
 
 **ITEM
      9:**
    **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**
 
 There
have not been disagreements with the auditors on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
 
 **ITEM
      9A:**
    **CONTROLS
      AND PROCEDURES**
 
 Evaluation
of Disclosure Controls and Procedures : Our
management with the participation of our principal executive officer and
principal financial officer has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) pursuant to Rule 13a-15c under the Exchange Act as of the end of the
period covered by this Annual Report on Form 10-K. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that as of
such date, our disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable SEC rules and
forms. ****
 
 Changes
in Internal Control over Financial Reporting : There
was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
period covered by this Annual Report on Form 10-K that has materially affected,
or is reasonably likely to materially affect our internal control over financial
reporting.
 
 **PART
III**
 
 **ITEM
      10:**
    **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE
REGISTRANT**
 
 The
following table sets forth certain information concerning the directors,
executive officers and key employees of the Company.
  
 
 **Name**
    
    **Age**
    
    **Position**Michael
      Sinclair
    
    62
    
    Chairman
      of the BoardManfred
      Walt
    
    52
    
    DirectorJacob
      (Koby) Ofek
    
    47
    
    DirectorMajor
      General Lewis MacKenzie
    
    64
    
    DirectorJohn
      Yarnell
    
    76
    
    DirectorSidney
      Braun
    
    45
    
    President
      and Chief Operating Officer,DirectorRamesh
      Zacharias
    
    53
    
    Chief
      Executive Officer,DirectorDonald
      Ross
    
    53
    
    V.P.
      OperationsWilliam
      J. Danis
    
    49
    
    Chief
      Financial Officer
 
 **Name**
    **Position**
    **Principal
      Occupation and Positions Held**Michael
      Sinclair(1)
    Chairman
    Dr.
      Sinclair has been involved in several healthcare staffing companies in
      North America and the United Kingdom. Dr. Sinclair was Chairman and the
      largest individual shareholder of Lifetime Corporation, a NYSE listed
      company. Through his vision and leadership, Lifetime grew to the largest
      home healthcare provider in the US with about US $1.2 billion in revenues
      and over 70,000 nurses affiliated through its nationwide branches. It was
      sold for more than US $600 million. Currently, he is the co-founder and
      Chairman of Atlantic Medical Management, which manages the New York based
      healthcare venture fund Atlantic Medical Capital. He serves as the
      non-executive chairman of two portfolio companies: Nursefinders and
      Healthcare Capital Resources.Manfred
      Walt(1)(2)
    Director
    Mr.
      Walt joined entities affiliated with Paul Reichmann and his family in May
      1998 as Executive Vice President and Chief Financial Officer of Central
      Park Lodges Ltd., a privately held retirement home company, a position he
      held to March 2003. From April 2001 to April 2002 he was Executive Vice
      President and Chief Financial Officer of Retirement Residences Real Estate
      Investment Trust. Since May 2002, Mr. Walt has been principally employed
      as President and Chief Executive Officer of Walt & Co Inc., a private
      investment and management company. Mr. Walt was a director of Oxford
      Automotive Inc., a private company which in January 2002, commenced a
      pre-packaged Chapter 11 filing in conjunction with a financial
      recapitalization as a result of the severe downturn in production volumes
      in the North American auto parts industry. Oxford Automotive Inc. emerged
      from Chapter 11 in June 2002 and Mr. Walt retired from its board in
      November 2003. Mr. Walt was previously employed in various capacities for
      18 years with Brascan Corporation and its predecessor companies comprising
      the Edper/Brascan Group of Companies.
  
  
 **Name**
    **Position**
    **Principal
      Occupation and Positions Held**Jacob
      (Koby) Ofek(1)
    Director
    Mr.
      Ofek is a 20 year veteran of the recruitment and staffing industry and an
      owner and manager of such businesses since 1986. Mr. Ofek is the Chairman
      of Oz Atid International Ltd. Through the years he has recruited many
      thousands of workers, mainly from Eastern Europe.Lewis
      MacKenzie(1)(2)
    Director
    During
      his thirty-six years of military service in the Infantry he served nine
      years in Germany with NATO forces and managed nine peacekeeping tours of
      duty in six different mission areas-The Gaza strip, Cyprus, Vietnam,
      Cairo, Central America and Sarajevo. He retired from the forces in 1993
      and in that same year received the prestigious Vimy Award for his
      outstanding contribution to the preservation of democratic values. Since
      his retirement from the military, General MacKenzie has regularly appeared
      on many of the international TV and radio networks as a commentator.
      Following the attacks of September 11, 2001, Lewis MacKenzie was appointed
      one of two advisors to the Government of Ontario on counter-terrorism and
      emergency measures. He is a graduate of the Xavier Junior College of
      Sydney, Cape Breton and The University of Manitoba.John
      Yarnell(1)(2)
    Director
    John
      Yarnell is the President Of Yarnell Companies Inc. Yarnell Companies Inc.
      is an investment and management services company formed in 1978 to invest
      and manage venture capital initiatives. Mr. Yarnell is the founder and
      retired Chairman of the Quorum Group of companies and a former director
      and chairman of Poco Petroleums Ltd., Guard Inc., and Aluma Systems Inc.
      He is a graduate of The University of Manitoba and Harvard Business
      SchoolSidney
      Braun
    President,
      Chief
      Operating
      Officer
      and
      Director
    For
      the last three years, Mr. Braun was an exclusive subcontractor to
      Poalim/IBI, the largest investment bank in Israel, covering the European
      financial markets. For the approximately two years prior to that, Mr.
      Braun was a representative for Raphael Zorn Helmsley, a UK investment
      bank. Mr. Braun assisted in taking Israeli based companies public on the
      AIM in London, EnglandRamesh
      Zacharias
    Chief
      Executive
      Officer
      and
      Director
    Dr.
      Ramesh Zacharias is the founder of Med-Emerg International Inc. and serves
      as the President and Chief Executive Officer, and Executive Medical
      Director, of Med-Emerg Inc. He has practiced medicine in Canada since 1981
      and has extensive experience in the delivery of emergency and primary,
      medical care. He has provided consulting services regarding the delivery
      of emergency care internationally in the Caribbean, Saipan and Malaysia
      and provided management-consulting services regarding the operation of
      medical clinics in Canada, the United States and Russia. In this continued
      role in providing medical insight and with his extensive business
      experience, he provides the strategic guidance and leadership to the
      Company’s management team. Under his leadership, MEII has grown to become
      the leading Canadian medical clinic management and medical staffing
      organization.
  
  
 **Name**
    **Position**
    **Principal
      Occupation and Positions Held**Donald
      Ross
    Vice
      President
      Business
      Development
    Dr.
      Ross has been Vice-President of Med-Emerg International Inc. since
      November 1, 2000 and is responsible for the operations of the Company. He
      is an experienced healthcare executive, responsible for hands-on
      day-to-day operations. In addition to his professional experience, Don
      holds a Masters degree in Clinical Epidemiology, is a Doctor of Dental
      Medicine, and has an honors Bachelors degree in neurophysiology from the
      University of British Columbia. Prior to working with the Company, Don was
      the Executive Vice President (Health Care) of Aetna Canada for five years
      and has extensive experience in managing clinical business units in the
      public and private sectors.William
      J. Danis
    Chief
      Financial
      Officer
      and
      Treasurer
    Mr.
      Danis is an experienced financial professional, bringing 25 years of
      operational and investment experience to his role at MEII. Prior to
      joining the company Bill was a founding partner of Greybrook Corporation,
      a private equity investment company. Previously Bill held senior
      investment roles with Working Ventures Canadian Fund Inc. and Royal Trust
      Enterprise Capital. Bill left public accounting in 1985 to accept the
      position of Managing Director of an offshore subsidiary of Brascan
      Corporation (TSX:BNNA).
 
 Notes:
 (1)
    Member
      of the Compensation Committee.(2)
    Member
      of the Audit Committee.
 
 Board
Structure and Committees:
 
 As a
result of the private placement of 43,708,272 common shares of the Company,
completed on June 15, 2004, the Board of Directors was increased from five (5)
to nine (9) and Messrs. Braun, Ofek, Sinclair and Walt were appointed as
directors. Contemporaneously with the completion of the private placement,
Messrs. Frank Baillie and William E. Thomson resigned from the Board.
 
 The
Board has a standing Compensation Committee and Audit Committee.
 
 The
Compensation Committee is primarily responsible for reviewing the compensation
arrangements for the Company’s executive officers, including the Chief Executive
Officer, and for administering the Company’s stock option plans. Members of the
Compensation Committee are Dr. Sinclair and Messrs. Walt, Ofek, Mackenzie and
Yarnell.
 
 The
Audit Committee is primarily responsible for overseeing the services performed
by the Company’s independent auditors and internal audit department evaluating
the Company’s accounting policies and its system of internal controls and
reviewing significant financial transactions. The Audit Committee is comprised
of three members: Messrs. Walt, Mackenzie and Yarnell.
 
