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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 April 30, 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 NO.: 000-30326
 TRI-ISTHMUS GROUP, INC.
  Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
    
    77-0557617
(I.R.S. Employer
Identification No.)149 South Barrington Avenue, Suite 808
Los 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 June 15, 2007
    
    
    3,777,623Number of shares of Series 1-A Convertible Preferred Stock outstanding as of June 15, 2007
    
    
    67,600Number of shares of Series 2-A Convertible Preferred Stock outstanding as of June 15, 2007
    
    
    3,900Number of shares of Series 4-A Convertible Preferred Stock outstanding as of June 15, 2007
    
    
    0Number of shares of Series 5-A Convertible Preferred Stock outstanding as of June 15, 2007
    
    
    2,767




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets April 30, 2007 (Unaudited) and January 31, 2007
    
    
    3Condensed Consolidated Statements of Operations Three months ended April 30, 2007 and 2006 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows Three months ended April 30, 2007 and 2006 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    28Exhibit Index
    
    
    29Certification Pursuant to Rule 13a-14(d)Certification Pursuant to Rule 13a-14(d)Certification Pursuant to 18 U.S.C. 1350Certification Pursuant to 18 U.S.C. 1350
  2




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PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 April 30, 2007
    
    
    January 31, 2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,052
    
    
    $
    286Accounts receivable, net of allowance for uncollectible accounts
    
    
    1,333
    
    
    
    1,403Advance to affiliated entity (note 7)
    
    
    273
    
    
    
    273Prepaid expenses
    
    
    27
    
    
    
    50Other current assets
    
    
    459
    
    
    
    457Total current assets
    
    
    3,144
    
    
    
    2,469Property and equipment, net
    
    
    1,087
    
    
    
    1,115Goodwill (Note 8)
    
    
    987
    
    
    
    987Total assets
    
    
    5,218
    
    
    
    4,571LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    353
    
    
    
    545Accrued expenses
    
    
    323
    
    
    
    290Staff accruals
    
    
    4
    
    
    
    4Total current liabilities
    
    
    680
    
    
    
    839Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Minority interest (Note 10)
    
    
    1,258
    
    
    
    1,285
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TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 April 30, 2007
    
    
    January 31, 2007(Unaudited)Non-redeemable Preferred Stock:Preferred stock Series 1-A ($0.01 par value, 67,600 shares
authorized; 67,600 shares issued and outstanding as of
April 30 and January 31, 2007)(Aggregate liquidation value is $169 as of April 30 and
January 31, 2007)
    
    
    166
    
    
    
    166Preferred stock Series 2-A ($0.01 par value, 3,900 shares
authorized; 3,900 shares issued and outstanding as of
April 30 and January 31, 2007)(Aggregate liquidation value is $25 as of April 30 and
January 31, 2007)
    
    
    25
    
    
    
    25Total non-redeemable preferred stock
    
    
    191
    
    
    
    191Redeemable preferred stock:Preferred stock Series 5-A ($0.01 par value, 3,752 shares
authorized; 2,717 and 1,842 shares issued and outstanding
as of April 30 and January 31, 2007 respectively)
    
    
    2,534
    
    
    
    1,509(Aggregate liquidation value is $2,717 and $1,842 as of
April 30 and January 31, 2007 respectively)(Aggregate redemption value is $3,321 and $1,774 as of
April 30 and January 31, 2007 respectively)Preferred stock Series B issued by subsidiary (note 8)
($0.01 per value, 38,250 shares authorized, 19,990 and 19,990
shares issued and outstanding as of April 30 and January
31, 2007, respectively)
    
    
    2,500
    
    
    
    2,500(Aggregate redemption value is $1,000 as of April 30 and
January 31, 2007)Receivable from issuance of preferred stock series 5-A
    
    
    (150
    )
    
    
    (150
    )Total preferred stock
    
    
    5,075
    
    
    
    4,050Shareholders equity:Common stock ($0.01 par value, 100,000,000 shares
authorized; 3,777,623 and 3,673,992 shares issued and
outstanding as of April 30 and January 31, 2007,
respectively)
    
    
    37
    
    
    
    37Additional paid-in capital
    
    
    65,393
    
    
    
    65,390Accumulated deficit
    
    
    (66,939
    )
    
    
    (66,694
    )Deferred stock-based compensation
    
    
    (234
    )
    
