UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K





(Mark
One)


x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT
OF 1934




For the
fiscal year ended October 31, 2009




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. 000-50956




PHARMA-BIO
SERV, INC.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
            20-0653570(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (IRS  Employer
              Identification
      No.)





Pharma-Bio
      Serv Building,
              #6
      Road 696
              Dorado,
      Puerto Rico
            00646
              (Zip
      Code)(Address
      of Principal Executive Offices)





Registrant’s
Telephone Number, Including Area Code 787-278-2709





Securities
registered under Section 12(b) of the Exchange Act: None




Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$0.0001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No ý





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ No ý





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý
No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
   Yes  o    No  o










Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            Smaller
      reporting company ý





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈ No ý





The
approximate aggregate market value of common stock held by non-affiliates of the
registrant, based on the closing price for the registrant’s common stock on
April 30, 2009 (the last business day of the second quarter of the registrant’s
current fiscal year), was $2,691,558.90.





The
number of shares of the registrant’s common stock outstanding as of January 27,
2010 was 20,751,215.





DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the registrant’s Proxy Statement relative to the 2010 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.









PHARMA-BIO
SERV, INC.


FORM
10-K


FOR
THE YEAR ENDED OCTOBER 31, 2009




TABLE
OF CONTENTS




PagePART
      IITEM
      1
            BUSINESS
            1ITEM
      1A
            RISK
      FACTORS
            6ITEM
      1B
            UNRESOLVED
      STAFF COMMENTS
            13ITEM
      2
            PROPERTIES
            13ITEM
      3
            LEGAL
      PROCEEDINGS
            13ITEM
      4
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            13PART
      IIITEM
      5
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS
              AND
      ISSUER PURCHASES OF EQUITY SECURITIES
            14ITEM
      6
            SELECTED
      FINANCIAL DATA
            15ITEM
      7
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
      RESULTS OF OPERATIONS
            15ITEM
      7A
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            23ITEM
      8
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA (See F-1)
            23ITEM
      9
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND
      FINANCIAL DISCLOSURE
            23ITEM
      9A
            CONTROLS
      AND PROCEDURES
            23ITEM
      9B
            OTHER
      INFORMATION
            24PART
      IIIITEM
      10
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            25ITEM
      11
            EXECUTIVE
      COMPENSATION
            25ITEM
      12
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
              RELATED
      STOCKHOLDER MATTERS
            25ITEM
      13
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            25ITEM
      14
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES
            25PART
      IVITEM
    15
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
            26SIGNATURES
            28ITEM
      8
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            F-1










PART
I





ITEM
1.  BUSINESS.





GENERAL





Pharma-Bio
Serv, Inc. is a Delaware corporation, organized in 2004 under the name Lawrence
Consulting Group, Inc. In February 2006, our corporate name was changed to
Pharma-Bio Serv, Inc.





On
January 25, 2006, pursuant to an agreement and plan of merger among us, Plaza
Acquisition Corp., Pharma-Bio Serv PR, Inc. (then known as Plaza Consulting
Group, Inc. and referred to as “Pharma-PR”), and the then sole stockholder of
Pharma-PR, Plaza Acquisition Corp. was merged into Pharma-PR, with the result
that Pharma-PR became our wholly-owned subsidiary and our sole business became
the business of Pharma-PR.





Pharma-PR
business was established as a sole proprietorship in 1993 and incorporated in
1997 to offer compliance consulting services to the pharmaceutical industry. The
business operations provide services to the pharmaceutical, biotechnology,
medical device and chemical manufacturing companies principally in Puerto Rico,
the United States and Ireland.





Our
executive offices are located at Pharma-Bio Serv Building, #6 Road 696, Dorado,
Puerto Rico 00646.  Our telephone number is (787)
278-2709.





Our
website is www.pharmabioserv.com. Information on our website or any other
website is not part of this Annual Report on Form 10-K.





References
to “we,” “us,” “our” and similar words in this Annual Report on Form 10-K refer
to Pharma-Bio Serv, Inc. and its subsidiaries.





OVERVIEW





We are a
compliance services consulting firm and laboratory testing facility with
headquarters in Puerto Rico, servicing the Puerto Rico, United States and Europe
markets. The compliance consulting service sector in those markets consists of
local validation and compliance consulting firms, United States dedicated
validation and compliance consulting firms and large publicly traded and private
domestic and foreign engineering and consulting firms. We provide a broad range
of compliance related consulting services. We also provide microbiological
testing services and anticipate providing chemical testing services through our
laboratory testing facility in Puerto Rico. We also provide information
technology consulting services and technical trainings/seminars, which services
are not currently significant to our operating results. We market our services
to pharmaceutical, chemical, biotechnology and medical devices, and allied
products companies in Puerto Rico, the United States and Europe. Our staff
includes more than 110 experienced engineering and life science professionals,
and includes former quality assurance managers or directors, and experienced and
trained professionals with bachelors, masters and doctorate degrees in health
sciences and engineering.





We have a
well-established and consistent relationship with the major pharmaceutical,
biotechnology, medical device and chemical manufacturing companies in Puerto
Rico and the United States, which provides us access to affiliated companies in
other markets. We seek opportunities in markets that could yield profitable
margins using our professional consulting force and also provide new services
such as those performed by our new microbiological testing laboratory facility,
our acquired information technology service firm, Integratek, and our technical
training division, Pharma Serv Academy.





Integratek
provides a variety of information technology services such as web pages and
portals development, digital art design, intranets, extranets, software
development including database integration, Windows and web applications
development, software technical training and learning management systems,
technology project management, and compliance consulting services, among others.
Our Pharma Serv Academy division, through a network of leading industry
professional experts in their field, which include resources of our own,
provides technical seminars/training that incorporates the latest regulatory
trends and standards as well as other related areas. Although these services are
not currently significant to our operating results, our goal is to broaden the
portfolio of services that we can provide to our customer base and also target
other potential customers in other industries.




- 1
-




We
believe the most significant factors to achieving future business growth
includes our ability to:  (i) continue to provide quality value-added
compliance services to our clients; (ii) recruit and retain highly educated and
experienced professionals; (iii) further expand our products and services to
address the expanding needs of our clients; and (iv) expand our market presence
in the United States, Europe and possibly other emerging pharmaceutical markets
in order to respond to the international compliance needs of our
clients.  Since our business is conducted mainly in Puerto Rico, our
business is affected to the extent that Puerto Rico’s current economic downturn
affects the decision of our clients and potential clients to establish
operations in Puerto Rico or to continue or expand their existing
operations.





Our
revenue is derived from (i) time and materials contracts (representing
approximately 85% of total revenues), where the clients are charged for the
time, materials and expenses incurred on a particular project or service, (ii)
fixed-fee contracts or from “not to exceed” contracts (approximately 8% of total
revenues), which are generally short-term contracts, in which the value of the
contract cannot exceed a stated amount, and (iii) laboratory testing
(representing approximately 7% of total revenues) which generally is completed
and certified within days of sample receipt. For time and materials contracts,
our revenue is principally a function of the number of resources and the number
of hours billed per professional. To the extent that our revenue is based on
fixed-fee or “not to exceed” contracts, our ability to operate profitably is
dependent upon our ability to estimate accurately the costs that we will incur
on a project and to manage and monitor the project. If we underestimate our
costs on any contract, we could sustain a loss on the contract or its
profitability might be reduced.





The
principal components for our consulting costs of services are resource
compensation (salaries and wages, independent contractors’ fees, taxes and
benefits) and expenses relating to the performance of the services. In order to
ensure that our pricing is competitive yet minimize the impact in our margins,
we manage increasing labor costs by (i) selecting resources according to our
cost for specific projects, (ii) negotiating, where applicable, rates with the
resource, (iii) subcontracting labor and (iv) negotiating and passing rate
increases to our customers, as applicable. Although this strategy has been
successful in the past, we cannot give any assurance that such strategy will
continue to be successful. As for our testing laboratory operation, the major
costs of services components are salaries and wages, occupancy and depreciation
expenses, plus consumable goods usage.





We have
established quality systems for our employees which include:




·
            Training
      Programs - including a Current Good Manufacturing Practices exam prior to
      recruitment and periodic
refreshers;




·
            Recruitment
      Full Training Program - including employee manual, dress code, time sheets
      and good project management and control procedures, job descriptions, and
      firm operating and administration
procedures;




·
            Safety
      Program - including OSHA, Environmental Health and Safety;
    and




·
            Code
      of Ethics and Business Conduct - a code of ethics and business conduct is
      used and enforced as one of the most significant company controls on
      personal behavior.





In
addition, we have implemented procedures to respond to client complaints and
customer satisfaction survey procedures. As part of our employee performance
appraisal annual process, our clients receive an evaluation form for employee
project performance feedback, including compliance with our code of
ethics.





BUSINESS
STRATEGY AND OBJECTIVES





We are
actively pursuing new markets as part of our growth strategy. We have a
well-established and consistent relationship with the major pharmaceutical,
biotechnology, medical device and chemical manufacturing companies in Puerto
Rico and the United States which provides us access to affiliated companies in
other markets. We seek opportunities in markets that could yield profitable
margins using our professional consulting force and also provide new services
such as those performed by our microbiological testing laboratory facility and
our acquired information technology service firm.




- 2
-





Our
business strategy is based on a commitment to provide premium quality and
professional consulting services and reliable customer service to our customer
base. Our business strategy and objectives are as follow:




·
            Continue
      growth in consulting services in each technical service, quality
      assurance, regulatory compliance, technology transfer, validation,
      engineering, laboratory testing and manufacturing departments by achieving
      greater market penetration from our marketing and sales
      efforts;





·
            Continue
      to enhance our technical consulting services through internal growth and
      acquisitions that provide solutions to our customers’
    needs;





·
            Motivate
      our professionals and support staff by implementing a compensation program
      which includes both individual performance and overall company performance
      as elements of compensation;





·
            Create
      a pleasant corporate culture and emphasize operational quality safety and
      timely service;





·
            Continue
      to maintain our reputation as a trustworthy and highly ethical partner;
      and





·
            Efficiently
      manage our operating and financial costs and
  expenses.





2006
U.S. Validation Compliance Service Business Acquisition





In January 2006, we acquired a
validation compliance service business which serves mainly the United States
East Coast market. We are
currently hosting our U.S. market expansion plans from this
organization.





2007
Entrance to Ireland Market





In
September 2007, we entered into the Ireland market through the formation of
an 80%-owned subsidiary. Currently, we provide the Ireland market the same
services we are currently providing in the Puerto Rico and United States
markets.





2008
Integratek Acquisition





On
December 2008, we acquired through one of our subsidiaries the operations and
assets of Integratek Corp. (“Integratek”), an information technology services
and consulting firm based in Puerto Rico. With this acquisition we broaden the
portfolio of services to our customer base and also target other potential
customers in other industries.


.


2009
Laboratory Testing Facility





Our
laboratory testing facility (“Lab”) located in Puerto Rico, with an investment
of $1.25 million for microbiology testing, commenced operations in early fiscal
2009. The Lab incorporates the latest technology and test methodologies meeting
pharmacopoeia industry standards and regulations. It currently offers
microbiological testing and related services to our core industries already
serviced as well as the cosmetic and food industries. The Lab will expand its
services to include chemical and environmental testing at an approximate
investment of $280,000 which was incurred during fiscal year 2009 and will be
further incurred in fiscal year 2010.





2009
Minority Controlled Company Certification





In line
with the strategy to penetrate the United States market, on July 1, 2009 we
obtained the renewal of the certification as a "minority-controlled company" as
defined by the National Minority Supplier Development Council and Growth
Initiative ("NMSDC"). The certification allows us to participate in corporate
diversity programs available from various potential customers in the United
States and Puerto Rico. The certification is subject to renewal on July 1,
2010.




- 3
-





TECHNICAL
CONSULTING SERVICES





We have
established a reputation as a premier technical consulting services firm to the
pharmaceutical, biotechnology, medical device and chemical manufacturing
industries in Puerto Rico. These services include regulatory compliance,
validation, technology transfer, engineering, project management and process
support. We have approximately 28 clients that are among the largest
pharmaceutical, chemical manufacturing, medical device and biotechnology
companies in Puerto Rico. We are actively participating
in exhibitions, conferences, conventions and seminars as either exhibitors,
sponsors or conference speakers.





MARKETING





We
conduct our marketing activities in Puerto Rico as well as the United States and
other marketplaces. We actively utilize our project managers and leaders who are
currently managing consulting service contracts at various client locations to
also market consulting and laboratory testing services to their existing and
past client relationships. Our senior management is also actively involved in
the marketing process, especially in marketing to major accounts. Our senior
management and staff also concentrate on developing new business opportunities
and focus on the larger customer accounts (by number of professionals or dollar
volume) and responding to prospective customers’ requests for
proposals.





PRINCIPAL
CUSTOMERS





We
provide a substantial portion of our services to three customers, each of whom
accounted for 10% or more of our revenues in the years ended October 31, 2009
and 2008. During the years ended October 31, 2009 and 2008, these customers
accounted in the aggregate 53% and 65% of total revenue, respectively. In spite
of the fact that just a few customers represent a significant source of revenue,
our functions are not a continuous process, accordingly, the client base for
which our services are typically rendered, on a project-by-project basis,
changes regularly.Therefore, in any given
year a small number of customers could represent a significant source of our
revenue for that year. The loss of or significant reduction in the scope of work
performed for any major customer or our inability to replace customers upon
completion of contracts could adversely affect our revenue and impair our
ability to operate profitably.





COMPETITION





We are
engaged in a highly competitive and fragmented industry. Some of our competitors
are, on an overall basis, larger than us or are subsidiaries of larger
companies, and therefore may possess greater resources than us. Furthermore,
because the technical professional aspects of our consulting business do not
usually require large amounts of capital, there is relative ease of market entry
for a new entrant possessing acceptable professional qualifications.
Accordingly, we compete with regional, national, and international firms. Within
the Puerto Rico, United States and Ireland markets, certain competitors,
including local competitors, may possess greater resources than we do as well as
better access to clients and potential clients.