  
  Mr.
Yarnell has been designated as the Financial Expert on the Audit Committee. The
Company has adopted a code of conduct for all employees, which has been reviewed
by the Board of Directors and management.
  **ITEM
      11:**
    **EXECUTIVE
      COMPENSATION**
 
 The
following table sets forth the cash compensation, as well as certain other
compensation paid or accrued to the Company's executive officers for the fiscal
years ended December 31, 2004, 2003 and 2002. No other executive officer has a
total annual salary and bonus of more than $100,000 during the reporting
periods.
  ANNUAL
      COMPENSATION(all
      amounts are Cdn$000's)NAME
      AND
    
    
    
    OTHERPRINCIPAL
      POSITION
    YEAR
    SALARY
    BONUS
    COMPENSATIONRamesh
      Zacharias
    2004
    345
    nil
    1,000,000
      optionsChief
      Executive Officer
    2003
    339
    nil2002
    339
    25
    200,000
      optionsSidney
      BraunPresident
      and COO
    2004
    2001
    
    1,250,000
      optionsDonald
      Ross
    2004
    142
    
    150,000
      optionsVice
      President Business Development
    2003
    131
    
    100,000
      options2002
    125
    15
    100,000
      optionsWilliam
      Danis
    2004
    172
    20
    250,000
      optionsCFO
      and Corporate Secretary
    2003
    1682
 
 Notes:
 1.
    Mr.
      Braun joined the company in June 2004. His salary for the year was
      approximately Cdn$80,000.2.
    Mr.
      Danis joined the company in May 2003. His salary for the year was
      approximately Cdn$98,000.
 
 Stock
Option Plan
 
 In
November 1999, the Board of Directors and shareholders adopted and approved the
Company’s Stock Option Plan (the “Plan”). The Plan provides for stock option
grants to both employees and directors of the Company. The Plan is to be
administered by the Board of Directors or a committee appointed by the Board.
The Plan was amended in 2003 to authorize the Company to issue options to
acquire up to 20% of the issued and outstanding common shares. Pursuant to the
Plan, options to acquire an aggregate 11,655,538 shares of Common Stock may be
granted, 1,825,000 of which have been granted as of December 31, 2004.
 
 During
the fiscal 2004, 100,000 options were awarded under the Stock Option
Plan .
 
 Director
Compensation:
 
 During
the fiscal year 2004 outside
directors of the Company received Cdn$20,000 per year for acting in such
  
  capacities
and were reimbursed for all reasonable expenses incurred in connection with
activities on behalf of the Company. All committee members received Cdn$5,000
per year for acting in such capacity and the Chairman of such committee received
Cdn$7,500 for acting in such capacity. In lieu of directors’ fees, Messrs. Ofek
and Sinclair have entered into consulting agreements with the Company, for which
they were compensated Cdn$70,000 per annum. The Company pays Yarnell Companies
Inc. and Walt & Co. Inc. for the services provided by Messrs. Yarnell and
Walt as directors, respectively.
 
 Compensation
Committee Interlocks and Insider Participation:
 
 The
current members of the Compensation Committee are Messrs. Walt, Ofek, Sinclair,
MacKenzie and Yarnell, none of whom are employees and each of Messrs. Walt,
MacKenzie and Yarnell are considered independent directors. No executive officer
of the Company (i) served as a member of the of the compensation committee (or
other board committee performing similar functions or in the absence of any such
committee , the board of directors) of another entity , one of whose executive
officers served on the Company’s Compensation Committee, (ii) served as a
director of another entity one of whose executive officers served on the
Company’s Compensation Committee or (iii) served as a member of the compensation
committee (or other board committee performing similar functions or in the
absence of any such committee, the board of directors) of another entity, one of
whose executive officers served as a director of the company.
 
 **ITEM
      12:**
    **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
  
 PRINCIPAL
SHAREHOLDERS
 
 The
following table sets forth, as of December 31, 2004 certain information with
respect to stock ownership of (i) all Officers and Directors; (ii) persons known
by the Company to be beneficial owners of 5% or more of its outstanding shares
of Common Stock; (iii) all directors and officers as a group.
 
 **Number
      of**
    
    **Percentage****Name
      of beneficial owner**
    
    **Common
      Shares (1)**
    
    **of
      Class**Jacob
      (Koby) Ofek (2) (3)
    
    
    15,778,265
    
    
    27.1
    %BXR1
      Holdings Inc. (2) (4)
    
    
    6,556,241
    
    
    11.25
    %The
      Sinclair Montrose Trust (2) (5)
    
    
    6,251,349
    
    
    10.7
    %Walt
      & Co. Inc. (2) (6)
    
    
    4,370,827
    
    
    7.5
    %David
      Kassie (2) (7)
    
    
    4,370,827
    
    
    7.5
    %Ramesh
      Zacharias (8)
    
    
    3,200,000
    
    
    5.5
    %All
      Officers and Directors as a group (2) (9)
    
    
    31,450,441
    
    
    52.8
    %
 
 (1)
    Pursuant
      to the rules and regulations of the Securities and Exchange Commission,
      shares of Common Stock that an individual or group has a right to acquire
      within 60 days pursuant to the exercise of options or warrants are deemed
      to be outstanding for the purposes of computing the percentage ownership
      of such individual or group, but are not deemed to be outstanding for the
      purposes of computing the percentage ownership of any other person shown
      in the table.(2)
    Under
      the terms of a warrant (the “A Warrants”) certificate issued by the
      Company on June 15, 2004, the Holder has the right to acquire up to a
      certain number of additional common shares of the Company
    at:(i)
    $0.50
      US per common share on the basis of three common shares of the Company for
      each common share of the Company that is issued pursuant to
      the:(A)
    2,325,000
      option currently outstanding which entitle the holder to purchase common
      shares at $0.50 US per common share;
  
  
 (B)
    the
      1,437,500 warrant currently outstanding which entitle the holder to
      purchase common shares at $0.50 US per common share (collectively
      hereinafter referred to as the “$0.50 Option Shares”);
  or(ii)
    $1.00
      US per common share on the basis of three (3) common shares of the Company
      for each common share of the Company that is issued pursuant to the
      100,000 options currently outstanding for the purchase of common shares at
      $1.00 US per common share (the “$1.00 Option Shares”).The
      terms of the A Warrants provide the Holder with the right to acquire
      additional common shares only if any of the $0.50 Option Shares or $1.00
      Option Shares are issued. Although the A Warrants allow the Holder to
      purchase additional common shares within one year after exercise
      conditional upon the issuance of the $0.50 Option Shares or the $1.00
      Option Shares, we have not included the number of share issuable pursuant
      to the A Warrants in the number of common shares owned by the persons
      listed in the table noted above.
 
 (3)
    Excludes
      the A Warrants granted to Mr. Ofek to purchase 4,182,976 Common Shares of
      the Company.(4)
    Excludes
      the A Warrants granted to BXR1 Holdings Inc. to purchase 1,738,126 common
      shares of the Company.(5)
    Excludes
      the A Warrants granted to The Sinclair Montrose Trust to purchase
      1,657,295 common shares of the Company.(6)
    Excludes
      the A Warrants granted to Walt & Co. to purchase 1,158,750 common
      shares of the Company.(7)
    Excludes
      the A Warrants granted to David Kassie to purchase 1,158,750 common shares
      of the Company.(8)
    Includes
      (i) 5,000,000 common shares owned by 1245841 Ontario Inc. (“1245841”),
      which is owned equally by Dr. and Mrs. Zacharias; (ii) options to purchase
      500,000 and 200,000 common shares granted by the board of directors on
      April 6, 2001, and May 15, 2003, respectively. Excludes warrants (the “B
      Warrants”) granted to 1245841 to purchase up to 1,931,250 common shares of
      the Company on the basis of one (1) common share upon the issuance of each
      two (2) $0.50 Option Shares or $1.00 Option Shares. Dr. Zacharias
      disclaims beneficial ownership of the shares and the B Warrants owned by
      his wife.(9)
    Includes
      common shares owned directly by Koby Ofek; common shares owned indirectly
      by Michael Sinclair through The Sinclair Montrose Trust; common shares
      owned indirectly by Manfred Walt through Walt & Co. Inc.; common
      shares owned indirectly by Ramesh Zacharias through 1245841, as well as
      the options identified in item 8 above; 1,250,000 common shares owned by
      Sidney Braun; options to purchase 150,000 common shares at $0.50 US per
      common share exercisable within sixty (60) days of the date hereof to each
      of Messrs. Lewis MacKenzie and John Yarnell; options to purchase 200,000
      common shares at $0.50 US per common share exercisable within sixty (60)
      days of the date hereof to Don Ross; and options to purchase 100,000
      common shares at $0.50 US per common share exercisable within sixty (60)
      days of the date hereof to William J. Danis. Excludes options granted to
      Messrs. William E. Thomson and Frank Baillie, who resigned as directors on
      May 31, 2004, and May 28, 2004,
respectively.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Securities Exchange Act of 1934 as amended requires the Company’s
officers and directors and persons who own more than ten percent of a registered
class of the Company’s equity securities, to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission (‘SEC”). Officers, directors and greater than ten percent
shareholders are also required by rules promulgated by the SEC to furnish the
Company with copies of all section 16(a) forms they file.
 
