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U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-30326
 TRI-ISTHMUS GROUP, INC.
  DELAWARE
    
    77-0557617(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)149 South Barrington Avenue, Suite 808Los Angeles, California
    
    90049(Address of principal executive offices)
    
    (Zip Code)
 (818) 887- 6659
 
 
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
  Number of shares of common stock outstanding as of May 11, 2007
    
    
    3,777,623Number of shares of Series 1-A Convertible Preferred Stock outstanding as of May 11, 2007
    
    
    67,600Number of shares of Series 2-A Convertible Preferred Stock outstanding as of May 11, 2007
    
    
    3,900Number of shares of Series 4-A Convertible Preferred Stock outstanding as of May 11, 2007
    
    
    0Number of shares of Series 5-A Convertible Preferred Stock outstanding as of May 11, 2007
    
    
    2,767




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TABLE OF CONTENTS
 Page
 PART IItem 1.
    
    BUSINESS
    
    
    1Item 1A.
    
    RISK FACTORS
    
    
    6Item 1B.
    
    UNRESOLVED STAFF COMMENTS
    
    
    9Item 2.
    
    PROPERTIES
    
    
    10Item 3.
    
    LEGAL PROCEEDINGS
    
    
    10Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    10PART IIItem 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    11Item 6.
    
    SELECTED CONSOLIDATED FINANCIAL DATA
    
    
    14Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15Item 8.
    
    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    21Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    46Item 9A.
    
    CONTROLS AND PROCEDURES
    
    
    46Item 9B.
    
    OTHER INFORMATION
    
    
    46PART IIIItem 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    47Item 11.
    
    EXECUTIVE COMPENSATION
    
    
    49Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    58Item 13.
    
 CERTAIN RELATIONSHIP
AND RELATED TRANSACTIONS

    
    
    64Item 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    64PART IVItem 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    66SIGNATURES
    
    
    68EXHIBIT INDEXSubsidiaries of the RegistrantCertification Pursuant to Rule 13a-14(d)Certification Pursuant to Rule 13a-14(d)Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350




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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
   
 PART I
 
 Item 1. BUSINESS
 www.tig3.com
      1




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CURRENT OPERATIONS
     Strategy
   2




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FUTURE FUNDING
     INTELLECTUAL PROPERTY
  www.vsource.com
  EMPLOYEES
  GOVERNMENT REGULATIONS
  CONs and State Licensing
  3




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Corporate Practice of Medicine
  Certification
  Medicare-Medicaid Fraud and Abuse Provisions
    4




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Prohibition on Physician Ownership of Healthcare Facilities and Certain Self-Referrals
   The Federal False Claims Act and Similar Federal and State Laws
   Healthcare Industry Investigations
   5




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Privacy Requirements and Administrative Simplification
  COMPETITORS
  
 Item 1A. RISK FACTORS
 ANY INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OR RISK. YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT.
 If we are unable to acquire and develop additional ASCs on favorable terms, we may be unable to
execute our acquisition and development strategy, which could limit our future growth.
  We have incurred significant losses and anticipate losses in the future, and as a result, there is
substantial doubt about our ability to continue as a going concern.
  6




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If we incur material liabilities as a result of acquiring companies or ambulatory surgical centers,
our operating results could be adversely affected.
  If we are unable to manage growth, we may be unable to achieve our growth strategy.
  If we are unable to grow revenues at our existing surgical facilities, our operating margins and
profitability could be adversely affected.
  We are dependent for our success on a few key executive officers. Were we to lose one or more of
these key executive officers, we would be forced to expend significant time and money in the
pursuit of a replacement, which would result in both a delay in the implementation of our business
plan and the diversion of working capital.
  We depend on our relationships with the physicians who use our facilities. Our ability to provide
medical services at our facilities would be impaired and our revenues reduced if we are not able to
maintain these relationships.
  We depend on payments from third party payors, including government healthcare programs. If these
payments are reduced, our revenue will decrease.
 7




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If we fail to comply with other applicable laws and regulations, we could suffer penalties or be
required to make significant changes to our operations.
  o
    
    physician ownership of our domestic facilities;o
    
    the adequacy of medical care, equipment, personnel, operating policies and
procedures;o
    
    building codes;o
    
    licensure, certification and accreditation;o
    
    billing for services;o
    
    maintenance and protection of records; ando
    
    environmental protection.
   Appropriate acquisitions or investment opportunities may not be available.
   We continue to have significant corporate and SEC-related expenses and limited revenue to offset
these expenses.
   8




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We have broad discretion in using our cash resources and may not use them in a manner that our
stockholders would prefer.
  We may finance acquisitions by issuing additional capital stock or incurring substantial debt, both
of which could have negative consequences.
  Need for ongoing financing.
  Substantial costs of any securities litigation could divert our limited resources.
  The market for our common stock may be illiquid.
  Our stock is not listed on a major stock market
  
 Item 1B. UNRESOLVED STAFF COMMENTS
 9




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Item 2. PROPERTIES
  
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Name of Class or Series
    
    Number of Shares
    
    Number of VotesCommon Stock
    
    
    3,673,992
    
    
    
    3,673,992Series 1-A Preferred Stock
    
    
    67,600
    
    
    
    75,712Series 2-A Preferred Stock
    
    
    3,900
    
    
    
    5,538Series 5-A Preferred Stock
    
    
    1,842
    
    
    
    5,894,400Total
    
    
    
    
    
    
    9,649,642
    Name
    
    Number of VotesDavid Hirschhorn
    
    
    6,918,143Todd Parker
    
    
    6,918,143Robert N. Schwartz
    
    
    6,918,143Richardson E. Sells
    
    
    6,918,143Dennis M. Smith
    
    
    6,918,143
  10




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PART II
 
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES
OF EQUITY SECURITIES
 PERFORMANCE GRAPH
  
 ASSUMES
$100 INVESTED ON JAN. 31, 2002
 FISCAL YEAR ENDING
    
    1/31/2002
    
    
    1/31/2003
    
    
    1/31/2004
    
    
    1/31/2005
    
    
    1/31/2006
    
    
    1/31/2007COMPANY/INDEX/MARKETTri-Isthmus Group, Inc.
    
    $
    100.00
    
    
    $
    53.33
    
    
    $
    18.67
    
    
    $
    5.00
    
    
    $
    30.00
    
    
    $
    11.67Customer Selected Stock List
    
    $
    100.00
    
    
    $
    102.48
    
    
    $
    189.55
    
    
    $
    197.36
    
    
    $
    231.72
    
    
    $
    197.78NASDAQ Market Index
    
    $
    100.00
    
    
    $
    69.03
    
    
    $
    108.34
    
    
    $
    107.90
    
    
    $
    121.32
    
    
    $
    130.15
 
 (1)
    
    Our peer group is made up of the following companies: Amsurg Corp.  Symbion Inc.  United Surgical Partners International Inc.
 In future reports we may no longer deem United Surgical Partners as a member of our peer group
because of recent changes to its ownership.
 MARKET
INFORMATION
  Fiscal Year Ended January 31, 2007
    
    High
    
    LowFirst Quarter
    
    $
    0.94
    
    
    $
    0.56Second Quarter
    
    
    0.90
    
    
    
    0.44Third Quarter
    
    
    0.58
    
    
    
    0.29Fourth Quarter
    
    
    0.80
    
    
    
    0.31
 Fiscal Year Ended January 31, 2006
    
    High
    
    LowFirst Quarter
    
    $
    0.20
    
    
    $
    0.12Second Quarter
    
    
    0.38
    
    
    
    0.10Third Quarter
    
    
    0.80
    
    
    
    0.32Fourth Quarter
    
    
    1.05
    
    
    
    0.30
 Fiscal Year Ended January 31, 2005
    
    High
    
    LowFirst Quarter
    
    $
    0.65
    
    
    $
    0.35Second Quarter
    
    
    0.51
    
    
    
    0.25Third Quarter
    
    
    0.32
    
    
    
    0.18Fourth Quarter
    
    
    0.20
    
    
    
    0.15
 SHAREHOLDERS
  DIVIDENDS
  11




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EQUITY COMPENSATION PLAN INFORMATION
 Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    
    future issuance underto be issued upon
    
    
    Weighted-average
    
    
    equity compensationexercise of
    
    
    exercise price of
    
    
    plans (excludingoutstanding options,
    
    
    outstanding options,
    
    
    securities reflected inwarrants and rights at
    
    
    warrants and rights
    
    
    column (a)) atPlan category
    
    January 31, 2007
    
    
    at January 31, 2007
    
    

January 31, 2007(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security
holders(1)
    
    
    131,346
    
    
    $
    0.99
    
    
    
    1,798,589Equity compensation
plans not approved
by security
holders(2)(3)(4)(5)
    
    
    1,298,421
    
    
    $
    1.4512,579Total
    
    
    1,429,767
    
    
    $
    1.39
    
    
    
    1,811,168
 
 (1)
    
    Consists of two plans: (a) our 2001 Stock Options/Stock Issuance Plan and (b) our
Employee Stock Purchase Plan. Both plans were approved by stockholders at our 2001 Annual
Meeting. The maximum number of shares of common stock that may be issued under the 2001
Stock Options/Stock Issuance Plan cannot exceed 20% of the total shares of common stock
outstanding at the time the calculation is made (including, on an as-converted basis, all
convertible preferred stock, convertible debt securities, warrants, options and other
convertible securities that are exercisable) but in no event will the maximum number of
shares of common stock which may be issued under this plan as incentive stock options
exceed 20,000,000. As of January 31, 2007, based on the 20% calculation, the maximum
number of shares issuable under the 2001 Plan was 1,929,935. The maximum number of shares
of common stock that may be purchased under our Employee Stock Purchase Plan is 350,000. In
Fiscal 2007, the Employee Stock Purchase Plan was not offered and consequently there were
no shares issued under this plan. Since its inception, a total of 22,940 shares of common
stock have been purchased pursuant to the Employee Stock Purchase Plan.(2)
    
