**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**


(Mark
      One)




**|X|
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**




For
      the
      quarterly period ended July 31, 2006




**|_|
      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.**


(Name
      of
      small business issuer as specified in its charter)





Delaware
            20-0653570(State
                of Incorporation)
            (I.R.S.
                EmployerIdentification
                No.)





373
      Mendez Vigo, Suite 110, Dorado, Puerto Rico 00646


(Address
      of principal executive offices)




787-278-2709


(Issuer's
      telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for 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. |X| yes |_| no




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). |_| yes |X| no




The
      number of shares outstanding of the registrant's Common Stock as of September
      14, 2006 was 18,315,001.











**PHARMA-BIO
      SERV, INC.**


**FORM
      10-QSB**


**FOR
      THE QUARTER ENDED JULY 31, 2006**





TABLE
      OF
      CONTENTS








PagePART
                I FINANCIAL INFORMATIONItem
                1 - Financial StatementsConsolidated
                Balance Sheet as of July 31, 2006(unaudited)
            3Consolidated
                Statements of Income for the three monthperiod
                and the nine month period ended July 31, 2006, andPlaza-Only
                Statements of Income for the three monthperiod
                and the nine month period ended July 31, 2005(unaudited)
            4Consolidated
                Statements of Cash Flows for the three monthperiod
                and the nine month period ended July 31, 2006, andPlaza-Only
                Statements of Cash Flows for the three monthperiod
                and the nine month period ended July 31, 2005(unaudited)
            5Consolidated
                Statement of Changes in Stockholders’Equity
                (Deficiency) for the nine month period endedJuly
                31, 2006 (unaudited)
            6Notes
                to Financial Statements
            7Item
                2 - Management's Discussion and Analysis of FinancialCondition
                and Results of Operation
            20Item
                3 - Controls and Procedures
            28PART
                II OTHER INFORMATIONItem
                6 - Exhibits
            29










**PHARMA-BIO
      SERV, INC.**


**CONSOLIDATED
      BALANCE SHEET (UNAUDITED)**


**AT
      JULY 31, 2006**




**PHARMA-BIO
        SERV, INC.**
 **Consolidated
        Balance Sheet (Unaudited)**
 **At
        July 31, 2006**
  Assets:Current
                  AssetsCash
                  and cash equivalents
              
              $
              1,394,413Accounts
                  receivable, including unbilled revenues of $47,080
              
              
              5,531,550Other
              
              
              504,307Total
                  Current Assets
              
              
              7,430,270Property
                  and equipment
              
              
              423,172Other
                  assets, mainly intangible assets
              
              
              223,317Total
                  Assets
              
              $
              8,076,759Liabilities
                  and Stockholders' Deficiency:Current
                  Liabilities:Current
                  portion-obligations under capital leases
              
              $
              38,094Accounts
                  payable and accrued expenses
              
              
              876,090Due
                  to affiliate - current
              
              
              2,327,529Total
                  Current Liabilities
              
              
              3,241,713Due
                  to affiliate
              
              
              5,149,991Other
                  Long-Term Liabilities
              
              
              151,658Total
                  Liabilities
              
              
              8,543,362Stockholders'
                  Deficiency:Preferred
                  Stock, $0.0001 par value; authorized10,000,000
                  shares; none outstanding
              
              
              -Common
                  Stock,$0.0001 par value; authorized 50,000,000 shares;issued
                  and outstanding 18,315,001 shares
              
              
              1,831Accumulated
                  deficit
              
              
              (468,434
              )Total
                  Stockholders' Deficiency
              
              
              (466,603
              )Total
                  Liabilities and Stockholders' Deficiency
              
              $
              8,076,759




The
      accompanying notes are an integral part of these statements.




3


**PHARMA-BIO
      SERV, INC.**


**STATEMENTS
      OF INCOME (UNAUDITED)**


**FOR
      THE THREE-MONTH PERIODS AND THE**


**NINE-MONTH
      PERIODS ENDED JULY 31, 2006 AND 2005**




**Three
                  months ended July 31,**
              
              
              **Nine
                  months ended July 31,****Consolidated**
              
              
              **Plaza-Only**
              
              
              **Consolidated**
              
              
              **Plaza-Only****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**REVENUES
              
              $
              3,216,933
              
              $
              3,857,825
              
              $
              10,425,818
              
              $
              13,617,908COST
                  OF REVENUES
              
              
              1,833,170
              
              
              2,129,870
              
              
              6,099,675
              
              
              7,244,700GROSS
                  PROFIT
              
              
              1,383,763
              
              
              1,727,955
              
              
              4,326,143
              
              
              6,373,208SELLING,
                  GENERAL ANDADMINISTRATIVE
                  EXPENSES
              
              
              569,208
              
              
              399,958
              
              
              1,499,497
              
              
              1,313,957INTEREST
                  EXPENSE
              
              
              128,327
              
              
              2,517
              
              
              262,473
              
              
              8,104DEPRECIATION
                  AND AMORTIZATION
              
              
              52,363
              
              
              34,909
              
              
              141,303
              
              
              70,422INCOME
                  BEFORE INCOME TAX
              
              
              633,865
              
              
              1,290,571
              
              
              2,422,870
              
              
              4,980,725INCOME
                  TAX
              
              
              281,013
              
              
              -
              
              
              701,191
              
              
              -NET
                  INCOME
              
              $
              352,852
              
              $
              1,290,571
              
              $
              1,721,679
              
              $
              4,980,725BASIC
                  EARNINGS PER COMMON SHARE
              
              $
              0.02
              
              $
              0.74
              
              $
              0.22
              
              $
              2.85DILUTED
                  EARNINGS PER COMMON SHARE
              
              $
              0.02
              
              $
              0.32
              
              $
              0.10
              
              $
              1.23WEIGHTED
                  AVERAGE NUMBEROF
                  COMMON SHARESOUTSTANDING
                  - BASIC
              
              
              18,315,001
              
              
              1,750,000
              
              
              7,878,323
              
              
              1,750,000WEIGHTED
                  AVERAGE NUMBEROF
                  COMMON SHARESOUTSTANDING
                  - DILUTED
              
              
              22,080,034
              
              
              4,045,752
              
              
              16,464,964
              
              
              4,045,752





The
      accompanying notes are an integral part of these statements.


4


**PHARMA-BIO
      SERV, INC.**


**STATEMENTS
      OF CASH FLOWS (UNAUDITED)**


**FOR
      THE THREE-MONTH PERIODS AND THE**


**NINE-MONTH
      PERIODS ENDED JULY 31, 2006 AND 2005**




**Three
                  months ended July 31,**
              
              
              **Nine
                  months ended July 31,****Consolidated**
              
              
              **Plaza-Only**
              
              
              **Consolidated**
              
              
              **Plaza-Only****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income for the period
              
              $
              352,852
              
              $
              1,290,571
              
              $
              1,721,679
              
              $
              4,980,725Loss
                  on disposition of property and equipment
              
              
              -
              
              
              -
              
              
              3,664
              
              
              -Depreciation
                  and amortization
              
              
              52,363
              
              
              34,909
              
              
              141,303
              
              
              70,422Bad
                  debts expense
              
              
              -
              
              
              -
              
              
              -
              
              
              31,450Imputed
                  interest expense
              
              
              125,304
              
              
              -
              
              
              252,520
              
              
              -Decrease
                  (increase) in accounts receivable
              
              
              (588,699
              )
              
              1,349,113
              
              
              (600,736
              )
              
              359,554Decrease
                  (increase) in other assets
              
              
              (222,685
              )
              
              (94,210
              )
              
              (508,718
              )
              
              (98,527
              )Increase
                  (decrease) in liabilities
              
              
              (345,727
              )
              
              (194,873
              )
              
              (349,431
              )
              
              (318,693
              )NET
                  CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
              
              
              (626,592
              )
              
              2,385,510
              
              
              660,281
              
              
              5,024,931CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              (6,514
              )
              
              -
              
              
              (97,198
              )
              
              (92,340
              )Cash
                  acquired as part of the acquisition of Plaza
              
              
              -
              
              
              -
              
              
              28,943
              
              
              -NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (6,514
              )
              
              -
              
              
              (68,255
              )
              
              (92,340
              )CASH
                  FLOW FROM FINANCING ACTIVITIES:Net
                  proceeds from the sale of preferred stock
              
              
              -
              
              
              -
              
              
              10,000,000
              
              
              -Payment
                  for purchase of stock in Plaza
              
              
              -
              
              
              -
              
              
              (9,900,000
              )
              
              -Payment
                  for non-compete covenant
              
              
              -
              
              
              -
              
              
              (100,000
              )
              
              -Payments
                  on capital lease obligations
              
              
              (9,037
              )
              
              (11,173
              )
              
              (26,228
              )
              
              (32,412
              )Payments
                  to affiliate
              
              
              (213,388
              )
              
              -
              
              
              (213,388
              )
              
              -Distributions
              
              
              -
              
              
              (123,330
              )
              
              (749,554
              )
              
              (4,667,850
              )NET
                  CASH USED IN FINANCING ACTIVITIES
              
              
              (222,425
              )
              
              (134,503
              )
              
              (989,170
              )
              
              (4,700,262
              )NET
                  INCREASE (DECREASE) IN CASH
              
              
              (855,531
              )
              
              2,251,007
              
              
              (397,144
              )
              
              232,329CASH
                  - BEGINNING OF PERIOD
              
              
              2,249,944
              
              
              1,018,047
              
              
              1,791,557
              
              
              3,036,725CASH
                  - END OF PERIOD
              
              $
              1,394,413
              
              $
              3,269,054
              
              $
              1,394,413
              
              $
              3,269,054PAYMENTS
                  OF:Income
                  tax
              
              $
              364,063
              
              $
              -
              
              $
              728,126
              
              $
              -Interest
              
              $
              3,023
              
              $
              2,517
              
              $
              9,953
              
              $
              8,104NONCASH
                  INVESTING AND FINANCING ACTIVITIES:Conversion
                  of preferred stock to common stock
              
              $
              -
              
              $
              -
              
              $
              1,483
              
              $
              -Acquisition
                  of vehicles under capital leases
              
              $
              -
              
              $
              57,230
              
              $
              -
              
              $
              90,260Application
                  of down payment to acquisition price ofproperty
                  and equipment
              
              $
              37,655
              
              $
              -
              
              $
              37,655
              
              $
              -Income
                  tax withheld by clients but used as a credit in theincome
                  tax return of a stockholder (noncash distribution)
              
              $
              -
              
              $
              256,877
              
              $
              84,561
              
              $
              557,097Debt
                  incurred in the acquisition of certain assets from avalidation
                  company
              
              $
              -
              
              $
              -
              
              $
              200,000
              
              $
              -Debt
                  payable to officer originated in the acquisition of PlazaPlaza,
                  net of $1,025,000 imputed interest
              
              $
              -
              
              $
              -
              
              $
              7,225,000
              
              $
              -
  The
      accompanying notes are an integral part of these statements.