  
  Based
solely upon a review of the copies of such forms furnished to the Company or
written representations that no Forms 5 were required, the Company believes that
all section 16(a) filing requirements were met during fiscal year
2004.
 
 Equity
Compensation Plan Information
 
 (a)
    
    (b)Plan
      category
    
    Number
      of Securities
      to
      be issued upon
      exercise
      of
      outstanding
      options,
      warrants
      and rights
    
    Weighted-average
      exercise
      price of
      outstanding
      options,
      warrants
      and rights
    
    Number
      of securities
      remaining
      available
      for
      future issuance
      under
      equity
      compensation
      plans
      (excluding
      securities
      reflected
      in column (a))Equity
      compensation plans approved by security holders
    
    
    1,825,000
    
    
    0.50
    
    
    11,655,539Equity
      compensation plans not approved by security holders
    
    
    3,250,000
    
    
    0.26
    
    
    0
 
 In 2004
the Company issued 100,000 options exercisable at $1.00, as partial
consideration for the purchase of a pain management center. The options vest
after 18 months and are exercisable until May 2009.
 
 In 2002
the Company awarded an aggregate of 600,000 options at prices ranging from $0.50
to $1.00 in consideration to parties that assisted in arranging third-party
financing for the Company. The options are fully vested, are exercisable for
periods ranging from April 2007 to June 2007.
  **ITEM
      13:**
    **CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS**
 
 There
were no transactions between the Company and any of its officers, directors or
5% or greater shareholders required to be reported hereunder, except for two
directors who have been retained as consultants and will be paid $53,785
(Cdn$70,000) per annum, each. During the year ended December 31, 2004 consulting
fees of approximately $31,374 (Cdn$ 40,833) were paid to each of these two
directors. Their contracts are scheduled to expire May 31, 2005. The Company
believes all previous transactions between the Company and its officers,
directors or 5% stockholders, and their affiliates were made on terms no less
favorable to the Company than those available from unaffiliated parties. The
Company presents all proposed transactions with affiliated parties to the Board
of Directors for its consideration and approval. Any such transaction is
approved by a majority of the disinterested directors.
 
 **ITEM
      14:**
    **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**
 
 The
following table sets forth the fees paid to the Company’s independent auditor,
Schwartz Levitsky Feldman llp, during fiscal years 2004 and 2003
 
  
  AUDIT
AND NON-AUDIT FEES:
 
 2004
    
    2003Audit
      fees
    
    $
    55,448
      (CDN$72,165
    )
    $
    54,961
      (CDN$77,000
    )Audit
      related fees
    
    $
    NIL
    
    $
    NILTax
      fees
    
    $
    6,954
      (CDN$9,050
    )
    $
    NILAll
      other fees
    
    $
    NIL
    
    $
    NILTOTAL
    
    $
    62,402
      (CDN$81,215
    )
    $
    54,961
      (CDN$77,000
    )
 
 (1)
    Audit
      fees relate to professional services rendered in connection with the audit
      of the Company’s annual consolidated financial statements, quarterly
      review of consolidated financial statements included in the Company’s
      Forms 10-Q and audit services provided in connection with other statutory
      and regulatory filings.(2)
    Audit
      related fees include professional services related to the audit of the
      Company’s consolidated financial statements, consultation on accounting
      standards or transactions and audits of employee benefit
      plans.(3)
    Tax
      fees include $6,954 for professional services and advice relating to goods
      and services taxes.(4)
    Other
      fees include professional services and advice relating to the equity
      financing completed in June 2004.
 
 Policy
on Audit Committees Pre-approval of Audit and Non-Audit Services Performed by
the Independent Auditors.
 
 The
audit Committee has pre-approved the audit engagement in accordance with
Regulation S-X Rule 201(c)(7)(i) of the Sarbanes Oxley Act.
 
 **PART
IV**
  **ITEM
      15:**
    **EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
      8-K**
 
 (A)
EXHIBITS
 
 14.1
    Code
      of Ethics of the Company21
    Subsidiaries
      of Med-Emerg International Inc.23.1
    Independent
      Auditors’ Consent31.1
    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 and Chief Financial
      Officer
  (B)
    FINANCIAL
      STATEMENTSAuditors’
      ReportRevised
      Consolidated Balance SheetRevised
      Consolidated Statement of Operations and DeficitRevised
      Consolidated Statement of Changes in Financial PositionNotes
      to Revised Consolidated Financial Statements(C)
    REPORTS
      ON FORM 8-KThere
      were no reports filed on Form 8-K during the fourth quarter of fiscal
      2004.
 
 
  
  
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  MED-EMERG
      INTERNATIONAL INC./s/
      Ramesh ZachariasRamesh
      ZachariasDirector,
      Chief Executive OfficerDATE:
      March 30, 2005
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  /s/
      Michael Sinclair
    
    /s/
      Jacob (Koby) OfekMichael
      Sinclair
    
    Jacob
      (Koby) OfekChairman
      of the Board
    
    DirectorDATE:
      March 30, 2005
    
    DATE:
      March 30, 2005/s/
      Ramesh Zacharias
    
    /s/
      Lewis MacKenzieRamesh
      Zacharias
    
    Lewis
      MacKenzieDirector,
      Chief Executive Officer
    
    DirectorDATE:
      March 30, 2005
    
    DATE:
      March 30, 2005/s/
      John Yarnell
    
    /s/
      Manfred WaltJohn
      Yarnell
    
    Manfred
      WaltDirector
    
    DirectorDATE:
      March 30, 2005
    
    DATE:
      March 30, 2005/s/
      Sidney Braun
    
    /s/
      William J DanisSidney
      Braun
    
    William
      J DanisPresident
      and Chief Operating Officer
    
    Chief
      Financial OfficerDATE:
      March 30, 2005
    
    DATE:
      March 30, 2005
 
 
  
  
 AUDITORS'
REPORT
 
 To the
Shareholders of
 Med-Emerg
International Inc.
 
 We have
audited the consolidated balance sheets of Med-Emerg International Inc. as at
December 31, 2004 and 2003 and the related consolidated statements of operations
and deficit and cash flows for each of the years ended December 31, 2004, 2003
and 2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
 We
conducted our audits in accordance with Canadian generally accepted auditing
standards and with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
 
 In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2004 and 2003
and the results of its operations and its cash flows for each of the years ended
December 31, 2004, 2003 and 2002 in accordance with Canadian generally accepted
accounting principles which differ in certain respects from generally accepted
accounting principles in the United States (refer to note 21).
 
  /s/ Schwartz Levitsky Fieldman, LLPChartered AccountantsToronto, Ontario, CanadaMarch 18, 2005
  
 
  
  
 **Med-Emerg
International Inc.**
 **Consolidated
Balance Sheet**
 **As
at December 31, 2004 and 2003**
 **(in
US$)**
 
 2004
    
    2003(as
      restated)(see
      note 25)**Assets****Current
      assets**Cash
    
    $
    2,312,958
    
    $
    129,132Accounts
      receivable (note 5)
    
    
    4,104,629
    
    
    3,409,771Prepaid
      expenses and other
    
    
    74,810
    
    
    81,041Discontinued
      operations (note 4)
    
    
    -
    
    
    102,7406,492,397
    
    
    3,722,684Long-term
      investment (note 6)
    
    
    83,195
    
    
    134,979Property,
      plant and equipment (note 7)
    
    
    508,839
    
    
    186,562Goodwill
      (note 8)
    
    
    237,596
    
    
    -$
    7,322,027
    
    $
    4,044,225**Liabilities
      and Shareholders' Equity (Deficit)****Current
      liabilities**Accounts
      payable and accrued liabilities
    
    $
    5,268,270
    
    $
    6,284,161Preferred share
      dividends payable
    
    
    -
    
    
    547,512Discontinued
      operations (note 4)
    
    
    -
    
    
    60,7035,268,270
    
    
    6,892,376**Long-term
      liabilities**Notes
      payable (note 9)
    
    
    599,991
    
    
    599,991Long-term debt
      (note 10)
    
    
    894,517
    
    
    -6,762,778
    
    
    7,492,367Commitments
      and contingent liabilities (note 17 and 18)**Shareholders'
      Equity (Deficit)**Capital
      stock (note 11)
    
    
    1,361,280
    
    
    11,544,736Contributed
      surplus (note 12)
    
    
    67,080
    
    
    2,397,849Deficit
    
    
    (68,320
    )
    
    (16,425,309
    )(Accumulated
      deficit of $17,152,785 has been eliminated by applying it against
      contributed surplus and capital stock)Cumulative
      translation adjustment
    
    
    (800,791
    )
    