    In July 2000, our Board of Directors approved a stock option plan (the 2000 Plan).
This plan has not been approved by our stockholders. The 2000 Plan authorizes the grant of
incentive stock options and non-statutory stock options covering an aggregate of 39,750
shares of common stock, as adjusted for our November 2002 reverse stock split (subject to
limitations of applicable laws, and adjustment in the event of stock dividends, stock
splits, reverse stock splits and certain other corporate events). The 2000 Plan expires on
July 6, 2010, unless it is terminated earlier or suspended by the Board. The 2000 Plan is
not subject to any provisions of the Employee Retirement Income Security Act of 1974. As of
January 31, 2007, options to purchase an aggregate of 27,171 shares of common stock are
classified as outstanding under the 2000 Plan, with a weighted average exercise price of
$15.25. We do not intend to issue any further options under the 2000 Plan or warrants to
purchase stock to additional individuals or vendors as compensation for services rendered.(3)
    
    During the third quarter of Fiscal 2006, our Board of Directors approved the issuance
to members of our Advisory Board, as compensation for participation on our Advisory Board,
of warrants to purchase an aggregate of 727,500 shares of our common stock at an exercise
price of $0.35 per share. These warrants become one-third vested upon issuance and vest an
additional third after each calendar year. These warrants will become fully vested after
two years. On December 12, 2006, our Board of Directors approved the issuance of warrants
to purchase 50,000 shares of our common stock at an exercise price of $0.45 per share to
Steven Spector, our newest Advisory Board member. 12




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(4)
    
    On November 17, 2005, our Board of Directors approved the grants to two independent
directors of options to acquire an aggregate of 360,000 shares of our common stock at an
exercise price of $0.40 per share. These options vest in quarterly increments over three
years, beginning on the effective issuance date of August 1, 2005. On December 12, 2006,
our Board of Directors approved the grant of options to Dennis Smith to acquire an
aggregate of 120,000 shares of our common stock at an exercise price of $0.42 per share.
Mr. Smith will receive 10,000 options per quarter beginning in December 2006. These
options vest in quarterly increments over three years, beginning on the effective issuance
date of December 12, 2006. As of January 31, 2007, Mr. Smith has been awarded 10,000 of
these options.(5)
    
    On December 12, 2006, our Board of Directors approved the issuance of warrants to
purchase an aggregate of 60,000 shares of our common stock at an exercise price of $0.45
per share for services provided.    13




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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
 AS NOTED ABOVE, IN FISCAL 2005 WE CONCLUDED THE EXCHANGE OFFER AND RELATED TRANSACTIONS
RESULTING IN THE CESSATION OF OUR OWNERSHIP IN VSOURCE ASIA, WHICH REPRESENTED 96% AND 100% OF OUR
REVENUES IN FISCAL 2005 AND FISCAL 2004 RESPECTIVELY. THE DISCUSSION BELOW PRESENTS OUR RESULTS,
EXCLUDING REVENUES AND EXPENSES FROM DISCONTINUED OPERATIONS.
 January 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(in thousands, except per share amounts)Revenue
    
    $
    702
    
    
    $
    
    
    
    $
    254
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    2,253
    
    
    
    2,175
    
    
    
    2,503
    
    
    
    5,394
    
    
    
    4,522Net income/(loss)
    
    
    (1,748
    )
    
    
    (2,170
    )
    
    
    (2,252
    )
    
    
    (5,362
    )
    
    
    (13,599
    )Minority interest
    
    
    168Net profit/(loss) per share
available to common
shareholders
    
    
    (1,580
    )- Basic
    
    $
    (0.43
    )
    
    $
    (0.91
    )
    
    $
    9.77
    
    
    $
    (9.01
    )
    
    $
    (4.08
    )- Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    $
    9.53
    
    
    
    N/A
    
    
    
    N/ACash and cash equivalents
    
    
    286
    
    
    
    1,289
    
    
    
    1,064
    
    
    
    1,452
    
    
    
    11,152Accounts receivables
    
    
    1,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property and Equipment, net
    
    
    1,115
    
    
    
    1
    
    
    
    40
    
    
    
    4,418
    
    
    
    4,974Goodwill
    
    
    987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    4,542
    
    
    
    1,579
    
    
    
    2,714
    
    
    
    10,834
    
    
    
    20,137Current liabilities
    
    
    (839
    )
    
    
    (552
    )
    
    
    779
    
    
    
    8,550
    
    
    
    5,696Long term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900Minority interest
    
    
    (1,285
    )Non-redeemable preferred stock
    
    
    (191
    )
    
    
    (191
    )
    
    
    191
    
    
    
    4,354
    
    
    
    5,368Redeemable preferred stock
    
    
    (3,859
    )
    
    
    (1,307
    )
    
    
    
    
    
    
    14,521
    
    
    
    2,728Shareholders equity/ (deficit)
    
    
    (1,603
    )
    
    
    (280
    )
    
    
    1,744
    
    
    
    (16,591
    )
    
    
    5,445
  14




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Item 7. MANAGEMENTS DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS
  FORWARD LOOKING STATEMENTS
   OVERVIEW
   FUNDING
   CRITICAL ACCOUNTING POLICIES
  Fiscal Year
  Principles of Consolidation and Basis of Presentation
  Use of Estimates
  15




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Property and Equipment
  Computer hardware
    
    2 to 5 yearsComputer software
    
    5 yearsOffice equipment, furniture and fixtures
    
    5 yearsMotor vehicle
    
    3 years
  Revenue Recognition
  Income Taxes
  Stock-Based Compensation
   Earnings Per Share
  Recent Accounting Pronouncements
 Income Taxes
  Fair Value Measurements
  16




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RESULTS OF OPERATIONS (All amounts in thousands)
 Year Ended January 31,2007
    
    
    2006
    
    
    2005Revenue from services
    
    $
    702
    
    
    $
    
    
    
    $
    254Cost of revenue from services
    
    
    
    
    
    
    
    
    
    
    161Selling, general and administrative expenses
    
    
    2,255
    
    
    
    2,028
    
    
    
    2,342Expenses related to terminated merger with
TEAM America
    
    
    
    
    
    
    
    
    
    
    Amortization of stock-based compensation
    
    
    198
    
    
    
    147
    
    
    
    Total costs and expenses
    
    
    2,453
    
    
    
    2,175
    
    
    
    2,503Operating loss
    
    
    (1,751
    )
    
    
    (2,175
    )
    
    
    (2,249
    )Interest income
    
    
    3
    
    
    
    5
    
    
    
    14Interest expense
    
    
    
    
    
    
    
    
    
    
    (12
    )Non-cash beneficial conversion feature expense
    
    
    
    
    
    
    
    
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    Loss from continuing operations before
taxation
    
    
    (1,748
    )
    
    
    (2,170
    )
    
    
    (2,247
    )Minority interest
    
    
    168
    
    
    
    
    
    
    
    Taxation
    
    
    
    
    
    
    
    
    
    
    (5
    )Net loss from continuing operations after
taxation
    
    
    (1,580
    )
    
    
    (2,170
    )
    
    
    (2,252
    )Discontinued operations
Income/(loss) from discontinued operations
before taxation
    
    
    
    
    
    
    
    
    
    
    17,491Taxation on discontinued operations
    
    
    
    
    
    
    
    
    
    
    3Income/(loss) from discontinued operations
after taxation
    
    
    
    
    
    
    
    
    
    
    17,494Net income/(loss)
    
    
    (1,580
    )
    
    
    (2,170
    )
    
    
    15,242Add/(Less): Deemed non-cash dividend to
preferred shareholders
Credit arising on exchange
    
    
    
    
    
    
    
    
    
    
    Deemed non-cash dividend
    
    
    
    
    
    
    
    
    
    
    (11,877
    )Net income/(loss) available to common
shareholders
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    (23,246
    )
 17




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MANAGEMENTS DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS  YEAR ENDED JANUARY 31, 2007 COMPARED
TO YEAR ENDED JANUARY 31, 2006 AND YEAR ENDED JANUARY 31, 2005.
 AS NOTED ABOVE, IN FISCAL 2005 WE CONCLUDED THE EXCHANGE OFFER AND RELATED TRANSACTIONS RESULTING
IN THE CESSATION OF OUR OWNERSHIP IN VSOURCE ASIA, WHICH REPRESENTED 96% OF OUR REVENUES IN FISCAL
2005.
 Revenue
  Cost of Revenue
  Selling, General and Administrative Expenses
   Amortization of Stock-based Compensation
       18




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Operating Loss
  Minority Interest
  Interest Expense
  Taxation
  Discontinued Operations
    Net Income or Loss
  Net Income or Loss Available to Common Shareholders
  LIQUIDITY AND CAPITAL RESOURCES
  19




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OFF-BALANCE SHEET FINANCING
  DISCLOSURE OF CONTRACTUAL OBLIGATIONS
  INTEREST RATE RISK
  FOREIGN CURRENCY RISK
  20




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Item 8. CONSOLIDATED FINANCIAL STATEMENTS
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Mendoza Berger & Company, LLP
 
 21




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January 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    286
    
    
    $
    1,289Accounts receivable, net of allowance for uncollectible accounts
    
    
    1,403Advance to affiliated entity (Note 7)
    
    
    273
    
    
    
    Prepaid expenses
    
    
    51
    
    
    
    45Other Current assets
    
    
    457
    
    
    
    244Total current assets
    
    
    2,469
    
    
    
    1,578Property and equipment, net
    
    
    1,115
    
    
    
    1Goodwill (Note 8)
    
    
    987
    
    
    
    Total assets
    
    $
    4,571
    
    
    $
    1,579
  22




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January 31,2007
    
    
    2006LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITY/ (DEFICIT)Current liabilities:Accounts payable
    
    $
    545
    
    
    $
    391Accrued expenses
    
    
    290
    
    
    
    150Staff accruals
    
    
    4
    
    
    
    11Total current liabilities
    
    
    839
    
    
    
    552Commitments and contingencies (Note 11)
    
    
    
    
    
    
    Minority interest (Note 9)
    
    
    1,285
    
    
    
    Non-redeemable preferred stock:Preferred stock Series 1-A ($0.01 par value, 67,600 shares
authorized; 67,600 and 67,600 shares issued and outstanding as of
January 31, 2007 and 2006 respectively)
(Aggregate liquidation value is $169 as of January 31, 2007 and
2006 respectively)
    
    
    166
    
    
    
    166Preferred stock Series 2-A ($0.01 par value, 3,900 shares
authorized; 3,900 shares issued and outstanding as of January 31,
2007 and 2006)
(Aggregate liquidation value is $25 as of January 31, 2007 and 2006 respectively)
    