5


**PHARMA-BIO
      SERV, INC.**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)**


**FOR
      THE NINE-MONTH PERIOD ENDED JULY 31, 2006**




**Retained****Additional**
              
              
              **Earnings****Common
                  Stock**
              
              
              **Preferred
                  Stock**
              
              
              **Paid-in**
              
              
              **(Accumulated****Shares**
              
              
              **Amount**
              
              
              **Shares**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **Deficit)**
              
              
              **Total**BALANCE
                  AT OCTOBER 31, 2005 (PLAZA-ONLY) -
                AUDITED
              
              
              50,000
              
              $
              1,000.00
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              5,979,569.00
              
              $
              5,980,569.00RECLASSIFICATION
                  OF $0.02 COMMON STOCK
              
              
              (50,000
              )
              
              (1,000
              )
              
              -
              
              
              -
              
              
              1,000
              
              
              -
              
              
              -ISSUANCE
                  OF $0.0001 COMMON STOCK IN CONNECTIONWITH
                  RECLASSIFICATION OF EQUITY
              
              
              275,900
              
              
              28
              
              
              -
              
              
              -
              
              
              20,947
              
              
              -
              
              
              20,975TO
                  REFLECT 2:1 STOCK DISTRIBUTION
              
              
              275,900
              
              
              28
              
              
              -
              
              
              -
              
              
              (28
              )
              
              -
              
              
              -ISSUANCE
                  OF $0.0001 COMMON STOCK
              
              
              1,750,000
              
              
              174
              
              
              -
              
              
              -
              
              
              844,385
              
              
              -
              
              
              844,559ISSUANCE
                  OF $0.0001 PREFERRED STOCK
              
              
              -
              
              
              -
              
              
              1,175,000
              
              
              118
              
              
              10,171,383
              
              
              -
              
              
              10,171,501ISSUANCE
                  OF STOCK WARRANTS TO PURCHASE 2,500,000SHARES
                  OF COMMON STOCK AT $0.06
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,686,000
              
              
              (1,686,000
              )
              
              -ISSUANCE
                  OF STOCK WARRANTS TO PURCHASE 1,600,000SHARES
                  OF COMMON STOCK AT $0.06
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              800
              
              
              (800
              )
              
              -CAPITAL
                  PAYMENT
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (12,724,487
              )
              
              (5,647,284
              )
              
              (18,371,771
              )CONVERSION
                  OF PREFERRED STOCK TO COMMON STOCK
              
              
              15,998,800
              
              
              1,600
              
              
              (1,175,000
              )
              
              (118
              )
              
              -
              
              
              (1,482
              )
              
              -ADDITIONAL
                  SHARES FROM CONVERSION OF PREFERREDSTOCK
                  TO COMMON STOCK
              
              
              14,401
              
              
              1
              
              
              
              
              
              
              
              
              
              
              
              (1
              )
              
              -NET
                  INCOME
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,721,679
              
              
              1,721,679DISTRIBUTIONS
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (834,115
              )
              
              (834,115
              )BALANCE
                  AT JULY 31, 2006 (CONSOLIDATED) - UNAUDITED
              
              
              18,315,001
              
              $
              1,831
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              (468,434
              )
              $
              (466,603
              )


The
      accompanying notes are an integral part of these statements.




6





**PHARMA-BIO
      SERV, INC.**





**NOTES
      TO FINANCIAL STATEMENTS**


**JULY
      31, 2006 (UNAUDITED)**




**NOTE
      A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**




**BASIS
      OF PRESENTATION**




Pharma-Bio
      Serv, Inc.(“Pharma-Bio”) is a Delaware corporation organized on January 14,
      2004, under the name Lawrence Consulting Group, Inc. ("Lawrence"). Pharma-Bio
      is
      the parent company of Plaza Consulting Group, Inc. ("Plaza"), a Puerto Rico
      corporation, which operates in Puerto Rico under the name of Pharma Serv and
      is
      engaged in providing technical compliance consulting services primarily to
      the
      pharmaceutical, chemical and biotechnology industries. Pharma-Bio and Plaza
      are
      collectively referred to as the “Company.”




On
      January 25, 2006, Pharma-Bio acquired Plaza in a transaction which is accounted
      for as a reverse acquisition. Although Pharma-Bio, then known as Lawrence,
      is
      the Company that made the acquisition, for accounting purposes, Plaza is treated
      as the acquiring company. As a result, the financial statements reflect the
      financial position, results of operations and cash flows of Plaza prior to
      January 25, 2006 and the combined operations of Pharma-Bio and Plaza from and
      after January 25, 2006.




All
      intercompany transactions and balances have been eliminated in
      consolidation.




On
      February 22, 2006, Pharma-Bio changed its fiscal year to the fiscal year ended
      October 31, which is Plaza’s fiscal year. The change in fiscal year is reflected
      in the Form 10-QSB for the quarter ended January 31, 2006. The change of fiscal
      year results from the acquisition of Plaza, which was accounted for as a reverse
      acquisition.




The
      unaudited interim financial statements for the quarters and the nine months
      ended July 31, 2006 and 2005 presented herein have been prepared in accordance
      with accounting principles generally accepted in the United States for interim
      financial statements and with the instructions to Form 10-QSB and Regulation
      S-B
      pertaining to interim financial statements and reflect all adjustments,
      consisting of normal recurring adjustments and accruals which, in the opinion
      of
      management, are considered necessary for a fair presentation of the Company’s
      financial position, results of operations and cash flows. Results of operations
      for interim periods are not necessarily indicative of the results that may
      be
      expected for the full year.




**SHARE
      DISTRIBUTION**




On
      January 24, 2006, Pharma-Bio effected a two-for-one share distribution with
      respect to its common stock pursuant to which Pharma-Bio issued one share of
      common stock for each share outstanding on the record date, January 24, 2006.
      All share and per share information in these financial statements give
      retroactive effect to this share distribution.




**REVERSE
      ACQUISITION**




On
      January 25, 2006, pursuant to a plan and agreement of merger (the "Plaza
      Agreement") dated as of October 31, 2005, among Pharma-Bio, Plaza Acquisition
      Corp., a wholly-owned subsidiary of Pharma-Bio ("Acquisition Company"), Plaza
      and Elizabeth Plaza, the sole stockholder of Plaza, Pharma-Bio acquired Plaza.
      The acquisition was effected by the merger of Acquisition Company into Plaza.
      Pursuant to the Plaza Agreement, Ms. Plaza, as the sole stockholder of Plaza,
      received at the closing $10,000,000 plus 1,150,000 shares of Pharma-Bio's common
      stock. In addition, Ms. Plaza will receive three payments, each in the amount
      of
      $2,750,000, payable on January 25, 2007, 2008 and 2009. At the closing, all
      of
      the present




7




officers
      and directors of Pharma-Bio resigned from their respective positions, except
      that Mr. Dov Perlysky, who was president and a director of Pharma-Bio, resigned
      as an officer, but continued as a director. At the closing, Pharma-Bio elected
      four directors, including Ms. Plaza. The other three are independent
      directors.Pursuant to the Plaza Agreement, at the closing, Pharma-Bio issued
      600,000 shares of common stock and warrants to purchase 2,500,000 shares of
      common stock with an exercise price of $.06 per share to San Juan Holdings,
      Inc., the investment banker for Plaza and Ms. Plaza. Pharma-Bio provided certain
      demand and piggyback registration rights to Ms. Plaza and San Juan Holdings
      covering the shares of common stock issued to them at the closing and the shares
      issuable upon exercise of the warrants issued to San Juan Holdings.




As
      a
      condition to closing, Plaza was required to have a net tangible book value
      of
      not less than $5,500,000, of which at least $2,000,000 was in cash, as of
      November 30, 2005. Subject to the requirement that Plaza have at least
      $2,000,000 in cash as of November 30, 2005, the purchase price was to be
      adjusted upward or downward depending on the net tangible book value, determined
      as provided in the Plaza agreement. This provision resulted in an additional
      payment to Ms. Plaza in the amount of $88,161, which was paid during the third
      quarter of 2006.




The
      Plaza
      Agreement provides that Plaza, rather than Ms. Plaza, is responsible for the
      income tax from December 1, 2005 through the closing date, which was January
      25,
      2006. Because of the status of Plaza as an N Corporation under the Puerto Rico
      Internal Revenue Code, Plaza's net income from December 1, 2005 to January
      24,
      2006 is taxed to Ms. Plaza. The income tax payable by Ms. Plaza for Plaza's
      taxable income for said period amounts to $125,227. Plaza reimbursed Ms. Plaza
      the $125,227 during the third quarter of 2006. The $88,161 payment described
      in
      the preceding paragraph and the $125,227 payment described in this paragraph
      are
      treated as additional payments on account of the purchase price of Plaza stock
      from Mrs. Plaza.




Pharma-Bio
      raised the funds necessary to make the $10,000,000 payment due to Ms. Plaza
      through the private placement of units consisting of shares of a series A preferred stock and warrants to purchase 7,999,400 common stock. The series
      A
      preferred stock was automatically converted into 15,998,800 shares of common
      stock upon an increase in Pharma-Bio's authorized common stock. See Note
      C.




The
      acquisition of Plaza and the private placement resulted in a change of control
      of Pharma-Bio. As a result of the reverse acquisition accounting treatment,
      Plaza is deemed to be the acquiring company for accounting purposes. The
      transaction was accounted for as a reverse acquisition because former owners
      of
      Plaza, together with the purchasers in the private placement who purchased
      the
      series A preferred stock and warrants in connection with the acquisition of
      Plaza, gained control of Pharma-Bio. Effective on the acquisition date,
      Pharma-Bio's balance sheet includes the assets and liabilities of Plaza and
      its
      equity accounts have been recapitalized to reflect the equity of Pharma-Bio.
      Comparative financial statements for earlier periods are those of
      Plaza-Only.




**SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




**USE
      OF ESTIMATES**




The
      preparation of 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 financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could 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 affiliate): cash, accounts receivable,
      accounts payable and accrued liabilities, are considered reasonable estimates
      of
      fair value due to the short period to maturity.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.




8


**REVENUE
      RECOGNITION**




The
      Company recognizes revenues in the month when services are rendered to
      customers. Revenue is primarily derived from time and materials contracts
      (representing approximately 90% of total revenues), where the clients are
      charged for the time, materials and expenses incurred on a particular project,
      and to a lesser extent, from fixed-fee contracts or from "not to exceed"
      contracts (approximately 10% of total revenues). In the case of fixed-fee
      contracts, which mostly are short-term contracts, revenue is recognized based
      on
      the percentage that the services rendered bears to the estimated services to
      be
      performed over the contract. If the Company determines that a fixed-fee or
“not
      to exceed” contract will result in a loss, the Company recognizes the estimated
      loss in the period in which such determination is made.




**CASH
      AND CASH EQUIVALENTS**




For
      purposes of the statements of cash flows, cash and cash equivalents include
      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.
      Bad debts are 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 the provisions of Statement of Financial Accounting Standards
      Board No. 109, "Accounting for Income Taxes," which requires 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.




Plaza,
      from its inception until January 24, 2006, was covered under the provisions
      of
      Subchapter N of Subtitle A of the Puerto Rico Internal Revenue Code (the "Puerto
      Rico Code"), which is similar to Subchapter S of the Internal Revenue Code
      in
      that its taxable income is taxed to the stockholders and therefore there is
      no
      income tax liability for that period. As a result of the completion of the
      reverse acquisition, Plaza and Pharma-Bio are no longer eligible for treatment
      as a Subchapter N corporation. See Note F.




Although
      Ms. Plaza is responsible for the taxes on the Plaza's taxable income for the
      period from December 1, 2005 to January 24, 2006, pursuant to the Plaza
      Agreement, the Company agreed to reimburse Ms. Plaza for the income taxes
      applicable to said taxable income. The reimbursement amounts to $125,227 and
      was
      paid on June 15, 2006.




**PROPERTY
      AND EQUIPMENT**




Property
      and equipment is stated at cost. Depreciation is provided using the
      straight-line basis over the estimated useful lives of the assets. Major
      renewals and betterments that extend the life of the assets are capitalized,
      while expenditures for repairs and maintenance are expensed when
      incurred.




**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.




9




**STOCK-BASED
      COMPENSATION**




Through
      the three month and the nine month periods ended July 31, 2006, the Company
      has
      elected to use the intrinsic value method of accounting for stock options issued
      to employees under its stock option plans in accordance with APB Opinion No.
      25
      and related interpretations whereby the amount of stock-based compensation
      expense is calculated as the difference between the fair market value and the
      exercise price on the date of issuance. For purposes of pro forma disclosures
      the amount of stock-based compensation is calculated using the fair value method
      of accounting for stock options issued to employees. The Company's pro forma
      information is as follows:





Three
                Months Ended July 31,
            
            
            Nine
                Months Ended July 31,2006
            
            
            2005
            
            
            2006
            
            
            2005Net
                income
            
            $
            352,852
            
            $
            1,290,571
            
            $
            1,721,679
            
            $
            4,980,725Less:
                Stock-based employee compensation under fair value method, net of
                tax
                effect
            
            
            2,654
            
            
            -
            
            
            529,084
            
            
            -Pro
                forma net income attributable to common stockholders
            
            $
            350,198
            
            $
            1,290,571
            
            $
            1,192,595
            
            $
            4,980,725Basic
                earnings per share of common stock:As
                reported
            
            $
            0.02
            
            $
            0.74
            
            $
            0.22
            
            $
            2.85Pro
                forma
            
            $
            0.02
            
            $
            0.74
            
            $
            0.15
            
            $
            2.85Diluted
                earnings per share of common stockAs
                reported
            
            $
            0.02
            
            $
            0.32
            
            $
            0.10
            
            $
            1.23Pro
                forma
            
            $
            0.02
            
            $
            0.32
            
            $
            0.07
            
            $
            1.23Weighted
                average number of common shares outstanding - basic
            
            
            18,315,001
            
            
            1,750,000
            
            
            7,878,323
            
            
            1,750,000Weighted
                average number of common shares outstanding - diluted
            
            
            22,080,034
            
            
            4,045,752
            
            
            16,464,964
            
            
            4,045,752





For
      the
      fiscal year ended October 31, 2004 Plaza granted stock options to purchase
      4,125
      shares of its common stock. Pursuant to the reverse acquisition, these Plaza
      option shares are equivalent to options to purchase 776,186 shares of Pharma-Bio
      common stock. Accordingly, the value of these options is estimated on the same
      basis as Pharma-Bio options.





The
      4,125
      of Plaza options are equivalent to 776,186 Pharma-Bio stock options based on
      the
      following:





10


Plaza
                options
            
            
            4,125Exercise
                price at market
            
            $
            x
                138.19Value
                of Options
            
            $
            570,031Pharma-Bio
                exercise price
            
            $
            ÷
                0.7344Equivalent
                Pharma-Bio options
            
            
            776,186




There
      were no additional Plaza options issued subsequent to October 31, 2004. None
      of
      the Plaza options ere exercised prior to the reverse acquisition
      transaction.




**INCOME
      PER SHARE OF COMMON STOCK**




Basic
      income per common share is calculated by 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. Pursuant to reverse
      acquisition accounting treatment, the weighted average number of shares
      outstanding in the computation of basic income per share was derived by
      weighting (i) for the period prior to the reverse acquisition transaction,
      the
      number of shares outstanding represented the 1,150,000 shares received by the
      former stockholder of Plaza and the shares 600,000 shares received by San Juan
      Holdings, Inc., and (ii) for the period after the transaction, the number of
      shares outstanding represented the shares of Pharma-Bio that are outstanding.
      Diluted income per share includes the dilution of common equivalents.
      Accordingly, the series A preferred stock was deemed outstanding from the date
      of issuance until April 25, 2006, when the Company’s restated certificate of
      incorporation was filed with the Secretary of State of Delaware and the shares
      of series A preferred stock were automatically converted into common stock.
      The
      warrants were deemed to be outstanding from the date of issuance to the end
      of
      the reporting period, except for stock warrants issued to the investment banker
      for Plaza as a result of the reverse acquisition, which were deemed to be
      outstanding through all periods prior to the reverse acquisition.




The
      weighted average common shares outstanding (basic and diluted) were calculated
      using the treasury stock method for the respective periods.




**NOTE
      B - RECENT ACCOUNTING PRONOUNCEMENTS**




1.
      In
      June 2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with FASB
      Statement No. 109, “Accounting for Income Taxes” *.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. Earlier application of the provisions
      of this Interpretation is encouraged if the enterprise has not yet issued
      financial statements, including interim financial statements, in the period
      this
      Interpretation is adopted. Management
      does not expect that the application of this standard will have any effect
      on
      the Company's results of operations or its financial condition.




2.
      In
      March 2005, the FASB issued Interpretation No. 47 "Accounting for Conditional
      Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the term
      conditional asset retirement obligation as used in FASB Statement No. 143
      "Accounting for Asset Retirement Obligations," refers to a legal obligation
      to
      perform an asset retirement activity in which the timing and (or) method of
      settlement are conditional on a future event that may or may not be within
      the
      control of the entity. The obligation to perform the asset retirement activity
      is unconditional even though uncertainty exists about the timing and (or) method
      of settlement. Thus, the timing and (or) method of settlement may be conditional
      on a future event. Accordingly, an entity is required to recognize a liability
      for the fair value of a conditional asset retirement obligation if the fair
      value of the liability can be reasonably estimated. The fair value of a
      liability for the conditional asset retirement obligation should be recognized
      when incurred, generally upon acquisition, construction or
      development and (or) through the normal operation of the asset. Uncertainty
      about the timing and (or) method of settlement of a conditional asset retirement
      obligation should be




11




factored
      into the measurement of the liability when sufficient information exists. FASB
      Statement 143 acknowledges that in some cases, sufficient information may not
      be
      available to a reasonably estimate the fair value of an asset obligation. This
      interpretation also clarifies when an entity would have sufficient information
      to reasonably estimate the fair value of an asset retirement obligation. The
      provisions of this interpretation are effective no later than the end of fiscal
      years ending after December 15, 2005. Management does not expect that the
      application of this standard will have any effect on the Company's results
      of
      operations or its financial condition.3. In December 2004, the FASB issued
      Statement No. 153 "Exchanges of Non-Monetary Transactions - an amendment of
      APB
      Opinion No. 29." The guidance in APB Opinion No. 29, "Accounting for
      Non-monetary Transactions," is based on the principle that exchanges of
      non-monetary assets should be measured based on the fair value of the assets
      exchanged. The guidance in that Opinion, however included certain exceptions
      to
      that principle. This Statement amends Opinion 29 to eliminate the exception
      for
      non-monetary exchanges of similar productive assets and replaces it with a
      general exception for exchanges of non-monetary assets that do not have
      commercial substance. A non-monetary exchange has commercial substance if the
      future cash flows of the entity are expected to change significantly as a result
      of the exchange. The provisions of this Statement are effective for non-monetary
      asset exchanges occurring in fiscal periods beginning after June 15, 2005.
      Earlier application is permitted for non-monetary asset exchanges occurring
      in
      fiscal periods beginning after December 16, 2004. The provisions of this
      Statement should be applied prospectively. The Company does not expect that
      the
      adoption of FASB Statement No. 153 will have a material impact on its results
      of
      operations and financial position.




4.
      In
      December 2004, the FASB published Statement No. 123R requiring that the
      compensation cost relating to share-based payment transaction be recognized
      in
      financial statements. That cost will be measured based on the fair value of
      the
      equity or liability instruments issued. Statement No. 123R covers a wide range
      of share-based compensation arrangements, including share option restricted
      plans, performance-based awards, share appreciation rights, and employee share
      purchase plans. Statement No. 123(R) replaces FASB Statement No. 123 "Accounting
      for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting
      for Stock Issued to Employees." Statement No. 123, as originally issued in
      1995,
      established as preferable a fair-value-based method of accounting for
      share-based payment transactions with employees. However, that Statement
      permitted entities the option of continuing to apply the guidance in Opinion
      No.
      25, as long as the footnotes to the financial statements disclosed what net
      income would have been had the preferable fair-value-based method been
      used.