    
    (284
    )Other comprehensive loss
    
    
    (52
    )
    
    
    (52
    )Total shareholders equity
    
    
    (1,795
    )
    
    
    (1,603
    )Total liabilities, preferred stock and shareholders equity
    
    
    5,218
    
    
    
    4,571
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TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 Three months endedApril 30,2007
    
    
    2006Revenue from services
    
    $
    880
    
    
    $
    Costs and expenses:Selling, general and administrative expenses
    
    
    1,098
    
    
    
    331Amortization of stock-based compensation
    
    
    54
    
    
    
    47Total costs and expenses, net
    
    
    1,152
    
    
    
    378Operating loss
    
    
    (272
    )
    
    
    (378
    )Interest income
    
    
    
    
    
    
    2Net loss from continuing operations before taxation
    
    
    (272
    )
    
    
    (376
    )Minority interest
    
    
    27
    
    
    
    Taxation
    
    
    
    
    
    
    Net loss
    
    
    (245
    )
    
    
    (376
    )Net loss available to common shareholders (Note 4)
    
    $
    (245
    )
    
    $
    (376
    )Net loss per
common share (Note 4):Basic
    
    
    (0.07
    )
    
    
    (0.10
    )Diluted
    
    
    N/A
    
    
    
    N/A
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TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 Three months ended April 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (245
    )
    
    $
    (376
    )Adjustments to reconcile net (loss) / profit to net cash used in
operating activities:Minority interest
    
    
    (27
    )
    
    
    Depreciation and amortization
    
    
    81
    
    
    
    47Changes in working capital components
    
    
    (68
    )
    
    
    4Net cash used in operating activities
    
    
    (259
    )
    
    
    (325
    )Cash flows from investing activities:Investment
in subsidiary for purchase of partnership interest (note 8)
    
    
    
    
    
    
    Advance to CSA II, LLC (note 7)
    
    
    
    
    
    
    (333
    )Net cash (used in) / provided by investing activities
    
    
    
    
    
    
    (333
    )Cash flows from financing activities:Issuance of Preferred stock Series 5-A (Note 11)
    
    
    1,025
    
    
    
    Issuance of Series B preferred stock by subsidiary
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    1,025Effect of exchange rates on cash
    
    
    
    
    
    
        (2)Net decrease in cash and cash equivalents
    
    
    766
    
    
    
    (656
    )Cash and cash equivalents at beginning of period
    
    
    286
    
    
    
    1,289Cash and cash equivalents at end of period
    
    $
    1,052
    
    
    $
    633
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1.
    
    Summary of Significant Accounting Policies
 Basis of Presentation
     Fiscal Year
  Cash and Cash Equivalents
  Future Funding
     Use of Estimates
  7




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Income Taxes
  Functional Currency
  Stock-Based Compensation
  Loss Per Share
  8




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2.
    
    Other Current Assets
 April 30, 2007
    
    
    January 31, 2007(in thousands)Other current assets:Deposits
    
    $
    81
    
    
    $
    81Other receivables
    
    
    378
    
    
    
    376$
    459
    
    
    $
    457
 3.
    
    Net (Loss)/Profit Available to Common Shareholders
  Three months endedApril 30,2007
    
    
    2006(in thousands)Net loss
    
    $
    (245
    )
    
    $
    (376
    )Less: Deemed non-cash dividend to preferred shareholders
    
    
    
    
    
    
    Net loss available to common shareholders
    
    $
    (245
    )
    
    $
    (376
    )
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4.
    
    Net Loss Per Share
  Three months endedApril 30,2007
    
    
    2006(in thousands, except for number ofshares and per share data)Numerator for basic and diluted loss per share:Net loss
    
    $
    (245
    )
    
    $
    (376
    )Denominator for basic (loss)/profit per share 
weighted average shares
    
    
    3,722,916
    
    
    
    3,673,992Effect of dilutive securities:Employee stock options
    
    
    N/A
    
    
    
    N/APreferred stock
    
    
    N/A
    
    
    
    N/AWarrants
    
    
    N/A
    
    
    
    N/ADenominator for diluted profit/(loss) per common
share  adjusted weighted average shares
    
    
    N/A
    
    
    
    N/ANet (loss)/profit per common share:Continuing operationsBasic
    
    
    (0.07
    )
    
    
    (0.10
    )Diluted
    
    
    N/A
    
    
    
    N/ATotalBasic
    
    
    (0.07
    )
    
    
    (0.10
    )Diluted
    
    
    N/A
    
    
    
    N/A
  5.
    