    
    25
    
    
    
    25191
    
    
    
    191Redeemable preferred stock: (Note 12)Preferred stock Series 5-A ($0.01 par value, 3,752 shares
authorized; 1,842 and 1,478 shares issued and outstanding as of
January 31, 2007 and January 31, 2006 respectively
(Aggregate liquidation value is $1,842 and $1,478 as of January 31,
2007 and 2006 respectively)
(Aggregate redemption value is $2,063 and $1,774 as of January 31,
2007 and 2006 respectively)
    
    
    1,509
    
    
    
    1,266Series B
preferred stock issued by subsidiary (note 12) ($0.01 par
value, 38,250 shares authorized, 19,990 and 0 shares issued and
outstanding as of January 31, 2007 and January 31, 2006,
respectively)
    
    
    2,500
    
    
    
    Receivable from issuance of preferred stock
    
    
    (150
    )
    
    
    (150
    )Total preferred stock
    
    
    4,050
    
    
    
    1,307Shareholders equity/(deficit):Common stock ($0.01 par value, 100,000,000 shares authorized;
3,674,029 and 3,673,992 shares issued and outstanding as of January
31, 2007 and 2006, respectively)
    
    
    37
    
    
    
    37Additional paid-in-capital
    
    
    65,390
    
    
    
    65,263Accumulated deficit
    
    
    66,694
    
    
    
    (65,114
    )Other comprehensive income
    
    
    (52
    )
    
    
    (50
    )Deferred
stock based Compensation
    
    
    (284
    )
    
    
    (416
    )Total shareholders equity/(deficit)
    
    
    (1,603
    )
    
    
    (280
    )Total liabilities, preferred stock and shareholders equity/(deficit)
    
    $
    4,571
    
    
    $
    1,579
  23




---



##### Table of Contents



Year Ended January 31,2007
    
    
    2006
    
    
    2005Revenue from services
    
    $
    702
    
    
    $
    
    
    
    $
    254Cost and expenses:Cost of revenue from services
    
    
    
    
    
    
    
    
    
    
    161Selling, general and administrative
expenses
    
    
    2,255
    
    
    
    2,028
    
    
    
    2,342
    
    
    
    
    
    
    
    Amortization of stock-based
compensation (Note 13)
    
    
    198
    
    
    
    147
    
    
    
    Total costs and expenses
    
    
    2,453
    
    
    
    2,175
    
    
    
    2,503Operating loss
    
    
    (1,751
    )
    
    
    (2,175
    )
    
    
    (2,249
    )Interest income
    
    
    3
    
    
    
    5
    
    
    
    14Interest expense
    
    
    
    
    
    
    
    
    
    
    (12
    )Net loss from continuing operations
before taxation
    
    $
    (1,748
    )
    
    $
    (2,170
    )
    
    $
    (2,247
    )Minority interest
    
    
    168Income tax benefit/(expense)
    
    
    
    
    
    
    
    
    
    
    (5
    )Net loss from continuing operations
after taxation
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    (2,252
    )Discontinued operationsIncome/(loss) from discontinued
operations before taxation
    
    
    
    
    
    
    
    
    
    
    17,491Income tax benefit/(expense) on
discontinued operations
    
    
    
    
    
    
    
    
    
    
    3Income/(loss) from discontinued
operations after taxation
    
    
    
    
    
    
    
    
    
    
    17,494Net income/(loss)
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    
    15,242Net income/(loss) available to common
shareholders (Note 4 )
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    37,386Net income/(loss) per common share:Continuing operationsBasic
    
    $
    (0.43
    )
    
    $
    (0.91
    )
    
    $
    9.77Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    $
    9.53Discontinued operationsBasic
    
    
    
    
    
    $
    
    
    
    $
    8.60Diluted
    
    
    
    
    
    $
    
    
    
    $
    8.39TotalBasic
    
    $
    (0.43
    )
    
    $
    (0.91
    )
    
    $
    18.37Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    $
    17.92
  24




---



##### Table of Contents



Common Shares
    
    
    Additional Paid-in
    
    
    Deferred Stock
    
    
    
    
    
    
    
    
    
    
    Other Comprehensive
    
    
    Total ShareholdersStock
    
    
    Amount
    
    
    Capital
    
    
    Based Compensation
    
    
    Notes Receivable
    
    
    Accumulated Deficit
    
    
    Income (Loss)
    
    
    DeficitBalance at January 31, 2004
    
    
    2,026,041
    
    
    
    $20
    
    
    
    $86,554
    
    
    $
    
    
    
    $
    
    
    
    
    $(102,986
    )
    
    
    $(179
    )
    
    
    $(16,591
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,242
    
    
    
    
    
    
    
    15,242Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    127Beneficial conversion feature of
Series 1-A, 2-A and 4-A
Preferred Stock Exchanged
    
    
    
    
    
    
    
    
    
    
    (19,188
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,188
    )Credit on exchange of Series
1-A, 2-A and 4-A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,144
    
    
    
    
    
    
    
    22,144Issuance of Common Stock on
stock options exercised
    
    
    48,193
    
    
    
    1
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at January 31, 2005
    
    
    2,074,234
    
    
    
    $21
    
    
    
    $67,375
    
    
    $
    
    
    
    
    
    
    
    
    $(65,600
    )
    
    
    $(52
    )
    
    
    $1,744Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,170
    )
    
    
    
    
    
    
    (2,170
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Issuance of Common Stock
    
    
    1,600,000
    
    
    
    16
    
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320Fractional shares arising on
reverse stock split
    
    
    (201
    )Warrants Cancelled
    
    
    
    
    
    
    
    
    
    
    (2,796
    )
    
    
    
    
    
    
    
    
    
    
    2,656
    
    
    
    
    
    
    
    (140
    )Issuance of Series 5-A Preferred
Stock and warrants under private
placement
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161Issuance of options
    
    
    
    
    
    
    
    
    
    
    82,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82Deferred stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416
    )Balance at January 31, 2006
    
    
    3,673,992
    
    
    
    $37
    
    
    
    $65,263
    
    
    
    $(416
    )
    
    
    
    
    
    
    $(65,114
    )
    
    
    $(50
    )
    
    
    $(280
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,580
    )
    
    
    
    
    
    
    (1,580
    )Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Fractional shares arising on
reverse stock split
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Issuance of options
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Balance at January 31, 2007
    
    
    3,674,029
    
    
    
    $37
    
    
    
    $65,390
    
    
    
    $(285
    )
    
    
    
    
    
    
    $(66,694
    )
    
    
    $(52
    )
    
    
    $(1,411
    )
  25




---



##### Table of Contents



Year Ended January 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income/(loss)
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    15,242Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Minority Interest
    
    
    (168
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    29
    
    
    
    
    
    
    
    1,883Bad debt provision/(writeback)
    
    
    
    
    
    
    12
    
    
    
    753Write-off of expenses related to terminated merger
with TEAM America
    
    
    
    
    
    
    
    
    
    
    (Gain)/loss on disposal of property and equipment
    
    
    1
    
    
    
    26
    
    
    
    (4
    )Amortization of stock-based compensation
    
    
    198
    
    
    
    147
    
    
    
    Minority interest in loss of a former subsidiary
    
    
    
    
    
    
    
    
    
    
    (758
    )Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (21,471
    )Changes in working capital components:
    
    
    
    
    
    
    Accounts receivable
    
    
    101
    
    
    
    
    
    
    
    (1,149
    )Inventory
    
    
    
    
    
    
    
    
    
    
    60Accounts payable
    
    
    15
    
    
    
    (106
    )
    
    
    (346
    )Advance from customers
    
    
    
    
    
    
    
    
    
    
    (892
    )Others
    
    
    (204
    )
    
    
    1,168
    
    
    
    (1,213
    )Net cash (used in)/provided by operating
activities
    
    
    (1,200
    )
    
    
    (923
    )
    
    
    (7,895
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    
    
    
    
    (3
    )
    
    
    (641
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1
    
    
    
    4Expenses related to terminated merger with TEAM
America
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of subsidiaries
    
    
    
    
    
    
    24
    
    
    
    9,596Short term investment in CSA
    
    
    (272
    )Cash disposed of in conjunction with the disposal of
subsidiaries
    
    
    
    
    
    
    
    
    
    
    (335
    )Acquisition of subsidiaries, net of cash acquired
    
    
    163Net cash used in investing activities
    
    
    (109
    )
    
    
    22
    
    
    
    8,624Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    10Proceeds from issuance of preferred stock, net of cost
    
    
    304
    
    
    
    1,266
    
    
    
    Warrants Cancelled
    
    
    
    
    
    
    (140
    )
    
    
    Proceeds from borrowings and convertible notes
    
    
    
    
    
    
    
    
    
    
    Repayment of convertible notes and preferred stock
    
    
    
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    304
    
    
    
    1,126
    
    
    
    10Effect of changes in foreign exchange rates
    
    
    
    
    
    
    
    
    
    
    (5
    )Net increase/(decrease) in cash and cash equivalents
    
    
    (1,003
    )
    
    
    225
    
    
    
    734Cash and cash equivalents at beginning of year
    
    
    1,289
    
    
    
    1,064
    
    
    
    330Cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    
    
    
    
    Cash and cash equivalents at end of year
    
    $
    286
    
    
    $
    1,289
    
    
    $
    1,064Supplemental
cash flow informationCash paid
for interest
    
    $
    
    
    
    $
    
    
    
    $
    Non-cash
financing and investing activitiesConversion
of Series 4-A Preferred Stock to Common Stock
    
    
    
    
    
    
    
    
    
    
    Conversion
of Series 1-A and 2-A Preferred Stock to Common Stock
    
    
    
    
    
    
    
    
    
    
    Issuance of
Series B Preferred Stock for acquisition of subsidiaries
    
    $
    2,500
    
    
    
    
    
    
    
    Cancellation
of preferred stock
    
    
    
    
    
    
    
    
    
    
    30,902Credit
arising on exchange
    
    
    
    
    
    
    
    
    
    
    (34,363
    )Beneficial
conversion feature of:Series 4-A
Preferred Stock (Note 4)
    
    
    
    
    
    
    
    
    
    
    12,219Convertible
notes
    
    
    
    
    
    
    
    
    
    
    