    (965,418
    )559,249
    
    
    (3,448,142
    )$
    7,322,027
    
    $
    4,044,225
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
  
 **Med-Emerg
International Inc.**
 **Consolidated
Statement of Operations and Deficit**
 **For
the years ended December 31, 2004, 2003 and 2002**
 **(in
US$)**
 
 2004
    
    2003
    
    2002(as
      restated)
    
    (as
      restated)(see
      note 25)
    
    (see
      note 25)**Revenue**
    
    $
    48,447,687
    
    $
    54,335,558
    
    $
    37,428,043**Physician
      fees and other direct costs**
    
    
    43,693,380
    
    
    49,217,416
    
    
    34,382,7524,754,307
    
    
    5,118,142
    
    
    3,045,291**Expenses**Salaries and
      benefits
    
    $
    2,825,981
    
    $
    2,249,647
    
    $
    1,582,301General
      and administration
    
    
    1,250,213
    
    
    1,747,081
    
    
    708,502Occupancy costs
      and supplies
    
    
    354,812
    
    
    334,460
    
    
    244,609Travel
      and marketing
    
    
    379,335
    
    
    347,477
    
    
    169,1174,810,341
    
    
    4,678,665
    
    
    2,704,529**Income
      (loss) before under noted items**
    
    
    (56,034
    )
    
    439,477
    
    
    340,762Interest and
      financing expenses
    
    
    337,310
    
    
    569,325
    
    
    993,508Amortization of
      property, plant, and equipment
    
    
    182,399
    
    
    120,924
    
    
    102,345Impairment of
      long-term investment
    
    
    57,626
    
    
    -
    
    
    -Stock
      compensation expense
    
    
    98,622
    
    
    1,161,262
    
    
    62,287Closing
      costs
    
    
    609,214
    
    
    -
    
    
    -Forgiveness of
      loan
    
    
    -
    
    
    -
    
    
    (228,459
    )1,285,171
    
    
    1,851,511
    
    
    929,681**Loss
      before income taxes**
    
    
    (1,341,205
    )
    
    (1,412,034
    )
    
    (588,919
    )Income
      taxes (recovery) (note 13)
    
    
    -
    
    
    (2,458
    )
    
    -**Net
      loss before minority interest**
    
    
    (1,341,205
    )
    
    (1,409,576
    )
    
    (588,919
    )Minority
      interest
    
    
    -
    
    
    (2,095
    )
    
    (2,211
    )**Net
      loss before discontinued operations**
    
    
    (1,341,205
    )
    
    (1,407,481
    )
    
    (586,708
    )**Discontinued
      operations (note 4)**Loss
      from operations of discontinued component
    
    
    -
    
    
    (200,702
    )
    
    (16,956
    )Gain on
      disposal of discontinued component
    
    
    -
    
    
    33,533
    
    
    -Loss on
      discontinued operations
    
    
    -
    
    
    (167,169
    )
    
    (16,956
    )**Net
      loss**
    
    
    (1,341,205
    )
    
    (1,574,650
    )
    
    (603,664
    )Preferred share
      dividends
    
    
    (34,173
    )
    
    (135,006
    )
    
    (134,983
    )Forgiveness of
      preferred share dividends
    
    
    579,582
    
    
    -
    
    
    -**Net
      loss attributable to common shareholders**
    
    
    (795,796
    )
    
    (1,709,656
    )
    
    (738,647
    )**Deficit,
      beginning of the year**
    
    
    (16,425,309
    )
    
    (14,715,653
    )
    
    (13,977,006
    )Elimination of
      deficit (note 14)
    
    
    17,152,785
    
    
    -
    
    
    -**Deficit,
      end of the year**
    
    $
    (68,320
    )
    $
    (16,425,309
    )
    $
    (14,715,653
    )**Basic
      loss per common share (note 15)**Continuing
      operations
    
    $
    (0.02
    )
    $
    (0.16
    )
    $
    (0.08
    )Discontinued
      operations
    
    $
    -
    
    $
    (0.02
    )
    $
    (0.00
    )**Weighted
      average common shares outstanding**
    
    
    37,982,583
    
    
    9,564,332
    
    
    9,444,332
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
  
  
 **Med-Emerg
International Inc.**
 **Consolidated
Statement of Cash Flows**
 **For
the years ended December 31, 2004, 2003 and 2002**
 **(in
US$)**
 
 2004
    
    2003
    
    2002(as
      restated)
    
    (as
      restated)(see
      note 25)
    
    (see
      note 25)**Cash
      Flows from Operating Activities**Net
      loss before discontinued operations
    
    $
    (1,341,205
    )
    $
    (1,407,481
    )
    $
    (586,708
    )Adjustments
      for:Amortization of
      property, plant and equipment (note 7)
    
    
    182,399
    
    
    120,924
    
    
    102,345Impairment of
      long-term investment
    
    
    57,626
    
    
    -
    
    
    -Minority
      interest
    
    
    -
    
    
    (2,170
    )
    
    (2,160
    )Stock
      compensation expense (note 12)
    
    
    98,622
    
    
    1,161,262
    
    
    62,287Forgiveness of
      loan
    
    
    -
    
    
    -
    
    
    (228,459
    )Common
      shares issued for financing
    
    
    -
    
    
    -
    
    
    194,400(1,002,558
    )
    
    (127,465
    )
    
    (458,295
    )Increase
      (decrease) in non-cash working capital components (note
16)
    
    
    (810,001
    )
    
    1,070,042
    
    
    1,141,029Discontinued
      operations (note 4)
    
    
    42,037
    
    
    22,243
    
    
    315,566(1,770,522
    )
    
    964,820
    
    
    998,300**Cash
      Flows from Investing Activities**Additions to
      property, plant, and equipment
    
    
    (504,676
    )
    
    (136,559
    )
    
    (65,866
    )Additions to
      Goodwill (note 8)
    
    
    (197,658
    )
    
    -
    
    
    -Proceeds from
      sale of investment in clinics (note 4)
    
    
    -
    
    
    469,341
    
    
    -Sale of
      investment in Next Generation TechnologyHoldings, Inc.
    
    
    -
    
    
    -
    
    
    102,051Discontinued
      operations (note 4)
    
    
    -
    
    
    (210,127
    )
    
    (333,634
    )(702,334
    )
    
    122,655
    
    
    (297,449
    )**Cash
      Flows from Financing Activities**Repayment of
      bank indebtedness
    
    
    -
    
    
    -
    
    
    (969,026
    )Demand
      loan
    
    
    -
    
    
    (11,462
    )
    
    11,462Deferred
      financing costs incurred
    
    
    -
    
    
    42,883
    
    
    (42,883
    )Issuance/(repayment)
      of debt
    
    
    -
    
    
    (660,505
    )
    
    466,710Discontinued
      operations (note 4)
    
    
    -
    
    
    (10,235
    )
    
    (71,144
    )Common
      shares issued
    
    
    4,500,000
    
    
    -
    
    
    -4,500,000
    
    
    (639,319
    )
    
    (604,881
    )Effect
      of foreign currency exchange rate changes
    
    
    156,682
    
    
    (408,641
    )
    
    (15,550
    )**Increase
      in cash**
    
    
    2,183,826
    
    
    39,515
    
    
    80,420Cash,
      beginning of year
    
    
    129,132
    
    
    89,617
    
    
    9,197**Cash,
      end of year**
    
    $
    2,312,958
    
    $
    129,132
    
    $
    89,617
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
  
  
 
 MED-EMERG
INTERNATIONAL INC.
 Notes
to Consolidated Financial Statements
 December
31, 2004, 2003 and 2002
 
 **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 five units during the 2003 fiscal year.
Subsequent to 2003, the Company is no longer actively involved in the Medical
Clinics business. MEII’s four remaining business units are: Staffing Solutions,
Government Healthcare Services (including Department of National Defence),
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 December 31, 2004, the Company had 28 physician and nurse
staffing contracts.
 
 The
Company sold all the medical clinics during the 2003 fiscal year (see note
4).
 
 The
Company provides in-garrison medical personnel to the Canadian Forces (“CF”) at
bases across Canada. Through this contract the Company recruits, schedules and
manages physicians, nurses, dentists, physiotherapists and other healthcare
professionals to provide services as required by the CF health authority
resident at each base. This contract expires March 31, 2005.
 
 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. The Company also provides similar
services to Novartis Pharmaceuticals Canada Inc. and has begun to supply
Zometa ’ for
treating cancer patients with bone metastases. In November 2004, the Company
acquired a pain management clinic and commenced offering services to those
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 audited consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP). These
financial statements consolidate, with minority interest, the accounts of MEII
and all wholly- and partially-owned subsidiaries of MEII i.e. 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
21.
 
 **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
      improvements
    3-4
      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.
 
 **(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)**
    **Government
      Healthcare Services (Includes Department of National Defence (“DND”)):**
 
 Revenue
is reported on a gross basis.
 
 MEII
has 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 has 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 bills DND for the work performed by these individuals and in turns pays the
medical personnel and support staff based on the terms of the respective
contracts signed with them.
 
