##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2006
 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 NO.: 000-30326
 TRI-ISTHMUS GROUP, INC.
  Delaware
    
    77-0557617(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)149 South Barrington Avenue, Suite 808Los Angeles, California
    
    90049(Address of Principal Executive Offices)
    
    (Zip Code)
 (818) 887-6659
  þ o
 
 o o þ
  o þ
 Number of shares of common stock outstanding as of September 13, 2006
    
    
    3,673,967Number of shares of Series 1-A Convertible Preferred Stock outstanding as of September 13, 2006
    
    
    67,600Number of shares of Series 2-A Convertible Preferred Stock outstanding as of September 13, 2006
    
    
    3,900Number of shares of Series 4-A Convertible Preferred Stock outstanding as of September 13, 2006
    
    
    0Number of shares of Series 5-A Convertible Preferred Stock outstanding as of September 13, 2006
    
    
    1,478




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets July 31, 2006 and January 31, 2006
    
    
    3Condensed Consolidated Statements of Operations
Three and six months ended July 31, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows
Six months ended July 31, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    25Signatures
    
    
    26Exhibit Index
    
    
    27Certification Pursuant to Rule 13a-14(d)Certification Pursuant to Rule 13a-14(d)Certification to 18 U.S.C. 1350Certification to 18 U.S.C. 1350
  2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 
   July 31, 2006
    
    
    January 31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    334
    
    
    $
    1,289Advance (note 9)
    
    
    272
    
    
    
    Prepaid expenses
    
    
    27
    
    
    
    45Other current assets
    
    
    186
    
    
    
    244Total current assets
    
    
    819
    
    
    
    1,578Property and equipment, net
    
    
    0
    
    
    
    1Long term investments (note 8)
    
    
    1,000
    
    
    
    Total assets
    
    $
    1,819
    
    
    $
    1,579LIABILITIES, PREFERRED STOCK AND
SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    124
    
    
    $
    391Accrued expenses
    
    
    195
    
    
    
    150Staff accruals
    
    
    9
    
    
    
    11Total current liabilities
    
    
    328
    
    
    
    552Commitments and contingencies (Note 10)
  3




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TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 July 31, 2006
    
    
    January 31, 2006Non-redeemable Preferred Stock:Preferred stock Series 1-A ($0.01 par value, 67,600 shares
authorized; 67,600 shares issued and outstanding as of
July 31 and January 31, 2006)(Aggregate liquidation value is $169 as of July 31 and
January 31, 2006)
    
    
    166
    
    
    
    166Preferred stock Series 2-A ($0.01 par value, 3,900 shares
authorized; 3,900 shares issued and outstanding as of July
31 and January 31, 2006)(Aggregate liquidation value is $25 as of July 31 and
January 31, 2006)
    
    
    25
    
    
    
    25Total non-redeemable preferred stock
    
    
    191
    
    
    
    191Redeemable preferred stock:Preferred stock Series 5-A ($0.01 par value, 3,752 shares
authorized; 1,478 shares issued and outstanding as of July
31 and January 31, 2006)(Aggregate liquidation value is $1,478 as of July 31 and
January 31, 2006)(Aggregate redemption value is $1,774 as of July 31 and
January 31, 2006)
    
    
    1,266
    
    
    
    1,266Series B preferred stock issued by subsidiary (note 8)
($0.01 per value, 38,250 shares authorized, 19,990 and 0
shares issued and outstanding as of July 31 and January
31, 2006, respectively)(Aggregate redemption value is $1,000 and nil as of July
31 and January 31, 2006, respectively)
    
    
    1,000
    
    
    
    Receivable from issuance of preferred stock Series 5-A
    
    
    (150
    )
    
    
    (150
    )Total preferred stock
    
    
    2,307
    
    
    
    1,307Shareholders equity:Common stock ($0.01 par value, 100,000,000 shares
authorized; 3,673,978 and 3,673,992 shares issued and
outstanding as of July 31 and January 31, 2006,
respectively)
    
    
    37
    
    
    
    37Additional paid-in capital
    
    
    65,263
    
    
    
    65,263Accumulated deficit
    
    
    (65,742
    )
    
    
    (65,114
    )Deferred stock-based compensation
    
    
    (322
    )
    
    
    (416
    )Other comprehensive loss
    
    
    (52
    )
    
    
    (50
    )Total shareholders equity
    
    
    (816
    )
    
    
    (280
    )Total liabilities, preferred stock and shareholders equity
    
    $
    1,819
    
    
    $
    1,579
  4




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TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 
   Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue from services
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs and expenses:Cost of revenue from services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and
administrative expenses
    
    
    206
    
    
    
    452
    
    
    
    537
    
    
    
    913Amortization of stock-based
compensation
    
    
    47
    
    
    
    
    
    
    
    94
    
    
    
    Total costs and expenses, net
    
    
    253
    
    
    
    452
    
    
    
    631
    
    
    