  26




---



##### Table of Contents



1. The Company
 Company Background
      27




---



##### Table of Contents



28




---



##### Table of Contents



Current Operations
    Strategy
   29




---



##### Table of Contents



Future Funding
      2. Summary of Significant Accounting Policies
 Fiscal Year
  Principles of Consolidation and Basis of Presentation
 30




---



##### Table of Contents



Use of Estimates
  Foreign Currency Translation
  Cash and Cash Equivalents
  Property and Equipment
  Computer hardware
    
    2 to 5 yearsComputer software
    
    5 yearsOffice equipment, furniture and fixtures
    
    5 yearsMotor vehicle
    
    3 years
  Impairment of Long-lived Assets
  Restricted Cash
  31




---



##### Table of Contents



Revenue Recognition
  Income Taxes
  Functional Currency
  Other Comprehensive Income (Loss)
  Stock-Based Compensation
  Earnings Per Share
  Segment Data
  Recent Accounting Pronouncements
  32




---



##### Table of Contents



3. Discontinued Operations
     For the Year Ended January 31, 2005Vsource
    
    
    VsourceAsia
    
    
    Texas
    
    
    TotalRevenues, net
    
    $
    13,934
    
    
    $
    254
    
    
    $
    14,188Income/(loss) before income tax benefit/(expense)
    
    $
    18,639
    
    
    $
    (1,148
    )
    
    $
    17,491Income tax benefits/(expense)
    
    
    3
    
    
    
    
    
    
    
    3Net income/(loss) (including gain/(loss) on
disposal of $21,633 and ($162))
    
    $
    18,642
    
    
    $
    (1,148
    )
    
    $
    17,494
 33




---



##### Table of Contents



4. Net Income/(Loss) Available to Common Shareholders and Comprehensive Profit/(Loss)
  For the Year Ended January 31,2007
    
    
    2006
    
    
    2005Net income/(loss)
    
    
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    15,242Add (Less): Deemed non-cash dividend to preferred shareholdersCredit arising on exchange
    
    
    
    
    
    
    
    
    
    
    34,363Deemed non-cash dividend
    
    
    
    
    
    
    
    
    
    
    (12,219
    )$
    (1,580
    )
    
    $
    (2,170
    )
    
    
    22,144Net profit/(loss) available to common shareholders
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    37,386Other comprehensive income/(loss):Foreign currency translation adjustment
    
    
    (2
    )
    
    
    2
    
    
    
    127Comprehensive Income/(Loss)
    
    $
    (1,582
    )
    
    $
    (2,168
    )
    
    $
    37,513
   34




---



##### Table of Contents



Earnings Per Share
  For the Year Ended January 31,2007
    
    
    2006
    
    
    2005Numerator for basic and diluted income/(loss) per share:Net income/(loss)  continuing operations
    
    
    (1,580
    )
    
    
    (2,170
    )
    
    $
    19,892Net income/(loss)  discontinued operations
    
    
    
    
    
    
    
    
    
    $
    17,494Net income/(loss)
    
    
    (1,580
    )
    
    
    (2,170
    )
    
    $
    37,386Denominator for basic earnings/(loss) per share 
weighted average shares
    
    
    3,673,996
    
    
    
    2,374,993
    
    
    
    2,035,434Effect of dilutive securities:Employee stock options
    
    
    N/A
    
    
    
    N/A
    
    
    
    23,913Preferred stock
    
    
    N/A
    
    
    
    N/A
    
    
    
    27,312Dilutive potential common shares
    
    
    N/A
    
    
    
    N/A
    
    
    
    51,225Denominator for diluted earnings/(loss) per common
share  adjusted weighted average shares
    
    
    3,673,996
    
    
    
    2,374,993
    
    
    
    2,086,659Net income/(loss) per common share:Continuing operationsBasic
    
    
    (0.43
    )
    
    
    (0.91
    )
    
    
    9.77Diluted
    
    
    
    
    
    
    
    
    
    
    9.53Discontinued operationsBasic
    
    
    
    
    
    
    
    
    
    
    8.60Diluted
    
    
    
    
    
    
    
    
    
    
    8.39TotalBasic
    
    
    (0.43
    )
    
    
    (0.91
    )
    
    
    18.37Diluted
    
    
    
    
    
    
    
    
    
    
    17.92
  5. Fair Value of Financial Instruments
  35




---



##### Table of Contents



6. Consolidated Balance Sheet Details
 January 31,2007
    
    
    2006(in thousands)Other current assets:Deposits
    
    
    81
    
    
    
    140Other receivables
    
    
    376
    
    
    
    104457
    
    
    $
    244Property and equipment:Computer hardware
    
    
    40
    
    
    $
    40Office equipment, furniture and fixtures
    
    
    49
    
    
    
    49Leasehold improvements
    
    
    
    
    
    
    Motor vehicle
    
    
    
    
    
    
    Medical
equipment
    
    
    1,144
    
    
    
    89Accumulated depreciation
    
    
    (118
    )
    
    
    (88
    )$
    1,115
    
    
    $
    1
 7. Advance to CSA II, LLC
  8. Goodwill
  Point Loma
    
    
    Del Mar
    
    
    TotalCash and cash equivalents
    
    $
    109
    
    
    $
    55
    
    
    $
    164Accounts receivable, net
    
    
    950
    
    
    
    569
    
    
    
    1,519Other current assets
    
    
    91
    
    
    
    145
    
    
    
    236Property and equipment, net
    
    
    428
    
    
    
    768
    
    
    
    1,144Accounts payable
    
    
    (51
    )
    
    
    (46
    )
    
    
    (97
    )Total
    
    
    1,527
    
    
    
    1,439
    
    
    
    2,966Less: Minority interest  49%
    
    
    (748
    )
    
    
    (705
    )
    
    
    (1,453
    )Share of net assets
    
    
    779
    
    
    
    734
    
    
    
    1,513Purchase consideration
    
    
    1,250
    
    
    
    1,250
    
    
    
    2,500Goodwill
    
    $
    471
    
    
    $
    516
    
    
    $
    987
  36




---



##### Table of Contents



9. Minority interest
   10. Warrants
         37




---



##### Table of Contents



Weighted-AverageNumber of Shares of Common Stock
    
    
    Exercise Price Per ShareYear ended January 31,
    
    
    Year ended January 31,2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Warrants
outstanding at
beginning of the
period
    
    
    2,097,095
    
    
    
    1,545,528
    
    
    
    1,609,886
    
    
    $
    0.56
    
    
    $
    2.65
    
    
    $
    4.42Granted
    
    
    328,400
    
    
    
    1,614,300
    
    
    
    
    
    
    
    0.48
    
    
    
    0.43
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled or Expired
    
    
    (701,195
    )
    
    
    (1,062,733
    )
    
    
    (64,358
    )
    
    
    0.67
    
    
    
    3.41
    
    
    
    47.03Converted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
outstanding at end
of the period
    
    
    1,724,300
    
    
    
    2,097,095
    
    
    
    1,545,528
    
    
    
    0.49
    
    
    
    0.56
    
    
    
    2.65Warrants
exercisable at end
of the period
    
    
    1,563,049
    
    
    
    1,733,345
    
    
    
    295,528
    
    
    
    0.44
    
    
    
    0.60
    
    
    $
    13.82
 11. Commitments and Contingencies
  Litigation
  12. Preferred Stock
 Non-Redeemable Preferred Stock
    Series 1-A Preferred Stock
  38




---



##### Table of Contents



Series 2-A Preferred Stock
    Conversion and Exchange of Series 1-A, Series 2-A and Series 4-A Preferred Stock
  39




---



##### Table of Contents



Series 5-A Preferred Stock
     Series B preferred stock issued by subsidiary
   40




---



##### Table of Contents



Related Party Interests in Preferred Stock
  13. Stock Options
 Stock-Based Compensation
  Year ended January 31,2007
    
    2006
    
    2005(in thousands, except for per share data)Net
income/(loss) (as reported after excluding minority expense)
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    15,242Add: Stock-based employee
compensation expense
included in reported net
income
    
    
    198
    
    
    
    147
    
    
    
    Less: Total stock-based
employee compensation
expense determined under
fair value method for all
awards
    
    
    198
    
    
    
    (147
    )
    
    
    Net income/(loss)
    
    $
    (1,580
    )
    
    $
    (2,170
    )
    
    $
    15,242Basic net income/(loss)
available to common
shareholders per shareAs reported
    
    $
    (0.43
    )
    
    $
    (0.91
    )
    
    $
    18.37Pro forma
    
    
    N/A
    
    
    
    N/A
    
    
    $
    18.37Diluted net income/(loss)
available to common
shareholders per shareAs reported
    
    
    N/A
    
    
    
    N/A
    
    
    $
    17.92
   Year ended January 31,2007
    
    2006
    
    2005Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    212
    %
    
    
    99
    %
    
    
    208
    %Risk-free rate of return
    
    
    4.5
    %
    
    
    4.1
    %
    
    
    3.1
    %Expected life (years)
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0
 41




---



##### Table of Contents



Stock Option Plans
       Weighted-AverageNumber of Options
    
    
    Exercise Price Per ShareYear ended January 31,
    
    
    Year ended January 31,2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Options outstanding at
beginning of the period
    
    
    458,517
    
    
    
    449,067
    
    
    
    3,697,249
    
    
    $
    1.88
    
    
    $
    3.82
    
    
    $
    2.44Granted at above fair market value
    
    
    
    
    
    
    360,000
    
    
    
    312,050
    
    
    
    
    
    
    
    0.40
    
    
    
    2.00 at fair market value
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    0.42
    
    
    
    
    
    
    
     at below fair market value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (48,225
    )
    
    
    
    
    
    
    
    
    
    
    0.20Cancelled
    
    
    (94767
    )
    
    
    (350,550
    )
    
    
    (2,754,482
    )
    
    $
    1.48
    
    
    $
    2.85
    
    
    
    2.34Forfeited
    
    
    
    
    
    
    
    
    
    
    (757,525
    )
    
    
    
    
    
    
    
    
    
    
    1.95Options outstanding at end
of the period
    
    
    483,750
    
    
    
    458,517
    
    
    
    449,067
    
    
    
    0.42
    
    
    
    1.88
    
    
    
    3.82Options vested/exercisable
at end of the period
    
    
    363,750
    
    
    
    458,517
    
    
    