Competition
for validation and consulting services used to be primarily based on reputation,
track record, experience, and quality of service. However, given the economic
recession and our clients' strategies to reduce costs, price of service has
become a major factor in sourcing our services. We believe that we enjoy
significant competitive advantages over other consulting service firms because
of our historical market share within Puerto Rico (16 years), brand name,
reputation and track record with many of the major pharmaceutical,
biotechnology, medical device and chemical manufacturing companies which have
presence in the markets we are pursuing.




- 4
-




The
market of qualified and experienced professionals that are capable of providing
technical consulting services is very competitive and consists primarily of our
competitors as well as companies in the pharmaceutical, chemical, biotechnology
and medical device industries who are our clients and potential clients. In
seeking qualified personnel we market our name recognition in the Puerto Rico
market, our reputation with our client, salary and benefit package, company
stock options and a low turnover of qualified employees.





RAW
MATERIALS





We
require the use of various raw materials, including culture media, DNA reagents,
LAL reagents and biological indicators, in our microbiological testing
laboratory facility.  We purchase these raw materials from various
suppliers. At times, we concentrate orders among a few suppliers in order to
strengthen our supplier relationships and receive quantity discounts. Raw
materials are generally available from multiple suppliers at competitive prices,
and amounts kept in stock are not significant.





ENVIRONMENTAL
REGULATIONS





Activities
in our microbiological testing laboratory facility are regulated under Puerto
Rico and U.S. federal laws designed to protect workers and the environment. Some
of these laws include the Occupational Safety and Health Act and the Resource
Conservation and Recovery Act. These laws apply to the use, handling and
disposal of various biological and chemical substances used in our processes. We
believe we are in material compliance with these laws and that continued
compliance will not have a materially adverse effect on our business. No
specific accounting for environmental compliance has been maintained or
projected by us at this time.





INTELLECTUAL
PROPERTY RIGHTS





We have
no proprietary software or products. We rely on non-disclosure agreements with
our employees to protect the proprietary software and other proprietary
information of our clients. Any unauthorized use or disclosure of this
information could harm our business.





EMPLOYEES





We
currently employ 85 employees.  None of our employees are represented
by a labor union, and we consider our employee relations to be good. Our
subsidiary, Pharma-PR, was recognized and awarded by Hewitt Associates as one of
the “Puerto Rico 20 best employers” in 2006.





EXECUTIVE
OFFICERS





The
following table sets forth certain information with respect to our executive
officers.




Name
            
            Age
            
            PositionElizabeth
      Plaza
            
            46
            
            President,
      Chairman of the Board and DirectorNélida Plaza
            
            42
            
            President
      of Puerto Rico Operations and SecretaryPedro
      J. Lasanta
            
            50
            
            Chief
      Financial Officer and Vice President - Finance and
      Administration




- 5
-




Elizabeth Plaza has been the
president and sole director of Pharma-PR since 1997, when the Company was
incorporated after operating as a sole proprietorship since 1993, and she has
been our president and chief executive officer since January 25, 2006. Ms. Plaza
holds a B.S. in Pharmaceutical Sciences, magna cum laude, from the School of
Pharmacy of the University of Puerto Rico. She was a 40 under 40 Caribbean
Business Award recipient in 2002, the 2003 recipient of Ernst & Young’s
Entrepreneur of the Year Award in Health Science, one of the 2003 recipients of
the Puerto Rico Powerful Business Women Award, elected as Puerto Rico
Manufacturers Association 2004 (Metropolitan-West Region) Executive of the Year,
and Puerto Rico 2008 Executive of the Year.




Nélida Plaza has been the vice
president of operations of Pharma-PR since January 2004, our secretary since
January 25, 2006, and our President of Puerto Rico Operations since December 31,
2009, in charge of Scienza Labs, Integratek, Pharma Academy and Pharma-PR. Ms.
Plaza served as our vice president from January 25, 2006 to December 31, 2009.
In July 2000, Ms. Plaza joined Pharma-PR as a project management consultant. In
the past, Ms. Plaza was a unit operations leader and safety manager at E.I.
DuPont De Nemours where she was involved with the development, support and audit
of environmental, safety and occupational health programs. Ms. Plaza holds a
M.S. in Environmental Management from the University of Houston in Clear Lake
and a B.S. in Chemical Engineering from the University of Puerto Rico. Nélida
Plaza was recognized by Casiano Communications as one of the 40 under 40
distinguished executives in Puerto Rico.




Pedro J. Lasanta has been our
chief financial officer and vice president - finance and administration since
November 2007. From 2006 until October 2007, Mr. Lasanta was in private practice
as an accountant, tax and business counselor. From 1999 until 2006, Mr. Lasanta
was the Chief Financial Officer for Pearle Vision Center PR, Inc. In the past,
Mr. Lasanta was also an audit manager for Ernst & Young, formerly Arthur
Young & Company. He is a cum laude graduate in business administration
(accounting) from the University of Puerto Rico.  Mr. Lasanta is a
certified public accountant.




Elizabeth
Plaza and Nélida Plaza are sisters.




ITEM 1A.  RISK FACTORS.




This
Annual Report on Form 10-K includes “forward-looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including, in particular, certain statements about our plans, strategies and
prospects. Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
cannot assure you that such plans, intentions or expectations will be achieved.
Important factors that could cause our actual results to differ materially from
our forward-looking statements include those set forth in this Risk Factors
section.




If any of
the following risks, or other risks not presently known to us or that we
currently believe to not be significant, develop into actual events, then our
business, financial condition, results of operations, cash flows or prospects
could be materially adversely affected.




Risks That Relate to our
Business




Because
our business is concentrated in the pharmaceutical industry in Puerto Rico, any
changes in that industry could impair our ability to generate revenue and
realize a profit.





Since
most of our business is performed in Puerto Rico for pharmaceutical,
biotechnology, medical device and chemical manufacturing companies, our ability
to generate revenue and realize a profit could be impaired by factors impacting
Puerto Rico.  For example, changes in tax laws or regulatory,
political or economic conditions, which discourage businesses from operating in
Puerto Rico and changes in U.S. law or government regulations, which affect the
need for services such as those provided by us could impair our ability to
generate revenue and realize a profit.




- 6
-





Because
our business is dependent upon a small number of clients, the loss of a major
client could impair our ability to operate profitably.





Our
business has been dependent upon a small number of clients. During the years
ended October 31, 2009 and 2008, a very small number of clients accounted for a
disproportionately large percentage of our revenue. In the years ended October
31, 2009 and 2008, three customers accounted for approximately 53% and 65% of
total revenue, respectively. The loss of or significant reduction in the scope
of work performed for any major customer could impair our ability to operate
profitably. We cannot assure you that we will not sustain significant decreases
in revenue from our major customers or that we will be able to replace any major
customers or the resulting decline in revenue.





Customer
procurement and sourcing practices intended to reduce costs could have an
adverse affect on our margins and profitability.




In an effort to reduce their costs,
many of our customers are establishing or extending the scope of their
procurement departments to include consulting and project services such as
ours.  As a result, we have less interaction with the end user of our
services (typically quality, technical or production units) when
bidding on a project, which we believe decreases the focus on the quality of
service provided and increases the emphasis on cost of the service.
This forces us to lower the price of our bids, which would reduce the
margins in a given project.  Also, some customers have established vendor
management programs with third-parties (some of whom are also our
competitors).  Because these vendor management programs may receive a
percentage of our fees, without a corresponding increase in the fee itself, our
margins would decline.  In addition, where a vendor management program is a
competitor for a particular service we provide, we may have difficulty securing
business and potentially lose current business overtime, which would adversely
impact growth and revenue.





Since
our business is dependent upon the development and enhancement of patented
pharmaceutical products or processes by our clients, the failure of our clients
to obtain and maintain patents could impair our ability to operate
profitably.





Companies
in the pharmaceutical industry are highly dependent on their ability to obtain
and maintain patents for their products or processes. We are aware of some
pharmaceutical companies with operations in Puerto Rico whose patent rights may
expire in the near future. The inability to obtain new patents and the
expiration of active patents may reduce the need for our services and thereby
impair our ability to operate profitably.




We
may be unable to pass on increased labor costs to our clients.





The
principal components of our cost of revenues are employee compensation
(salaries, wages, taxes and benefits) and expenses relating to the performance
of the services we provide. We face increasing labor costs which we seek to pass
on to our customers through increases in our rates. To remain competitive, we
may not be able to pass these increased costs on to our clients, and, to the
extent that we are not able to pass these increased costs on to our clients, our
gross margin will be reduced.





Consolidation
in the pharmaceutical industry may have a harmful effect on our
business.




In recent
years, the pharmaceutical industry has undergone consolidation, and may in the
future undergo further substantial consolidation which may reduce the
number of our existing and potential customers.  The consolidation in
the pharmaceutical industry may have a harmful effect on our business and or
ability to maintain and replace customers.




Because
the pharmaceutical industry is subject to government regulations, changes in
government regulations relating to this industry may affect the need for our
services.





Because
government regulations affect all aspects of the pharmaceutical, biotechnology,
medical device and chemical manufacturing industries, including regulations
relating to the testing and manufacturing of pharmaceutical products and the
disposal of materials which are or may be considered toxic, any change in
government regulations could have a profound effect upon not only these
companies but companies, such as ours, that provide services to these
industries. If we are not able to adapt and provide necessary services to meet
the requirements of these companies in response to changes in government
regulations, our ability to generate business may be impaired.




- 7
-




Changes
in tax benefits may affect the willingness of companies to continue or expand
their operations in Puerto Rico.





Until
1996, the Internal Revenue Code provided certain tax benefits to pharmaceutical
companies operating in Puerto Rico by enabling their Puerto Rico operations to
operate free from federal income taxes. Partly as a result of the tax benefits,
numerous pharmaceutical companies established facilities in Puerto Rico. In
1996, this tax benefit was eliminated, although companies that had facilities in
Puerto Rico could continue to receive these benefits for ten years, at which
time the benefits were set to expire. In order to promote business activities in
Puerto Rico, in May 2008 the Puerto Rico government enacted a tax incentive law
(“Act 73”). Act 73 provides tax exemption from various taxes, including income
tax, and investment credits for activities similar to those of our customers and
our company. The change in the tax laws may affect favorably or unfavorably the
willingness of pharmaceutical companies to continue or to expand their Puerto
Rico operations. To the extent that pharmaceutical companies choose to develop
and manufacture products outside of Puerto Rico, our ability to generate new
business may be adversely impaired.




Puerto
Rico’s economy, including its governmental financial crisis, may affect the
willingness of businesses to commence or expand operations in Puerto
Rico.





As a
result of Puerto Rico’s governmental financial crisis, businesses may be
reluctant to establish or expand their operations in Puerto Rico. Further, since
Puerto Rico’s economy is petroleum-based, the fluctuating price of oil, combined
with Puerto Rico’s high level of debt, may make Puerto Rico a less attractive
place to expand existing operations or commence new business activities. To the
extent that companies in the pharmaceutical and related industries decide not to
commence new operations or not to expand their existing operations in Puerto
Rico, the market for our services may decline.




Other
factors, including economic factors, may affect the decision of businesses to
continue or expand their operations in Puerto Rico.





Companies
in the pharmaceutical and related industries for which we perform service are
subject to economic pressures, which affect their global operations and which
may influence the decision to reduce or increase the scope of their operations
in Puerto Rico. These companies consider a wide range of factors in making such
a decision, and may be influenced by a need to consolidate operations, to reduce
expenses, to increase their business in geographical regions where there are
large customer bases, tax, regulatory and political considerations and many
other factors. We can not assure you that our customers and potential customers
will not make extensive reductions or terminate their operations in Puerto Rico
entirely, which could significantly impair our ability to generate
revenue.





If
we are unable to protect our clients’ intellectual property, our ability to
generate business will be impaired.





Our
services either require us to develop intellectual property for clients or
provide our personnel with access to our clients’ intellectual property. Because
of the highly competitive nature of the pharmaceutical, biotechnology, medical
device and chemical manufacturing industries and the sensitivity of our clients’
intellectual property rights, our ability to generate business would be impaired
if we fail to protect those rights. Although all of our employees and
contractors are required to sign non-disclosure agreements, any disclosure of a
client’s intellectual property by an employee or contractor may subject us to
litigation and may impair our ability to generate business either from the
affected client or other potential clients. In addition, we are required to
enter into confidentiality agreements and our failure to protect the
confidential information of our clients may impair our business
relationship.




- 8
-




We
may be subject to liability if our services or solutions for our clients
infringe upon the intellectual property rights of others.





It is
possible that in performing services for our clients, we may inadvertently
infringe upon the intellectual property rights of others. In such event, the
owner of the intellectual property may commence litigation seeking damages and
an injunction against both us and our client, and the client may bring a claim
against us. Any infringement litigation would be costly, regardless of whether
we ultimately prevail. Even if we prevail, we will incur significant expenses
and our reputation would be hurt, which would affect our ability to generate
business and the terms on which we would be engaged, if at all.




We
may be held liable for the actions of our employees or contractors when on
assignment.





We may be
exposed to liability for actions taken by our employees or contractors while on
assignment, such as damages caused by their errors, misuse of client proprietary
information or theft of client property. Due to the nature of our assignments,
we cannot assure you that we will not be exposed to liability as a result of our
employees or contractors being on assignment.





To
the extent that we perform services pursuant to fixed-price or incentive-based
contracts, our cost of services may exceed our revenue on the
contract.





Some of
our revenue is derived from fixed-price contracts. Our costs of services may
exceed revenue of these contracts if we do not accurately estimate the time and
complexity of an engagement. Further, we are seeking contracts by which our
compensation is based on specified performance objectives, such as the
realization of cost savings, quality improvements or other performance
objectives. Our failure to achieve these objectives would reduce our revenue and
could impair our ability to operate profitably.