 **(3)**
    **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.
 
 **(4)**
    **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.
 
 **(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.
 
 **(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**
 
 Ontario
Medical Clinics Sale
 On
September 5, 2003 the Company entered into a transaction with AIM Health Group
Ltd. (“AIM”) to dispose of MEII’s Ontario-based clinic operations and more
specifically the following clinics: Elmvale, Merivale, Herongate, Kanata,
Orleans, Hillside, Hampton, PSA, Caresource, Pond Mills, Central, Glenderry,
Dundas and Wallaceburg.
 
 The
Company sold the subsidiary corporations that owned these clinics to AIM. The
names of these corporations are as follows: 1189543 Ontario Inc. (and its
subsidiaries 1180668 Ontario Inc., 1292363 Ontario Corporation and 1024528
Ontario Inc.), Med-Plus Health Centres Ltd. (and its subsidiary Glenderry
Medical Walk-In Clinic Inc.), Med-Emerg Urgent Care Inc. and Caremedics
(Elmvale) Inc.
 
 MEII
sold all of the shares owned by MEII in these companies (including all assets
and liabilities of the companies identified
above), complete with all lease and employee obligations.
 
 In
consideration for the sale of the shares of these corporations, MEII received
$597,763 ($775,000 CDN). The purchase price was settled as follows:
 
 I.
    $385,654
      ($500,000 CDN) cash upon signing the purchase and sale agreement on
      September 5, 2003.II.
    $38,565
      ($50,000 CDN) cash upon the date of closing of the transaction of the
      purchase and sale for the purchased shares.III.
    $38,565
      ($50,000 CD) cash on the later of the renegotiation of certain contractual
      obligations related to one of the clinic operations.IV.
    $145,591
      ($175,000 CDN) by way of issuance by AIM of 175,000 Class A preferred
      shares in the capital of AIM, with a face value of $0.77 ($1 CDN) per
      share on September 30, 2003.
 
 This
transaction resulted in a $104,138 gain on disposition of these clinic companies
as the net assets of the companies sold were less than proceeds received by
MEII.
 
 The
Company has accounted for the investment using the cost method at a value of
$0.77 ($1 CDN) for each Class A preferred share. It is the Company’s intention
to hold the Class A preferred shares for greater than one year and accordingly
it has classified the investment as long-term (see note 6).
 
 Each
Class A preferred share entitles the holder to receive for each fiscal year as
declared by the board of directors of AIM a cumulative dividend at an amount
equal to the greater of:
 
 I.
    Three
      (3%) percent of the amount recorded in the stated capital account
      maintained in respect of the Class A preferred shares of AIM (“fixed
      dividends”); andII.
    Twenty
      (20%) of the cumulative net income of the clinic corporations calculated
      under generally accepted accounting principles on a basis consistent with
      those of the previous years (“variable
dividends”).
 
 The
cumulative amount of the fixed dividends paid to the holders of Class A
preferred shares in prior years shall reduce the variable dividends payable to
the holders of Class A preferred shares in a given year.
 
 MEII
and AIM continue to work together to ensure the long-term successful development
of these clinics.
 
 Alberta
Medical Clinics Sale
 On
December 31, 2003, MEII’s indirect wholly-owned subsidiary YFMC Healthcare
(Alberta) Inc. sold certain assets of the following four medical clinics located
in the province of Alberta: Martindale Medical Centre, McKnight Village Medical
Clinic, Jasper Avenue Medical Clinic, West Edmonton Mall Medical Centre. In
consideration of the sale MEII received $15,426 ($20,000 CDN) in cash during the
2004 fiscal year.
 
 This
transaction resulted in a $51,581 loss on disposition of these clinic companies
as the net assets of the companies sold were higher than proceeds received by
MEII.
 
 Manitoba
Medical Clinic Sale
 During
the fourth quarter of 2003, MEII sold certain assets of the Wildwood Medical
Centre located in Winnipeg, Manitoba. In consideration for the sale, MEII
received $6,557($8,500 CDN) in cash. This transaction resulted in net loss of
$19,024 upon disposition as the net assets of the companies sold were higher
than proceeds received by MEII.
  
  
 
 The
summarized statements of income (loss) for the Discontinued Operations are as
follows:
 2004
    
    2003
    
    2002$
    
    $
    
    $Revenue
    
    
    -
    
    $
    6,489,747
    
    $
    7,616,267Physician
      fees and other direct costs
    
    
    -
    
    
    3,593,429
    
    
    3,998,789Gross
      margin
    
    
    -
    
    
    2,896,318
    
    
    3,617,478Operating,
      general and administrative expenses
    
    
    -
    
    
    2,955,990
    
    
    3,413,537Depreciation
    
    
    -
    
    
    128,475
    
    
    195,029Other
      expense
    
    
    -
    
    
    13,255
    
    
    27,446Loss
      before income taxes
    
    
    -
    
    
    (201,402
    )
    
    (18,534
    )Income
      taxes (recovery)
    
    
    -
    
    
    (1,321
    )
    
    (13,570
    )Minority
      interest
    
    
    -
    
    
    621
    
    
    11,992Loss
      for the period
    
    
    -
    
    
    (200,702
    )
    
    (16,956
    )Gain
      on disposal of discontinued operations
    
    
    -
    
    
    (33,533
    )
    
    -Loss
      from discontinued operations
    
    
    -
    
    
    (167,169
    )
    
    (16,956
    )
 
 The
summarized balance sheets for the Discontinued Operations are as
follows:
 
 2004
    
    2003$
    
    $Current
      assetsCash
    
    
    -
    
    $
    43,134Accounts
      receivable
    
    
    -
    
    
    59,606Prepaid
      expenses and other
    
    
    -
    
    
    --
    
    
    102,740Property,
      plant and equipment
    
    
    -
    
    
    --
    
    
    102,740Current
      liabilitiesAccounts
      payable and accrued liabilities
    
    
    -
    
    $
    60,703Current
      portion of deferred revenue
    
    
    -
    
    
    -Other
      loans
    
    
    -
    
    
    --
    
    
    60,703Long-term
      liabilitiesDeferred
      revenue
    
    
    -
    
    
    --
    
    
    60,703Net
      assets
    
    
    -
    
    
    42,037
 
 
  
  
 **5.**
    **ACCOUNTS
      RECEIVABLE**
  2004
    
    2003Trade
      receivable
    
    $
    4,120,429
    
    $
    3,455,886Allowance
      for doubtful accounts
    
    
    (15,800
    )
    
    (46,115
    )$
    4,104,629
    
    $
    3,409,771
 
 **6.**
    **LONG-TERM
      INVESTMENT**
 
 2004
    
    2003Investment
      in AIM Health Group Ltd.
    
    $
    83,195
    
    $
    134,979
 
 MEII
has an investment of 175,000 class A preferred shares of AIM as a result of
disposition of the Ontario based clinics on September 30, 2003 (see note 4 for
further details). It was determined that there was an impairment in the carrying
value of the long term investment, and hence the investment has been written
down by $57,626.
 
 **7.**
    **PROPERTY,
      PLANT AND EQUIPMENT**
 
 2004
    
    2003Accumulated
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Net
    
    Cost
    
    Amortization
    
    NetFurniture
      and fixtures
    
    $
    292,949
    
    $
    168,766
    
    $
    124,183
    
    $
    189,848
    
    $
    139,957
    
    $
    49,891Computer
      software
    
    
    509,964
    
    
    432,492
    
    
    77,472
    
    
    329,144
    
    
    292,609
    
    
    36,535Computer
      hardware
    
    
    687,887
    
    
    494,280
    
    
    193,607
    
    
    509,224
    
    
    409,088
    
    
    100,136Leasehold
      improvements
    
    
    196,650
    
    
    83,073
    
    
    113,577
    
    
    67,946
    
    
    67,946
    
    
    -$
    1,687,450
    
    $
    1,178,611
    
    $
    508,839
    
    $
    1,096,162
    
    $
    909,600
    
    $
    186,562
 
 Amortization
of property, plant, and equipment for the year amounted to $182,399 ($120,924
for December 31, 2003 and $102,345 for December 31,2002).
 
 **8.**
    **GOODWILL**
 
 Goodwill
amounting to $237,596 arises from the acquisition of the business of the
Scarborough Pain Clinic **** in
November 2004. The net purchase price was set at $204,026 plus $39,938 being the
fair value of the 100,000 options granted to Dr Lorne Greenspan, the former
owner and operator of the clinic, using the Black Scholes option pricing model.
The fair value of the property, plant and equipment acquired was estimated to be
$6,368, and the balance of $237,596 has been recorded as goodwill. The net cash
outflow for goodwill is $197,658 ($237,596 less non cash expense of $39,938).
The Company has determined that there was no permanent decline in the value of
the goodwill as at the year end.
 