    449,067
    
    
    $
    0.42
    
    
    $
    1.88
    
    
    $
    3.82
 42




---



##### Table of Contents



Weighted-average
    
    Weighted-average remainingExercise price
    
    Number of options
    
    exercise price
    
    contractual life$
    0.40
    
    
    
    360,000
    
    
    $
    0.40
    
    
    
    8.0$
    0.42
    
    
    
    120,000
    
    
    $
    0.42
    
    
    
    3.0$
    2.00
    
    
    
    3,750
    
    
    $
    2.00
    
    
    
    5.0483,750
 Employee Stock Purchase Plan
    14. 401(k) Plan
  43




---



##### Table of Contents



15. Income Taxes
  January 31,2007
    
    
    2006Net income/(loss) subject to U.S income taxes only
    
    $
    (1,474
    )
    
    $
    (1,756
    )Net loss subject to foreign income taxes only
    
    
    (274
    )
    
    
    (414
    )Net income/(loss)
    
    $
    (1,748
    )
    
    $
    (2,170
    )
  January 31,2007
    
    
    2006Deferred tax assets:- net operating loss carryforward
    
    $
    15,382
    
    
    $
    14,777Gross deferred tax assets
    
    
    15,382
    
    
    
    14,777Deferred tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    
    15,382
    
    
    
    14,777Valuation allowance
    
    
    (15,382
    )
    
    
    (14,777
    )$
    
    
    
    $
    Current year taxation:- Corporate tax  Federal
    
    
    
    
    
    $
    5- Corporate tax  Foreign
    
    
    
    
    
    
    (3
    )Total
    
    
    
    
    
    $
    2
   16. Segment Data
  17. Subsequent Events
 44




---



##### Table of Contents



45




---



##### Table of Contents



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 
 Item 9B.
OTHER INFORMATION
  46




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##### Table of Contents



PART III
 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionDavid Hirschhorn
    
    
    45
    
    
    Co-Chairman and Director
Co-Chief Executive Officer
Co-Chief Financial OfficerTodd Parker
    
    
    44
    
    
    Co-Chairman and Director
Co-Chief Executive Officer
Co-Chief Financial OfficerDennis M. Smith
    
    
    55
    
    
    Director and Senior AdvisorRobert N. Schwartz, PhD.(1)
    
    
    67
    
    
    DirectorRichardson E. Sells(1)
    
    
    60
    
    
    Director
 
 (1)
    
    Member of the Audit Committee. David Hirschhorn
 Todd Parker
 Dennis M. Smith
 47




---



##### Table of Contents



Robert N. Schwartz, Ph.D.
 Richardson E. Sells
 Board Meetings and Committees
     Stockholder Communications with the Board of Directors
  
  Compensation of Directors
  48




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##### Table of Contents



Section 16(a) Beneficial Ownership Reporting Compliance
   Number ofTransactions Not
    
    Known FailuresNumber of Late
    
    Reported On a
    
    To File aName
    
    Reports
    
    Timely Basis
    
    Required Form(#)
    
    (#)Symphony House Berhad
    
    
    2
    
    
    
    1
    
    
    Form 4 due June 16, 2005;
Form 5 due March 17, 2006David Hirschhorn
    
    
    2
    
    
    
    2
    
    
    Form 4 due September 20, 2006
Form 5 due March 15, 2007Todd Parker
    
    
    2
    
    
    
    2
    
    
    Form 4 due September 20, 2006
Form 5 due March 15, 2007Robert N. Schwartz
    
    
    2
    
    
    
    1
    
    
    Form 4 due November 21, 2005;
Form 5 due March 17, 2006Dennis M. Smith
    
    
    3
    
    
    
    3
    
    
    Form 4 due September 20, 2006
Form 4 due December 14, 2006
Form 5 due March 15, 2007Richardson E. Sells
    
    
    3
    
    
    
    1
    
    
    Form 5 due March 17, 2006
 Code of Ethics
  
 Item 11. EXECUTIVE COMPENSATION
 49




---



##### Table of Contents





COMPENSATION DISCUSSION AND ANALYSIS


Compensation Philosophy and Compensation Program Objectives




o
    
    Attract the highest caliber of talent required for the success of our business;o
    
    Retain those individuals capable of achieving challenging performance standards;o
    
    Incent our executives to strive for superior company wide and individual performance; ando
    
    Align management and stockholder interests over both the short and long-term.




o
    
    Base Salaries. We seek to provide competitive base salaries factoring in the
position, the executives skills and experience, the executives performance as well as
other factors. We believe appropriate base salary levels are critical in helping us to
attract and retain talented executives.o
    
    Annual Cash Incentives.The aim of this element of compensation is to reward
individual contributions to align with our annual operating performance and to recognize
the achievement of challenging performance standards.o
    
    Long-Term Equity Incentives.The long-term element of our compensation program
consists of discretionary grants of equity awards which are reviewed annually. These are
designed to align interests of management and employees with those of the Company and its
stockholders by directly linking individual compensation to the Companys long-term
performance, as reflected in stock price appreciation and increased stockholder value.




The Executive Compensation Process


The Board of Directors






o
    
    Reviewing and approving our compensation philosophy;o
    
    Determining executive compensation levels;o
    
    Annually reviewing and assessing performance goals and objectives for all executive
officers, including our Co-Chief Executive Officers; ando
    
    Determining short-term and long-term incentive compensation for all executive officers,
including our Co-Chief Executive Officers.


50




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##### Table of Contents







Outside Compensation Advice




Benchmarking Process




Co-CEO Compensation








Components of the Executive Compensation Program




51



---



##### Table of Contents



Base Salary
  Annual Cash Incentives
  Long-Term Equity Incentives
  Perquisites and Other Benefits
  Retirement Plans
  Benefits Upon Termination of Employment
  Tax and Accounting Matters
  52




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##### Table of Contents



FISCAL 2007 SUMMARY EXECUTIVE COMPENSATION TABLE
  Change inNon-
    
    Pension ValueEquity
    
    andIncentive
    
    NonqualifiedName
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    Deferred
    
    All otherand
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    Option
    
    Compen-
    
    Compensation
    
    Compen-Principal
    
    
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    sation
    
    Earnings
    
    sation
    
    TotalPosition
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    
    
    ($)
    
    ($)David
Hirschhorn
Co-Chief
Executive
Officer and
Co-Chief
Financial
Officer
    
    Fiscal 2007
    
    
    $223,724
    
    
    
    $88,697
    (1)
    
    
    $83,333
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $395,754Todd Parker
Co-Chief
Executive
Officer and
Co-Chief
Financial
Officer
    
    Fiscal 2007
    
    $
    96,000
    
    
    $
    63,698
    (3)
    
    
    $23,333
    (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $183,051
 
 (1)
    
    Mr. Hirschhorn was entitled to a guaranteed bonus payment in
the amount of $88,697 in Fiscal 2007. He did not receive this bonus
in Fiscal 2007.
 (2)
    
    Pursuant to his employment agreement, Mr. Hirschhorn was granted 1,250,000 restricted shares
of our common stock upon becoming our Co-Chief Executive Officer. One/third (1/3) of these
shares of our common stock vest annually. 416,666 of these shares of our common stock vested
at an average share price of $0.20 in Fiscal 2007.
 53




---



##### Table of Contents



(3)
    
    Pursuant to his employment agreement, Mr. Parker was granted 350,000 restricted shares of our
common stock upon becoming our Co-Chief Executive Officer. One/third (1/3) of these shares of
common stock vest annually. 116,666 of these shares of our common stock vested at an average
share price of $0.20 in Fiscal 2007.
 (4)
    
    Mr. Parker was entitled to a guaranteed bonus payment in the
amount of $63,698 in Fiscal 2007. He did not receive this bonus in
Fiscal 2007.
 EMPLOYMENT AGREEMENTS
    FISCAL 2007 GRANTS OF PLAN-BASED AWARDS
  OUTSTANDING EQUITY AWARDS AT 2007 FISCAL YEAR-END
  54




---



##### Table of Contents



Stock AwardsEquity
    
    EquityIncentive Plan
    
    Incentive PlanAwards:
    
    Awards:Number of
    
    Market orUnearned
    
    Payout ValueNumber of
    
    Market Value
    
    Shares, Units
    
    of UnearnedShares or
    
    of Shares or
    
    or Other
    
    Shares, UnitsUnits of Stock
    
    Units of Stock
    
    Rights That
    
    or Other RightsThat Have
    
    That Have
    
    Have Not
    
    That Have NotName
    
    Not Vested(#)
    

Not Vested($)
    
    Vested(#)
    
    Vested($)David Hirschhorn
Co-Chief Executive
Officer and
Co-Chief Financial
Officer
    
    
    605,022
    (1)
    
    $
    211,758
    (2)
    
    
    
    
    
    
    Todd Parker
Co-Chief Executive
Officer and
Co-Chief Financial
Officer
    
    
    169,405
    (3)
    
    $
    59,292
    (4)
    
    
    
    
    
    
    
 
 (1)
    
    Pursuant to his employment agreement, Mr. Hirschhorn was granted 1,250,000 restricted shares of
our common stock upon becoming our Co-Chief Executive Officer on July 18, 2005. One/third (1/3) of
these shares of our common stock vest annually.(2)
    
    This is determined by multiplying the number of shares that have not vested by the market
price on January 31, 2007 of $0.35.(3)
    
    Pursuant to his employment agreement, Mr. Parker was granted 350,000 restricted shares of our
common stock upon becoming our Co-Chief Executive Officer on July 18, 2005. One/third (1/3) of
these shares of common stock vest annually.(4)
    
    This is determined by multiplying the number of shares that have not vested by the market
price on January 31, 2007 of $0.35. OPTION EXERCISES AND STOCK VESTED DURING FISCAL 200
  55




---



##### Table of Contents



Number of
    
    
    
    
    
    Number ofShares
    
    Value
    
    Shares
    
    ValueAcquired on
    
    Realized on
    
    Acquired on
    
    Realized onName
    

Exercise(#)
    
    Exercise($)
    

Vesting(#)
    
    Vesting($)David Hirschhorn
Co-Chief Executive
Officer and
Co-Chief Financial
Officer
    
    
    
    
    
    
    
    
    
    
    416,666
    (1)
    
    $
    83,333Todd Parker
Co-Chief Executive
Officer and
Co-Chief Financial
Officer
    