Our
profit margin is largely a function of the rates we are able to charge and
collect for our services and the utilization rate of our professionals.
Accordingly, if we are not able to maintain our pricing for our services or an
appropriate utilization rate for our professionals without corresponding cost
reductions, our profit margin and profitability will suffer. The rates we are
able to charge for our services are affected by a number of factors,
including:





·
            Our
      clients’ perception of our ability to add value through our
      services;





·
            Our
      ability to complete projects on
time;





·
            Pricing
      policies of competitors;





·
            Our
      ability to accurately estimate, attain and sustain engagement revenues,
      margins and cash flows over increasingly longer contract periods;
      and





·
            General
      economic and political conditions.





Our
utilization rates are also affected by a number of factors,
including:





·
            Our
      ability to move employees and contractors from completed projects to new
      engagements; and





·
            Our
      ability to manage attrition of our employees and
    contractors.




- 9
-





Because
most of our contracts may be terminated on little or no advance notice, our
failure to generate new business could impair our ability to operate
profitably.





Most of
our contracts can be terminated by our clients with little or no advance notice.
Our clients typically retain us on a non-exclusive, engagement-by-engagement
basis, and the client may terminate, cancel or delay any engagement or the
project for which we are engaged, at any time and on no advance notice. As a
result, the termination, cancellation, expiration or delay of contracts could
have a significant impact on our ability to operate profitably.





Because
of the competitive nature of the pharmaceutical, biotechnology, medical device
and chemical manufacturing consulting market, we may not be able to compete
effectively if we cannot efficiently respond to changes in the structure of the
market and developments in technology.





Because
of recent consolidations in the pharmaceutical, biotechnology, medical device
and chemical manufacturing consulting business, we are faced with an increasing
number of larger companies that offer a wider range of services and have better
access to capital than we have. We believe that larger and better-capitalized
competitors have enhanced abilities to compete for both clients and skilled
professionals. In addition, one or more of our competitors may develop and
implement methodologies that result in superior productivity and price
reductions without adversely affecting their profit margins. We cannot assure
you that we will be able to compete effectively in an increasingly competitive
market.





Because
we are dependent upon our management, our ability to develop our business may be
impaired if we are not able to engage skilled personnel.





Our
success to date has depended in large part on the skills and efforts of
Elizabeth Plaza, our president, chief executive officer and founder. The loss of
the services of Ms. Plaza could have a material adverse effect on the
development and success of our business. We recently amended Ms. Plaza’s
employment agreement to extend the term of her employment under her current
position and responsibilities through July 1, 2010, and as a consultant
thereafter. Although we have a contract with Ms. Plaza, this agreement does not
guarantee that she will continue to be employed by us. Our future success will
depend in part upon our ability to attract and retain additional qualified
management and technical personnel. Competition for such personnel is intense
and we compete for qualified personnel with numerous other employers, including
consulting firms, some of which have greater resources than we have, as well as
pharmaceutical companies, most of which have significantly greater financial and
other resources than we do. We may experience increased costs in order to retain
and attract skilled employees. Our failure to attract additional personnel or to
retain the services of key personnel and independent contractors could have a
material adverse effect on our ability to operate profitably.





We
may not be able to continue to grow unless we consummate acquisitions or enter
markets outside of Puerto Rico.





An
important part of our growth strategy is (i) to acquire other businesses which
can increase the range of services and products that we can offer and (ii) to
establish offices in places where we do not presently operate, either by
acquisition or by internal growth. If we fail to make any acquisitions or
otherwise expand our business, our future growth may be limited. We have
recently entered into the Irish market through a newly formed 80%-owned
subsidiary. The success of the operation is dependent on such factors as
regulatory, tax, political or economic conditions, our abilities to penetrate
the market, hire qualified personnel in a timely manner, obtain and maintain
reasonable labor costs, generate service revenue volume and profitable
margins.





If
we identify a proposed acquisition, we may require substantial cash to fund the
cost of the acquisition.





Any
acquisitions we make may be made with cash or our securities or a combination of
cash and securities. To the extent that we require cash, we may have to borrow
the funds or sell equity securities. We have no commitments from any financing
source and we may not be able to raise any cash necessary to complete an
acquisition. If we seek to expand our business internally, we will incur
significant start-up expenses without any assurance of our ability to penetrate
the market.




- 10
-





If
we make any acquisitions, they may disrupt or have a negative impact on our
business.





If we
make acquisitions or establish operations in locales outside of Puerto Rico, we
could have difficulty integrating the acquired companies’ personnel and
operations with our own. In addition, the key personnel of the acquired business
may not be willing to work for us. We cannot predict the effect an expansion may
have on our core business. Regardless of whether we are successful in making an
acquisition, the negotiations could disrupt our ongoing business, distract our
management and employees and increase our expenses. In addition to the risks
described above, acquisitions are accompanied by a number of inherent risks,
including, without limitation, the following:





·
            the
      difficulty of integrating acquired products, services or
      operations;





·
            the
      potential disruption of the ongoing businesses and distraction of our
      management and the management of acquired
  companies;





·
            the
      potential loss of contracts from clients of acquired
      companies;





·
            the
      difficulty of maintaining profitability due to increased labor and
      expenses from acquired company;





·
            difficulties
      in complying with regulations in other countries that relate to both the
      pharmaceutical or other industries to which we provide services as well as
      our own operations;




·
            difficulties
      in maintaining uniform standards, controls, procedures and
      policies;





·
            the
      potential impairment of relationships with employees and customers as a
      result of any integration of new management
  personnel;





·
            the
      potential inability or failure to achieve additional sales and enhance our
      customer base through cross-marketing of the products to new and existing
      customers;





·
            the
      effect of any government regulations which relate to the business
      acquired;





·
            potential
      unknown liabilities associated with acquired businesses or product lines,
      or the need to spend significant amounts to retool, reposition or modify
      the marketing and sales of acquired products or the defense of any
      litigation, whether of not successful, resulting from actions of the
      acquired company prior to our
acquisition;





·
            difficulties
      in disposing of the excess or idle facilities of an acquired company or
      business and expenses in maintaining such facilities;
  and





·
            potential
      expenses under the labor, environmental and other laws of other
      countries.





Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks or other problems encountered in
connection with an acquisition. Further, the commencement of business in locales
where we have no current operations may be subject to additional significant
risks.




- 11
-





Risks
Concerning our Securities





Because
there is a limited market in our common stock, stockholders may have difficulty
in selling our common stock and our common stock may be subject to significant
price swings.





There is
a very limited market for our common stock. Since trading commenced in December
2006, there has been little activity in our common stock and on some days there
is no trading in our common stock. Because of the limited market for our common
stock, the purchase or sale of a relatively small number of shares may have an
exaggerated effect on the market price for our common stock. We cannot assure
stockholders that they will be able to sell common stock or, that if they are
able to sell their shares, that they will be able to sell the shares in any
significant quantity at the quoted price.





Our
quarterly revenues, operating results and profitability will vary from quarter
to quarter, which may result in increased volatility of our stock
price.





Our
quarterly revenues, operating results and profitability have varied in the past
and are likely to vary significantly from quarter to quarter, making them
difficult to predict. This may lead to volatility in our share price. The
factors that are likely to cause these variations are:





·
            Seasonality,
      including number of workdays and holiday and summer
    vacations;





·
            The
      business decisions of clients regarding the use of our
      services;





·
            Periodic
      differences between clients’ estimated and actual levels of business
      activity associated with ongoing engagements, including the delay,
      reduction in scope and cancellation of
projects;





·
            The
      stage of completion of existing projects and their
      termination;





·
            Our
      ability to move employees quickly from completed projects to new
      engagements and our ability to replace completed contracts with new
      contracts with the same clients or other
  clients;





·
            The
      introduction of new services by us or our
  competitors;




·
            Changes
      in pricing policies by us or our
competitors;





·
            Our
      ability to manage costs, including personnel compensation,
      support-services and severance
costs;





·
            Acquisition
      and integration costs related to possible acquisitions of other
      businesses;





·
            Changes
      in estimates, accruals and payments of variable compensation to our
      employees or contractors; and





·
            Global
      economic and political conditions and related risks, including acts of
      terrorism.





The
issuance of securities, whether in connection with an acquisition or otherwise,
may result in significant dilution to our stockholders.





If we are
required to issue securities either as payment of all or a portion of the
purchase price of an acquisition or in order to obtain financing for the
acquisition or for other corporate purposes could result in dilution to our
stockholders. The amount of such dilution will be dependent upon the terms on
which we issue securities. The issuance of securities at a price which is less
than the exercise price of warrants or the conversion price of securities could
result in additional dilution if we are required to reduce the exercise price or
conversion price of the then outstanding options or warrants or other
convertible securities.




- 12
-




ITEM
1B.  UNRESOLVED STAFF COMMENTS.





Not
applicable.





ITEM
2.  PROPERTIES.





In
February 2007, we entered into an agreement for our main resource facilities in
Dorado, Puerto Rico with Plaza Professional Center, Inc., a company controlled
by Elizabeth Plaza.  These facilities accommodate our microbiological
testing laboratory, our customer-specialized training facilities and, our
operational and administrative offices. The agreement is for a five year term,
with initial monthly installments of $18,750, which will increase by 5%
annually. The agreement also requires the payment of utilities, property taxes,
insurance and a portion of expenses incurred by the affiliate in connection with
the maintenance of common areas. The agreement provides a five year renewal
option.





We will
be moving our current US office facilities from Limerick to Plymouth Meeting,
Pennsylvania. The Plymouth three year term lease, with monthly rental payments
of $2,100, will commence upon the landlord’s completion of the leased premises
(approximately February 2010). The Limerick three year term lease, with current
monthly rental payments of $1,150, is set to expire in July 2010.





Our
Ireland office facilities are located in Cork, Ireland. Currently, the
facilities are under a month-to-month lease with monthly payments of
approximately $750.





We
believe that our present facilities are adequate to meet our needs and that, if
we require additional space, it will be available on commercially reasonable
terms.





ITEM
3.  LEGAL PROCEEDINGS.





From time
to time, we may be a party to legal proceedings incidental to our
business.  We do not believe that there are any proceedings threatened
or pending against us, which, if determined adversely to us, would have a
material effect on our financial position or results of operations and cash
flows.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





None.




- 13
-




PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





Our
common stock has been quoted on the Over the Counter Bulletin Board under the
trading symbol PBSV since December 4, 2006. The table below presents the closing
high and low bid prices for our common stock for each quarter during the two
most recent fiscal years. These prices reflect inter-dealer prices, without
retail markup, markdown, or commission, and may not represent actual
transactions.





Quarter
      Ending
            
            High
      Bid
            
            
            Low
      BidJanuary
      31, 2008
            
            $
            0.99
            
            
            $
            0.51April
      30, 2008
            
            
            0.72
            
            
            
            0.42July
      31, 2008
            
            
            0.64
            
            
            
            0.45October
      31, 2008
            
            
            0.60
            
            
            
            0.27January
      31, 2009
            
            
            0.59
            
            
            
            0.27April
      30, 2009
            
            
            0.55
            
            
            
            0.16July
      31, 2009
            
            
            0.40
            
            
            
            0.30October
      31, 2009
            
            
            0.65
            
            
            
            0.31





On
January 27, 2010, the closing price of our common stock on the Over the Counter
Bulletin Board was $0.25 per share and there were approximately 84 holders of
record of our common stock.





Prior to
the acquisition of Pharma-PR, Pharma-PR was taxed as an N Corporation under the
Puerto Rico Internal Revenue Code, which is similar to that of an S Corporation
under the Internal Revenue Code. As a result, all of the income from Pharma-PR
was taxed to our then sole stockholder. Other than the distributions to our then
sole stockholder which were made during the period that we were an N
Corporation, we have not paid dividends on our common stock. We plan to retain
future earnings, if any, for use in our business. We do not anticipate paying
dividends on our common stock in the foreseeable future.





Equity
Compensation Plan Information





The
following table summarizes the equity compensation plans under which our
securities may be issued as of October 31, 2009.





Plan Category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options
              and warrants
            
            
            Weighted-average exercise
              price per share of
              outstanding options and
              warrants
            
            
            Number of securities
              remaining available for
              future issuance under
              equity compensation
              plansEquity
      compensation plans approved by security holders
            
            
            1,342,913
            
            
            $
            0.6833
            
            
            
            1,157,087Equity
      compensation plans not approved by security holders
            
            
            2,804,216
            
            
            $
            0.2941
            
            
            
            16,500





The
securities issuable pursuant to the equity plan that was approved by security
holders is the 2005 long-term incentive plan, which was approved by stockholders
in April 2006, and amended by stockholder approval in April 2007.





The
equity compensation plans not approved by security holders are (i) warrants to
purchase 973,225 shares of common stock which were issued to brokers in
connection with the January 2006 private placement, (ii) warrants to purchase
1,830,991 shares of common stock issued to San Juan Holdings for services
relating to the acquisition of Pharma-PR, and (iii) approximately 16,500 shares
of common stock issuable to employees.




- 14
-




ITEM
6.  SELECTED FINANCIAL DATA.





Not Applicable.





TEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.




The
following discussion of our results of operations and financial condition should
be read in conjunction with Part I, including matters set forth in the “Risk
Factors” section of this Annual Report on Form 10-K, and our Consolidated
Financial Statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.