 **9.**
    **NOTES
      PAYABLE**
 
 The
promissory notes were issued on September 30, 2001, are due on September 30,
2006 and bear interest at 7%. MEII may pay the principal amount and accrued
interest at any time until maturity by way of cash or common stock or a
combination of cash and common stock at the discretion of the Company.
 
 There
has been a change in the accounting policy concerning the promissory notes.
Section 3860 of the CICA Handbook has been amended in January 2004 (effective
November 2004). The promissory notes were previously treated as equity, and
shown as Convertible debentures. However, with the amendment of section 3860,
they are now classified as liability. This change has been applied
retroactively, and hence comparative figures have been restated (note 25). This
treatment is in accordance with US GAAP, and hence the Canadian-US GAAP
accounting policy difference has been eliminated.
 
 
  
  
 **10.**
    **LONG-TERM
      DEBT**
 
 The
amount of $894,517 pertains to the long-term portion of the Goods and Services
Tax which is payable over a period of five years, as per an agreement between
the Company and the Canada Revenue Agency (“CRA”). An amount of $23,050 ($30,000
CDN) is payable monthly and is reviewable every six months. Accordingly, the
current portion of this debt has been classified under Accounts payable and
accrued liabilities. The CRA will register a Lien under the Personal Property
Security Act with the Province of Ontario to secure its position.
 
 **11.**
    **CAPITAL
      STOCK**
 
 *Authorized*Unlimited
      number of the following classes of shares and warrants:Preferred
      shares, voting, non-redeemable, non-retractable, having a cumulative
      dividend of US$0.27 per share payable by cash or shares at the option of
      the company; convertible to common shares;Class
      "A", redeemable, retractable, non-cumulative preferred
    shares;Class
      "B", redeemable, retractable, non-cumulative preferred
    shares;Special
      shares, issuable in series, with rights, privileges and restricitions to
      be fixed by the directors;Common
      sharesCommon
      shares purchase warrants, redeemable, entitling holder to purchase one
      share of common stock at a price of US$0.50 per share to February 11,
      2006.*Issued*
 
 2004
    
    2003Nil
      Preferred shares (2003-500,000 preferred shares)
    
    $
    -
    
    $
    445,71758,277,696
      Common shares ( 2003-9,564,332 shares)
    
    
    15,938,625
    
    
    10,992,90813,025,000
      Common stock purchase warrants (2003-1,437,500 warrants)
    
    
    106,111
    
    
    106,111$
    16,044,736
    
    $
    11,544,736Elimination
      of deficit (note 14)
    
    $
    (14,683,456
    )
    $
    -$
    1,361,280
    
    $
    11,544,736
 
 Preferred
      SharesNumber
    
    AmountBalance,
      December 31, 2003 and 2002
    
    
    500,000
    
    $
    445,717Conversion of
      500,000 preferred shares into common shares
    
    
    (500,000
    )
    $
    (445,717
    )Balance,
      December 31, 2004
    
    
    -
    
    $
    -
 
 Common
      SharesNumber
    
    AmountBalance,
      December 31, 2003 and 2002
    
    
    9,564,332
    
    $
    10,992,908Shares
      issued to new investors
    
    
    39,360,272
    
    
    4,500,000Conversion of
      500,000 preferred shares into common shares
    
    
    9,348,000
    
    
    445,717Others
    
    
    5,092
    
    
    -Balance,
      December 31, 2004
    
    
    58,277,696
    
    $
    15,938,625
 
 WarrantsNumber
    
    AmountBalance,
      December 31, 2003 and 2002
    
    
    1,437,500
    
    $
    106,11111,587,500
      unregistered warrants issued
    
    
    11,587,500
    
    $
    -Balance,
      December 31, 2004
    
    
    13,025,000
    
    $
    106,111
 
  
   (a)
    Share
      Capital
 
 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 which were in arrears, 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.
  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.
 
 (b)
    Stock Option
Plan
 
 The
Company maintains a stock option plan (the “Plan”) for the benefit of directors,
officers and employees. Pursuant to an amendment of the Plan, the maximum number
of options that may be granted shall not exceed 11,655,539. Options expire no
later than five years from date of grant. As at
December 31, 2004 total options outstanding of 5,075,000 are comprised of
1,825,000 granted under the Plan and 3,250,000 granted outside the Plan. The
following options were granted in 2004, 2003 and 2002:
 
 Date
    Quantity
    Option
      Price
    Expiry
    Fair
      Value
    Risk
      free
      rate
    Expected
      life
    Expected
      volatility
    Expected
      dividends
    NotesJun
      02
    100,000
    $1.00
    Jun
      07
    62,287
    2.49%
    5
      yrs
    91%
    NIL
    (1)May
      03
    785,000
    $0.50
    May
      08
    370,662
    2.68%
    5
      yrs
    98%
    NIL
    (2)Jan
      04
    100,000
    $0.50
    Jan
      09
    40,876
    1.43%
    5
      yrs
    102%
    NIL
    (2)Jun
      04
    2,550,000
    $0.115
    Jun
      09
    57,746
    1.43%
    5
      yrs
    94%
    NIL
    (2)Nov
      04
    100,000
    $1.00
    Nov
      09
    39,938
    2.43%
    5
      yrs
    123%
    NIL
    (1)
 
 Note
      (1):
    These
      options were granted where exercise price exceeds market price on grant
      date.Note
      (2):
    These
      options were granted where exercise price equals market price on grant
      date.
 
 The
100,000 options issued in January 2004 vested immediately. 250,000 of the
options issued in June 2004 vest 125,000 per year for two years. The remaining
2,300,000 options issued in June 2004 do not vest until earnings criteria are
met. Since these criteria are not met, they do not vest and hence no stock
compensation expense is booked. The 100,000 options issued in November 2004
become exercisable May 15, 2006.
 
  
  
 The
following summarizes options outstanding as at December 31:
 
 Option
    
    **Number
      of Shares**priceExpiry
      date
    
    per
      share
    
    2004
    
    2003
    
    2002Jan-04
    
    $
    1.870
    
    
    -
    
    
    -
    
    
    230,000Jul-04
    
    $
    1.500
    
    
    -
    
    
    -
    
    
    400,000Apr-06
    
    $
    0.500
    
    
    1,440,000
    
    
    1,440,000
    
    
    1,540,000Jun-07
    
    $
    1.000
    
    
    100,000
    
    
    100,000
    
    
    100,000May-08
    
    $
    0.500
    
    
    785,000
    
    
    785,000
    
    
    -Jan-09
    
    $
    0.500
    
    
    100,000
    
    
    -
    
    
    -Jun-09
    
    $
    0.115
    
    
    2,550,000
    
    
    -
    
    
    -Nov-09
    
    $
    1.000
    
    
    100,000
    
    
    -
    
    
    -5,075,000
    
    
    2,325,000
    
    
    2,270,000Weighted
      average exercise price at end of year
    
    
    
    
    $
    0.33
    
    $
    0.52
    
    $
    0.84
 
 **Number
      of Shares****YEAR
      OF ISSUANCE**2004
    
    2003
    
    2002Outstanding,
      beginning of year
    
    
    2,325,000
    
    
    2,270,000
    
    
    2,441,300Granted
    
    
    2,750,000
    
    
    785,000
    
    
    100,000Expired
    
    
    -
    
    
    -
    
    
    -Exercised
    
    
    -
    
    
    -
    
    
    -Forfeited
    
    
    -
    
    
    -
    
    
    -Cancelled
    
    
    -
    
    
    (730,000
    )
    
    (271,300
    )Outstanding,
      end of year
    
    
    5,075,000
    
    
    2,325,000
    
    
    2,270,000Exercisable,
      end of year
    
    
    2,487,500
    
    
    2,325,000
    
    
    2,270,000
 
 The
Company expensed the fair value of the stock options granted during the
year.
 
 (c
) Common
stock purchase warrants
 
 During
the first quarter of 2003, the terms of the warrants were amended entitling each
warrant holder to purchase one share of common stock at a price of $0.50
(previously $4.50). The expiry of these warrants was extended from February 11,
2003 to February 11, 2005. The fair value determined by Black Scholes was
$790,600, and the fair value assumptions were a risk-free rate of 2.49%,
expected life of 2 yrs, expected volatility of 125% and expected dividends of
NIL.
 
 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. The terms of the warrants were amended such that if the
common stock of MEII, closes at $0.70 or greater for thirty consecutives trading
days, MEII has the right to redeem the Warrants at $0.01 per Warrant upon ten
days prior notice.
 
  
  
 **12.**
    **CONTRIBUTED
      SURPLUS**
 
 2004
    
    2003Stock
      compensation expense
    
    $
    2,408,404
    
    $
    2,309,782Fair
      value of options in connection with acquisition of Scarborough pain clinic
    
    
    39,938
    
    
    -Share
      repurchase - difference between cost per share and assigned
      value
    
    
    46,292
    
    
    46,292Fair
      value of warrants and stock options issued in connection with the
      acquisition of YFMC Healthcare Inc.
    