    
    
    
    
    
    
    
    
    
    116,666
    (2)
    
    $
    23,333
 
 (1)
    
    Pursuant to his employment agreement, Mr. Hirschhorn was granted 1,250,000 restricted shares of
our common stock upon becoming our Co-Chief Executive Officer on July 18, 2005. One/third (1/3) of
these shares of our common stock vest annually. The average per share
price is $0.20.(2)
    
    Pursuant to his employment agreement, Mr. Parker was granted 350,000 restricted shares of our
common stock upon becoming our Co-Chief Executive Officer on July 18, 2005. One/third (1/3) of
these shares of common stock vest annually. The average per share
price is $0.20. FISCAL 2007 NONQUALIFIED DEFERRED COMPENSATION
  FISCAL 2007 PENSION BENEFITS
  FISCAL 2007 EQUITY COMPENSATION PLAN INFORMATION
  Number ofsecurities to beissued upon
    
    Weighted-averageexercise of
    
    exercise price of
    
    Number of securities remainingoutstanding
    
    outstanding
    
    available for future issuance underoptions, warrants
    
    options, warrants
    
    equity compensation plans (excludingand rights at
    
    and rights at
    
    securities reflected in column (a)) atPlan category
    

January 31, 2007(a)
    

January 31, 2007(b)
    

January 31, 2007(c)Equity compensation
plans approved by
security
holders
    
    
    131,346
    
    
    $
    0.99
    
    
    
    1,798,589Equity compensation
plans not approved
by security
holders
    
    
    1,298,421
    
    
    $
    1.4512,579Total
    
    
    1,429,767
    
    
    $
    1.39
    
    
    
    1,811,168
 56




---



##### Table of Contents



FISCAL 2007 POTENTIAL PAYMENTS UPON TERMINATION OR A CHANGE IN CONTROL
  DAVID HIRSCHHORN, CO-CEO and CO-CFO
 InvoluntaryTerminationVoluntary
    
    Involuntary Not
    
    
    
    
    
    Without CauseTermination
    
    For
    
    
    
    
    
    or TerminationBenefits/Payments
    
    (including
    
    Cause
    
    For Cause
    
    for Good
    
    Death orUpon Termination
    
    Retirement)
    
    Termination
    
    Termination
    
    Reason
    
    DisabilitySalary
    
    
    
    
    
    $
    480,000
    
    
    
    
    
    
    
    
    

    
    
    Accelerated Vesting
of Deferred Compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,004
    (1)
    
    
    Compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accelerated Vesting
of Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Continuation of
Insurance Benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    All of Mr. Hirschhorns unvested shares of our restricted common stock that were granted to him
pursuant to his becoming Co-Chief Executive Officer will vest upon a change of control, as that
term is defined in his employment agreement. As of January 31, 2007, he owned 605,022 restricted
shares of our common stock. TODD
PARKER, CO-CEO and CO-CFO
 InvoluntaryTerminationVoluntary
    
    Involuntary Not
    
    
    
    
    
    Without CauseTermination
    
    For
    
    
    
    
    
    or TerminationBenefits/Payments
    
    (including
    
    Cause
    
    For Cause
    
    for Good
    
    Death orUpon Termination
    
    Retirement)
    
    Termination
    
    Termination
    
    Reason
    
    DisabilitySalary
    
    
    
    
    
    $
    192,000
    
    
    
    
    
    
    
    
    
    
    
    Accelerated Vesting
of Deferred
Compensation
    
    
    
    
    
    
    
    
    
    
    
    

    $
    33,881
    (1)
    
    
    Accelerated Vesting
of Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Continuation of
Insurance Benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 57




---



##### Table of Contents



(1)
    
    All of Mr. Parkers unvested shares of our restricted common stock that were granted to
him pursuant to his becoming Co-Chief Executive Officer will vest upon a change of control, as that
term is defined in his employment agreement. As of January 31, 2007, he owned 169,405 restricted
shares of our common stock.
 FISCAL 2007 DIRECTOR COMPENSATION
  Change inPension ValueandFees Earned
    
    
    
    
    
    
    
    Non-Equity
    
    Nonqualifiedor Paid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings
    
    ($)
    
    ($)Dennis Smith
    
    
    
    
    
    
    
    
    $
    2,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,620Richardson Sells
    
    
    
    
    
    
    
    
    $
    13,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,704Robert Schwartz
    
    
    
    
    
    
    
    
    $
    13,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,704
 (1)
    
    Dennis Smith receives a consulting fee of $25,000 per month as consideration for consulting
services he provides to us. The payment for this consulting fees is outside the scope of his
services as a director.
 
 Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 Common Stock
 Executive Compensation
 58




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##### Table of Contents



Percent ofNumber of
    
    TotalShares
    
    Common
    
    Percent ofBeneficially
    
    Stock
    
    TotalName of Beneficial Owner(1)
    
    Owned
    
    Outstanding(2)
    
    Outstanding(3)Greater Than 5% Beneficial OwnersSymphony House Berhad
Level 17 Menara Milenium
Jalan Damanlela
Pusat Bandar Damansara
50490 Kuala Lumpur, Malaysia
    
    
    648,860
    
    
    
    17.18
    %
    
    
    5.10
    %Eparfin SA (4)
84, Grand Rue
L-1660
Luxembourg
    
    
    250,000
    
    
    
    6.21
    %
    
    
    1.93
    %Current DirectorsDavid Hirschhorn (5)
149 South Barrington Avenue
Suite 808
Los Angeles, California 90049
    
    
    1,725,000
    
    
    
    44.77
    %
    
    
    13.49
    %Todd Parker (6)
149 South Barrington Avenue
Suite 808
Los Angeles, California 90049
    
    
    873,000
    
    
    
    22.37
    %
    
    
    6.75
    %Robert N. Schwartz, Ph.D (7)
6 Duquesa
Dana Point, CA 92629
    
    
    185,857
    
    
    
    4.69
    %
    
    
    1.44
    %Richardson E. Sells (8)
18 Audubon Pond
Hilton Head, SC 29928
    
    
    180,000
    
    
    
    4.55
    %
    
    
    1.40
    %Dennis M. Smith (9)
33 Gull Point
Hilton Head, SC 29928
    
    
    495,000
    
    
    
    12.78
    %
    
    
    3.86
    %Current directors and executive officers as a group
(5 persons) (10)
    
    
    3,432,732
    
    
    
    78.52
    %
    
    
    25.88
    %
 
 *
    
    Less than 1%. 59




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##### Table of Contents



(1)
    
    Except as otherwise indicated, we believe that the beneficial owners of the securities listed
have sole investment and voting power with respect to their shares. The number of shares
shown as beneficially owned by any person or entity includes all Preferred Stock, options,
warrants and other convertible securities currently exercisable by that person or entity
within 60 days of May 11, 2007.(2)
    
    The percentages of beneficial ownership shown assume the exercise or conversion of all
Preferred Stock, options, warrants and other securities convertible into common stock held by
such person or entity currently exercisable within 60 days of May 11, 2007, but not the
exercise or conversion of Preferred Stock, options, warrants and other convertible securities
held by other holders of such securities.(3)
    
    Based on a total of 12,713,273 shares of common stock outstanding on a fully-diluted basis as
of May 11, 2007, which includes shares of common stock issuable upon the conversion of our
outstanding Preferred Stock and shares of common stock issuable upon the exercise of stock
options and warrants that are exercisable within 60 days of May 11, 2007.(4)
    
    Consists of warrants to purchase 250,000 shares of common stock at an exercise price of $0.01
per share novated by the original warrant holder, Quilvest Asia Equity Ltd, pursuant to a
Novation Agreement, dated as of February 2, 2005, between us, Quilvest Asian Equity Ltd and
Eparfin SA. These warrants were originally issued in connection with our October 2002 private
placement.(5)
    
    Consists of (a) 1,250,000 restricted shares of common stock granted in connection with Mr.
Hirschhorns Employment Agreement, dated as of July 18, 2005; and (b) 475,000 shares
beneficially owned by Mr. Hirschhorn in his capacity as President of Hope & Abel Investments,
LLC, which directly holds (i) 125 shares of Series 5-A Preferred Stock, which are convertible
into 400,000 shares of common stock, and (ii) warrants to purchase 75,000 shares of common
stock at an exercise price of $0.50 per share, both which were issued in connection with
Series 5-A Preferred Stock and Warrant Agreements, dated as of July 18, 2005 and September 18,
2006.(6)
    
    Consists of (a) 350,000 restricted shares of common stock granted in connection with Mr.
Parkers Employment Agreement, dated as of July 18, 2005; and (b) (i) 135 shares of Series 5-A
Preferred Stock, which are convertible into 432,000 shares of common stock and (ii) warrants
to purchase 81,000 shares of common stock at an exercise price of $0.50 per share, both which
were issued in connection with the Series 5-A Preferred Stock and Warrant Agreements, dated as
of July 18, 2005 and September 18, 2006.(7)
    
    Consists of (a) 982 shares directly owned by Mr. Schwartz; (b) 1,125 shares owned in a trust
on behalf of Mr. Schwartz and (c) 183,750 shares of common stock issuable upon exercise of Mr.
Schwartzs stock options.(8)
    
    Consists of 180,000 shares of common stock issuable upon exercise of Mr. Sells stock
options.(9)
    
    Consists of (a) 125 shares of Series 5-A Preferred Stock, which are convertible into 400,000
shares of common stock; (b) warrants to purchase 75,000 shares of common stock at an exercise
price of $0.50 per share, both which were issued in connection with the Series 5-A Preferred
Stock and Warrant Agreements, dated as of July 18, 2005 and September 18, 2006 and (c) 20,000
shares of common stock issuable upon exercise of Mr. Smiths stock options.(10)
    
    Includes shares held directly, as well as shares held jointly with family members, held in
retirement accounts, held in a fiduciary capacity, held by certain of the group members
families, or held by trusts of which the group member is a trustee or substantial beneficiary,
with respect to which shares the group member may be deemed to have sole or shared voting or
investment powers. Also includes an aggregate of 383,750 shares of common stock issuable upon
exercise of stock options held by all current directors and executive officers as a group. 60




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##### Table of Contents



Preferred Stock
 Series 1-A Convertible Preferred Stock
  Executive
Compensation
 Number of Shares
    