Overview





We are a
compliance services consulting firm with a laboratory testing facility with
headquarters in Puerto Rico, servicing the Puerto Rico, United States and Europe
markets. The compliance consulting service sector in those markets consists of
local compliance and validation consulting firms, United States dedicated
validation and compliance consulting firms and large publicly traded and private
domestic and foreign engineering and consulting firms. We provide a broad range
of compliance related consulting services. We also provide microbiological
testing services and anticipate providing chemical testing services through our
laboratory testing facility (“Lab”) in Puerto Rico. We also provide information
technology consulting services and technical trainings/seminars, which services
are not currently significant to our operating results. We market our services
to pharmaceutical, chemical, biotechnology and medical devices, and allied
products companies in Puerto Rico, the United States and Europe. Our staff
includes more than 110 experienced engineering and life science professionals,
and includes former quality assurance managers or directors, and experienced and
trained professionals with bachelors, masters and doctorate degrees in health
sciences and engineering.





We
expanded the markets we serve from Puerto Rico to the United States and Ireland.
We have offices in the United States and Ireland markets since fiscal years 2006
and 2008, respectively. Our Ireland operation, with an Ireland based management
team reporting to our headquarters, has established a network of potential key
customers and contacts that serve as the base for our sales target and
opportunities. We are also actively pursuing to further expand our US
market.





We have
plans to further penetrate the markets we currently serve. We market our
services with an active presence in industry trade shows, professional
conventions, industry publications and company provided seminars to the
industry. Our senior management is also actively involved in the marketing
process, especially in marketing to major accounts. Our senior management and
staff also concentrate on developing new business opportunities and focus on the
larger customer accounts (by number of professionals or dollar volume) and
responding to prospective customers’ requests for proposals.





While our
core business is FDA and international agencies regulatory compliance related
services, we feel that our clients are in need of other services that we can
provide and allow us to present the company as a global solution provider with a
portfolio of integrated services that will bring value added solutions to our
customers. Accordingly, in fiscal year 2009 we expanded our portfolio of
services to include a laboratory testing facility, an information technology
consulting practice and a training center that provides seminars/trainings to
the industry.





Our Lab
located in Puerto Rico, with an investment of $1.25 million for microbiology
testing, commenced operations in early fiscal 2009. The Lab incorporates the
latest technology and test methodologies meeting pharmacopoeia industry
standards and regulations. It currently offers microbiological testing and
related services to our core industries already serviced as well as the cosmetic
and food industries. The Lab will expand its services to include chemical and
environmental testing at an approximate investment of $280,000 which was
incurred during fiscal year 2009 and will be further incurred in fiscal year
2010.





We
identified the industry need, and the opportunity to provide, technical
seminars/trainings that will incorporate the latest regulatory trends and
standards as well as other related areas. A network of leading industry
professional experts in their field, which includes resources of our own, were
identified and teamed to provide these seminars/trainings to the industry
through our newly created “Pharma Serv Academy” division. Our goal is to provide
these services and market our company in the markets we currently serve as well
as others.




- 15
-





In
December 2008, we acquired the operations and assets of Integratek Corp.
(“Integratek”), an information technology services and consulting firm based in
Puerto Rico. Integratek provides a variety of information technology services
such as web pages and portals development, digital art design, intranets,
extranets, software development including database integration, Windows and web
applications development, software technical training and learning management
systems, technology project management, and compliance consulting services,
among others. Integratek is a Microsoft Certified Partner and a reseller for
technology products from leading vendors in the market. Although this operation
is not currently significant to our operating results, our goal is to broaden
the portfolio of services that we can provide to our customer base and also
target other potential customers in other industries.





In line
with the strategy to penetrate the United States market, on July 1, 2009 we
obtained the renewal of the certification as a "minority-controlled company" as
defined by the National Minority Supplier Development Council and Growth
Initiative ("NMSDC"). The certification allows us to participate in corporate
diversity programs available from various potential customers in the United
States and Puerto Rico. The certification is subject to renewal on July 1,
2010.





On July
2008, Pharma-Bio and Pharma-PR obtained a Grant of Industrial Tax Exemption
(“the Grant”) from the Puerto Rico Industrial Development Company pursuant to
the terms and conditions set forth in Act No. 135 of December 2, 1997, as
amended. The Grant provides relief on various Puerto Rico taxes, including
income tax, mostly for our new Lab and service activities outside of Puerto
Rico. The Grant is effective as of September 1, 2007 and covers a ten year
period. Activities covered by the Grant are subject to a reduced income tax rate
of 7%.





Although
we believe we have instituted the right strategies to be profitable and seek
growth, we cannot control the fact that the industry and the local and global
economies are undergoing a recession and that has affected our operation and
business growth.





The
reduction in operations of some of our clients, mostly triggered by the global
economic recession and the industry worldwide consolidation, affected our fiscal
year 2009 revenues and our growth plans. For the year ended in October 31, 2009
our total net revenues decreased by approximately $3.7 million or 24.3%, when
compared to last year. In order to maintain volume in the markets we serve and
ensure we are price competitive, we have adjusted our pricing and gross margin
structure accordingly. In addition, we implemented cost containment measures and
have refocused the overall operations strategy to reduce our overhead costs.
Among others, we have reduced management salaries, including those of our
headquarters team. These factors have lead our net income for the year ended
October 31, 2009 to be approximately $535,000, a decline of $953,000 or a
reduction in profit margin of 5.1 percentage points when compared to last
year.





The
following table sets forth information as to our revenue for the years ended
October 31, 2009 and 2008, by geographic regions (dollars in
thousands).





Year
      ended October 31,Revenues by
      Region
            
            2009
            
            
            2008Puerto
      Rico
            
            $
            8,359
            
            
            
            72.8
            %
            
            $
            10,902
            
            
            
            71.7
            %United States
            
            
            1,972
            
            
            
            17.2
            %
            
            
            4,060
            
            
            
            26.7
            %Ireland
            
            
            1,148
            
            
            
            10.0
            %
            
            
            234
            
            
            
            1.6
            %$
            11,479
            
            
            
            100.0
            %
            
            $
            15,196
            
            
            
            100.0
            %








We
believe that our future profitability and liquidity is going to be highly
dependent of the effect the global economy, changes in tax laws and worldwide
industry consolidations will have over our operations, and our ability to seek
service opportunities and adapt to the current industry trends.




- 16
-





Results
of Operations





The
following table sets forth our statements of operations for the years ended
October 31, 2009 and 2008, (dollars in thousands) and as a percentage of
revenue:




Year
      ended October 31,2009
            
            
            2008Revenues
            
            $
            11,479
            
            
            
            100.0
            %
            
            $
            15,196
            
            
            
            100.0
            %Cost
      of services
            
            
            7,640
            
            
            
            66.6
            %
            
            
            9,429
            
            
            
            62.0
            %Gross
      profit
            
            
            3,839
            
            
            
            33.4
            %
            
            
            5,767
            
            
            
            38.0
            %Selling,
      general andadministrative
      costs
            
            
            2,923
            
            
            
            25.5
            %
            
            
            3,113
            
            
            
            20.5
            %Interest
      expense
            
            
            52
            
            
            
            0.4
            %
            
            
            227
            
            
            
            1.5
            %Interest
      income
            
            
            26
            
            
            
            -0.2
            %
            
            
            82
            
            
            
            -0.5
            %Gain
      on disposition of property
            
            
            6
            
            
            
            -0.1
            %
            
            
            -
            
            
            
            0.0
            %Income
      before income taxes
            
            
            896
            
            
            
            7.8
            %
            
            
            2,509
            
            
            
            16.5
            %Income
      tax expense
            
            
            361
            
            
            
            3.1
            %
            
            
            1,021
            
            
            
            6.7
            %Net
      income
            
            
            535
            
            
            
            4.7
            %
            
            
            1,488
            
            
            
            9.8
            %




Revenues. Revenues
for the year ended October 31, 2009 were $11.5 million, a decrease of
approximately $3.7 million or 24.3%, when compared to last year. The reduction
is mainly attributable to the decrease of approximately $3.6 million and $2.1
million in the Puerto Rico and the United States market consulting service
revenue, respectively, partially offset by $0.9 million generated by the Ireland
consulting operation, $0.8 million derived from our new Lab operation and $0.3
million from the Integratek division.





Decrease
in the consulting service revenue is mostly attributable to the global economic
recession and the closing of, or decrease in, operations of some pharmaceutical
plants, triggered by operations’ consolidation.





Cost of Services; gross
margin. The gross margin for the year ended October 31, 2009 reflected a
net reduction of 4.6 percentage points when compared to last year. The decrease
is attributable to the effect over gross margin of 3.2 and 1.4 percentage points
from the consulting and Lab operations, respectively.





The
decline in gross margin ratios for the year ended in October 31, 2009, as
compared to last year, is mainly attributable to our strategy to maintain volume
in the consulting market we serve by keeping our prices competitive, and the
Lab’s low gross margin yield as a function of billings versus fixed costs of
services.





Selling, General and
Administrative Expenses. Selling, general and administrative expenses for
the year ended in October 31, 2009 were approximately $2.9 million, a net
reduction in expenses of approximately $0.2 million as compared to last
year.





The
reduction in selling general and administrative expenses for year ended October
31, 2009, as compared to last year, is mainly attributable to the net savings
attained in salary adjustments to our management team and other cost containment
measures implemented, partially offset by expenses incurred by our new
Integratek, Lab, Pharma Serv Academy and Ireland operations.





Interest Expense. We
recognized imputed interest expense in connection with the long-term obligations
originated pursuant to a plan and agreement of merger dated January 25, 2006 for
the acquisition of Pharma-PR. This expense decreased as annual payments were
made through fiscal year 2009. The final payment under this agreement was made
in fiscal year 2009. Interest expense savings for the year ended in October 31,
2009 as compared to last year were approximately $175,000.




- 17
-





Income Taxes Expense.
The decrease in income taxes expense is attributable to the decrease of income
before income tax. The statutory income tax rate differs to the effective rate
mainly due to the new operation in Ireland which does not have previous taxable
income where its current net operating loss could be carried back and derive a
tax benefit. Income tax benefits will be recognized when realization is
determined to be more probable than not. Realization of future tax benefits is
dependent on many factors, including the tax activity ability to generate
taxable income.





Net
Income.Our net income for
the year ended October 31, 2009 was approximately $0.5 million, a decline of
$0.9 million or a reduction in profit margin of 5.1 percentage points when
compared to last year. For
the year ended October 31, 2009, earnings per common share basic and diluted
were $0.026 and $0.024, respectively, a decline of $0.049 and $0.043 per share,
respectively, when compared to last year.





Our net
income was affected by the decrease in overall gross margin, new operations
selling general and administrative expenses partially offset by cost containment
measures, favorable variances in interest expense, and the reduction of income
tax expense due to the decline in taxable income.





Liquidity
and Capital Resources





Liquidity
is a measure of our ability to meet potential cash requirements, including
planned capital expenditures. For the year ended October 31, 2009, we have
generated cash flow from operations of approximately $2.2 million and a working
capital increase of approximately $0.6 million. Within the year we invested
approximately $0.25 million in a laboratory facility, and have made the final
payment of $2.75 million pursuant the 2006 Pharma-PR acquisition
agreement.





We are
pursuing possible opportunities of expanding our operations beyond Puerto Rico,
and in furtherance of this plan, we have set up facilities in Ireland to offer
our services to companies in the pharmaceutical and related industries in
Ireland. To the extent that we are able to expand our operations, either by
acquisition or by the establishment of operations in a new locale, we will incur
additional overhead, and there may be a delay between the period we commence
operations and our generation of net cash flow from operations.





Our
primary cash needs consist of the payment of compensation to our professional
staff, overhead expenses, and statutory taxes.





Management
believes that based on current levels of operations and cash flows from
operations, the collectability of high quality customer receivables will be
sufficient to fund anticipated expenses and satisfy long-term contractual
commitments for the next twelve months.





While
uncertainties relating to the current local and global economic condition,
competition, the industries and geographical regions served by us and other
regulatory matters exist within the consulting services industry, management is
not aware of any trends or events likely to have a material adverse effect on
liquidity or its financial statements.





Off-Balance
Sheet Arrangements




We were
not involved in any significant off-balance sheet arrangements during the fiscal
year ended October 31, 2009.




- 18
-





Critical
Accounting Policies and Estimates





The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles (“GAAP”) in the United
States. We believe the following are the critical accounting policies that
impact the consolidated financial statements, some of which are based on
management’s best estimates available at the time of preparation. Actual
experience may differ from these estimates.





Consolidation- The accompanying consolidated financial
statements include the accounts of all of our wholly owned and majority-owned
subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.





Use of
Estimates- The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from these
estimates.




Fair Value
of Financial Instruments- The carrying value of
our financial instruments (excluding obligations under capital leases and
amounts due to affiliate): cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, are considered reasonable estimates of
fair value due to their liquidity or short-term nature. Management believes,
based on current rates, that the fair value of its obligations under capital
leases and amounts due to affiliate approximates the carrying
amount.





Revenue Recognition -
Revenue is primarily derived from: (1) time and materials contracts
(representing approximately 85% of total revenues), which is recognized by
applying the proportional performance model, whereby revenue is recognized as
performance occurs, (2) short-term fixed-fee contracts or "not to exceed"
contracts (representing approximately 8% of total revenues), which revenue is
recognized similarly, except that certain milestones also have to be reached
before revenue is recognized, and (3) laboratory testing revenue (representing
approximately 7% of total revenues) is mainly recognized as the testing is
completed and certified (normally within days of sample receipt from customer).
If we determine that a contract will result in a loss, we recognize the
estimated loss in the period in which such determination is made.




Cash
Equivalents- For purposes of the consolidated
statements of cash flows, cash equivalents include investments in a money market
obligations trust that is registered under the U.S. Investment Company Act of
1940 and liquid investments with original maturities of three months or
less.





Accounts Receivable -
Accounts receivable are recorded at their estimated realizable value. Accounts
are deemed past due when payment has not been received within the stated time
period. Our policy is to review individual past due amounts periodically and
write off amounts for which all collection efforts are deemed to have been
exhausted. Due to the nature of our customers, bad debts are mainly accounted
for using the direct write-off method whereby an expense is recognized only when
a specific account is determined to be uncollectible. The effect of using this
method approximates that of the allowance method.