This
      Statement is effective as of the beginning of the first interim or annual
      reporting period of the first fiscal year that begins after December 15, 2005.
      One of the effects of the application of FASB123R is to treat the value (as
      properly determined) of the options as compensation to the grantees, thus
      increasing the Company's selling, general and administrative
      expenses.




5.
      In May
      2005, the FASB issued Statement No. 154 "Accounting for Changes and Errors
      Corrections." This Statement replaces APB Opinion No. 20 "Accounting Changes"
      and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial
      Statements," and changes the requirements for the accounting for and reporting
      of a change in accounting principle.




This
      Statement requires retrospective application to prior periods' financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. When its is impracticable to determine the period specific effects
      of an
      accounting change on one or more individual prior periods presented, this
      Statement requires that the new accounting principle be applied to the balances
      of assets and liabilities as of the beginning of the earliest period for which
      retroactive application is practicable and that a corresponding adjustment
      be
      made to the opening balance of retained earnings (or other appropriate
      components of equity or net assets in statement of financial position) for
      that
      period rather than being reported in an income statement. When it is
      impracticable to determine the cumulative effect of applying a change in
      accounting principle to all prior periods, this Statement requires that the
      new
      accounting principle be applied as if it were adopted prospectively from the
      earliest date practicable. This Statement shall be effective for accounting
      changes and corrections of errors made in fiscal years beginning after December
      15, 2005. The Company does not expect that the adoption of FASB Statement No.
      154 will have a material impact on its consolidated financial
      statements.




12




**NOTE
      C - CAPITAL TRANSACTIONS**




On
      January 25, 2006, contemporaneously with the consummation of the acquisition,
      Pharma-Bio sold, in a private placement, 47 units, each unit consisting of
      25,000 shares of series A preferred stock, warrants to purchase 85,100 shares
      of
      common stock at $1.10 per share and warrants to purchase 85,100 shares of common
      stock at $1.65 per share. In the private placement, Pharma-Bio issued an
      aggregate of 1,175,000 shares of series A preferred stock (which were
      convertible into an aggregate of 15,998,800 shares of common stock), warrants
      to
      purchase 3,999,700 shares of common stock at $1.10 per share, and warrants
      to
      purchase 3,999,700 shares of common stock at $1.65 per share, to 42 accredited
      investors. Pharma-Bio paid brokerage commissions of 10% of the gross purchase
      price and an aggregate non-accountable expense allowance of 3% of the gross
      purchase price with respect to the units sold. In certain cases, the broker
      waived the commission and non-accountable expense allowance, and the investor
      paid the purchase price less the commission and non-accountable expense
      allowance. The purchase price for the 47 units sold was $11,750,000.
      Broker-dealers waived commission and non-accountable expense allowance with
      respect to $628,750, Pharma-Bio paid commissions and non-accountable expense
      allowances totaling $898,750, and Pharma-Bio issued warrants to purchase an
      aggregate of 1,439,892 shares of common stock. The warrants have an exercise
      price of $.7344 per share and a term of three years.




Each
      share of series A preferred stock was automatically converted into 13.616 shares
      of common stock, or an aggregate of 15,998,800 shares of common stock upon
      the
      filing on April 25, 2006, of a restated certificate of incorporation which
      increased the authorized capital stock to 10,000,000 shares of preferred stock
      and 50,000,000 shares of common stock.




The
      subscription agreement pursuant to which the series A preferred stock and
      warrants were issued required Pharma-Bio to file a registration statement within
      60 days after the effective date of the merger between Plaza and Plaza
      Acquisition Corp. The effective date of the merger was January 25, 2006,
      therefore, the 60-day term expired on March 26, 2006. Since Pharma-Bio failed
      to
      file the registration statement by that date, Pharma-Bio was required to issue
      .0003 shares of common stock for each share of common stock issued upon
      conversion of the series A preferred stock for each day of delay. Pharma-Bio
      was
      three days late, therefore, 14,401 shares of common stock were issued to the
      former holders of the series A preferred stock.




The
      warrants issued in the private placement expire five years from the closing
      date
      and are callable by Pharma-Bio if the closing price of the common stock is
      at
      least twice the exercise price of the warrants for twenty (20) consecutive
      trading days.




**NOTE
      D - PROPERTY AND EQUIPMENT**




The
      balance of property and equipment, as of July 31, 2006 consists of:




13








Useful
                life
              (years)
            
            
            AmountVehicles
            
            
            5
            
            $
            221,434Leasehold
                improvements
            
            
            5
            
            
            64,895Computers
            
            
            3
            
            
            164,982Equipment
            
            
            3-5
            
            
            121,450Furniture
                and fixtures
            
            
            10
            
            
            67,907Total
            
            
            
            
            
            640,668Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (217,496
            )Property
                and equipment, net
            
            
            
            
            $
            423,172





**NOTE
      E - OTHER ASSETS**




At
      July
      31, 2006, non-current other assets include the following:





Intangible
                assets:Covenant
                not to compete, net of accumulated amortization of $13,333
            
            $
            86,666Customer-related
                intangibles, net of accumulated amortization of $29,167
            
            
            120,833Other
            
            
            5,818$
            223,317




Covenant
      not to compete represents the portion of the payment made in connection with
      the
      purchase of the Plaza stock that was allocated to a non-competition covenant.
      Under this agreement, the sole stockholder of Plaza agreed not to compete with
      the Company for a period of five years. This amount is amortized on the
      straight-line method over the term of the non-competition covenant (5
      years).




Customer-related
      intangible assets consist mainly of a customer list which Plaza acquired along
      with certain other assets from a business which performs in the United States
      consulting services similar to those performed by the Company in Puerto Rico.
      The value of the customer list is being amortized on the straight-line method
      over its estimated useful life of 3 years.




All
      of
      the intangibles assets were originated during the nine-month period ended July
      31, 2006, therefore, there was no amortization of intangible assets in prior
      periods. The amortization expense for the three-month period and the nine-month
      period ended on July 31, 2006 amounted to $17,500 and $42,500,
      respectively.




**NOTE
      F - INCOME TAXES**




The
      Company's taxable income is subject to the Puerto Rico income tax at the 20%
      to
      39% rates provided by the 1994 Puerto Rico Internal Revenue Code, as amended.
      However, on August 1, 2005, Puerto Rico Act No. 41 was approved, which imposes
      an additional 2.5% special tax to all corporations and partnerships having
      a net
      taxable income over $20,000. The Act is effective for taxable years commencing
      after December 31, 2004 and ending on or before December 31, 2006, therefore,
      the Company's maximum effective tax rate will be 41.5% for its fiscal year
      ending on October 31, 2006. The maximum effective tax rate for all other years
      will be 39%.




14




Provision
      for income tax is computed at statutory rates applied to income calculated
      in
      accordance with the accounting practices described herein and as shown in the
      financial statements. Deferred income tax assets and liabilities are computed
      for differences between the 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.




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
      statutory tax rate in Puerto Rico, were as follows:





Three
                months
              ended
                July 31,
            
            
            Nine
                months
              ended
                July 31,2006
            
            
            2005
            
            
            2006
            
            
            2005Theoretical
                income tax expense by application of statutory rates to the book
                pre-tax
            
            $
            263,054
            
            $
            503,323
            
            $
            1,005,491
            
            $
            1,942,483Effect
                of income subject to taxation under Subchapter N (taxable income
                taxed to
                stockholders)
            
            
            -
            
            
            (503,323
            )
            
            (358,037
            )
            
            (1,942,483
            )Permanent
                difference
            
            
            17,959
            
            
            -
            
            
            53,737
            
            
            -Income
                tax expense
            
            $
            281,013
            
            $
            -0-
            
            $
            701,191
            
            $
            -0-




Because
      Plaza was treated as an N Corporation under the Puerto Rico Internal Revenue
      Code during the year ended October 31, 2005 and the period from November 1,
      2005
      through January 24, 2006, its income was taxed to its stockholder during those
      periods, and Plaza did not pay income tax. If income tax were paid at the
      statutory rate, Plaza’s net income would have been $787,248, or $0.45 per share
      (basic) and $0.19 per share (diluted), for the quarter ended July 31, 2005;
      $1,363,642, or $0.17 per share (basic) and $0.08 per share (diluted), for the
      nine months ended July 31, 2006; and $3,038,242, or $1.74 per share (basic)
      and
      $0.75 per share (diluted), for the nine months ended July 31, 2005.




**NOTE
      G - RELATED PARTY TRANSACTIONS; DUE TO AFFILIATE**




On
      January 25, 2006, pursuant to the Plaza Agreement, Elizabeth Plaza, as the
      sole
      stockholder and affiliate of Plaza, received at the closing $10,000,000 plus
      1,150,000 shares of Pharma-Bio's common stock. In addition, the Company will
      pay
      Mrs. Plaza, three payments of $2,750,000, including imputed interest determined
      in accordance with Section 1274 of the Internal Revenue Code, on January 25,
      2007, 2008 and 2009 as follows:




15





2007
            
            $
            2,750,0002008
            
            
            2,750,0002009
            
            
            2,750,000Total
                payments
            
            
            8,250,000Less:
                imputed interest
            
            
            (
                772,480
            )Present
                value of minimumpayments
            
            
            7,477,520Current
                portion
            
            
            (2,327,529
            )Long-term
                portion
            
            $
            5,149,991





San
      Juan
      Holdings represented Plaza and Elizabeth Plaza in connection with the reverse
      acquisition. For such services, Pharma-Bio issued 600,000 shares of common
      stock
      and warrants to purchase 2,500,000 shares of common stock, with an exercise
      price of $.06 per share, to San Juan Holdings. In Pharma-Bio's private placement
      of series A preferred stock and warrants, San Juan Holdings purchased three
      units. The purchase price for the three units was $750,000. The broker, which
      is
      an affiliate of San Juan Holdings, waived the commission and non-accountable
      expense allowance with respect to such sales, and as a result, San Juan Holdings
      purchased the three units for a net payment of $652,500. Pharma-Bio also paid
      an
      affiliate of San Juan Holdings a broker's commission and non-accountable expense
      allowance of $195,000 for sales made to other purchasers in the private
      placement, and Pharma-Bio issued to the affiliate three-year warrants to
      purchase an aggregate of 275,724 shares of common stock at an exercise price
      of
      $.7344 per share.