    Percent of TotalBeneficially
    
    Series 1-A Preferred
    
    Percent of TotalName of Beneficial Owner
    
    Owned
    
    Stock Outstanding
    
    Outstanding(1)Greater Than 5% Beneficial OwnersRon Soderling
Suite 270
Newport Beach, CA 92660
    
    
    40,000
    
    
    
    59.17
    %
    
    
    *First Clearing Corporation
P.O. Box 6570
Glen Allen, VA 23058
    
    
    20,000
    
    
    
    29.59
    %
    
    
    *Susan Lacerra & Steven Tingey JT
c/o Jefferies & Co. Inc.
650 California Street
San Francisco, CA 94108
    
    
    7,600
    
    
    
    11.24
    %
    
    
    *Current directors and executive
officers as a group
(0 persons)
    
    
    0
    
    
    
    0
    %
    
    
    0
    %
 
 *
    
    Less than 1%.(1)
    
    The percentages of beneficial ownership assume the conversion into common stock of all Series
1-A Preferred Stock held by such person or entity and is based on a total of 12,713,273 shares
of common stock outstanding on a fully-diluted basis as of May 11, 2007, which includes shares
of common stock issuable upon the conversion of our outstanding preferred securities and
shares of common stock issuable upon the exercise of stock options and warrants that are
exercisable within 60 days of May 11, 2007. 61




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##### Table of Contents



Series 2-A Convertible Preferred Stock
  Executive
Compensation
 Number of Shares
    
    Percent of Total
    
    Percent ofBeneficially
    
    Series 2-A Preferred
    
    TotalName of Beneficial Owner
    
    Owned
    
    Stock Outstanding
    
    Outstanding(1)Greater Than 5% Beneficial OwnersAli R. Moghaddami
2000 Riverside Drive
Los Angeles, CA 90039
    
    
    3,900
    
    
    
    100
    %
    
    
    *Current directors and executive
officers as a group (0 persons)
    
    
    0
    
    
    
    0
    %
    
    
    0
    %
 
 *
    
    Less than 1%.(1)
    
    The percentages of beneficial ownership assume the conversion into common stock of all Series
2-A Preferred Stock held by such person or entity and is and is based on a total of 12,713,273
shares of common stock outstanding on a fully-diluted basis as of May 11, 2007, which includes
shares of common stock issuable upon the conversion of our outstanding preferred securities
and shares of common stock issuable upon the exercise of stock option and warrants that are
exercisable within 60 days of May 11, 2007. 62




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##### Table of Contents



Series 5-A Convertible Preferred Stock
  Executive
Compensation
 Number of Shares
    
    Percent of TotalBeneficially
    
    Series 5-A Preferred
    
    Percent of TotalName of Beneficial Owner
    
    Owned
    
    Stock Outstanding
    
    Outstanding(1)Greater Than 5% Beneficial OwnersSMP Investments I, LLC
    
    
    250
    
    
    
    9.04
    %
    
    
    6.29
    %3366 N. Torrey Pines Court,
Suite 210,
La Jolla, California, 92037Officers and DirectorsDavid Hirschhorn (2)
149 South Barrington Avenue
    
    
    125
    
    
    
    4.52
    %
    
    
    3.15
    %Suite 808
Los Angeles, California 90049Todd Parker
    
    
    135
    
    
    
    4.88
    %
    
    
    3.40
    %149 South Barrington Avenue
Suite 808
Los Angeles, California 90049Dennis M. Smith
    
    
    125
    
    
    
    4.52
    %
    
    
    3.15
    %33 Gull Point
Hilton Head, SC 28828Current directors and executive
officers as a group
(5 persons)
    
    
    285
    
    
    
    13.91
    %
    
    
    9.69
    %
 
 *
    
    Less than 1%.(1)
    
    The percentages of beneficial ownership assume the conversion into common stock of all Series
5-A Preferred Stock held by such person or entity and is based on a total of 12,713,273 shares
of common stock outstanding on a fully-diluted basis as of May 11, 2007, which includes shares
of common stock issuable upon the conversion of our outstanding preferred securities and
shares of common stock issuable upon the exercise of stock options and warrants that are
exercisable within 60 days of May 11, 2007.(2)
    
    Includes shares beneficially owned by Mr. Hirschhorn in his capacity as President of Hope &
Abel Investments, LLC, which directly holds 125 shares of Series 5-A Preferred Stock, which
are convertible into 400,000 shares of common stock. 63




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##### Table of Contents



Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Vsource Asia Board of Directors
  Vsource Asia Relationship and Symphony House
    Advisory Board
  Cross Shore Acquisition Corporation Advance
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  64




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##### Table of Contents



Fees
  2007
    
    
    2006Audit
    
    $
    61
    
    
    $
    91,000Audit Related
    
    $
    
    
    
    $
    Tax
    
    $
    
    
    
    $
    1,822Total
    
    $
    61
    

    $

    92,822
 Audit .
 Audit Related
 Tax
  Audit Committee Pre-Approval Policies and Procedures
  65




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##### Table of Contents



PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Consolidated Financial StatementsReports of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of January 31, 2007 and 2006Consolidated Statements of Operations for each of the three years in the period ended
January 31, 2007Consolidated Statements of Stockholders Equity for each of the three years in the
period ended January 31, 2007Consolidated Statements of Cash Flows for each of the three years in the period ended
January 31, 2007Notes to the Consolidated Financial Statements(2)
    
    Financial Statement SchedulesAll schedules have been omitted because they are not required or the required
information is shown in the financial statements or notes thereto.(3)
    
    The following documents are filed as exhibits to this Annual Report on Form
10-K (exhibits marked with an asterisk (*) have been previously filed with the SEC as
indicated and are incorporated herein by reference):3.1*
    
    Certificate of Incorporation (filed as Exhibit 3.1 to the Form 8-K, as filed
with the SEC on November 14, 2000)3.2*
    
    Bylaws (filed as Exhibit 3.2 to the Form 8-K, as filed with the SEC on November
14, 2000)3.3*
    
    Amendment to Certificate of Incorporation, dated January 16, 2002 (filed as
Exhibit 3.3 to the Form 8-K, as filed with the SEC on January 23, 2002)3.4*
    
    Amendment to Certificate of Incorporation, dated November 20, 2002 (filed as
Exhibit 3.1 to the Form 10-Q for the period ending October 31, 2002, as filed with the
SEC on December 5, 2002)3.5*
    
    Certificate of Amendment to Certificate of Incorporation, dated December 16,
2005 (filed as Exhibit 3.5 to the Form 10-Q for the period ending October 31, 2005, as
filed with the SEC on December 20. 2005)4.1*
    
    Certificate of Designations of Rights and Preferences of Series 5-A Convertible
Preferred Stock (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on July
21, 2005)4.2*
    
    Certificate of Decrease of Shares Designated as Series 1-A Convertible
Preferred Stock (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on July
13, 2005)4.3*
    
    Certificate of Decrease of Shares Designated as Series 2-A Convertible
Preferred Stock (filed as Exhibit 4.2 to the Form 8-K, as filed with the SEC on July
13, 2005)4.4*
    
    Certificate of Decrease of Shares Designated as Series 3-A Convertible
Preferred Stock (filed as Exhibit 4.3 to the Form 8-K, as filed with the SEC on July
13, 2005)4.5*
    
    Certificate of Decrease of Shares Designated as Series 4-A Convertible
Preferred Stock (filed as Exhibit 4.4 to the Form 8-K, as filed with the SEC on July
13, 2005)4.6*
    
    Series 5-A Preferred Stock and Warrant Purchase Agreement, dated as of July 7,
2005, by and among Vsource, Inc. and the investors listed therein (filed as Exhibit
4.1 to the Form 8-K, as filed with the SEC on July 21, 2005)4.7*
    
    Form of Vsource, Inc. Common Stock Purchase Warrant (filed as Exhibit 4.2 to
the Form 8-K, as filed with the SEC on July 21, 2005)4.8*
    
    Form of Vsource, Inc. Common Stock Purchase Warrant issuable to Advisory Board
members (filed as Exhibit 4.2 to the Form 8-K, as filed with the SEC on August 23,
2005)10.1*
    
    Purchase and Sale of Obligation Agreement, dated as of May 24, 2005, by and
among Vsource, Inc. and Symphony House Berhad (filed as Exhibit 10.1 to the Form 8-K,
as filed with the SEC on May 27, 2005)
 66




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##### Table of Contents



10.2*
    
    Consulting and Non-Competition Agreement, dated as of July 18, 2005, by and
between Vsource, Inc. and Dennis M. Smith (filed as Exhibit 10.1 to the Form 8-K, as
filed with the SEC on July 21, 2005)10.3*
    
    Loan Agreement, dated as of July 29, 2005, between Clinicis-Phoenix Surgery,
LLC and Vsource (USA) Inc. (filed as Exhibit 10.1 to the Form 8-K, as filed with the
SEC on August 9, 2005)10.4*
    
    Secured Promissory Note, dated as of July 29, 2005, executed by
Clinicis-Phoenix Surgery, LLC. (filed as Exhibit 10.2 to the Form 8-K, as filed with
the SEC on August 9, 2005)10.5*
    
    Stock Pledge Agreement, dated as of July 29, 2005, between Donald A. Cook and
Vsource (USA) Inc. (filed as Exhibit 10.3 to the Form 8-K, as filed with the SEC on
August 9, 2005)10.6*
    
    Inducement Agreement, dated as of July 29, 2005, between Vsource, Inc. and
Clinicis, Inc. (filed as Exhibit 10.4 to the Form 8-K, as filed with the SEC on August
9, 2005)10.7*
    
    Employment and Non-Competition Agreement, dated as of July 18, 2005, between
David Hirschhorn and Vsource (USA) Inc. (filed as Exhibit 10.1 to the Form 8-K, as
filed with the SEC on August 23, 2005)10.8*
    
    Employment and Non-Competition Agreement, dated as of July 18, 2005, between
Todd Parker and Vsource (USA) Inc. (filed as Exhibit 10.2 to the Form 8-K, as filed
with the SEC on August 23, 2005)10.9*
    