    
    41,775
    
    
    41,7752,536,409
    
    
    2,397,849Elimination
      of Sept 2004 deficit (note 14)
    
    
    (2,469,329
    )
    
    -$
    67,080
    
    $
    2,397,849
 
 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 (note 11b). 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 would vest every year.
Options for 125,000 shares shall be 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 (note 11b). 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 (note 11b).
 
 During
the first quarter of 2003, the terms of warrants were amended entitling each
warrant holder to purchase one share of common stock at a price of $0.50
(previously $4.50). Due to this amendment, the fair value amounting to $790,600
had been determined, and was credited to contributed surplus (note
11c).
 
 **13.**
    **FUTURE
      INCOME TAXES**
 
 At
December 31, 2004, the Company has losses available to reduce future federal and
provincial taxable income of approximately $ 8.5 million. These losses expire
between tax years 2005 and 2010. The future tax benefits available as a result
of these losses have been fully provided for in the consolidated financial
statements.
 
 **14.**
    **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
      Surplus($)
    
    ($)Balance
      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
    
    
    67,080
 
 * In
December 2004 the Company changed its accounting policy regarding its promissory
notes, as required by section 3860 of the CICA Handbook (note 25). 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.
 
 **15.**
    **BASIC
      LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS**
 
 Basic
loss per share attributable to common shareholders is calculated using the
weighted average number of common shares outstanding during the year. Diluted
earnings per common share is calculated using the treasury stock method in
accordance with the recommendations of Handbook section 3500. Had share options
and common share purchase warrants been exercised, and the preferred shares and
convertible debentures been converted, the effect on the basic loss per share
would be anti-dilutive.
  2004
    
    2003
    
    2002Basic
      loss per common share:Continuing
      operations
    
    $
    (0.02
    )
    $
    (0.16
    )
    $
    (0.08
    )Discontinued
      operations
    
    $
    (0.00
    )
    $
    (0.02
    )
    $
    (0.00
    )
 **16.**
    **NOTES
      TO THE STATEMENT OF CASH FLOWS**(i)
    Changes
      in non-cash working capital
components
  2004
    
    2003
    
    2002Accounts
      receivable
    
    $
    (694,858
    )
    $
    (1,693,984
    )
    
    (120,870
    )Prepaid
      expenses and other
    
    
    6,231
    
    
    (12,963
    )
    
    (1,350
    )Accounts
      payable and accrued liabilities
    
    
    (121,374
    )
    
    2,776,989
    
    
    1,263,249$
    (810,001
    )
    $
    1,070,042
    
    
    1,141,029
 
  
  
 (ii)
    Property,
      plant, and equipment
 
 Property,
plant, and equipment purchased during the year amounts to $504,676 ($136,559 for
December 31, 2003, and $65,866 for December 31, 2002) through cash
payments.
 
 (iii)
    Interest
      and income taxes paid
 
 Operating
expenses reflect interest paid of $ 60,429 during the year ended December 31,
2004 ($685,469 for December 31, 2003 and $993,508 for December 31, 2002); and
income taxes paid of $23,172 during the year ended December 31, 2004 ($nil for
December 31, 2003 and $nil for December 31, 2002).
 
 (iv)
    Non
      cash transaction
 
 As part
of the sale of clinics to AIM, the company received partial payment by way of
Class A preferred shares in AIM.
 
 **17.**
    **COMMITMENTS**
 
 The
Company is committed to payments under operating leases of its premises and
equipment totaling $1,295,430. Annual payments under the operating leases are as
follows:
  2005
    
    $
    288,3092006
    
    
    293,2762007
    
    
    293,6792008
    
    
    135,3422009
    
    
    113,3522010
      and thereafter
    
    
    171,472$
    1,295,430
 
 **18.**
    **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. The
      measurement of this uncertainty is not determinable and accordingly no
      provision has been made in respect thereof in these consolidated financial
      statements.(iii)
    There
      is uncertainty 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.(iv)
    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.
 
 **19.**
    **FAIR
      VALUE OF FINANCIAL INSTRUMENTS**
 
 The
carrying value of accounts receivable, accounts payable and accrued liabilities
approximate their fair value due to the short-term maturity of these
items.
 
 **20.**
    **SUBSEQUENT
      EVENTS**
 
 On
January 25, 2005, MEII filed a statement of claim against Calian Limited
(Calian) and a former employee of MEII, seeking Cdn$100,000,000 in damages, in
regards to the recent contract award by Public Works and Government Services
Canada (“PWGSC”) to provide services to the Canadian Forces, Department of
National Defence. This contract would have been an extension of a current
contract which expires March 31, 2005. MEII has been advised that Calian intends
to defend the claim.
  On
February 8, 2005, the Canadian International Trade Tribunal (CITT) announced
that it would conduct an inquiry into the award by PWGSC, of a medical staffing
contract, to Calian. MEII filed a complaint with the CITT on January 31, 2005
alleging that PWGSC:
  •
    Awarded
      the contract to a bidder that did not meet the mandatory requirements of
      the bid;•
    Introduced
      unpublished evaluation criteria to the evaluation process;
    and•
    Failed
      to properly apply the published evaluation
criteria.
 
 If the
CITT determines that the complaint by MEII is valid, it could recommend that the
contract award to Calian be terminated and a contract awarded to MEII, that the
proposals be re-evaluated or that a new solicitation should take place. In the
alternative, MEII is seeking compensation for lost profit as a result of the
improper contract award.
 
 During
the first quarter of 2005 the terms of the 1,437,500 common stock purchase
warrants issued in February 1998 were amended, extending the expiry of these
warrants from February 11, 2005 to February 11, 2006. MEII has also amended the
terms of the warrants to provide that if the common stock of MEII, closes at
$.70 or greater for thirty consecutive trading days, MEII has the right to
redeem the Warrants at $.01 per Warrant upon ten days prior notice.
 
 **21.**
    **CANADIAN
      AND UNITED STATES ACCOUNTING POLICY
DIFFERENCES**
 
 These
revised 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
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 consolidated financial
statements. Under U.S. GAAP, based on an ascribed fair value of $ 0.364 for each
of the 1,000,000 share purchase warrants issued, share capital would be lower by
$ 36,406 and, given that the share 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:
  2004
    
    2003Capital
      stock (as previously shown)
    
    $
    1,361,280
    
    $
    11,544,736Capital
      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
    
    
    12,596,202Contributed
      surplus (as previously shown)
    
    
    67,080
    
    
    2,397,849Share
      purchase warrants
    
    
    36,406
    
    
    36,406Paid-in-capital
      - U.S. GAAP
    
    
    103,486
    
    
    2,434,255Deficit
      (as previously shown)
    
    
    (68,320
    )
    
    (16,425,309
    )Cumulative
      translation adjustment
    
    
    (800,791
    )
    
    (965,418
    )Shareholders’
      equity (deficit) - U.S. GAAP
    
    $
    1,647,121
    
    $
    (2,360,270
    )
 (b)
    Comprehensive
      loss
 
 Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”
(SFAS 130), establishes
standards for reporting and display of comprehensive income and its components
in the consolidated financial statements. Under U.S. GAAP, the comprehensive
loss for the fiscal year ended December 31, 2004,2003 and 2002 would be adjusted
as follows:
 
 2004
    
    2003
    
    2002Net
      loss
    
    $
    (1,341,205
    )
    $
    (1,574,650
    )
    $
    (603,664
    )Foreign
      currency translation adjustment
    
    
    164,627
    
    
    (408,641
    )
    
    (15,550
    )Comprehensive
      loss
    
    $
    (1,176,578
    )
    $
    (1,983,291
    )
    $
    (619,214
    )
 
 The
foreign currency translation adjustments are not currently adjusted for income
taxes. The company is situated in Canada, and the foreign currency translation
adjustments relate to the translation of the consolidated financial statements
from Canadian dollars into United States dollars, solely for the convenience of
the readers.
  (c)
    Recently issued accounting
      standards
 
 The
following standards were issued by the Financial Accounting Standards Board
during 2004 and 2003:
  SFAS
      No. 149 - Amendment of statement 133 on derivative instruments and hedging
      activities. This statement amends and clarifies financial accounting and
      reporting for derivative instruments embedded in other contracts
      (collectively referred to as derivatives) and for hedging activities under
      FASB 133 accounting for derivative instruments and hedging activities.SFAS
      No. 150- Accounting for certain financial instruments with characteristics
      of both liabilities and equity. This statement establishes standards for
      how an issuer classifies and measures certain financial instruments with
      characteristics of both liabilities and equity.
 