    913Operating loss
    
    
    (253
    )
    
    
    (452
    )
    
    
    (631
    )
    
    
    (913
    )Interest income
    
    
    0
    
    
    
    1
    
    
    
    2
    
    
    
    1Net loss from operations before taxation
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (253
    )
    
    
    (451
    )
    
    
    (629
    )
    
    
    (912
    )Net loss available to common shareholders (Note 5)
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Net loss per common share:Basic
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.17
    )
    
    $
    (0.44
    )Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  5




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##### Table of Contents



TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 
   Six months ended July 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (629
    )
    
    $
    (912
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    
    
    
    
    12Write off of property and equipment
    
    
    1
    
    
    
    Bad debt provision
    
    
    
    
    
    
    12Loss on disposal of property and equipment
    
    
    
    
    
    
    22Amortization of stock-based compensation
    
    
    94
    
    
    
    Changes in working capital components
    
    
    (149
    )
    
    
    608Net cash used in operating activities
    
    
    (683
    )
    
    
    (258
    )Cash flows from investing activities:Advance (note 9)
    
    
    (272
    )
    
    
    Purchase of property and equipment
    
    
    
    
    
    
    (2
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1Proceeds from disposal of subsidiaries
    
    
    
    
    
    
    24Net cash (used in) / provided by investing activities
    
    
    (272
    )
    
    
    23Cash flows from financing activities:Proceeds from issuance of preferred stock
    
    
    
    
    
    
    1,328Cost of issuance of preferred stock
    
    
    
    
    
    
    (62
    )Warrants cancelled
    
    
    
    
    
    
    (140
    )Net cash provided by financing activities
    
    
    
    
    
    
    1,126Net (decrease)/increase in cash and cash equivalents
    
    
    (955
    )
    
    
    891Cash and cash equivalents at beginning of period
    
    
    1,289
    
    
    
    1,064Cash and cash equivalents at end of period
    
    $
    334
    
    
    $
    1,955Non cash financing and investing activities:Issuance of Series B Preferred Stock by subsidiary (Note 8)
    
    $
    1,000
    
    
    
    
  6




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1. Summary of Significant Accounting Policies
 Basis of Presentation
     Fiscal Year
  Cash and Cash Equivalents
  Future Funding
    7




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Use of Estimates
  Income Taxes
  Functional Currency
  Stock-Based Compensation
  Loss Per Share
  2. Other Current Assets
 July 31, 2006
    
    
    January 31, 2006(in thousands)Other current assets:Deposits
    
    $
    82
    
    
    $
    140Other receivables
    
    
    104
    
    
    
    104$
    186
    
    
    $
    244
 8




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3. Net (Loss)/Profit Available to Common Shareholders
  Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Net loss
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Less: Deemed non-cash
dividend to preferred
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss available to
common shareholders
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )
 4. Net Loss Per Share
  Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per(in thousands, except per share data)
    
    
    share data)Numerator for basic and diluted
loss per share:Net loss
 continuing operations
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Net
(loss)/income 
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Denominator for basic and
diluted loss per share 
weighted average shares
    
    
    3,673,992
    
    
    
    2,074,032
    
    
    
    3,673,992
    
    
    
    2,074,058Net loss per common share:Continuing operationsBasic
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.17
    )
    
    $
    (0.44
    )Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotalBasic
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.17
    )
    
    $
    (0.44
    )Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  9




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5. Comprehensive loss
  Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Net loss available to common
shareholders
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Other comprehensive (loss)/gain
foreign currency translations
    
    
    
    
    
    
    (5
    )
    
    
    (2
    )
    
    
    1Comprehensive loss
    
    $
    (253
    )
    
    $
    (456
    )
    
    $
    (631
    )
    
    $
    (911
    )
 6. Stock Options
 Stock-Based Compensation
      10




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2001 Stock Options/Stock Issuance Plan
   Weighted-AverageNumber of Options
    
    
    Exercise Price Per ShareSix Months Ended July 31, 2006
    
    
    As of July 31, 2006Options outstanding
at beginning of the
period
    
    
    458,517
    
    
    $
    1.88Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    94,767
    
    
    
    1.48Forfeited
    
    
    
    
    
    
    Options outstanding
at end of the
period
    
    
    363,750
    
    
    $
    0.42Options
vested/exercisable
at end of the
period
    
    
    363,750
    
    
    $
    0.42
  Weighted-averageWeighted-average
    
    
    remainingExercise price
    
    
    Number of options
    
    
    exercise price
    
    
    contractual life$
    0.40
    
    
    
    360,000
    
    
    $
    0.40
    
    
    
    9.0$
    2.00
    
    
    
    3,750
    
    
    $
    2.00
    
    
    
    6.0363,750
    
    
    $
    0.42
 11




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7. Warrants
       Weighted-AverageNumber of Shares of Common Stock
    