Pursuant
      to the Puerto Rico Internal Revenue Code, the Company's clients are required
      to
      withhold a percentage of its fees (usually 3%, but sometimes 7%) as withheld
      income tax and remit such amount to the Puerto Rico Department of the Treasury.
      Such payment is treated as a payment on account to the Company's income tax
      obligations. Prior to January 25, 2006, Plaza was an N Corporation, and the
      Company's taxable income was taxed to Ms. Plaza, as sole stockholder.
      Accordingly, such withheld taxes were treated as a distribution to the Company's
      stockholder since Ms. Plaza was the person entitled to take the credit for
      the
      income tax withheld by the Company's clients in her personal income tax return.
      The amounts withheld prior to January 25, 2006 are recognized in the financial
      statements as noncash distribution.




**NOTE
      H - COMMITMENTS**




1.
      Contracts




On
      January 25, 2006, the Company entered into employment agreements with Elizabeth
      Plaza and Nelida Plaza. The agreement with Elizabeth Plaza provides that Ms.
      Plaza will serve as president and chief executive officer of the Company for
      a
      period of 18 months, for which she will receive a salary at the annual rate
      of
      $250,000. For 18 months thereafter, Ms. Plaza will serve as a consultant for
      which she will receive compensation at the annual rate of $75,000. During the
      term of her employment, the Company will also provide Ms. Plaza with an
      automobile allowance at the annual rate of $24,828, discretionary bonuses and
      stock options or other equity-based incentives as shall be determined by the
      compensation committee's board of directors, except that her bonus shall not
      be
      less than 4% nor more than 50% of her salary. If the Company terminates Ms.
      Plaza's employment other than for cause or as a result of her death or
      disability, the Company is required to pay Ms. Plaza the balance of her
      compensation for her employment terms and her consulting term and other
      benefits, including a pro rata portion of the bonus that would have been paid
      to
      her, and her obligations under her non-competition provision
      terminate.




16




The
      Company's agreement with Nelida Plaza provides that Ms. Plaza will serve as
      vice
      president for a term of three years for which she will receive annual
      compensation at the annual rate of $150,000. She is also entitled to such bonus
      compensation as is determined by the compensation committee, not to exceed
      50%
      of her salary. The Company also agreed to make the lease payments on the
      automobile she currently leases. Such payments are at the annual rate of
      approximately $11,600. If the Company terminates Ms. Plaza's employment other
      than for cause or as a result of her death or disability, the Company is
      required to pay Ms. Plaza the balance of her compensation for her employment
      terms and her consulting term and other benefits, including a pro rata portion
      of the bonus that would have been paid to her, and her obligations under her
      non-competition provision, terminate.




On
      January 26, 2006, the Company entered into a one-year consulting agreement
      with
      Dov Perlysky, pursuant to which the Company agreed to pay Mr. Perlysky a 5%
      commission on business generated by Mr. Perlysky's efforts. This agreement
      replaced his prior employment agreement.





On
      April
      3, 2006, the Company entered into an employment agreement with its Chief
      Financial Officer (CFO) pursuant to which the Company will pay him an annual
      salary of $80,000. The agreement has a one-year term, which may be extended
      for
      up to two years. The Company granted the CFO stock options to purchase 90,000
      shares of common stock at $0.7344 per share, which was the fair market value
      on
      the date of grant.




2.
      Lease
      commitments




Capitalized
      lease obligations - As of July 31, 2006, the Company owned vehicles acquired
      under non-cancelable capital leases with a cost of $221,434 (accumulated
      depreciation of $55,789). Depreciation expense for these assets amounted to
      $11,072 and $14,376 in the three-month periods ended July 31, 2006 and 2005,
      and
      $33,733 and $34,900 in the nine-month period ended July 31, 2006 and 2005,
      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 July 31, 2006:





2007
            
            $
            48,2402008
            
            
            48,2402009
            
            
            48,2402010
            
            
            64,1212011
            
            
            3,178Total
                minimum lease payments
            
            
            212,019Less:
                Amount of imputed interest
            
            
            (22,267
            )Present
                value of minimum leasepayments
            
            
            189,752Current
                portion of obligation undercapital
                leases
            
            
            (38,094
            )Long-term
                portion
            
            $
            151,658




Operating
      facilities - The Company conducts its administrative operations in office
      facilities which are leased under different rental agreements with the following
      terms:





MonthlyDescription
            
            
            Rent
            
            
            Commitment
                TermMain
                resources facilities
            
            $
            3,200
            
            
            Ending
                in October 2007Housing
                for employees
            
            $
            1,850
            
            
            Ending
                in November 2006Lemerick
                office space
            
            $
            1,000
            
            
            Ending
                in July 2007




17




The
      first
      lease listed in the table is with an affiliate of the chief executive
      officer.




In
      June
      2006, the Company entered into a new lease agreement for new office facilities
      in Lemerick, Pennsylvania, at a monthly rental of $1,000. The lease term of
      the
      new lease agreement expires on July 31, 2007, but the agreement may be
      terminated earlier by giving a prior 90 days written notice. The new lease
      agreement may be renewed for an additional term of three years at monthly rental
      of $1,050 during the first year, $1,100 during the second year, and $1,150
      during the third year of the lease renewal term.





Rent
      expense during the three-month period ended July 31, 2006 and 2005 was $29,086
      and $30,675, respectively, and $81,786 and $91,145 for the nine-month period
      ended July 31, 2006 and 2005, respectively.




**NOTE
      I - STOCK OPTIONS**




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, and consultants.
      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.
      Independent directors are not eligible of discretionary options. However, each
      newly elected independent director receives at the time of his or her election,
      a five-year option to purchase 25,000 shares of common stock at the market
      price
      on the date of his or her election. In addition, the plan provides for the
      annual grant of an option to purchase 5,000 shares of common stock on the first
      trading day of January of each year, commencing January 2007. The options to
      directors have a term of five years and become exercisable cumulatively as
      to
      50% of the shares subject to the option six months from the date of grant and
      as
      to the remaining 50% 18 months from the date of grant. Pursuant to this
      provision, on January 25, 2006, options to purchase 25,000 shares at $.7344
      per
      share, being the fair market value on the date of grant, were automatically
      granted to each of the three independent 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
      10% of our 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.




Pursuant
      to the Plaza Agreement, all outstanding options issued by Plaza were terminated,
      and the Company granted incentive stock options to purchase an aggregate of
      1,400,000 shares of common stock at an exercise price of $0.7344 per share
      to
      the holders of such terminated Plaza options pursuant to the Company's 2005
      Long-Term Incentive Plan. Of the total options to purchase 1,400,000 shares
      of
      common stock, options to purchase 776,186 shares of common stock were granted
      to
      18 employees whose options to purchase Plaza common stock were cancelled. The
      options to purchase the remaining 623,814 shares of common stock were granted
      to
      both the 18 former holders of Plaza options and 23 additional Plaza
      employees.




Pursuant
      to the Plaza Agreement, Pharma-Bio agreed that it would issue 100 shares of
      common stock to each of Plaza'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.




**NOTE
      J - CONCENTRATION OF RISKS**




The
      Company's cash balances are maintained in a bank checking account.




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




18




The
      Company's revenues are concentrated in the pharmaceutical industry in the island
      of Puerto Rico, and a small number of customers have accounted for a significant
      percentage of its revenue. The following table sets forth information as to
      revenues and percentage of revenues for these periods (dollars in thousands)
      for
      the Company's principal clients, all of which are pharmaceutical
      companies:




Three
                months ended July 31,
            Nine
                months ended July 31,Customer
            
            
            2006
            
            
            2005
            
            
            2006
            
            
            2005Customer
                A
            
            $
            523
                (16.3
            %)
            $
            1,873
                (48.5
            %)
            $
            2,620
                (25.1
            %)
            $
            6,132
                (45.0
            %)Customer
                B
            
            
            334
                (10.4
            %)
            
            850
                (22.0
            %)
            
            1,118
                (10.7
            %)
            
            2,712
                (19.9
            %)Customer
                C
            
            
            1,330
                (41.3
            %)
            
            122
                (3.2
            %)
            
            3,126
                (30.0
            %)
            
            129
                (0.9
            %)Customer
                D
            
            
            506
                (15.7
            %)
            
            215
                (5.6
            %)
            
            1,094
                (10.5
            %)
            
            728
                (5.3
            %)




Client
      A,
      B, C and D had an outstanding balance at July 31, 2006 representing 21%, 12%,
      40% and 9%, respectively, of the total receivables.


The
      Company assesses the financial strength of its customers and, as a consequence,
      believes that its trade accounts receivable credit risk exposure is limited.
      However, the loss or significant decline in business from any of its major
      customers could have a material effect upon its revenue and income.




In
      June
      2006, one of the Company’s largest customers  announced
      the closing of one of its two facilities in Puerto Rico and the reduction of
      staff in the second. The accompanying statements of operations include revenues
      from the closed facility as follows:




**Period**
            
            
            **Revenues**Three
                months ended July 31, 2006
            
            $
            322,881Three
                months ended July 31, 2005
            
            $
            1,256,979Nine
                months ended July 31, 2006
            
            $
            1,785,804Nine
                months ended July 31, 2005
            
            $
            4,474,743




The
      receivables at July 31, 2006 from the closed facility amounted to approximately
      $760,000. The Company does not anticipate any problem in connection with the
      collection of said outstanding balance.




**NOTE
      K - RETIREMENT PLAN**




The
      Company 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
      three months ended July 31, 2006 and 2005 were $9,121 and $12,228, respectively.
      Contributions for the nine months ended July 31, 2006 and 2005 were $30,926
      and
      $28,108, respectively.




19




**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**




The
      following discussion of the Company's results of operations and financial
      condition should be read in conjunction with the financial statements of the
      Company and the related notes. The following discussion includes forward-looking
      statements. For a discussion of important factors that could cause actual
      results to differ from results discussed in the forward-looking statements,
      see
      "Forward Looking Statements."




As
      a
      result of the reverse acquisition that closed on January 25, 2006, Plaza is
      treated as the accounting acquirer and the results of operations for periods
      prior to January 25, 2006 reflect only the operations of Plaza.




**Overview**




The
      Company is a validation and compliance consulting service firm in Puerto Rico.
      The validation and compliance consulting service market in Puerto Rico consists
      of local validation and compliance consulting firms, United Stated dedicated
      validation and compliance consulting firms and large publicly traded and private
      domestic and foreign engineering and consulting firms. The Company provides
      a
      broad range of compliance and validation consulting services. The Company
      markets its services to pharmaceutical, chemical, biotechnology and medical
      devices and allied products companies in Puerto Rico, the United States and
      Europe through their Puerto Rico operations. The Company's staff includes more
      than 140 experienced engineering and life science professionals, and includes
      former FDA investigators, former quality assurance managers or directors, and
      experienced and well-trained professionals with masters and doctorates in health
      sciences and engineering.