  
  
 SFAS
      No. 151-Inventory Costs - an amendment of ARB No. 43, Chapter 4 (Issued
      11/04). This Statement amends the guidance in ARB No. 43, Chapter 4,
      "Inventory Pricing," to clarify the accounting for abnormal amounts of
      idle facility expense, freight, handling costs, and wasted material
      (spoilage).SFAS
      No. 152-Accounting for Real Estate Time-Sharing Transactions - an
      amendment of FASB Statements No. 66 and 67. This Statement amends FASB
      Statement No. 66, Accounting for Sales of Real Estate, to reference the
      financial accounting and reporting guidance for real estate time-sharing
      transactions that is provided in AICPA Statement of
    Position.SFAS
      No. 153-Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
      29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
      Transactions, is based on the principle that exchanges of nonmonetary
      assets should be measured based on the fair value of the assets
      exchanged.SFAS
      No. 123 (revised 2004)-Share-Based Payment. This Statement is a revision
      of FASB Statement No. 123, Accounting for Stock-Based Compensation. This
      Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to
      Employees, and its related implementation guidance.SFAS
      No. 132 (revised 2003)- Employers’ Disclosures about Pensions and Other
      Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and
      106 (Issued 12/03). This Statement revises employers’ disclosures about
      pension plans and other postretirement benefit plans. It does not change
      the measurement or recognition of those plans required by FASB Statements
      No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting
      for Settlements and Curtailments of Defined Benefit Pension Plans and for
      Termination Benefits, and No. 106, Employers’ Accounting for
      Postretirement Benefits Other Than Pensions.
 
 The
Company believes that the above standards would not have a material impact on
its financial position, results of operations or cash flows as it relates to the
reconciliation of Canadian and United States accounting policy differences.
 
 **22.**
    **ECONOMIC
      DEPENDENCE**
 
 Approximately
80% of revenue and 53% of gross margin is derived from one customer (74% of
revenue and 46% of gross margin in 2003; 84% of revenue and 62% of gross margin
in 2002). Receivables for this customer amounted to 64% of total receivables
(41% of total receivables in 2003). The loss of a material amount of revenue to
this customer could have a material adverse effect on operations of the
Company.
 
 In
December 2004, the Company learned that we were not successful in our bid to win
a follow-on contract with DND. March 31, 2005, will mark the end of the contract
for the Company. In January 2005, the Company launched a Cdn.$100,000,000
lawsuit against the winning bidder and a former employee of the Company. MEII
believes substantial evidence demonstrates that the successful bidder used
confidential information obtained through the hiring of a former company
employee to win the contract, and that the former MEII employee retained by the
successful bidder breached his legal obligations by disclosing financial and
other information confidential to the company. Further, in February 2005, the
Company filed a complaint under subsection 30.11(1) of the Canadian
International Trade Tribunal Act (CITT). In the filing, MEII seeks to terminate
the contract award to the winning bidder, have MEII awarded the contract, or in
the alternative, to have a new bid process conducted. As an alternative to the
above relief, we have proposed that we be compensated for lost profit on the
contract and the costs associated with the filing of the complaint. The CITT
responded by issuing a Notice of Inquiry, on February 8, 2005. The CITT has
until June 15, 2005 to make its ruling on the complaint.
  **23.**
    **SEGMENTED
      INFORMATION**
 
 The
Company operated under four business units during 2004 as follows: Staffing
Solutions, Medical Services, Government Healthcare Services, and Healthcare
Consulting Services.
 
  
  The
Staffing Solutions unit contracts with hospitals for the provision of physician
staffing, nurse staffing and administrative support services. The Company also
contracts with clinical facilities and local communities for the locum or
permanent placement of a physician in a community.
 
 The
Medical Services unit provides infusion services to patients suffering from
chrohn’s disease and rheumatoid arthritis and pain management
services.
 
 The
Government Healthcare Services unit recruits, schedules and manages physicians,
nurses, dentists, physiotherapists and other regulated healthcare professionals
at all Canadian Forces bases.
 
 The
Healthcare Consulting unit provides select Canadian public and private
institutions, consulting services on a variety of healthcare
topics.
 
 The
segmented information for the business units are as follows:
 
 2004GovernmentStaffing
    
    Medical
    
    HealthcareSolutions
    
    Services
    
    Services
    
    Consulting
    
    ConsolidatedRevenue
    
    $
    7,485,801
    
    $
    1,227,533
    
    $
    38,944,441
    
    $
    789,912
    
    $
    48,447,687Gross
      margin
    
    $
    1,352,167
    
    $
    544,454
    
    $
    2,522,209
    
    $
    335,477
    
    $
    4,754,307Net
      income (loss) before discontinued operations
    
    $
    188,648
    
    $
    99,290
    
    $
    (1,623,127
    )
    $
    (6,016
    )
    $
    (1,341,205
    )Property,
      plant and equipment employed at end ofyear
    
    $
    149,500
    
    $
    170,529
    
    $
    39,310
    
    $
    149,500
    
    $
    508,839Amortization
    
    $
    134,005
    
    $
    234
    
    $
    48,160
    
    $
    Nil
    
    $
    182,399
 
 2003GovernmentStaffing
    
    Medical
    
    HealthcareSolutions
    
    Services
    
    Services
    
    Consulting
    
    ConsolidatedRevenue
    
    $
    13,018,943
    
    $
    883,287
    
    $
    40,278,718
    
    $
    154,610
    
    $
    54,335,558Gross
      margin
    
    $
    2,169,176
    
    $
    422,878
    
    $
    2,371,478
    
    $
    154,610
    
    $
    5,118,142Net
      income (loss) before discontinued operations
    
    $
    (75,613
    )
    $
    (242,962
    )
    $
    (1,220,830
    )
    $
    131,924
    
    $
    (1,407,481
    )Property,
      plant and equipment employed at end of year
    
    $
    52,681
    
    $
    17,560
    
    $
    116,321
    
    $
    Nil
    
    $
    186,562Amortization
    
    $
    23,783
    
    $
    7,928
    
    $
    89,213
    
    $
    Nil
    
    $
    120,924
  2002GovernmentStaffing
    
    Medical
    
    HealthcareSolutions
    
    Services
    
    Services
    
    Consulting
    
    ConsolidatedRevenue
    
    $
    5,699,613
    
    $
    392,587
    
    $
    31,335,843
    
    $
    NIL
    
    $
    37,428,043Gross
      margin
    
    $
    1,023,718
    
    $
    139,344
    
    $
    1,882,229
    
    $
    NIL
    
    $
    3,045,291Net
      income (loss) before discontinued operations
    
    $
    (312,402
    )
    $
    (119,186
    )
    $
    (155,120
    )
    $
    NIL
    
    $
    (586,708
    )Property,
      plant and equipment employed at end of year
    
    $
    55,568
    
    $
    18,523
    
    $
    96,836
    
    $
    NIL
    
    $
    170,927Amortization
    
    $
    23,590
    
    $
    7,863
    
    $
    70,892
    
    $
    NIL
    
    $
    102,345
 
  
  
 **24.**
    **RELATED
      PARTY TRANSACTIONS**
 
 Consulting
fees of approximately $ 31,374 (Cdn $ 40,833) were paid to each of two
directors, who have been retained as consultants ($43,000 in 2003 and $65,000 in
2002).
 
 Closing
costs including legal, travel and due diligence costs amounting to $609,214 have
been paid to a related party (note 11a).
 
 Unpaid
preferred share dividends amounting to $579,582 have been forgiven by a related
party (note 11a).
 
 **25.**
    **COMPARATIVE
      FIGURES**
 
 Certain
figures in the 2003 and 2002 consolidated financial statements have been
reclassified to conform with the basis of presentation in 2004.
 
 (a)
    There
      has been a change in the accounting policy concerning the promissory
      notes. Section 3860 of the CICA Handbook has been amended in January 2004
      (effective November 2004). The promissory notes payable were previously
      treated as equity, and shown as Convertible debentures. However, with the
      amendment of section 3860, they are now classified as a liability. This
      change has been applied retroactively, and hence comparative figures have
      been restated (note 9).(b)
    There
      has been an error in the foreign exchange amount conversion of Notes
      Payable (Convertible debentures). This error has been rectified during the
      current year, and as a result interest and financing expenses and notes
      payable amounts have been restated.(c)
    There
      has been a change in the presentation of preferred share dividends payable
      which has been segregated from Accounts payable and accrued
      liabilities.
 
 The
effect of these restatements is as follows:
 
 As
      restated
    
    As
      previously reportedIn
      2003
    
    in
      2003Accounts
      payable and accrued liabilities
    
    $
    6,284,161
    
    $
    6,717,406Notes
      payable
    
    $
    599,991
    
    
    -Convertible
      debentures
    
    
    -
    
    $
    414,434Deficit
    
    $
    16,425,309
    
    $
    16,265,370Cumulative
      translation adjustment
    
    $
    965,418
    
    $
    825,533Working
      Capital Deficit
    
    $
    3,169,692
    
    $
    3,055,425Interest
      and financing expenses
    
    $
    569,325
    
    $
    685,471Loss
      before income taxes
    
    $
    1,412,034
    
    $
    1,528,180Net
      loss attributable to common shareholders
    
    $
    1,709,656
    
    $
    1,825,802Convertible
      debenture charges
    
    
    -
    
    $
    105,996Basic
      loss per share continuing operations
    
    $
    0.16
    
    $
    0.17