    Partnership Interest Purchase Agreement, dated as of December 2, 2005, by and
among Del Mar GenPar, Inc. and Del Mar Acquisition, Inc., as the buyers; Surgical
Ventures, Inc., as the seller; and David M. Kupfer, M.D. (filed as Exhibit 10.1 to
the Form 8-K, as filed with the SEC on December 7, 2005)10.10*
    
    Partnership Interest Purchase Agreement, dated as of December 2, 2005, by and among
Point Loma GenPar, Inc. and Point Loma Acquisition, Inc., as the buyers; Surgical
Ventures, Inc., as the seller; and David M. Kupfer, M.D. (filed as Exhibit 10.2 to
the Form 8-K, as filed with the SEC on December 7, 2005)10.11*
    
    First Amendment to Partnership Interest Purchase Agreement, dated as of March 13,
2006, by and among Del Mar GenPar, Inc. and Del Mar Acquisition, Inc., as the buyers;
Surgical Ventures, Inc., as the seller; and David M. Kupfer, M.D. (filed as Exhibit
10.3 to the Form 8-K, as filed with the SEC on March 16, 2006)10.12*
    
    First Amendment to Partnership Interest Purchase Agreement, dated as of March 13,
2006, by and among Point Loma GenPar, Inc. and Point Loma Acquisition, Inc., as the
buyers; Surgical Ventures, Inc., as the seller; and David M. Kupfer, M.D. (filed as
Exhibit 10.4 to the Form 8-K, as filed with the SEC on March 16, 2006)10.13*
    
    Series 5-A Preferred Stock and Warrant Purchase Agreement, dated as of September, 18,
2006, by and among Tri-Isthmus Group, Inc. and certain Series 5-A Preferred Stock
Investors (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on September 22,
2006)10.14*
    
    Form of Common Stock Purchase Warrant (filed as Exhibit 4.2 to the Form 8-K, as filed
with the SEC on September 22, 2006)21.1
    
    Subsidiaries of Tri-Isthmus Group, Inc. (f/k/a Vsource, Inc.)31.1
    
    Certification Pursuant to Rule 13a-14(d) promulgated under the Securities Exchange Act of 193431.2
    
    Certification Pursuant to Rule 13a-14(d) promulgated under the Securities Exchange Act of 193432.1
    
    Certification Pursuant to 18 U.S.C. 135032.2
    
    Certification Pursuant to 18 U.S.C. 1350
 (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on September 22, 2006
 67




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##### Table of Contents



SIGNATURES
  Tri-Isthmus Group, Inc.Date: May 16, 2007
    
    /s/ David HirschhornDavid HirschhornCo-Chief Executive Officer
  Signature
    
    Title
    
    Date/s/ David Hirschhorn

David Hirschhorn
    
    Co-Chairman of the Board,
Co-Chief Executive Officer and
Co-Chief Financial Officer
    
    May 16, 2007/s/ Todd Parker

Todd Parker
    
    Co-Chairman of the Board,
Co-Chief Executive Officer and
Co-Chief Financial Officer
    
    May 16, 2007/s/ Dennis M. Smith

Dennis M. Smith
    
    Director
    
    May 16, 2007/s/ Robert N. Schwartz

Robert N. Schwartz
    
    Director
    
    May 16, 2007/s/ Richardson E. Sells

Richardson E. Sells
    
    Director
    
    May 16, 2007
 68




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description3.1*
    
    Certificate of Incorporation (filed as Exhibit 3.1 to the Form 8-K, as filed with the SEC on November 14, 2000)3.2*
    
    Bylaws (filed as Exhibit 3.2 to the Form 8-K, as field with the SEC on November 14, 2000)3.3*
    
    Amendment to Certificate of Incorporation, dated January 16, 2002 (filed as Exhibit 3.3 to the Companys Form
8-K, as filed with the SEC on January 23, 2002)3.4*
    
    Amendment to Certificate of Incorporation, dated November 20, 2002 (filed as Exhibit 3.1 to the Companys Form
10-Q for the period ending October 31, 2002, as filed with the SEC on December 5, 2002)3.5*
    
    Certificate of Amendment to Certificate of Incorporation, dated December 16, 2005 (filed as Exhibit 3.5 to the
Companys Form 10-Q for the period ending October 31, 2005, as filed with the SEC on December 20. 2005)4.1*
    
    Certificate of Designations of Rights and Preferences of Series 5-A Convertible Preferred Stock (filed as
Exhibit 3.1 to the Companys Form 8-K, as filed with the SEC on July 21, 2005)4.2*
    
    Certificate of Decrease of Shares Designated as Series 1-A Convertible Preferred Stock (filed as Exhibit 4.1
to the Companys Form 8-K, as filed with the SEC on July 13, 2005)4.3*
    
    Certificate of Decrease of Shares Designated as Series 2-A Convertible Preferred Stock (filed as Exhibit 4.2
to the Form 8-K, as filed with the SEC on July 13, 2005)4.4*
    
    Certificate of Decrease of Shares Designated as Series 3-A Convertible Preferred Stock (filed as Exhibit 4.3
to the Form 8-K, as filed with the SEC on July 13, 2005)4.5*
    
    Certificate of Decrease of Shares Designated as Series 4-A Convertible Preferred Stock (filed as Exhibit 4.4
to the Form 8-K, as filed with the SEC on July 13, 2005)4.6*
    
    Series 5-A Preferred Stock and Warrant Purchase Agreement, dated as of July 7, 2005, by and among Vsource,
Inc. and the investors listed therein (filed as Exhibit 4.1 to the Form 8-K, as filed with the SEC on July
21, 2005)4.7*
    
    Form of Vsource, Inc. Common Stock Purchase Warrant (filed as Exhibit 4.2 to the Form 8-K, as filed with the
SEC on July 21, 2005)4.8*
    
    Form of Vsource, Inc. Common Stock Purchase Warrant issuable to Advisory Board members (filed as Exhibit 4.2
to the Form 8-K, as filed with the SEC on August 23, 2005)10.1*
    
    Purchase and Sale of Obligation Agreement, dated as of May 24, 2005, by and among Vsource, Inc. and Symphony
House Berhad (filed as Exhibit 10.1 to the Form 8-K, as filed with the SEC on May 27, 2005)10.2*
    
    Consulting and Non-Competition Agreement, dated as of July 18, 2005, by and between Vsource, Inc. and Dennis
M. Smith (filed as Exhibit 10.1 to the Form 8-K, as filed with the SEC on July 21, 2005)10.3*
    
    Loan Agreement, dated as of July 29, 2005, between Clinicis-Phoenix Surgery, LLC and Vsource (USA) Inc.
(filed as Exhibit 10.1 to the Form 8-K, as filed with the SEC on August 9, 2005)10.4*
    
    Secured Promissory Note, dated as of July 29, 2005, executed by Clinicis-Phoenix Surgery, LLC. (filed as
Exhibit 10.2 to the Form 8-K, as filed with the SEC on August 9, 2005)10.5*
    
    Stock Pledge Agreement, dated as of July 29, 2005, between Donald A. Cook and Vsource (USA) Inc. (filed as
Exhibit 10.3 to the Form 8-K, as filed with the SEC on August 9, 2005)10.6*
    
    Inducement Agreement, dated as of July 29, 2005, between Vsource, Inc. and Clinicis, Inc. (filed as Exhibit
10.4 to the Form 8-K, as filed with the SEC on August 9, 2005)10.7*
    
    Employment and Non-Competition Agreement, dated as of July 18, 2005, between David Hirschhorn and Vsource
(USA) Inc. (filed as Exhibit 10.1 to the Form 8-K, as filed with SEC on August 23, 2005)10.8*
    
    Employment and Non-Competition Agreement, dated as of July 18, 2005, between Todd Parker and Vsource (USA)
Inc. (filed as Exhibit 10.2 to the Form 8-K, as filed with the SEC on August 23, 2005)10.9*
    
    Partnership Interest Purchase Agreement, dated as of December 2, 2005, by and among Del Mar GenPar, Inc. and
Del Mar Acquisition, Inc., as the buyers; Surgical Ventures, Inc., as the seller; and David M. Kupfer, M.D.
(filed




---



##### Table of Contents



Exhibit No.
    
    Descriptionas Exhibit 10.1 to the Form 8-K, as filed with the SEC on December 7, 2005)10.10*
    
    Partnership Interest Purchase Agreement, dated as of December 2, 2005, by and among Point Loma GenPar, Inc.
and Point Loma Acquisition, Inc., as the buyers; Surgical Ventures, Inc.,
as the seller; and David M. Kupfer,
M.D. (filed as Exhibit 10.2 to the Form 8-K, as filed with the SEC on December 7, 2005)10.11*
    
    First Amendment to Partnership Interest Purchase Agreement, dated as of March 13, 2006, by and among Del Mar
GenPar, Inc. and Del Mar Acquisition, Inc., as the buyers; Surgical Ventures, Inc., as the seller; and David
M. Kupfer, M.D. (filed as Exhibit 10.3 to the Form 8-K, as filed with the SEC on March 16, 2006)10.12*
    
    First Amendment to Partnership Interest Purchase Agreement, dated as of March 13, 2006, by and among Point
Loma GenPar, Inc. and Point Loma Acquisition, Inc., as the buyers; Surgical Ventures, Inc., as the seller;
and David M. Kupfer, M.D. (filed as Exhibit 10.4 to the Form 8-K, as filed with the SEC on March 16, 2006)10.13*
    
    Series 5-A Preferred Stock and Warrant Purchase Agreement, dated as of September, 18, 2006, by and among
Tri-Isthmus Group, Inc. and certain Series 5-A Preferred Stock Investors (filed as Exhibit 4.1 to the Form
8-K, as filed with the SEC on September 22, 2006)10.14*
    
    Form of Common Stock Purchase Warrant (filed as Exhibit 4.2 to the Form 8-K, as filed with the SEC on
September 22, 2006)21.1
    
    Subsidiaries of Tri-Isthmus Group,
Inc. (f/k/a Vsource, Inc.)31.1
    
    Certification Pursuant to Rule 13a-14(d) promulgated under the Securities Exchange Act of 193431.2
    
    Certification Pursuant to Rule 13a-14(d) promulgated under the Securities Exchange Act of 193432.1
    
    Certification Pursuant to 18 U.S.C. 135032.2
    
    Certification Pursuant to 18 U.S.C. 1350
 
 *
    
    Previously filed with the SEC as indicated, and hereby incorporated herein by reference.