The
      Company's revenue is derived from time and materials contracts (representing
      approximately 90% of total revenues), where the clients are charged for the
      time, materials and expenses incurred on a particular project, and to a lesser
      extent (approximately 10% of total revenues), from fixed-fee contracts or from
      "not to exceed" contracts, which generally are short-term contracts, in which
      the value of the contract to the Company cannot exceed a stated amount. For
      time
      and materials contracts, the Company's revenue is principally a function of
      the
      number of its compliance and validation professional employees and the volume
      of
      hours billed per professional. To the extent that the Company's revenue is
      based
      on fixed-fee or "not to exceed" contracts, its ability to operate profitably
      is
      dependent upon its ability to estimate accurately the costs that it will incur
      on a project and to management and monitoring progress. If the Company
      underestimates its costs on any contract, it would sustain a loss on the
      contract.




The
      Company believes the most significant factors to achieving future business
      growth are the ability to (a) continue to provide quality value-added validation
      and compliance services to its clients in the Puerto Rico marketplace; (b)
      recruit and retain highly educated and experienced validation and compliance
      professionals; (c) further expand its products and services to address the
      expanding compliance needs of its clients; and (d) expand the Company's market
      presence into the United States, Latin America and Europe in order to respond
      to
      the international validation and compliance demands of its clients.




The
      Company's business has been dependent upon a small number of clients. During
      the
      three months ended July 31, 2006 and 2005, and the nine months ended July 31,
      2006 and 2005, a very small number of clients accounted for a disproportionately
      large percentage of the Company's revenues. For the three-month and nine-month
      periods ended July 31, 2006, four customers accounted for approximately 80%
      of
      revenues. For the three-month and nine-month periods ended July 31, 2005, two
      of
      these four customers accounted for approximately 68% of revenues. The loss
      of or
      significant reduction in the scope of work performed for any major customer
      could impair the Company's ability to operate profitably. In
      particular, the Company had a contract with one of these major customers which
      expired on December 31, 2005. Although this contract was divided in various
      smaller contracts and extended with termination dates varying through December
      2006, the level of business has significantly declined from the prior year.
      In
      June 2006, this customer announced the closing of one of its two facilities
      located in Puerto Rico and a reduction of staff in the second facility. The
      revenues from this major customer were as follows:




20





Period
            
            
            Operating
              facility
            
            
            Closing
              facility
            
            
            TotalThree
                months ended July 31, 2006
            
            $
            200,360
            
            $
            322,881
            
            $
            523,241Three
                months ended July 31, 2005
            
            
            615,925
            
            
            1,256,979
            
            
            1,872,904Nine
                months ended July 31, 2006
            
            
            834,582
            
            
            1.785,804
            
            
            2,620,386Nine
                months ended July 31, 2005
            
            
            1,657,145
            
            
            4,474,743
            
            
            6,131,888





Although
      our business is affected by seasonal factors such as vacation and holiday work
      policies, we do not believe that our business is seasonal. However, because
      our
      business is based on performing services under contracts which relate to
      specific projects, there may be a lag between the completion of one project
      and
      the commencement of the following project. This lag may cause some decline
      in
      revenues and a related decline in gross margin.





On
      January 9, 2006, Plaza acquired, for $300,000, certain assets of a United States
      based company that performs consulting services for the pharmaceutical and
      biotech industries. These assets include a client list and a validation
      compliance service business. The purchase price was paid in three installments,
      each in the amount of $100,000. Plaza also hired nine former employees of the
      business. This acquisition was made pursuant to Plaza's strategy to expand
      its
      operations beyond Puerto Rico and Puerto Rico businesses with a view to
      lessening Plaza's dependence upon a small number of Puerto Rico pharmaceutical
      companies. Revenues from these operations for the quarter ended July 31, 2006
      amounted to approximately $180,000, and revenues for the nine-month period
      ended
      July 31, 2006 amounted to approximately $538,000. The Company cannot give
      assurance that any significant revenues will be derived from these
      operations.




The
      principal components of the Company's costs of revenue are employee compensation
      (salaries, wages, taxes and benefits) and expenses relating to the performance
      of the services. The Company faces increasing labor costs which the Company
      seeks to pass on to its customers through increases in its rates. However,
      there
      is often a delay between the increase in the Company's costs and the increases
      in its billing rate, which may result in a reduced gross margin during that
      period. Although the Company has been successful in the past in being able
      to
      increase its billing rates to reflect its increased labor costs, the Company
      cannot give any assurance that it will continue to be able to do
      so.




On
      January 25, 2006, Pharma-Bio acquired Plaza in a transaction which is accounted
      for as a reverse acquisition, with Plaza being deemed the accounting acquirer.
      Pursuant to the acquisition agreement, Pharma-Bio paid Ms. Elizabeth Plaza,
      the
      sole stockholder of Plaza, $10,000,000 plus 1,150,000 shares of the Pharma-Bio's
      common stock. In addition, Ms. Plaza will receive three payments, each in the
      amount of $2,750,000, payable on January 25, 2007, 2008 and 2009. The first
      payment, net of imputed interest, is a current liability at July 31, 2006,
      and,
      together with the costs incurred by Pharma-Bio in connection with the
      acquisition of Plaza, is a significant factor in the reduction in the Company's
      working capital at July 31, 2006, as discussed under "Liquidity and Capital
      Resources."





As
      a
      condition to closing, Plaza was required to have a net tangible book value
      of
      not less than $5,500,000, of which at least $2,000,000 was in cash, as of
      November 30, 2005, with the excess to be paid to Ms. Plaza, the selling
      stockholder. As a result, we owed Ms. Plaza an additional $88,161 pursuant
      to
      this provision.




The
      agreement relating to the acquisition of Plaza also provides that we, rather
      than Ms. Plaza, are responsible for the income tax from December 1, 2005 through
      the closing date, which was January 25, 2006. Because of the status of Plaza
      as
      an N Corporation under the Puerto Rico Internal Revenue Code, Plaza’s net income
      from December 1, 2005 to January 24, 2006 is taxed to Ms. Plaza. The income
      tax
      payable by Ms. Plaza for Plaza’s taxable income for said period amounts to
      $125,227. On June 15, 2005, we paid Ms. Plaza the $88,161 payable described
      in
      the preceding paragraph and the $125,227 tax reimbursement. Both of these
      payments are treated as additional payments on account of the purchase price
      of
      Ms. Plaza’s stock.




21




Prior
      to
      January 25, 2006, we operated as an N Corporation under the Puerto Rico Internal
      Revenue Code. An N corporation is similar to an S corporation under the Internal
      Revenue Code in that the corporation itself is not subject to tax and all
      taxable income is taxed to Ms. Plaza, as the sole stockholder. Upon the
      completion of the reverse acquisition on January 25, 2006, we became subject
      to
      Puerto Rico income tax, which provides for corporate income tax at our tax
      bracket at rates ranging from 39% to 41.5%. The table under “Results of
      Operations” shows the pro forma results of operations as if we had been subject
      to Puerto Rico income tax since November 1, 2003.




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of the Company's financial condition and results of
      operations are based upon the Company's consolidated financial statements,
      which
      have been prepared in accordance with generally accepted accounting principles
      ("GAAP") in the United States. Management believes the following are the
      critical accounting policies that impact the financial statements.




Use
      of
      estimates - The preparation of 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 financial statements, and the reported amounts
      of
      revenue and expenses during the reporting period. Actual results could differ
      from those estimates.




Cash
      and
      cash equivalents - For purposes of the statements of cash flows, cash and cash
      equivalents include liquid investments with original maturities of three months
      or less.




Revenue
      Recognition - The Company recognizes revenues when services are rendered to
      customers for time and materials contracts. In the case of fixed-fee or "not
      to
      exceed" contracts, which are generally short-term contracts, revenue is
      recognized based on the percentage that the services rendered bears to the
      estimated services to be performed over the contract.




Bad
      Debt
      - Bad debts are 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.


Property
      and Equipment -- Property and equipment is stated at cost. Depreciation is
      provided using the straight-line basis over the estimated useful lives of the
      assets. Major renewals and betterments that extend the life of the assets are
      capitalized, while expenditures for repairs and maintenance are expensed when
      incurred.




Income
      Taxes -- Plaza elected from its inception until January 25, 2006, when
      Pharma-Bio acquired Plaza, to be covered under the provisions of Subchapter
      N of
      Subtitle A of the Puerto Rico Internal Revenue Code (the "Puerto Rico Code"),
      which is similar to Subchapter S of the Internal Revenue Code in that the
      Company pays no income taxes since the taxable income is taxed to the Company's
      stockholders. Under the provisions of the Puerto Rico Code, Plaza paid the
      Puerto Rico Secretary of Treasury, on behalf of its stockholder, an amount
      equal
      to 33% of its taxable income. These payments, and any income tax withheld,
      were
      included in the amount of distributions to stockholder in Plaza's financial
      statements.





Commencing
      with the acquisition of Plaza on January 25, 2006, the Company will be tax
      based
      on its taxable income under the applicable provisions of the Puerto Rico Code
      and the Internal Revenue Code. The financial statements for the three-month
      and
      the nine-month periods ended July 31, 2006, reflect an income tax expense based
      on the applicable provisions of the Puerto Rico Code, since the income was
      earned in Puerto Rico, and, pursuant to the Puerto Rico Code, the Company did
      not pay income tax for periods prior to January 25, 2006.




22




Concentration
      of credit risk -- Financial instruments which potentially subject the Company
      to
      concentrations of credit risk consist principally of cash deposits and trade
      accounts receivable. The Company maintains its bank account in a high quality
      financial institution. While the Company attempts to limit any financial
      exposure, its deposit balances frequently exceed federally insured limits;
      however, no losses have been experienced on this account.




The
      Company's revenues are concentrated in the pharmaceutical industry in the island
      of Puerto Rico. Approximately $2.7 million, or 84%, of the revenues in the
      July
      31, 2006 quarter were generated by four customers. Two of these customers
      accounted for revenue of approximately $2.7 million, or 71%, of revenue for
      the
      July 31, 2005 quarter. The four customers had an outstanding balance at July
      31,
      2006 representing 82% of the total receivables. The Company assesses the
      financial strength of its customers and, as a consequence, believes that its
      trade accounts receivable credit risk exposure is limited.