    Comprehensive loss
  Three months endedApril 30,2007
    
    
    2006(in thousands)Net loss available to common shareholders
    
    $
    (245
    )
    
    $
    (376
    )Other comprehensive incomeForeign currency translations
    
    
    
    
    
    
    (2
    )Comprehensive loss
    
    $
    (245
    )
    
    $
    (378
    )
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6. Stock based compensation
          11




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Stock Option Plans
    Weighted-AverageNumber of Options
    
    
    Exercise Price Per ShareThree Months Ended April 30, 2007
    
    
    As of April 30, 20072007
    
    
    2007Options outstanding
at beginning of the
period
    
    
    483,750
    
    
    $
    0.42Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Options outstanding
at end of the
period
    
    
    483,750
    
    
    $
    0.42Options
vested/exercisable
at end of the
period
    
    
    373,750
    
    
    $
    0.42
  Weighted-averageWeighted-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
    
    
    $
    1.88
 Warrants
  12




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7. Advance to CSA II, LLC
  8. Goodwill
  13




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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
     9. Commitments and Contingencies
 Operating Leases
  Litigation
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HI Del Mar, LLC Point Loma, LLC
 10. Minority interest
   11. Series 5-A Preferred Stock
     15




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16




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12. Subsequent Events
  17




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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 2008 AND 2007 RELATE TO THE FISCAL YEARS ENDED JANUARY 31, 2008 AND 2007,
RESPECTIVELY, RATHER THAN CALENDAR YEARS.
 RECENT DEVELOPMENTS
 San Diego Surgical Center Acquisitions.
 CSA II Agreement.
 Closing of Additional Series 5-A Preferred Stock and Warrants Private Placement.
 18




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SUBSEQUENT EVENTS
 Subscriptions for Additional Series 5-A Preferred Stock and Warrants.
 19




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CURRENT OPERATIONS
     Strategy
   20




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RESULTS OF OPERATIONS (All amounts in thousands)
 Three months endedApril 30,2007
    
    
    2006Revenue from services
    
    $
    880
    
    
    $
    Costs and expenses:Selling, general and administrative expenses
    
    
    1,098
    
    
    
    331Amortization of stock-based compensation
    
    
    54
    
    
    
    47Total costs and expenses, net
    
    
    1,152
    
    
    
    378Operating loss
    
    
    (272
    )
    
    
    (378
    )Interest income
    
    
    
    
    
    
    2Net loss from continuing operations before taxation
    
    
    (272
    )
    
    $
    (376
    )Minority interest
    
    
    27Taxation
    
    
    
    
    
    
    Net loss
    
    
    (245
    )
    
    
    (376
    )Net loss available to common shareholders (Note 4)
    
    $
    (245
    )
    
    $
    (376
    )Net loss per common share:Basic
    
    
    (0.07
    )
    
    
    (0.10
    )Diluted
    
    
    N/A
    
    
    
    N/A
  MATERIAL CHANGES IN RESULTS OF OPERATIONS  THREE MONTHS ENDED APRIL 30, 2007, COMPARED TO THREE
MONTHS ENDED APRIL 30, 2006
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MATERIAL CHANGES IN FINANCIAL CONDITION  AT APRIL 30, 2007, COMPARED TO JANUARY 31, 2007:
         LIQUIDITY AND CAPITAL RESOURCES
  23




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OFF-BALANCE SHEET FINANCING
  CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
 Income Taxes
  Fair Value Measurements
  24




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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
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PART II
OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
 HI Del Mar, LLC Point Loma, LLC
 
 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
  26




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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
 27




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SIGNATURES
  Tri-Isthmus Group, Inc.(Registrant)Date:  June 19, 2007
    By:
    /s/ David HirschhornDavid HirschhornCo-Chief Executive OfficerDate: June 19, 2007
    /s/ David HirschhornDavid HirschhornCo-Chief Financial Officer
(Co-Principal Financial Officer)Date: June 19, 2007
    /s/ Todd ParkerTodd ParkerCo-Chief Financial Officer
(Co-Principal Financial Officer) 28




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EXHIBIT INDEX
 Exhibit No.
    
    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
 29