Income
Taxes - We follow an asset
and liability approach method of accounting for income taxes. This method
measures deferred income taxes by applying enacted statutory rates in effect at
the balance sheet date to the differences between the tax basis of assets and
liabilities and their reported amounts on the financial statements. The
resulting deferred tax assets or liabilities are adjusted to reflect changes in
tax laws as they occur. A valuation allowance is provided when it is more likely
than not that a deferred tax asset will not be realized.




- 19
-





Property
and equipment - Owned
property and equipment, and leasehold improvements are stated at cost. Equipment
and vehicles under capital leases are stated at the lower of fair market value
or net present value of the minimum lease payments at the inception of the
leases.




Depreciation
and amortization of owned assets are provided for, when placed in service, in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, using straight-line basis. Assets under capital
leases and leasehold improvements are amortized, over the shorter of the
estimated useful lives of the assets or lease term. Major renewals and
betterments that extend the life of the assets are capitalized, while
expenditures for repairs and maintenance are expensed when
incurred.





We
evaluate for impairment our long-lived assets to be held and used, and
long-lived assets to be disposed of, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.Based on management
estimates, no impairment of the operating properties was present.





Intangible
assets-Definite-lived intangible assets, such
as customer lists and covenants not to compete, are amortized on a straight-line
basis over their estimated useful lives. We continually evaluate the
reasonableness of the useful lives of these assets.





Stock-based
Compensation - Stock-based
compensation expense is recognized in the consolidated financial statements
based on the fair value of the awards granted. Stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period, which generally
represents the vesting period, and includes an estimate of awards that will be
forfeited. We calculate the fair value of stock options using the Black-Scholes
option-pricing model at grant date. Excess tax benefits related to stock-based
compensation are reflected as cash flows from financing activities rather than
cash flows from operating activities. We have not recognized such cash flow from
financing activities since there has been no tax benefit related to the
stock-based compensation.





Income Per
Share of Common Stock - Basic income per share of common stock
is calculated dividing net income by the weighted average number of shares of
common stock outstanding. Diluted income per share includes the dilution of
common stock equivalents. The diluted weighted average shares of common stock
outstanding were calculated using the treasury stock method for the respective
periods.





Foreign
Operations-The functional currency of
our foreign subsidiary is its local currency. The assets and liabilities of our
foreign subsidiary are translated into U.S. dollars at exchange rates in effect
at the balance sheet date. Income and expense items are translated at the
average exchange rates prevailing during the period. The cumulative translation
effect for subsidiaries using a functional currency other than the U.S. dollar
is included as a cumulative translation adjustment in stockholders’ equity and
as a component of comprehensive income.





Our
intercompany accounts are typically denominated in the functional currency of
the foreign subsidiary. Gains and losses resulting from the remeasurement of
intercompany receivables that we consider to be of a long-term investment nature
are recorded as a cumulative translation adjustment in stockholders’ equity and
as a component of comprehensive income, while gains and losses resulting from
the remeasurement of intercompany receivables from those international
subsidiaries for which we anticipate settlement in the foreseeable future are
recorded in the consolidated statements of operations. The net gains and losses
recorded in the condensed consolidated statements of income were not significant
for the periods presented.




- 20
-





New
Accounting Standards




In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification (the “Codification”) as the single source of
authoritative non-governmental generally accepted accounting principles (GAAP).
All existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the our
consolidated financial statements, as all future references to authoritative
accounting literature will be referenced in accordance with the Codification. As
a result of our implementation of the Codification during the quarter ended
October 31, 2009, previous references to new accounting standards and literature
are no longer applicable.




The FASB
issued guidance related to the accounting for business combinations and related
disclosures which is effective for fiscal years beginning on or after December
15, 2008. This new guidance addresses the recognition and accounting for
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in business combinations. The guidance also establishes expanded disclosure
requirements for business combinations. Accordingly, we will apply this new
guidance prospectively to all business combinations subsequent to November 1,
2009. The nature and magnitude of the specific effects of this standard will
depend upon the nature, terms and size of the acquisitions we complete after the
effective date, if any.




The FASB
issued guidance related to the accounting for noncontrolling interests in
consolidated financial statements which is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. This guidance establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance requires that noncontrolling interests in subsidiaries
be reported in the equity section of the controlling company’s balance sheet. It
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. Accordingly, we
will adopt this new standard effective November 1, 2009. The adoption of this
guidance should not have a significant effect on our financial
statements.




- 21
-




Forward-Looking
Statements




Our
business, financial condition, results of operations, cash flows and prospects,
and the prevailing market price and performance of our common stock, may be
adversely affected by a number of factors, including the matters discussed
below. Certain statements and information set forth in this Annual Report on
Form 10-K, as well as other written or oral statements made from time to time by
us or by our authorized executive officers on our behalf, constitute
“forward-looking statements” within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These statements include all
statements other than those made solely with respect to historical fact and
identified by words such as “believes”, “anticipates”, “expects”, “intends” and
similar expressions, but such words are not the exclusive means of identifying
such statements.  We intend for our forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and we set forth this
statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of
the date of this Annual Report on Form 10-K or when made and we undertake no
duty or obligation to update or revise our forward-looking statements, whether
as a result of new information, future events or otherwise. Although we believe
that the expectations, plans, intentions and projections reflected in our
forward-looking statements are reasonable, such statements are subject to known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. The risks, uncertainties and other factors that our stockholders and
prospective investors should consider include, but are not limited to, the
following:




·
            Because our business is
      concentrated in the pharmaceutical industry in Puerto Rico, any changes in
      that industry could impair our ability to generate revenue and realize a
      profit.


·
            Because our business is dependent
      upon a small number of clients, the loss of a major client could impair
      our ability to operate
profitably.


·
            Customer procurement and sourcing
      practices intended to reduce costs could have an adverse affect on our
      margins and profitability.


·
            Since our business is dependent
      upon the development and enhancement of patented pharmaceutical products
      or processes by our clients, the failure of our clients to obtain and
      maintain patents could impair our ability to operate
      profitably.


·
            We may be unable to pass on
      increased labor costs to our
clients.


·
            Consolidation
      in the pharmaceutical industry may have a harmful effect on our
      business.


·
            Because the pharmaceutical
      industry is subject to government regulations, changes in government
      regulations relating to this industry may affect the need for our
      services.


·
            Changes in tax benefits may
      affect the willingness of companies to continue or expand their operations
      in Puerto Rico.


·
            Puerto Rico’s economy, including
      its governmental financial crisis, may affect the willingness of
      businesses to commence or expand operations in Puerto
      Rico.


·
            Other factors, including economic
      factors, may affect the decision of businesses to continue or expand their
      operations in Puerto Rico.


·
            If we are unable to protect our
      clients’ intellectual property, our ability to generate business will be
      impaired.


·
            We may be subject to liability if
      our services or solutions for our clients infringe upon the intellectual
      property rights of others.


·
            We may be held liable for the
      actions of our employees or contractors when on
      assignment.


·
            To the extent that we perform
      services pursuant to fixed-price or incentive-based contracts, our cost of
      services may exceed our revenue on the
  contract.


·
            Because most of our contracts may
      be terminated on little or no advance notice, our failure to generate new
      business could impair our ability to operate
      profitably.


·
            Because we are dependent upon our
      management, our ability to develop our business may be impaired if we are
      not able to engage skilled
personnel.


·
            We may not be able to continue to
      grow unless we consummate acquisitions or enter markets outside of Puerto
      Rico.




- 22
-





·
            If we identify a proposed
      acquisition, we may require substantial cash to fund the cost of the
      acquisition.


·
            If we make any acquisitions, they
      may disrupt or have a negative impact on our
    business.


·
            Because there is a limited market
      in our common stock, stockholders may have difficulty in selling our
      common stock and our common stock may be subject to significant price
      swings.


·
            Our
      quarterly revenues, operating results and profitability will vary from
      quarter to quarter, which may result in increased volatility of our stock
      price.


·
            The issuance of securities,
      whether in connection with an acquisition or otherwise, may result in
      significant dilution to our
stockholders.





ITEM
7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.





Not Applicable.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





Our Consolidated Financial Statements, together with the report
of our independent registered public accounting firm are included herein
immediately following the signature page of this report. See Index to
Consolidated Financial Statements on page F-1.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.




None.




ITEM
9A.  CONTROLS AND PROCEDURES.




Management’s Annual Report on Internal Control Over Financial
Reporting




Our
management is responsible for establishing and maintaining adequate “internal
control over financial reporting,” as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act, for the Company. This rule defines internal
control over financial reporting as a process designed by, or under the
supervision of, a company’s chief executive officer and chief financial officer,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:




•
            
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;




•
            
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and




•
            
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.




Because
of its inherent limitations, our internal control systems and procedures may not
prevent or detect misstatements. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. Also, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.




- 23
-




We, under
the supervision of and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, assessed the effectiveness
of the Company’s internal control over financial reporting as of October 31,
2009, based on criteria for effective internal control over financial reporting
described in “Internal Control — Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, our Chief Executive Officer and Chief Financial Officer concluded
that the Company maintained effective internal control over financial reporting
as of October 31, 2009, based on the specified criteria.




This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.




Disclosure
Controls and Procedures.




We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this Annual Report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this Annual Report.




Changes
in Internal Control Over Financial Reporting




Based on
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
there has been no change in our internal control over financial reporting during
our last fiscal quarter identified in connection with that evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




ITEM
9B.  OTHER INFORMATION.




None.




- 24
-




PART
III




ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year. Such information is incorporated herein by
reference.




Information
with respect to our executive officers is included in Part I.




ITEM
11.  EXECUTIVE COMPENSATION.




The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year. Such information is incorporated herein by
reference.




ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND   RELATED STOCKHOLDER MATTERS.




The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year. Such information is incorporated herein by
reference.




ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.




The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year. Such information is incorporated herein by
reference.




ITEM 14.  PRINCIPAL ACCOUNTING FEES AND
SERVICES.




The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year. Such information is incorporated herein by
reference.




- 25
-




PART IV




ITEM 15.  EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.




The
following documents are filed as a part of this Annual Report on Form
10-K:




1.
            All
      Financial Statements:  Consolidated Financial Statements are
      included herein immediately following the signature page of this report.
      See Index to Consolidated Financial Statements on page
  F-1.




2.
            Financial
      Statement
Schedules:  None.




3.
            Exhibits:  The
      following exhibits are filed herewith or are incorporated by reference to
      exhibits previously filed with the Commission, as indicated in the
      description of each.




Incorporated By ReferenceExhibit Number
            Exhibit Description
            Form
            File Number
            Exhibit
            Filing Date3.1
            Restated
      Certificate of Incorporation
            8-K
            000-50956
            99.1
            5/1/20063.2
            By-laws
            10-SB12G
            000-50956
            3.2
            9/24/20043.3
            Amendment
      No. 1 to the By-laws
            8-K
            000-50956
            3.1
            6/6/20084.1
            Form
      of warrant issued to Investors in January 2006 private
      placement
            8-K
            000-50956
            4.2
            1/31/20064.2
            Form
      of warrant held by initial warrant holders
            8-K
            000-50956
            4.3
            1/31/20064.3
            Form
      of warrant held by San Juan Holdings
            8-K
            000-50956
            4.4
            1/31/20064.4
            Form
      of warrants issued to broker-dealers in January 2006 private
      placement
            8-K
            000-50956
            4.5
            1/31/20064.5
            Form
      of First Amendment to Series C Common Stock Purchase
    Warrant.
            8-K
            000-50956
            4.1
            1/29/200910.1
            Form
      of subscription agreement for January 2006 private
    placement
            8-K
            000-50956
            99.1
            1/31/200610.2
            Registration
      rights provisions for the subscription agreement relating to January 2006
      private placement
            8-K
            000-50956
            99.2
            1/31/200610.3
            Registration
      rights provisions for Elizabeth Plaza and San Juan Holdings,
      Inc.
            8-K
            000-50956
            99.3
            1/31/200610.4
            Employment
      Agreement dated January 2, 2008 between the Registrant and Elizabeth
      Plaza
            10-KSB
            000-50956
            10.5
            1/31/200810.5
            Amendment
      to Employment Agreement dated June 9, 2008 between the Registrant and
      Elizabeth Plaza
            10-K
            000-50956
            10.5
            1/29/200910.6
            Second
      Amendment to Employment Agreement, dated March 11, 2009, by and between
      the Company and Elizabeth Plaza.
            8-K
            000-50956
            10.1
            3/17/2009




- 26
-


10.7
            Third
      Amendment to Employment Agreement, dated March 11, 2009, by and between
      the Company and Elizabeth Plaza.
            8-K
            000-50956
            10.2
            3/17/200910.8
            Employment
      Agreement Amendment, effective as of January 1, 2010, by and between the
      Company and Elizabeth Plaza.
            8-K
            000-50956
            10.1
            1/07/201010.9
            Employment
      Agreement dated January 25, 2006 between the Registrant and Nélida
      Plaza
            8-K
            000-50956
            99.5
            1/31/200610.10
            Amendment
      to Employment Agreement, dated March 11, 2009, by and between the Company
      and Nelida Plaza.
            8-K
            000-50956
            10.4
            3/17/200910.11
            Employment
      Agreement, dated as of December 31, 2009, by and between Pharma-Bio Serv
      PR, Inc. and Nelida Plaza.
            8-K
            000-50956
            10.3
            1/07/201010.12
            Employment
      Agreement dated November 5, 2007 between the Registrant and Pedro
      Lasanta
            10-K
            000-50956
            10.8
            1/29/200910.13
            Amendment
      to Employment Agreement dated December 17, 2008 between the Registrant and
      Pedro Lasanta
            8-K
            000-50956
            99.1
            12/23/200810.14
            Amendment
      to Employment Agreement, dated March 11, 2009, by and between the Company
      and Pedro  Lasanta.
            8-K
            000-50956
            10.3
            3/17/200910.15
            Employment
      Agreement Amendment, effective as of January 1, 2010, by and between the
      Company and Pedro Lasanta.
            8-K
            000-50956
            10.2
            1/07/201010.16
            2005
      Long-term incentive plan, as amended
            DEF
      14A
            000-50956
            Appendix
      C
            3/26/200710.17
            Lease
      dated March 16, 2004 between Plaza Professional Center, Inc. and the
      Registrant
            SB-2
            333-132847
            10.9
            3/30/200610.18
            Lease
      dated November 1, 2004 between Plaza Professional Center, Inc. and the
      Registrant
            SB-2
            333-132847
            10.10
            3/30/200610.19
            Vendor
      Agreement dated May 4, 2006 between the Registrant and Schering-Plough
      Products, L.L.C.
            SB-2/A
            333-132847
            10.12
            11/8/200610.20
            Agreement
      dated January 17, 2006 between Lilly del Caribe, Inc. and Plaza Consulting
      Group, Inc.
            SB-2/A
            333-132847
            10.13
            11/8/200610.21
            Agreement
      effective as of November 1, 2005 between SB Pharmco Puerto Rico Inc. d/b/a
      GlaxoSmithKline
            SB-2/A
            333-132847
            10.14
            10/27/200614.1
            Code
      of business conduct and ethics for senior management
            10-KSB
            000-50956
            14.1
            2/2/200721.1*
            List
      of Subsidiaries31.1*
            Certification
      of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
            Certification
      of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1**
            Certification
      of chief executive officer and chief financial officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002





_____________________





*   Filed
herewith


**  Furnished
herewith





Exhibits
10.4 through 10.16 are management contracts or compensatory plans, contracts or
arrangements.