Retirement
      Plan -- Plaza adopted a qualified profit sharing plan in January 2002 (amended
      on November 30, 2003) in accordance with the applicable provisions 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, amounting to $9,121 for the July 31, 2006 quarter and $12,228
      for the July 31, 2005 quarter.




Stock
      Option Plan --During the year ended October 31, 2004, Plaza granted stock
      options with an exercise price equal to the book value of the common stock
      as of
      October 31, 2003, which Plaza deemed to be the fair value of its common stock.
      The options expired ten years from the date of grant and generally vested over
      a
      three-year period. In connection with the acquisition of Plaza, these options
      were cancelled and Pharma-Bio granted the option holders options to purchase
      an
      aggregate of 776,186 shares of common stock in respect of the cancelled options
      and issued options to purchase an additional 623,814 shares of common stock
      to
      employees of Plaza, including those whose options were cancelled. In addition,
      options to purchase 75,000 shares of common stock were granted to our
      independent directors pursuant to a provision of the plan that provided for
      the
      automatic grant of an option to purchase 25,000 shares upon the initial election
      of an independent director. All of the Company’s outstanding have an exercise
      price of $.7344, a term of five years and are exercisable in installments.




Fair
      value of financial instruments - The carrying value of the Company's financial
      instruments (excluding obligations under capital leases): cash, accounts
      receivable, accounts payable and accrued liabilities, are considered reasonable
      estimates of fair value due to the short period to maturity. The Company
      believes, based on current rates, that the fair value of its obligations under
      capital leases approximates the carrying amount.





**New
      Accounting Pronouncements**




In
      June
      2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with FASB
      Statement No. 109, “Accounting for Income Taxes” *.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. Earlier application of the provisions
      of this Interpretation is encouraged if the enterprise has not yet issued
      financial statements, including interim financial statements, in the period
      this
      Interpretation is adopted. Management does not expect that the application
      of
      this standard will have any effect on the Company's results of operations or
      its
      financial condition.




23




In
      March
      2005, the FASB issued FASB Interpretation No. 47 "Accounting for Conditional
      Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the term
      "conditional asset retirement obligation" as used in FASB Statement No. 143
      "Accounting for Asset Retirement Obligations," refers to a legal obligation
      to
      perform an asset retirement activity in which the timing and (or) method of
      settlement are conditional on a future event that may or may not be within
      the
      control of the entity. The obligation to perform the asset retirement activity
      is unconditional even though uncertainty exists about the timing and (or) method
      of settlement. Thus, the timing and (or) method of settlement may be conditional
      on a future event. Accordingly, an entity is required to recognize a liability
      for the fair value of a conditional asset retirement obligation if the fair
      value of the liability can be reasonably estimated. The fair value of a
      liability for the conditional asset retirement obligation should be recognized
      when incurred, generally upon acquisition, construction or development and
      (or)
      through the normal operation of the asset. Uncertainty about the timing and
      (or)
      method of settlement of a conditional asset retirement obligation should be
      factored into the measurement of the liability when sufficient information
      exists. FASB Statement 143 acknowledges that in some cases, sufficient
      information may not be available to reasonably estimate the fair value of an
      asset obligation. This interpretation also clarifies when an entity would have
      sufficient information to reasonably estimate the fair value of an asset
      retirement obligation. Management does not expect that the application of this
      standard will have any effect on the Company's results of operations or
      financial condition.




In
      December 2004, the FASB issued FASB Statement No. 153 "Exchanges of Non-Monetary
      Transactions - an amendment of APB Opinion No. 29." The guidance in APB Opinion
      No. 29, "Accounting for Non-monetary Transactions," is based on the principle
      that exchanges of non-monetary assets should be measured based on the fair
      value
      of the assets exchanged. The guidance in that Opinion, however included certain
      exceptions to that principle. This Statement amends Opinion 29 to eliminate
      the
      exception for non-monetary exchanges of similar productive assets and replaces
      it with a general exception for exchanges of non-monetary assets that do not
      have commercial substance. A non-monetary exchange has commercial substance
      if
      the future cash flows of the entity are expected to change significantly as
      a
      result of the exchange. The Company does not expect that the adoption of FASB
      Statement No. 153 will have a material impact on its results of operations
      and
      financial position.




In
      December 2004, the FASB issued a revision of FASB Statement No. 123 "Accounting
      for Stock-Based Compensation." This Statement, No. 123R, supersedes APB Opinion
      No. 25 "Accounting for Stock Issued to Employees" and its related implementation
      guide. This Statement establishes standards for the accounting for transactions
      in which an entity exchanges instruments for goods and services. It also
      addresses transactions in which an entity incurs in liabilities in exchange
      of
      goods and services that are based on the fair value of the entity's equity
      instruments. This Statement focuses primarily on accounting for transactions
      in
      which an entity obtains employees services in share-based payment transactions.
      This Statement is effective as of the beginning of the first interim or annual
      reporting period of the first fiscal year that begins after December 15, 2005.
      As a result of the implementation of Statement 123R, the grant of options will
      be treated as compensation based on the value of the option, which will increase
      the Company's selling, general and administrative expenses.





In
      May
      2005, the FASB issued FASB Statement No. 154 "Accounting for Changes and Errors
      Corrections." This Statement replaces APB Opinion No. 20 "Accounting Changes"
      and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial
      Statements," and changes the requirements for the accounting for and reporting
      of a change in accounting principle. This Statement requires retrospective
      application to prior periods' financial statements of changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. When it is impracticable to
      determine the period specific effects of an accounting change on one or more
      individual prior periods presented, this Statement requires that the new
      accounting principle be applied to the balances of assets and liabilities as
      of
      the beginning of the earliest period for which retroactive application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      statement of financial position) for that period rather than being reported
      in
      an income statement. When it is impracticable to determine the cumulative effect
      of applying a change in accounting principle to all prior periods, this
      Statement requires that the new accounting principle be applied as if it were
      adopted prospectively from the earliest date practicable. The Company does
      not
      expect that the adoption of FASB Statement No. 154 will have a material impact
      on its results of operations and financial position.




24





**Results
      of Operations**




The
      following tables set forth our statements of operations for the three-month
      and
      the nine-month periods ended July 31, 2006 and 2005, in dollars (dollars in
      thousands) and as a percentage of revenue:





Three
                months ended July 31,
            Nine
                months ended July 31,2006
            2005
            2006
            2005Revenue
            
            $
            3,217
            
            
            100.0
            %
            $
            3,858
            
            
            100.0
            %
            $
            10,426
            
            
            100.0
            %
            $
            13,618
            
            
            100.0
            %Cost
                of revenue
            
            
            1,833
            
            
            57.0
            %
            
            2,130
            
            
            55.2
            %
            
            6,100
            
            
            58.5
            %
            
            7,245
            
            
            53.2
            %Gross
                profit
            
            
            1,384
            
            
            43.0
            %
            
            1,728
            
            
            44.8
            %
            
            4,326
            
            
            41.5
            %
            
            6,373
            
            
            46.8
            %Selling,
                general and administrative costs
            
            
            570
            
            
            17.7
            %
            
            400
            
            
            10.3
            %
            
            1,500
            
            
            14.4
            %
            
            1,314
            
            
            9.6
            %Interest
                expense
            
            
            128
            
            
            4.0
            %
            
            2
            
            
            0.1
            %
            
            262
            
            
            2.5
            %
            
            8
            
            
            0.1
            %Depreciation
                and amortization
            
            
            52
            
            
            1.6
            %
            
            35
            
            
            0.9
            %
            
            141
            
            
            1.4
            %
            
            70
            
            
            0.5
            %Income
                before income taxes
            
            
            634
            
            
            19.7
            %
            
            1,291
            
            
            33.5
            %
            
            2,423
            
            
            23.2
            %
            
            4,981
            
            
            36.6
            %Income
                tax expense1
            
            
            281
            
            
            8.7
            %
            
            --
            
            
            --
            
            
            701
            
            
            6.7
            %
            
            --
            
            
            --Net
                income1
            
            $
            353
            
            
            11.0
            %
            $
            1,291
            
            
            33.5
            %
            $
            1,722
            
            
            16.5
            %
            $
            4,981
            
            
            36.6
            %




(1)
      Plaza
      was treated as an N Corporation under the Puerto Rico Internal Revenue Code,
      which is similar to an S Corporation under the Internal Revenue Code, prior
      to
      the reverse acquisition. As
      a
      result, Plaza did not pay any income tax. Since January 25, 2006, the Company
      has been subject to income tax in Puerto Rico. If Plaza had not been treated
      as an N
      Corporation during the three-month and the nine-month periods ended July 31,
      2006 and 2005, the Company income before income taxes would have been taxed
      at
      rates ranging from 39% to 41.5%. The following table shows the income before
      income taxes, pro forma income taxes and pro forma net income for these periods
      in dollars (dollars in thousands) and as a percentage of revenue:




Three
                months ended July 31,
            Nine
                months ended July 31,2006
            2005
            2006
            2005Income
                before income taxes
            
            $
            634
            
            
            19.7
            %
            $
            1,291
            
            
            33.5
            %
            $
            2,423
            
            
            23.2
            %
            $
            4,981
            
            
            36.6
            %Pro
                forma income tax expense
            
            
            281
            
            
            8.7
            %
            
            503
            
            
            13.0
            %
            
            1,059
            
            
            10.2
            %
            
            1,942
            
            
            14.3
            %Pro
                forma net income
            
            $
            353
            
            
            11.0
            %
            $
            788
            
            
            20.4
            %
            $
            1,364
            
            
            13.1
            %
            $
            3,039
            
            
            22.3
            %








Revenues .
      Revenues for the quarter ended July 31, 2006 were $3.2 million, a decrease
      of
      approximately $0.7 million, or 17%, compared to the revenues for the quarter
      ended July 31, 2005. The decrease reflected a decline in revenue of
      approximately $1.9 million in the quarter ended July 31, 2006 from the
      comparable quarter of the prior year from two of the Company’s largest customers
      (Customers A and B), following completion of contracts with these customers.
      One
      of these customers has announced that it is significantly reducing the scope
      of
      its operations by closing one of its two facilities in Puerto Rico and reducing
      personnel at the second. The decrease in revenue was partially offset by an
      increase of $1.5 million from the other two customers (Customers C and D),
      which
      generated nominal revenue in the three-month period ended July 31, 2006.




