##### 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, 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
    
    77-0557617(State or Other Jurisdiction of Incorporation or 
Organization)
    
    (I.R.S. Employer
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 18, 2007
    
    
    3,777,623Number of shares of Series 1-A Convertible Preferred Stock outstanding as of September 18, 2007
    
    
    67,600Number of shares of Series 2-A Convertible Preferred Stock outstanding as of September 18, 2007
    
    
    3,900Number of shares of Series 4-A Convertible Preferred Stock outstanding as of September 18, 2007
    
    
    0Number of shares of Series 5-A Convertible Preferred Stock outstanding as of September 18, 2007
    
    
    2,852




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
July 31, 2007 (Unaudited) and January 31, 2007
    
    
    4Condensed Consolidated Statements of Operations 
Three months ended July 31, 2007 and 2006 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows 
Six months ended July 31, 2007 and 2006 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Item 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
    
    
    26Signatures
    
    
    26Exhibit Index
    
    
    27Certification 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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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 
 TRI-ISTHMUS GROUP, INC.
 July 31, 2007
    
    
    January 31, 2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,007
    
    
    $
    286Accounts
receivable, net of allowance for uncollectible accounts
    
    
    1,381
    
    
    
    1,403Advance to affiliated entity (Note 7)
    
    
    273
    
    
    
    273Prepaid expenses
    
    
    31
    
    
    
    50Other current assets
    
    
    477
    
    
    
    457Total current assets
    
    
    3,169
    
    
    
    2,469Property and equipment, net (Note 2)
    
    
    1,130
    
    
    
    1,115Goodwill (Note 8)
    
    
    987
    
    
    
    987Total assets
    
    $
    5,286
    
    
    $
    4,571LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    596
    
    
    $
    545Accrued expenses
    
    
    455
    
    
    
    290Staff accruals
    
    
    4
    
    
    
    4Total current liabilities
    
    
    1,055
    
    
    
    839Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Minority interest (Note 10)
    
    
    1,186
    
    
    
    1,285
  3




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##### Table of Contents



TRI-ISTHMUS GROUP, INC.
 July 31, 2007
    
    
    January 31, 2007Non-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, 2007)(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, 2007)(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; 2,852 and 1,842 shares issued and outstanding
as of July 31 and January 31, 2007 respectively) (Note 11)
    
    
    2,669
    
    
    
    1,509(Aggregate liquidation value is $2,852 and $1,842 as of
July 31 and January 31, 2007, respectively)(Aggregate redemption value is $3,423 and $1,774 as of
July 31 and January 31, 2007, respectively)Preferred
stock Series B issued by subsidiary (Notes 8 and 12)
($0.01 per value, 38,250 shares authorized, 19,990 and 0
shares issued and outstanding as of July 31 and January
31, 2007, respectively)
    
    
    2,500
    
    
    
    2,500(Aggregate redemption value is $1,000 and $1,000 as of July 31 and January 31,
2007, respectively)Receivable from issuance of preferred stock series 5-A
    
    
    (150
    )
    
    
    (150
    )Total preferred stock
    
    
    5,211
    
    
    
    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 July 31 and January 31, 2007,
respectively)
    
    
    37
    
    
    
    37Additional paid-in capital
    
    
    65,638
    
    
    
    65,390Accumulated deficit
    
    
    (67,431
    )
    
    
    (66,694
    )Deferred stock-based compensation
    
    
    (357
    )
    
    
    (284
    )Other comprehensive loss
    
    
    (52
    )
    
    
    (52
    )Total shareholders equity
    
    
    (2,165
    )
    
    
    (1,603
    )Total liabilities, preferred stock and shareholders equity
    
    $
    5,286
    
    
    $
    4,571
  4




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TRI-ISTHMUS GROUP, INC. (f/k/a VSOURCE, INC.)
 
 Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from services
    
    $
    868
    
    
    $
    
    
    
    $
    1,747
    
    
    $
    Costs and expenses:Cost of revenue from services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and
administrative expenses
    
    
    1,316
    
    
    
    206
    
    
    
    2,414
    
    
    
    537Amortization of stock-based
compensation (Note 6)
    
    
    123
    
    
    
    47
    
    
    
    176
    
    
    
    94Total costs and expenses, net
    
    
    1,439
    
    
    
    253
    
    
    
    2,590
    
    
    
    631Operating loss
    
    
    (571
    )
    
    
    (253
    )
    
    
    (843
    )
    
    
    (631
    )Interest income
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    2Net loss from operations before taxation
    
    
    (570
    )
    
    
    (253
    )
    
    
    (842
    )
    
    
    (629
    )Minority interest (Note 10)
    
    
    77
    
    
    
    
    
    
    
    105
    
    
    
    Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (493
    )
    
    
    (253
    )
    
    
    (737
    )
    
    
    (629
    )Net loss available to common shareholders (Notes 3 and 5)
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (629
    )Net loss per common share: (Note 4)Basic
    
    $
    (0.13
    )
    
    $
    (0.07
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 5




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TRI-ISTHMUS GROUP, INC.
 Six months ended July 31,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (737
    )
    
    $
    (629
    )Adjustments to reconcile net (loss) / profit to
net cash used in operating activities:Minority interest
    
    
    (105
    )
    
    
    Depreciation and amortization
    
    
    232
    
    
    
    94Write off of property and equipment
    
    
    
    
    
    
    1Changes in working capital components
    
    
    239
    
    
    
    (149
    )Net cash used in operating activities
    
    
    (369
    )
    
    
    (683
    )Cash flows from investing activities:Purchase of
property and equipment
    
    
    (70
    )
    
    
    Advance to CSA II, LLC (Note 7)
    
    
    
    
    
    
    (273
    )Net cash used in investing activities
    
    
    (70
    )
    
    
    (272
    )Cash flows from financing activities:Issuance of Preferred stock Series 5-A (Note 11)
    
    
    1,160
    
    
    
    Net cash provided by financing activities
    
    
    1,160
    
    
    
    Effect of exchange rates on cash
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    721
    
    
    
    (955
    )Cash and cash equivalents at beginning of period
    
    
    286
    
    
    
    1,289Cash and cash equivalents at end of period
    
    $
    1,007
    
    
    $
    334
  6




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TRI-ISTHMUS GROUP, INC.
 1. Summary of Significant Accounting Policies
 Basis of Presentation
     Fiscal Year
  Cash and Cash Equivalents
  Future Funding
     7




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TRI-ISTHMUS GROUP, INC.
 Use of Estimates
  Income Taxes
  Functional Currency
  Stock-Based Compensation
  Loss Per Share
  2. Consolidated Balance Sheet Details
 July 31, 2007
    
    
    January 31, 2007(in thousands)Other current assets:Deposits
    
    $
    94
    
    
    $
    81Other receivables
    
    
    383
    
    
    
    376$
    477
    
    
    $
    457
 July 31, 2007
    
    
    January 31, 2007(in thousands)Property and equipmentMedical equipment
    
    $
    1,153
    
    
    $
    1,144Computer equipment
    
    
    62
    
    
    
    1,215
    
    
    
    1,144Accumulated depreciation
    
    
    (85
    )
    
    
    (29
    )$
    1,130
    
    
    $
    1,115
 8




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TRI-ISTHMUS GROUP, INC.
 3. Net (Loss)/Profit Available to Common Shareholders
  Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)
    
    
    (in thousands)Net loss
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (629
    )Less: Deemed non-cash
dividend to preferred
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss available to
common shareholders
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (629
    )
 4. Net Loss Per Share
  Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per
    
    
    (in thousands, except pershare data)
    
    
    share data)Numerator for basic
and diluted loss
per share:Net loss
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (629
    )Denominator for
basic and diluted
loss
    
    
    3,673,985
    
    
    
    3,673,992
    
    
    
    3,673,998
    
    
    
    3,673,992per share 
weighted average
shares
    
    
    3,777,623
    
    
    
    
    
    
    
    3,777,623Basic
    
    $
    (0.13
    )
    
    $
    (0.07
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  5. Comprehensive loss
  9




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TRI-ISTHMUS GROUP, INC.
 Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)
    
    
    (in thousands)Net loss available to common
shareholders
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (629
    )Other comprehensive (loss)/gain
foreign currency translations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Comprehensive loss
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (631
    )
 6. Stock based compensation
       10




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TRI-ISTHMUS GROUP, INC.
         Stock Option Plans
  11




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TRI-ISTHMUS GROUP, INC.
    Weighted-AverageNumber of Options
    