- 27
-




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




PHARMA-BIO
      SERV, INC.Dated:
       January 29, 2010
            By:
            /s/
      ELIZABETH PLAZAName: Elizabeth PlazaTitle:
      President and CEO




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/
      Elizabeth Plaza
            
            President,
      Chief Executive Officer and Director
            
            January
      29, 2010Elizabeth
      Plaza
            
            (Principal
      Executive Officer)/s/
      Pedro J. Lasanta
            
            Chief
      Financial Officer
            
            January
      29, 2010Pedro
      J. Lasanta
            
            (Principal
      Financial and Accounting Officer)/s/
      Kirk Michel
            
            Director
            
            January
      29, 2010Kirk
      Michel/s/
      Howard Spindel
            
            Director
            
            January
      29, 2010Howard
      Spindel/s/
      Dov Perlysky
            
            Director
            
            January
      29, 2010Dov
      Perlysky/s/
      Irving Wiesen
            
            Director
            
            January
      29, 2010Irving
      Wiesen




- 28
-




PHARMA-BIO
SERV, INC.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
      Balance Sheets as of October 31, 2009 and 2008
            
            
            F-3Consolidated
      Statements of Income for the Years Ended October 31, 2009 and
      2008
            
            
            F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the Years EndedOctober
      31, 2009 and 2008
            
            
            F-5Consolidated
      Statements of Cash Flows for the Years Ended October 31, 2009 and
      2008
            
            
            F-7Consolidated
      Notes to Financial Statements
            
            
            F-8




F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Stockholders of


Pharma-Bio
Serv, Inc.


Dorado,
Puerto Rico




We have
audited the accompanying consolidated balance sheets of Pharma-Bio Serv, Inc.as of
October 31, 2009 and 2008, and the related consolidated statements of income,
changes in stockholders’ equity, and cash flows for the years then
ended.  Pharma-Bio
Serv, Inc.’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pharma-Bio Serv, Inc as of
October 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.








S/HORWATH
VÉLEZ & CO, PSC


San Juan,
Puerto Rico






January
29, 2010


Puerto
Rico Society of Certified Public Accountants


Stamp
number 2477364 was


Affixed
to the original of this report




F-2




PHARMA-BIO
SERV, INC.


Consolidated
Balance Sheets


October 31, 2009 and
2008




October
      31,ASSETS:
            
            
            2009
            
            
            
            2008Current
      assetsCash
      and cash equivalents
            
            $
            2,051,874
            
            
            $
            3,087,990Accounts
      receivable
            
            
            2,034,963
            
            
            
            3,245,153Other
            
            
            298,830
            
            
            
            194,108Total
      current assets
            
            
            4,385,667
            
            
            
            6,527,251Property
      and equipment
            
            
            1,567,145
            
            
            
            1,521,575Other
      assets, mainly intangible assets
            
            
            69,469
            
            
            
            63,127Total
      assets
            
            $
            6,022,281
            
            
            $
            8,111,953LIABILITIES AND STOCKHOLDERS’
      EQUITY:Current
      liabilitiesCurrent
      portion-obligations under capital leases
            
            $
            43,737
            
            
            $
            45,318Accounts
      payable and accrued expenses
            
            
            1,112,739
            
            
            
            1,189,705Due
      to affiliate
            
            
            -
            
            
            
            2,706,892Income
      taxes payable
            
            
            140,443
            
            
            
            48,324Total
      current liabilities
            
            
            1,296,919
            
            
            
            3,990,239Obligations
      under capital leases
            
            
            62,385
            
            
            
            69,934Total
      liabilities
            
            
            1,359,304
            
            
            
            4,060,173Stockholders'
      equity:Preferred
      Stock, $0.0001 par value; authorized10,000,000
      shares; none outstanding
            
            
            -
            
            
            
            -Common
      Stock, $0.0001 par value; authorized 50,000,000shares;
      issued
              and
      outstanding 20,751,215 shares in 2009 and 2008
            
            
            2,075
            
            
            
            2,075Additional
      paid-in capital
            
            
            602,508
            
            
            
            540,337Retained
      earnings
            
            
            4,068,817
            
            
            
            3,534,060Accumulated
      other comprehensive loss
            
            
            (10,423
            )
            
            
            (24,692
            )Total
      stockholders' equity
            
            
            4,662,977
            
            
            
            4,051,780Total
      liabilities and stockholders' equity
            
            $
            6,022,281
            
            
            $
            8,111,953




See notes
to consolidated financial statements.




F-3





PHARMA-BIO
SERV, INC.


Consolidated
Statements of Income


For
the Years Ended October 31, 2009 and 2008




Years
      ended October 31,2009
            
            
            2008REVENUES
            
            $
            11,479,083
            
            
            $
            15,196,393COST
      OF SERVICES
            
            
            7,640,333
            
            
            
            9,429,324GROSS
      PROFIT
            
            
            3,838,750
            
            
            
            5,767,069SELLING,
      GENERAL ANDADMINISTRATIVE
      EXPENSES
            
            
            2,923,295
            
            
            
            3,113,244INCOME
      FROM OPERATIONS
            
            
            915,455
            
            
            
            2,653,825OTHER
      INCOME (EXPENSE):Interest
      expense
            
            
            (52,394
            )
            
            
            (227,449
            )Interest
      income
            
            
            26,961
            
            
            
            82,707Gain
      on disposition of property and equipment
            
            
            6,081
            
            
            
            -(19,352
            )
            
            
            (144,742
            )INCOME
      BEFORE INCOME TAXES
            
            
            896,103
            
            
            
            2,509,083INCOME
      TAXES
            
            
            361,346
            
            
            
            1,021,287NET
      INCOME
            
            $
            534,757
            
            
            $
            1,487,796BASIC
      EARNINGS PER COMMON SHARE
            
            $
            0.026
            
            
            $
            0.075DILUTED
      EARNINGS PER COMMON SHARE
            
            $
            0.024
            
            
            $
            0.067WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING – BASIC
            
            
            20,751,215
            
            
            
            19,970,549WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING – DILUTED
            
            
            22,324,996
            
            
            
            22,259,016




See notes
to consolidated financial statements.




F-4




PHARMA-BIO
SERV, INC.


Consolidated
Statements of Changes in Stockholders' Equity


For
the Years Ended October 31, 2009 and 2008




AccumulatedAdditional
            
            
            
            
            
            OtherCommon
      Stock
            
            
            Preferred Stock
            
            
            Paid-in
            
            
            Retained
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income
      (Loss)
            
            
            TotalBALANCE
      AT OCTOBER 31, 2007
            
            
            19,615,539
            
            
            $
            1,961
            
            
            
            -
            
            
            $
            -
            
            
            $
            115,404
            
            
            $
            2,046,264
            
            
            $
            3,554
            
            
            $
            2,167,183CONVERSION
      OF WARRANTS TO
              SHARES
      OF COMMON STOCK
            
            
            1,135,676
            
            
            
            114
            
            
            
            -
            
            
            
            -
            
            
            
            382,747
            
            
            
            -
            
            
            
            -
            
            
            
            382,861STOCK-BASED
      COMPENSATION
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            42,186
            
            
            
            -
            
            
            
            -
            
            
            
            42,186COMPREHENSIVE
      INCOME:NET
      INCOME
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,487,796
            
            
            
            -
            
            
            
            1,487,796OTHER
      COMPREHENSIVE INCOME:FOREIGN
      CURRENCY TRANSLATION ADJUSTMENT
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (28,246
            )
            
            
            (28,246
            )OTHER
      COMPREHENSIVE INCOME
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (28,246
            )COMPREHENSIVE
      INCOME
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,459,550BALANCE
      AT OCTOBER 31, 2008
            
            
            20,751,215
            
            
            
            2,075
            
            
            
            -
            
            
            
            -
            
            
            
            540,337
            
            
            
            3,534,060
            
            
            
            (24,692
            )
            
            
            4,051,780STOCK-BASED
      COMPENSATION
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            62,171
            
            
            
            -
            
            
            
            -
            
            
            
            62,171COMPREHENSIVE
      INCOME:NET
      INCOME
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            534,757
            
            
            
            -
            
            
            
            534,757OTHER
      COMPREHENSIVE INCOME:FOREIGN
      CURRENCY TRANSLATION ADJUSTMENT
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,269
            
            
            
            14,269OTHER
      COMPREHENSIVE INCOME
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            14,269COMPREHENSIVE
      INCOME
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            549,026BALANCE
      AT OCTOBER 31, 2009
            
            
            20,751,215
            
            
            $
            2,075
            
            
            
            -
            
            
            $
            -
            
            
            $
            602,508
            
            
            $
            4,068,817
            
            
            $
            (10,423
            )
            
            $
            4,662,977




See notes
to consolidated financial statements.




F-5





PHARMA-BIO
SERV, INC.


Consolidated
Statements of Cash Flows


For
the Years Ended October 31, 2009 and 2008




Years
      ended October 31,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            534,757
            
            
            $
            1,487,796Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Loss
      on disposition of property and equipment
            
            
            (6,081
            )
            
            
            -Stock-based
      compensation
            
            
            62,171
            
            
            
            42,186Depreciation
      and amortization
            
            
            307,332
            
            
            
            227,152Imputed
      interest expense
            
            
            43,108
            
            
            
            219,127Decrease
      in accounts receivable
            
            
            1,301,996
            
            
            
            320,252Decrease
      in other assets
            
            
            (44,494
            )
            
            
            73,620(Decrease)
      increase in liabilities
            
            
            (26,258
            )
            
            
            (790,027
            )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            2,172,531
            
            
            
            1,580,106CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
            
            
            (290,137
            )
            
            
            (845,814
            )Payments
      for business assets acquisition
            
            
            (150,394
            )
            
            
            -Proceeds
      from sale of property and equipment
            
            
            12,400
            )
            
            
            -NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (428,131
            )
            
            
            (845,814
            )CASH
      FLOW FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
            
            
            -
            
            
            
            382,861Payments
      on obligations under capital lease
            
            
            (34,573
            )
            
            
            (60,091
            )Payments
      to affiliate
            
            
            (2,750,000
            )
            
            
            (2,750,000
            )NET
      CASH USED IN FINANCINGACTIVITIES
            
            
            (2,784,573
            )
            
            
            (2,427,230
            )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
            
            
            4,057
            
            
            
            (11,438
            )NET
      (DECREASE) INCREASE IN CASH AND CASHEQUIVALENTS
            
            
            (1,036,116
            )
            
            
            (1,704,376
            )CASH
      AND CASH EQUIVALENTS - BEGINNING OFYEAR
            
            
            3,087,990
            
            
            
            4,792,366CASH
      AND CASH EQUIVALENTS – END OF YEAR
            
            $
            2,051,874
            
            
            $
            3,087,990SUPPLEMENTAL
      DISCLOSURES OFCASH FLOW INFORMATION:Cash
      paid during the period for:Income
      taxes
            
            $
            289,904
            
            
            $
            1,344,334Interest
            
            $
            510,799
            
            
            $
            353,455SUPPLEMENTARY
      SCHEDULES OF NON-CASHINVESTING AND FINANCING
      ACTIVITIES:Property
      and equipment with accumulated depreciation of$98,334
      disposed during
              the
      year ended October 31, 2009
            
            $
            138,180
            
            
            $
            -Income
      tax withheld by clients to be used as a credit inthe
      Company’s income tax return
            
            $
            18,924
            
            
            $
            23,621Obligations
      under capital lease incurred for theacquisition  of
      a vehicle
            
            $
            58,970
            
            
            $
            33,695





See notes
to consolidated financial statements.




F-6




PHARMA-BIO
SERV, INC.


Notes
To Consolidated Financial Statements


For
the Years Ended October 31, 2009 and 2008





NOTE
A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





ORGANIZATION





Pharma-Bio
Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14,
2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc.
(“Pharma-PR”), Pharma Serv, Inc. (“Pharma-Serv”) both  Puerto Rico
corporations, Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation,
and Pharma-Bio Serv Validation & Compliance Limited (“Pharma-IR”), a
majority owned Irish corporation. Pharma-Bio, Pharma-PR, Pharma-Serv, Pharma-US
and Pharma-IR are collectively referred to as the “Company.” The Company
operates in Puerto Rico, the United States and in Ireland under the name of
Pharma-Bio Serv and is engaged in providing technical compliance consulting
service, and microbiological and chemical laboratory testing services primarily
to the pharmaceutical, chemical, medical device and biotechnology
industries.