25




There
      was
      a decrease in revenue of $3.2 million, or 23%, in the nine month period ended
      July 31, 2006 from the comparable nine month period of the prior year. The
      decrease reflected a decline in revenue of $5.1 million from the two largest
      customers (Customers A and B) referred to in the preceding paragraph, which
      was
      partially offset by an increase of $3.4 million from Customers C and D that
      generated revenues of $0.9 million in the nine month period ended July 31,
      2005.




Cost
      of Revenues; Gross Margin .
      The
      Company's gross margin decreased from 44.8% to 43.0% during the quarter ended
      July 31, 2006 as compared to the quarter ended July 31, 2005, and from 46.8%
      to
      41.5% during the nine months ended July 31, 2006 as compared to the nine months
      ended July 31, 2005. The reduction of gross margin was attributable to increased
      labor costs, which is the only component of our cost of revenues. Although
      we
      try to pass on the increased costs, we are not always able to do so in a timely
      manner, and there are often delays between the time we incur increased labor
      costs and the time we are able to increase our charges to
      customers.




Selling,
      General and Administrative Expenses .
      Total
      expenses were approximately $570,000 during the quarter ended July 31, 2006,
      an
      increase of approximately $170,000, or 43.5%, from the comparable quarter of
      the
      prior year. An increase of $186,000 resulted in the nine month period ended
      July
      31, 2006 from the comparable period of the prior year. Such increases resulted
      mainly from expenses incurred mainly from the reverse acquisition date, which
      was January 25, 2006. The expenses correspond to executive salaries not
      previously incurred, as well as to legal and related expenses associated with
      SEC filings.




Interest
      Expense .
      Since
      January 25, 2006, the Company has been recognizing approximately $125,000
      quarterly corresponding to imputed interest expense incurred in connection
      with
      the long-term obligations to Ms. Plaza which originated as a result of the
      reverse acquisition.




Income
      Tax Expense .
      The
      increase in the income tax expense results from a change in its tax status.
      The
      Company became a regular corporation taxpayer effective January 25, 2006. Prior
      to that date, the Company did not pay taxes pursuant to the provisions of
      Subchapter N of Subtitle A of the Puerto Rico Internal Revenue Code (the "Puerto
      Rico Code"), which is similar to Subchapter S of the Internal Revenue Code
      in
      that its taxable income is taxed to the stockholders.




Net
      Income .
      As a
      result of the Company's decline in revenues, combined with a lower gross margin
      resulting from the increase in labor costs, the increase in selling, general
      and
      administrative expenses, the recognition of imputed interest and the change
      of
      its tax status, the Company's:





*
      net
      income for the July 31, 2006 quarter decreased to approximately $0.4 million,
      or
      $0.02 per share (basic and diluted), a decline of approximately $0.9 million,
      or
      73%, from $1.3 million net income, or $0.74 per share (basic) and $0.32 per
      share (diluted), for the July 31, 2005 quarter, and




*
      net
      income for the nine-month period ended on July 31, 2006 decreased to
      approximately $1.7 million, or $0.22 per share (basic) and $0.10 per share
      (diluted), a decline of approximately $3.3 million, or 65%, from $5.0 million
      net income, or $2.85 per share (basic) and $1.23 per share (diluted), for the
      nine-month period ended July 31, 2005.




The
      basic
      and diluted income per share are also affected by the securities issued in
      connection with the private placement that was completed contemporaneously
      with
      the reverse acquisition. At that time, the Company issued shares of series
      A
      preferred stock which were convertible into 15,998,800 shares of common stock.
      The series A preferred stock was automatically converted into the 15,998,800
      shares on April 25, 2005, when the Company increased its authorized capital
      stock. As a result, the shares of common stock that were issued upon conversion
      of the series A preferred stock are included in determining diluted earnings
      per
      share from January 25, 2006 until April 24, 2006 and in determining basic
      earnings per share thereafter.




26




**Liquidity
      and Capital Resources**




Liquidity
      is a measure of our ability to meet potential cash requirements, including
      planned capital expenditures. At July 31, 2006, the Company had working capital
      of approximately $4.2 million, a decrease of $1.6 million from the working
      capital at October 31, 2005 of $5.8 million. Although we generated approximately
      $0.6 million from operations during the nine months ended July 31, 2006, this
      increase was offset by the current obligation of approximately $2.3 million
      payable to Elizabeth Plaza in connection with the acquisition of Plaza. We
      also
      have long-term obligations to Ms. Plaza for the payments of $2.75 million due
      in
      each of January 2008 and 2009.




We
      raised
      gross proceeds of $11.75 million from the sale of series A preferred stock
      and
      warrants, and used $10 million to pay Elizabeth Plaza the cash portion of the
      purchase price of the Plaza stock and most of the balance to pay offering
      expenses and closing expenses.




Pursuant
      to the merger agreement the Company was required to pay Ms. Plaza the amount
      by
      which our tangible net worth exceeded $5.5 million at November 30, 2005.
      Pursuant to this provision, the Company paid Ms. Plaza $88,161 on June 15,
      2006.
      Prior to the closing under the merger agreement, Plaza was taxed as an N
      Corporation under the Puerto Rico Internal Revenue Code, which, like an S
      Corporation under the Internal Revenue Code, provides that the corporation
      is
      not subject to corporate income tax and income is taxed to the stockholders.
      Ms.
      Plaza, as sole stockholder, was taxed on Plaza’s income during the period from
      December 1, 2005 to January 24, 2006, and the merger agreement required the
      Company to reimburse Ms. Plaza for the amount of the tax. This amount was
      $125,227, which was paid on June 15, 2006.




For
      the
      nine months ended July 31, 2006 and the year ended October 31, 2005, we made
      cash distributions of approximately $834,000 and $8.0 million, respectively,
      to
      or on behalf of Elizabeth Plaza. These amounts include cash distributions
      ($750,000 for the nine months ended July 31, 2006 and $7.3 million for the
      year
      ended October 31, 2005) and income tax withheld by clients which was treated
      as
      a payment of taxes on behalf of Ms. Plaza and used as a credit by Ms. Plaza
      on
      her income taxes ($85,000 for the nine months ended July 31, 2006 and $649,000
      for the year ended October 31, 2005).




The
      Company's primary cash needs consist of payment of compensation to its
      professional employees, overhead expenses and payment to the Puerto Rico
      Secretary of the Treasury for income taxes. The Company has an unsecured line
      of
      credit of $250,000 that bears interest at 2.00% over the prime rate and was
      unused at July 31, 2006. In
      addition, since January 25, 2006, we have been subject to income tax in Puerto
      Rico. Our taxable income in Puerto Rico is taxed at rates ranging from 39%
      to
      41.5% of taxable income.




Management
      believes that based on current levels of operations and anticipated growth,
      cash
      flows from operations, high quality customer receivables will be sufficient
      to
      fund anticipated expenses and satisfy other possible long-term contractual
      commitments, including our obligations to pay Ms. Plaza $2.75 million in January
      2007 pursuant to the agreement relating to the acquisition of Plaza, for the
      next twelve months.




While
      uncertainties relating to competition, the industries and geographical regions
      served by the Company 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.
      However, as stated above, our largest client has significantly reduced the
      scope
      of its operations in Puerto Rico and other companies in the industries which
      we
      serve may take similar actions. To the extent that these factors result in
      a
      continued decline in our revenue, our liquidity may be affected if we are not
      able to expand our potential customer base both in and outside of Puerto
      Rico.





27




**Forward
      Looking Statements**




This
      Report on Form 10-QSB contains certain forward-looking statements that are
      based
      on current expectations. In light of the important factors that can materially
      affect results, including those set forth in this paragraph and below, the
      inclusion of forward-looking information herein should not be regarded as a
      representation by the Company or any other person that the objectives or plans
      of the Company will be achieved. The Company may be unable to expand its
      customer base and to replace customers upon the completion of contracts, and
      may
      encounter competitive, technological, financial and business challenges making
      it more difficult than expected to continue to develop and market its services;
      the market may not accept the Company's existing and future services; the
      Company may be unable to retain existing key management personnel; and there
      may
      be other material adverse changes in the Company's operations or business.
      Assumptions relating to budgeting, marketing, and other management decisions
      are
      subjective in many respects and thus susceptible to interpretations and periodic
      revisions based on actual experience and business developments, the impact
      of
      which may cause the Company to alter its marketing, or other budgets, which
      may
      in turn affect the Company's financial position and results of operations.
      The
      reader is therefore cautioned not to place undue reliance on forward-looking
      statements contained herein, which speak solely as of the date of this Form
      10-QSB, and the forward looking statements are qualified in their entirety
      by
      reference to the material contained in "Risk Factors" and "Management's
      Discussion and Analysis of Financial Condition and Results of Operations"
      contained in the Company's Form 8-K which was filed on January 31, 2006 and
      in
      the Company’s other filings with the SEC and the "Management's Discussion and
      Analysis of Financial Condition and Results of Operations" contained in this
      Form 10-QSB. The Company assumes no responsibility to update any forward-looking
      statements as a result of new information, future events, or
      otherwise.





**Item
      3. Controls and Procedures**




As
      of the
      end of the period covered by this report, our chief executive officer and chief
      financial officer evaluated the effectiveness of our disclosure controls and
      procedures. Based on their evaluation, the chief executive officer and chief
      financial officer concluded that our disclosure controls and procedures are
      effective in alerting them to material information that is required to be
      included in the reports that we file or submit under the Securities Exchange
      Act
      of 1934 and that information required to be disclosed in the reports that we
      file or submit under the Securities Exchange Act of 1934 is accumulated and
      communicated to our management, including our chief executive officer and chief
      financial officer, to allow timely decisions regarding required disclosure.




During
      the quarterly period covered by this report, there were no changes in the
      Company's internal controls over financial reporting that materially affected,
      or are reasonably likely to materially affect, the Company's internal controls
      over financial reporting.




28


**PART
        II. OTHER INFORMATION**




**Item
      6. Exhibits**




(a) 
      Exhibits:




31.1 
      Certification of chief executive officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002




31.2 
      Certification of chief financial officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002




32.1 
      Certification of the chief executive officer and chief financial officer
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








29





**SIGNATURES**




Pursuant
      to the requirements 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.**








/s/
                Elizabeth PlazaElizabeth
                PlazaChief
                Executive Officer/s/
                Manuel O. MoreraManuel
                O. MoreraChief
                Financial Officer







30