    
    Exercise Price Per ShareSix Months Ended July 31, 2007
    
    
    As of July 31, 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
    
    
    483,750
    
    
    $
    0.42
  Weighted-average
    
    
    Weighted-averageExercise price
    
    Number of options
    
    
    exercise price
    
    
    remaining contractual life$0.45
    
    
    120,000
    
    
    $
    0.45
    
    
    
    9.5$0.40
    
    
    360,000
    
    
    $
    0.40
    
    
    
    8.9$2.00
    
    
    3,750
    
    
    $
    0.42
    
    
    
    6.0483,750
    
    
    $
    0.42
 Warrants
  12




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TRI-ISTHMUS GROUP, INC.
   7. Advance to CSA II, LLC
  13




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TRI-ISTHMUS GROUP, INC.
 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
  9. Commitments and Contingencies
 Operating Leases
  Litigation
  14




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TRI-ISTHMUS GROUP, INC.
  10. Minority interest
  11.
Series 5-A Redeemable Preferred Stock
     15




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##### Table of Contents



TRI-ISTHMUS GROUP, INC.
   12. Subsequent Events
 Subscriptions for Additional Series 5-A Preferred Stock and Warrants.
 16




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##### Table of Contents



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
 17




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Closing of Additional Series 5-A Preferred Stock and Warrants Private Placement
 SUBSEQUENT EVENTS
 Subscriptions for Additional Series 5-A Preferred Stock and Warrants.
 CURRENT OPERATIONS
   Strategy
  18




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19




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RESULTS OF OPERATIONS (All amounts in thousands)
 Three months ended
    
    
    Six months endedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from services
    
    $
    868
    
    
    $
    
    
    
    $
    1,747
    
    
    $
    Costs and expenses:Cost of revenue from services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and
administrative expenses
    
    
    1,316
    
    
    
    206
    
    
    
    2,413
    
    
    
    537Amortization of stock-based
compensation
    
    
    123
    
    
    
    47
    
    
    
    177
    
    
    
    94Total costs and expenses, net
    
    
    1,439
    
    
    
    253
    
    
    
    2,590
    
    
    
    631Operating loss
    
    
    (571
    )
    
    
    (253
    )
    
    
    (843
    )
    
    
    (631
    )Interest income
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    2Net loss from operations before taxation
    
    
    (570
    )
    
    
    (253
    )
    
    
    (842
    )
    
    
    (629
    )Minority interest
    
    
    77
    
    
    
    
    
    
    
    105
    
    
    
    Taxation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (493
    )
    
    
    (253
    )
    
    
    (737
    )
    
    
    (629
    )Net loss available to common shareholders (Note 5)
    
    $
    (493
    )
    
    $
    (253
    )
    
    $
    (737
    )
    
    $
    (629
    )Net loss per common share:Basic
    
    $
    (0.13
    )
    
    $
    (0.07
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )Diluted
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 MATERIAL CHANGES IN RESULTS OF OPERATIONS  THREE AND SIX MONTHS ENDED JULY 31, 2007, COMPARED TO
THREE AND SIX MONTHS ENDED JULY 31, 2006
 REVENUE
  COST OF REVENUE
  20




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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  AMORTIZATION OF STOCK-BASED COMPENSATION
       21




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INTEREST INCOME
  BASIC WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING
  MATERIAL CHANGES IN FINANCIAL CONDITION  AT JULY 31, 2007, COMPARED TO JANUARY 31, 2007
 CASH AND CASH EQUIVALENTS
  PREPAID EXPENSES
  22




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ACCOUNTS PAYABLE
  SERIES 5-A PREFERRED STOCK
  LIQUIDITY AND CAPITAL RESOURCES
      OFF-BALANCE SHEET FINANCING
  CRITICAL ACCOUNTING POLICIES
  23




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RECENT ACCOUNTING PRONOUNCEMENTS
 Income Taxes
  Fair Value Measurements
  
 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
 HI
 
 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
  25




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Item 6. EXHIBITS
     
 SIGNATURES
  Date: September 19, 2007
    Tri-Isthmus Group, Inc.(Registrant)By:
    /s/ David HirschhornDavid HirschhornCo-Chief Executive OfficerDate: September 19, 2007
    /s/ David HirschhornDavid HirschhornCo-Chief Financial Officer
(Co-Principal Financial Officer)Date: September 19, 2007
    /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