Pharma-US
and Pharma Serv are wholly owned subsidiaries. As of October 31, 2009, both
subsidiaries were in development stage and have not incurred significant
revenues or expenses.





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Consolidation





The
accompanying consolidated financial statements include the accounts of the
Company and all of its wholly owned and majority-owned subsidiaries. All
intercompany transactions and balances have been eliminated in
consolidation.





Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results may differ
from these estimates.




Fair
Value of Financial Instruments




The
carrying value of the Company's financial instruments (excluding obligations
under capital leases and amounts due to affiliate): cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, are considered
reasonable estimates of fair value due to their liquidity or short-term nature.
Management believes, based on current rates, that the fair value of its
obligations under capital leases and amounts due to affiliate approximates the
carrying amount.




F-7





Revenue
Recognition




Revenue
is primarily derived from: (1) time and materials contracts (representing
approximately 85% of total revenues), which is recognized by applying the
proportional performance model, whereby revenue is recognized as performance
occurs, (2) short-term fixed-fee contracts or "not to exceed" contracts
(representing approximately 8% of total revenues), which revenue is recognized
similarly, except that certain milestones also have to be reached before revenue
is recognized, and (3) laboratory testing revenue (representing approximately 7%
of total revenues) is mainly recognized as the testing is completed and
certified (normally within days of sample receipt from customer). If the Company
determines that a contract will result in a loss, the Company recognizes the
estimated loss in the period in which such determination is made.




Cash
Equivalents




For
purposes of the consolidated statements of cash flows, cash equivalents include
investments in a money market obligations trust that is registered under the
U.S. Investment Company Act of 1940 and liquid investments with original
maturities of three months or less.





Accounts
Receivable




Accounts
receivable are recorded at their estimated realizable value. Accounts are deemed
past due when payment has not been received within the stated time period. The
Company's policy is to review individual past due amounts periodically and write
off amounts for which all collection efforts are deemed to have been exhausted.
Due to the nature of the Company’s customers, bad debts are mainly accounted for
using the direct write-off method whereby an expense is recognized only when a
specific account is determined to be uncollectible. The effect of using this
method approximates that of the allowance method.





Income
Taxes




The
Company follows an asset and liability approach method of accounting for income
taxes. This method measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
basis of assets and liabilities and their reported amounts on the financial
statements. The resulting deferred tax assets or liabilities are adjusted to
reflect changes in tax laws as they occur. A valuation allowance is provided
when it is more likely than not that a deferred tax asset will not be
realized.





Property
and equipment




Owned
property and equipment, and leasehold improvements are stated at cost. Equipment
and vehicles under capital leases are stated at the lower of fair market value
or net present value of the minimum lease payments at the inception of the
leases.




Depreciation
and amortization of owned assets are provided for, when placed in service, in
amount sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, using straight-line basis. Assets under capital
leases and leasehold improvements are amortized, over the shorter of the
estimated useful lives of the assets or initial lease term. Major renewals and
betterments that extend the life of the assets are capitalized, while
expenditures for repairs and maintenance are expensed when
incurred.




The
Company evaluates for impairment its long-lived assets to be held and used, and
long-lived assets to be disposed of, whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.Based on management
estimates, no impairment of the operating properties was present.





Intangible
assets





Definite-lived
intangible assets, such as customer lists and covenants not to compete, are
amortized on a straight-line basis over their estimated useful lives. The
Company continually evaluates the reasonableness of the useful lives of these
assets.




F-8





Stock-based
Compensation





Stock-based
compensation expense is recognized in the consolidated financial statements
based on the fair value of the awards granted. Stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period, which generally
represents the vesting period, and includes an estimate of awards that will be
forfeited. The Company calculates the fair value of stock options using the
Black-Scholes option-pricing model at grant date. Excess tax benefits related to
stock-based compensation are reflected as cash flows from financing activities
rather than cash flows from operating activities. The Company has not recognized
such cash flow from financing activities since there has been no tax benefit
related to the stock-based compensation.





Income
Per Share of Common Stock




Basic
income per share of common stock is calculated dividing net income by the
weighted average number of shares of common stock outstanding. Diluted income
per share includes the dilution of common stock equivalents.




The
diluted weighted average shares of common stock outstanding were calculated
using the treasury stock method for the respective periods.





Foreign
Operations





The
functional currency of the Company’s foreign subsidiary is its local currency.
The assets and liabilities of the Company’s foreign subsidiary are translated
into U.S. dollars at exchange rates in effect at the balance sheet date. Income
and expense items are translated at the average exchange rates prevailing during
the period. The cumulative translation effect for subsidiaries using a
functional currency other than the U.S. dollar is included as a cumulative
translation adjustment in stockholders’ equity and as a component of
comprehensive income.





The
Company’s intercompany accounts are typically denominated in the functional
currency of the foreign subsidiary. Gains and losses resulting from the
remeasurement of intercompany receivables that the Company considers to be of a
long-term investment nature are recorded as a cumulative translation adjustment
in stockholders’ equity and as a component of comprehensive income, while gains
and losses resulting from the remeasurement of intercompany receivables from
those international subsidiaries for which the Company anticipates settlement in
the foreseeable future are recorded in the consolidated statements of
operations. The net gains and losses recorded in the condensed consolidated
statements of income were not significant for the periods
presented.





Reclassifications





Certain
reclassifications have been made to the October 31, 2008 consolidated financial
statements to conform them to the October 31, 2009 consolidated financial
statements presentation. Such reclassifications do not have effect on net income
as previously reported.




F-9





NOTE
B - RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS





1. In
June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification (the “Codification”) as the single source of
authoritative non-governmental generally accepted accounting principles (GAAP).
All existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the Company’s
consolidated financial statements, as all future references to authoritative
accounting literature will be referenced in accordance with the Codification. As
a result of the Company’s implementation of the Codification during the quarter
ended October 31, 2009, previous references to new accounting standards and
literature are no longer applicable.




2. The
FASB issued guidance related to the accounting for business combinations and
related disclosures which is effective for fiscal years beginning on or after
December 15, 2008. This new guidance addresses the recognition and accounting
for identifiable assets acquired, liabilities assumed, and noncontrolling
interests in business combinations. The guidance also establishes expanded
disclosure requirements for business combinations. Accordingly, the Company will
apply this new guidance prospectively to all business combinations subsequent to
November 1, 2009. The nature and magnitude of the specific effects of this
standard will depend upon the nature, terms and size of the acquisitions the
Company completes after the effective date, if any.




3. The
FASB issued guidance related to the accounting for noncontrolling interests in
consolidated financial statements which is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. This guidance establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance requires that noncontrolling interests in subsidiaries
be reported in the equity section of the controlling company’s balance sheet. It
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. Accordingly, the
Company will adopt this new standard effective November 1, 2009. The adoption of
this guidance should not have a significant effect on the Company’s financial
statements.




NOTE
C - PROPERTY AND EQUIPMENT




The
balance of property and equipment at October 31, 2009 and 2008 consisted of the
following:




October
      31,Useful
      life (years)
            
            
            2009
            
            
            2008Vehicles
      under capital leases
            
            5
            
            
            $
            175,919
            
            
            $
            255,129Leasehold
      improvements
            
            5
            
            
            
            566,851
            
            
            
            566,851Computers
            
            3
            
            
            
            302,560
            
            
            
            253,417Equipment
            
            3-5
            
            
            
            754,675
            
            
            
            752,744Furniture
      and fixtures
            
            10
            
            
            
            119,349
            
            
            
            119,349Projects
      in progress
            
            -
            
            
            
            308,541
            
            
            
            54,170Total
            
            
            
            
            
            2,227,895
            
            
            
            2,001,660Less:
      Accumulated depreciation and amortization
            
            
            
            
            
            (660,750
            )
            
            
            (480,085
            )Property
      and equipment, net
            
            
            
            
            $
            1,567,145
            
            
            $
            1,521,575




F-10




NOTE
D - OTHER ASSETS




At
October 31, 2009 and 2008 non-current other assets included the
following:


October
      31,Intangible
      assets:
            
            2009
            
            
            2008Covenant
      not to compete (Pharma-PR acquisition), net of accumulatedamortization
      of $78,333 and $58,333 in October 31, 2009 and 2008,respectively
            
            $
            21,667
            
            
            $
            41,667Covenant
      not to compete (Integratek acquisition), net of accumulatedamortization
      of $15,278 at October 31, 2009
            
            
            34,722
            
            
            
            -Customer-related
      intangibles, net of accumulated amortization of $150,000and
      $141,667 in October 31, 2009 and 2008, respectively
            
            
            -
            
            
            
            8,333Total
      intangible assets net of amortization
            
            
            56,389
            
            
            
            50,000Other
      assets
            
            
            13,080
            
            
            
            13,127Total
      non-current other assets
            
            $
            69,469
            
            
            $
            63,127





Covenant
not to compete (Pharma-PR acquisition) represents the portion of the payment
made in connection with the purchase of the Pharma-PR stock that was allocated
to a non-competition covenant. Under this agreement, the then sole stockholder
of Pharma-PR agreed not to compete with the Company for a period of five years.
The covenant not to compete of $100,000 is amortized on the straight-line method
over the five-year term of the non-competition covenant.





Covenant
not to compete (Integratek acquisition) represents the portion of the payment
allocated to a non-competition covenant pursuant to the December 2008 $150,000
purchase of operations and assets of Integratek, an information technology
consulting firm based in Puerto Rico. Under the agreement, the stockholders of
Integratek agreed not to compete with the Company for a period of three years.
The covenant not to compete of $50,000 is amortized on the straight-line method
over the three-year term of the non-competition covenant.





Customer-related
intangible assets consist mainly of a customer list which Pharma-PR acquired
along with other assets from a business which performed in the United States
consulting services similar to those performed by the Company in Puerto Rico.
The value of the customer list of $150,000 was amortized on the straight-line
method over its estimated useful life of three years.





Intangible
assets amortization expense for the years ended on October 31, 2009 and 2008
amounted to $88,611 and $70,000, respectively. The amortization expense for the
year ended on October 31, 2009 includes $45,000 for the full amortization of an
Integratek acquired customer list which useful life was revaluated.





NOTE
E - LINE-OF-CREDIT





The
Company has available an unsecured line-of-credit with a financial institution,
which provides for borrowings up to $250,000. This line of credit may be used as
working capital whenever the Company’s bank account cannot meet its daily cash
requirements. Interest on advances obtained from this line-of-credit will be
paid at 2% over the bank’s prevailing prime rate. At no time during the periods
presented herein was the line-of-credit used.




F-11




NOTE
F - INCOME TAXES





On July
2008, Pharma-Bio and Pharma-PR obtained a Grant of Industrial Tax Exemption
(“the Grant”) from the Puerto Rico Industrial Development Company pursuant to
the terms and conditions set forth in Act No. 135 of December 2, 1997, as
amended. The Grant provides relief on various Puerto Rico taxes, including
income tax, mostly for the Company's new microbiological testing facility and
service activities outside of Puerto Rico. The Grant is effective as of
September 1, 2007 and covers a ten year period. Activities covered by the Grant
are subject to a reduced income tax rate of 7%.





For
fiscal years 2009 and 2008 Pharma-PR operations not covered in the exempt
activities of the Grant are subject to Puerto Rico income tax at a maximum tax
rate of 39% as provided by the 1994 Puerto Rico Internal Revenue Code, as
amended.





The
operations carried out in the United States by the Company’s subsidiary are
taxed in the United States. With certain limitations, the Company receives a
credit on its Puerto Rico tax for the federal income tax paid. Also, upon
distribution of earnings by the Puerto Rican subsidiary to its parent those
dividends are taxed at the federal level, however, the parent is able to receive
a credit for the taxes paid by the subsidiary on its operations in Puerto Rico,
to the extent of the federal taxes that result from those earnings (determined
at rates which are normally lower than in Puerto Rico). As a result, the income
tax expense of the Company, under its present corporate structure, would
normally be the Puerto Rico taxes on operations in Puerto Rico, plus 10%
withholding in Puerto Rico from dividends paid to the Puerto Rican subsidiary’s
parent, plus federal taxes on operations in the United States.





Deferred
income tax assets and liabilities are computed for differences between the
consolidated financial statements and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income.





As of
October 31, 2009 and 2008, the Company has not recognized deferred income taxes
on $4,357,614 and $3,792,546 of undistributed earnings of its Puerto Rican
subsidiary, respectively, since such earnings are considered to be reinvested
indefinitely. If the earnings were distributed in the form of dividends, the
Company would be subject to a $435,761 and $379,255 tollgate tax,
respectively.





The
reasons for the difference between the provision for income tax applicable to
income before provision for income taxes and the amount computed by applying the
applicable statutory tax rate in Puerto Rico were as follows:





Year
      ended
      October 31,2009
            
            
            2008Theoretical
      income tax expense by application of statutory rates to the book pre-tax
      income
            
            $
            361,302
            
            
            $
            1,042,524Benefit
      of tax grant
            
            
            (1,464
            )
            
            
            (28,660
            )Permanent
      differences, net
            
            
            1,508
            
            
            
            7,423$
            361,346
            
            
            $
            1,021,287





At
October 31, 2009, Pharma-Bio and Pharma-IR have unused operating losses of
approximately $195,000 and $292,000 after considering various timing differences
for income tax purposes, which result in a potential deferred tax asset of
approximately $66,300 and $36,500, respectively. However, an allowance has been
provided covering the total amount of such balance since it is uncertain whether
the net operating losses can be used to offset future taxable income before
their expiration dates. Realization of future tax benefits related to a deferred
tax asset is dependent on many factors, including the company’s ability to
generate taxable income. Accordingly, the income tax benefit will be recognized
when realization is determined to be more probable than not. These net operating
losses are available to offset future taxable income which expires for
Pharma-Bio in 2027, while for Pharma-IR are available indefinitely.