    
    Exercise Price Per ShareSix Months Ended July 31, 2006
    
    
    As of July 31, 2006Warrants
outstanding at
beginning of the
period
    
    
    2,097,095
    
    
    $
    0.56Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled or Expired
    
    
    (469,374
    )
    
    
    (0.94
    )Converted
    
    
    
    
    
    
    Warrants
outstanding at end
of the period
    
    
    1,627,721
    
    
    $
    0.45Warrants
exercisable at end
of the period
    
    
    1,385,221
    
    
    $
    0.46
 12




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8. Issuance of Series B Preferred Stock by Subsidiary
    9. Advance to CSA II, LLC
  13




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10. Commitments and Contingencies
 Operating Lease
  Litigation
  11. Subsequent Events
 Closing of Additional Series 5-A Preferred Stock and Warrants Financing.
 14




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Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD LOOKING STATEMENTS
  OVERVIEW
 OUR FISCAL YEAR ENDS ON JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. UNLESS OTHERWISE INDICATED,
REFERENCES TO 2007 AND 2006 RELATE TO THE FISCAL YEARS ENDED JANUARY 31, 2007 AND 2006,
RESPECTIVELY, RATHER THAN CALENDAR YEARS.
 RECENT DEVELOPMENTS
 San Diego Surgical Center Acquisitions.
 Amendments to San Diego Surgical Center Acquisition Agreements
 15




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##### Table of Contents



CSA II Agreement.
 Letter of Intent for Surgical Center Management Company.
 Subscriptions for Additional Series 5-A Preferred Stock and Warrants.
 Interim Financing Agreements for San Diego ASCs.
 SUBSEQUENT EVENTS
 Closing of Additional Series 5-A Preferred Stock and Warrants Private Placement.
 16




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CURRENT OPERATIONS
    STRATEGY
  
    
    Process-intensive businesses and/or businesses with differentiating assets.
    
    Businesses that operate in a fragmented competitive landscape with the potential for
both organic growth and growth through consolidation.
    
    Companies lending themselves to a partnership with TIGroup, with the seller
retaining a continued involvement in the success of the business and the success of
TIGroup.
    
    Diverse client base with strong retention traits.
    
    Positive cash flow, which can be improved with better operating efficiencies.
  
    
    Healthcare delivery and processing services including ambulatory surgical centers,
data and billing management and claims processing.
    
    Financial processing services including accounting, tax preparation and accounts
receivable and payable management.
    
    Asset management services including funds management and benefits management.
 17




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RESULTS OF OPERATIONS (All amounts in thousands)
 Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue from services
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs and expenses:Selling, general
and administrative
expenses
    
    
    206
    
    
    
    452
    
    
    
    537
    
    
    
    913Amortization of
stock-based
compensation
    
    
    47
    
    
    
    
    
    
    
    94
    
    
    
    Total costs and expenses, net
    
    
    253
    
    
    
    452
    
    
    
    631
    
    
    
    913Operating loss
    
    
    (253
    )
    
    
    (452
    )
    
    
    (631
    )
    
    
    (913
    )Interest income
    
    
    0
    
    
    
    1
    
    
    
    2
    
    
    
    1Net loss from operations before taxation
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )Net loss available to common
shareholders (Note 5)
    
    $
    (253
    )
    
    $
    (451
    )
    
    $
    (629
    )
    
    $
    (912
    )
 18




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MATERIAL CHANGES IN RESULTS OF OPERATIONS  THREE AND SIX MONTHS ENDED JULY 31, 2006, COMPARED TO
THE THREE AND SIX MONTHS ENDED JULY 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. THEREFORE, A COMPARISON OF THE THREE AND SIX MONTHS ENDED JULY 31, 2006 TO THE THREE AND
SIX MONTHS ENDED JULY 31, 2005 WOULD NOT ENHANCE A READERS UNDERSTANDING OF OUR CURRENT FINANCIAL
CONDITION, CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE DISCUSSION BELOW PRESENTS
OUR RESULTS, EXCLUDING REVENUES AND EXPENSES FROM DISCONTINUED OPERATIONS.
            19




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MATERIAL CHANGES IN FINANCIAL CONDITION  AT JULY 31, 2006, COMPARED TO JANUARY 31, 2006:
           20




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21




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LIQUIDITY AND CAPITAL RESOURCES
        22




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OFF-BALANCE SHEET FINANCING
  CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
    23




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting
 24




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PART II
OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
  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
 25




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##### Table of Contents



SIGNATURES
  Date: September 19, 2006
    



Tri-Isthmus
Group, Inc.(Registrant)By:
    
    /s/ David HirschhornDavid HirschhornCo-Chief Executive OfficerDate: September 19, 2006
    
    /s/ David HirschhornDavid HirschhornCo-Chief Financial Officer(Co-Principal Financial Officer)Date: September 19, 2006
    
    /s/ Todd ParkerTodd ParkerCo-Chief Financial Officer(Co-Principal Financial Officer)
 26




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EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    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
 27