The
Company files income tax returns in the U.S. in federal and various states
jurisdictions, Puerto Rico and Ireland. The 2004 through 2009 tax years are open
and may be subject to potential examination in one or more jurisdictions. The
Company is not currently under federal, state, Puerto Rico or foreign income tax
examination.




F-12


Effective
November 1, 2007, the Company adopted guidance from the FASB related to Accounting for Uncertainty in Income
Taxes which includes a two-step approach to recognizing, de-recognizing
and measuring uncertain tax positions. As a result of the implementation, the
Company recognized no increase in the liability for unrecognized tax benefits.
Therefore upon implementation, the Company recognized no material adjustment to
the November 1, 2007 balance of retained earnings. By the end of fiscal year
2009, the Company had no significant uncertain tax positions that would be
reduced as a result of a lapse of the applicable statute of
limitations.





NOTE
G - DUE TO AFFILIATE





Pursuant
to a plan and agreement of merger dated January 25, 2006, the Company agreed to
pay its then sole stockholder of Pharma-PR three installments of $2,750,000 on
January 25, 2007, 2008 and 2009, including imputed interest of 6.72%. As of
October 31, 2008 only the last installment of $2,750,000 (present value of
$2,706,892) due in 2009 was pending for payment. This installment was paid in
full during fiscal year 2009.





NOTE
H – COMMITMENTS AND CONTINGENCIES





Capitalized lease obligations
- The Company leases vehicles under non-cancelable capital lease agreements with
a cost of $175,919 and $255,129 (accumulated amortization of $98,715 and
$160,488) as of October 31, 2009 and 2008, respectively. Amortization expense
for these assets amounted to $36,562 and $49,341 in the years ended October 31,
2009 and 2008, respectively. The following is a schedule, by year, of future
minimum lease payments under the capitalized leases together with the present
value of the net minimum lease payments at October 31, 2009:





Twelve
      months ending October 31,
            
            Amount2010
            
            $
            48,8662011
            
            
            23,4262012
            
            
            23,4262013
            
            
            17,3862014
            
            
            5,124Total
      future minimum lease payments
            
            
            118,228Less:
      Amount of imputed interest
            
            
            (
      12,106
            )Present
      value of future minimum lease payments
            
            
            106,122Current
      portion of obligation under capital leases
            
            
            (43,737
            )Long-term
      portion
            
            $
            62,385





Operating facilities - The
Company conducts its administrative operations in office facilities which are
leased under three different rental agreements.





In
February 2007, the Company entered into a lease agreement with an affiliate of
the chief executive officer for the headquarters and laboratory testing
facilities in Dorado, Puerto Rico. The lease agreement is for a term of five
years with monthly rental payments of $18,750, $19,687, $20,672, $21,705 and
$22,791 for each of the years under the lease. The lease agreement ends in
January 2012 and provides a five year-renewal option. The agreement also
requires the payment of utilities, property taxes, insurance and a portion of
expenses incurred by the affiliate in connection with the maintenance of common
areas.





The
Company pays monthly rent of $1,150 for its leased US office facilities in
Limerick, Pennsylvania which expires in July 2010. Upon landlord completion of
improvements (approximately February 2010), the US office will be moved to a new
facility in Plymouth, Pennsylvania. The new facility is covered by a three year
lease term agreement commencing the date of landlord delivery of the finished
leased premises and rental monthly installments of $2,100.





The
Company maintains office facilities in Cork, Ireland. The facilities are under a
month-to-month lease with monthly payments of approximately $750.





The
Company leases certain apartments as dwellings for employees. The leases are
under short-term lease agreements and usually are cancelable upon 30-day
notification.




F-13




Minimum
future rental payments under non-cancelable operating leases having remaining
terms in excess of one year as of October 31, 2009 are as follows:





Amount2010
            
            $
            286,6152011
            
            
            295,4332012
            
            
            93,5722013
            
            
            6,300Total
      minimum lease payments
            
            $
            681,920





Rent
expense during the years ended October 31, 2009 and 2008 was $386,480 and
$407,554, respectively.





Contingencies - In the
ordinary course of business, the Company may be a party to legal proceedings
incidental to the business. These proceedings are not expected to have a
material adverse effect on the Company’s business or financial
condition.





NOTE
I - STOCK OPTIONS AND STOCK BASED COMPENSATION





In
October 2005, the Company's board of directors adopted, and on April 25, 2006,
the Company’s stockholders approved, the 2005 Long-Term Incentive Plan, covering
2,500,000 shares of common stock. The 2005 plan provides for the grant of
incentive and non-qualified options, stock grants, stock appreciation rights and
other equity-based incentives to employees, including officers, consultants and
directors. The 2005 plan is to be administered by a committee of independent
directors. In the absence of a committee, the plan is administered by the board
of directors. Options intended to be incentive stock options must be granted at
an exercise price per share which is not less than the fair market value of the
common stock on the date of grant and may have a term which is not longer than
ten years. If the option holder holds at least 10% of the Company’s common
stock, the exercise price must be at least 110% of the fair market value on the
date of grant and the term of the option cannot exceed five years.





The
Company recognizes stock-based compensation based on the fair value of the
awards. Stock-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense over the requisite service
period, which generally represents the vesting period, and includes an estimate
of awards that will be forfeited.




The 2005
Plan stock options activity and status for the years ended October 31, 2009 and
2008 was as follows:




Year
      ended October 31,2009
            
            
            2008Weighted-
            
            
            
            
            
            Weighted-Number
      of
            
            
            Average
      Option
            
            
            Number
      of
            
            
            Average
      OptionShares
            
            
            Exercise
      Price
            
            
            Shares
            
            
            Exercise
      PriceOutstanding
      at beginning of year
            
            
            1,356,772
            
            
            $
            0.7213
            
            
            
            1,199,355
            
            
            $
            0.7496Granted
            
            
            220,000
            
            
            $
            0.4545
            
            
            
            415,000
            
            
            $
            0.6821Exercised
            
            
            -
            
            
            
            
            
            
            
            -Forfeited
            
            
            (233,859
            )
            
            $
            0.6886
            
            
            
            (227,583
            )
            
            $
            0.7363Total
      outstanding at end of year
            
            
            1,342,913
            
            
            $
            0.6833
            
            
            
            1,356,772
            
            
            $
            0.7213Outstanding
      exercisable stockoptions
      at end of year
            
            
            759,016
            
            
            $
            0.7197
            
            
            
            479,648
            
            
            $
            0.7359October
      31,
              2009
            
            
            
            
            
            
            October
      31,
              2008Weighted
      average remaining yearsin
      contractual life for:Total
      outstanding options
            
            2.1
      years
            
            
            
            
            
            
            2.7
      yearsOutstanding
      exercisable options
            
            1.7
      years
            
            
            
            
            
            
            2.5
      yearsShares
      of common stock availablefor
      issuance pursuant to futurestock
      option grants
            
            
            1,157,087
            
            
            
            
            
            
            
            1,143,228




F-14








The
following table presents the stock-based compensation included in the Company’s
consolidated statement of income and the effect in earnings per share:


Year
      ended October
      31,2009
            
            
            2008Stock-based
      compensation expense:Cost
      of services
            
            $
            22,386
            
            
            $
            17,245Selling,
      general and administrative
            
            
            39,785
            
            
            
            24,941Stock-based
      compensation before tax
            
            
            62,171
            
            
            
            42,186Income
      tax benefit
            
            
            -
            
            
            
            -Net
      stock-based compensation expense
            
            $
            62,171
            
            
            $
            42,186Effect
      on earnings per share:Basic
      earnings per share
            
            $
            (0.003
            )
            
            $
            (0.002
            )Diluted
      earnings per share
            
            $
            (0.003
            )
            
            $
            (0.002
            )





As of
October 31, 2009, estimated stock based compensation expense to be recognized in
future periods for granted nonvested stock options amounted to approximately
$69,000. These nonvested stock options compensation expense will be recognized
in a weighted average period of approximately 0.7 years.





The fair
value of stock-based awards to employees is calculated using the Black-Scholes
option pricing model. The Black-Scholes model requires subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of the option has been
estimated using the “simplified” method as provided in Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin No. 107. Under this method, the
expected term equals the arithmetic average of the vesting term and the
contractual term of the option. The risk-free rate is based on the U.S. Treasury
rates in effect during the corresponding period of grant. The expected
volatility is based on the historical volatility of the Company’s stock price.
These factors could change in the future, which would affect fair values of
stock options granted in such future periods, and could cause volatility in the
total amount of the stock-based compensation expense reported in future
periods.





The
following weighted average assumptions were used to estimate the fair value of
stock options granted for the years ended October 31, 2009 and
2008:




Year
      ended October 31,2009
            
            
            2008Expected
      dividend yield
            
            
            0.0
            %
            
            
            0.0
            %Expected
      stock price volatility
            
            
            111.6
            %
            
            
            82.6
            %Risk
      free interest rate
            
            
            1.3
            %
            
            
            3.2
            %Expected
      life of options
            
            3.4
      years
            
            
            3.5
      yearsWeighted
      average fair value of options granted
            
            $
            0.3205
            
            
            $
            0.1197





As of
October 31, 2009 the outstanding stock options have no aggregate intrinsic value
since the closing stock price on such date was below the exercise price of the
stock options. The aggregate intrinsic value represents the difference between
the Company’s stock price at year end and the exercise price, multiplied by the
number of in-the money options had all option holders exercised their options.
This amount changes based on the fair market value of the Company’s stock. For
the years ended October 31, 2009 and 2008 no stock options were
exercised.





Pursuant
to the acquisition of Pharma-PR, Pharma-Bio agreed that it would issue 100
shares of common stock to each of Pharma-PR's eligible employees. Such shares
will not be issued until Pharma-Bio is eligible to use a Form S-8 registration
statement in connection with the issuance of such shares. Approximately 16,500
shares of common stock may be issued pursuant to this program.




F-15




NOTE
J – WARRANTS




At
October 31, 2009 and 2008 the Company had outstanding warrants to purchase
11,053,216 shares, of the Company’s common stock at prices ranging from $0.06 to
$1.65 per share for both years. The warrants became exercisable at various dates
commencing in 2004 and expire at various dates through 2014.





Warrants
for the purchase of 466,667 and 669,009 common shares with exercise prices of
$0.7344 and $0.06, respectively, were exercised by two warrant holders in July
2008. Proceeds in excess of the common shares’ par value were recorded in the
consolidated financial statements as Additional Paid-in Capital.





On
January 23, 2009, the Board of Directors of the Company authorized a one year
extension on the expiration date of the outstanding warrants issued pursuant to,
and subject to the terms and conditions of, those certain Series C Common Stock
Purchase Warrants of the Company, dated as of January 25, 2006, and which were
set to expire on January 24, 2009. In total, this extension of the expiration
date of the common stock purchase warrants identified above will apply to an
aggregate of 973,225 warrants. These warrants have an exercise price of
$0.7344.





NOTE
K – EARNINGS PER SHARE





The
following data show the amounts used in the calculations of basic and diluted
earnings per share.





Years
      ended
      October 31,2009
            
            
            2008Net
      income available to common equity holders - used to compute basic and
      diluted earnings per share
            
            $
            534,757
            
            
            $
            1,487,796Weighted
      average number of common shares - used to compute basic earnings per share
            
            
            20,751,215
            
            
            
            19,970,549Effect
      of warrants to purchase common stock
            
            
            1,573,781
            
            
            
            2,288,467Effect
      of options to purchase common stock
            
            
            -
            
            
            
            -Weighted
      average number of shares - used to compute diluted earnings per
      share
            
            
            22,324,996
            
            
            
            22,259,016





Warrants
for the purchase of 8,972,625 shares of common stock for the years ended in
October 31, 2009 and 2008, were not included in computing diluted earnings per
share because their effects were antidilutive. In addition, options for the
purchase of 1,342,913 and 1,356,772 shares of common stock for the years ended
in October 31, 2009 and 2008, respectively, were not included in computing
diluted earnings per share because their effects were also
antidilutive.





NOTE
L - CONCENTRATION OF RISKS




Cash
and cash equivalents





The
Company maintains cash deposits in a FDIC insured bank and in a money market
obligations trust, registered under the US Investment Company Act of 1940, as
amended. The bank deposit balances frequently exceed federally insured limits.
No losses have been experienced or are expected on these accounts.




F-16





Accounts
receivable and revenues





Management
deems all its accounts receivable to be fully collectible, and, as such, does
not maintain any allowances for uncollectible receivables.




The
Company's revenues, and the related receivables, are concentrated in the
pharmaceutical industry in Puerto Rico, the United States of America and
Ireland. Although few customers represent a significant source of revenue, the
Company’s functions are not a continuous process, accordingly, the client base
for which the services are typically rendered, on a project-by-project basis,
changes regularly.





The
Company provided a substantial portion of its services to three customers, who
accounted for 10% or more of its revenues in either of the years ended October
31, 2009 or 2008. During the year ended October 31, 2009 revenues from these
customers were 24%, 19% and 10%, or a total of 53%, as compared to the same
period last year for 29%, 28% and 8%, or a total of 65%, respectively. At
October 31, 2009 and 2008 amounts due from these customers represented 37% and
59% of total accounts receivable balance, respectively.





NOTE
M - RETIREMENT PLAN




Pharma-PR
has a qualified profit sharing plan in accordance with the provision of Section
l165(a)(3)(A) of the Puerto Rico Code, for employees who meet certain age and
service period requirements. The Company makes contributions to this plan as
required by the provisions of the plan document. Contributions for the years
ended October 31, 2009 and 2008 were $53,668 and $60,640,
respectively.




F-17