**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 SECURITIESEXCHANGE
                ACT OF 1934




For
      the
      quarterly period ended April 30, 2007





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
                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.
                Employer
              Identification
                No.)





373
      Méndez 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 o no





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





The
      number of shares outstanding of the registrant's Common Stock as of June 12,
      2007 was 19,615,539.







**PHARMA-BIO
      SERV, INC.**





**FORM
      10-QSB**





**FOR
      THE QUARTER ENDED APRIL 30, 2007**




**TABLE
      OF CONTENTS**


PagePART
                    I FINANCIAL INFORMATIONItem
                    1 - Financial StatementsConsolidated
                    Balance Sheet as of April 30, 2007 (unaudited)
                
                
                3Consolidated
                    Statements of Income for the three-month periods and the six-month
                    periods
                    ended April 30, 2007 and 2006 (unaudited)
                
                
                4Consolidated
                    Statements of Cash Flows for the three-month periods and the
                    six-months
                    periods ended April 30, 2007 and 2006 (unaudited)
                
                
                5Consolidated
                    Statement of Changes in Stockholders’ Equity for the six-month period
                    ended April 30, 2007 (unaudited)
                
                
                6Notes
                    to Consolidated Financial Statements (unaudited)
                
                
                7Item
                    2 - Management's Discussion and Analysis of Financial Condition
                    and
                    Resultsof
                    Operations
                
                
                20Item
                    3 - Controls and Procedures
                
                
                27PART
                    II OTHER INFORMATIONItem
                    6 - Exhibits
                
                
                28


2




**PHARMA-BIO
      SERV, INC.**


**Consolidated
      Balance Sheet (Unaudited)**


**As
      of April 30, 2007**


Assets:Current
                  assetsCash
                  and cash equivalents
              
              $
              3,309,531Accounts
                  receivable
              
              
              3,971,261Other
              
              
              216,563Total
                  current assets
              
              
              7,497,355Property
                  and equipment
              
              
              314,484Other
                  assets, mainly intangible assets
              
              
              168,391Total
                  Assets
              
              $
              7,980,230Liabilities
                  and Stockholders' Equity:Current
                  liabilitiesCurrent
                  portion-obligations under capital leases
              
              $
              40,430Accounts
                  payable and accrued expenses
              
              
              1,330,779Due
                  to affiliate - current
              
              
              2,613,225Income
                  taxes
              
              
              364,128Total
                  current liabilities
              
              
              4,348,562Long-term
                  liabilitiesDue
                  to affiliate
              
              
              2,450,465Other
                  long-term liabilities
              
              
              121,043Total
                  long-term liabilities
              
              
              2,571,508Total
                  Liabilities
              
              
              6,920,070Stockholders'
                  Equity: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 19,615,539 shares
              
              
              1,961Additional
                  paid-in capital
              
              
              65,374Retained
                  earnings
              
              
              992,825Total
                  Stockholders' Equity
              
              
              1,060,160Total
                  Liabilities and Stockholders' Equity
              
              $
              7,980,230




See
      notes
      to financial statements.


3




**PHARMA-BIO
      SERV, INC.**


**Consolidated
      Statements of Income (Unaudited)**


**For
      the Three-Month Periods and the Six-Month Periods Ended April 30, 2007 and
      2006**


**Three
                  months ended April 30,**
              
              **Six
                  months ended April 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**REVENUES
              
              $
              4,180,562
              
              $
              3,804,703
              
              $
              7,798,892
              
              $
              7,208,885COST
                  OF SERVICES
              
              
              2,362,277
              
              
              2,233,166
              
              
              4,529,405
              
              
              4,266,505GROSS
                  PROFIT
              
              
              1,818,285
              
              
              1,571,537
              
              
              3,269,487
              
              
              2,942,380SELLING,
                  GENERAL ANDADMINISTRATIVE
                  EXPENSES
              
              
              829,672
              
              
              567,243
              
              
              1,566,257
              
              
              1,019,229INTEREST
                  EXPENSE
              
              
              84,556
              
              
              130,734
              
              
              213,802
              
              
              134,146INCOME
                  BEFORE INCOME TAX
              
              
              904,057
              
              
              873,560
              
              
              1,489,428
              
              
              1,789,005INCOME
                  TAX
              
              
              385,745
              
              
              398,305
              
              
              641,700
              
              
              420,178NET
                  INCOME
              
              $
              518,312
              
              $
              475,255
              
              $
              847,728
              
              $
              1,368,827BASIC
                  EARNINGS PER COMMON SHARE
              
              $
              0.03
              
              $
              0.14
              
              $
              0.04
              
              $
              0.53DILUTED
                  EARNINGS PER COMMON SHARE
              
              $
              0.02
              
              $
              0.02
              
              $
              0.04
              
              $
              0.10WEIGHTED
                  AVERAGE NUMBER OF COMMONSHARES
                  OUTSTANDING - BASIC
              
              
              19,615,539
              
              
              3,381,342
              
              
              19,162,866
              
              
              2,573,492WEIGHTED
                  AVERAGE NUMBER OF COMMONSHARES
                  OUTSTANDING - DILUTED
              
              
              22,120,730
              
              
              22,066,604
              
              
              21,897,862
              
              
              13,610,896


See
      notes
      to financial statements.


4




**PHARMA-BIO
      SERV, INC.**


**Consolidated
      Statements of Cash Flows (Unaudited)**


**For
      the Three-Month Periods and the Six-Month Periods Ended April 30, 2007 and
      2006**


**Three
                  months ended April 30,**
              
              **Six
                  months ended April 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income for the period
              
              $
              518,312
              
              $
              475,255
              
              $
              847,728
              
              $
              1,368,827Loss
                  on disposition of property and equipment
              
              
              5,798
              
              
              -
              
              
              25,661
              
              
              3,664Stock-based
                  compensation
              
              
              26,352
              
              
              -
              
              
              65,374
              
              
              -Depreciation
                  and amortization
              
              
              53,160
              
              
              58,796
              
              
              107,657
              
              
              88,940Imputed
                  interest expense
              
              
              82,118
              
              
              127,216
              
              
              208,729
              
              
              127,216Decrease
                  (increase) in accounts receivable
              
              
              23,370
              
              
              (1,493,829
              )
              
              1,784,616
              
              
              (12,037
              )Decrease
                  (increase) in other assets
              
              
              200,876
              
              
              (135,728
              )
              
              249,536
              
              
              (286,033
              )Increase
                  (decrease) in liabilities
              
              
              243,834
              
              
              146,218
              
              
              532,323
              
              
              (3,704
              )NET
                  CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
              
              
              1,153,820
              
              
              (822,072
              )
              
              3,821,624
              
              
              1,286,873CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              (7,859
              )
              
              (3,656
              )
              
              (18,080
              )
              
              (90,684
              )Cash
                  acquired as part of the acquisition of Plaza
              
              
              -
              
              
              -
              
              
              -
              
              
              28,943NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (7,859
              )
              
              (3,656
              )
              
              (18,080
              )
              
              (61,741
              )CASH
                  FLOW FROM FINANCING ACTIVITIES:Net
                  proceeds from the sale of preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              10,000,000Payment
                  for purchase of stock in Plaza
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,900,000
              )Payment
                  for non-compete covenant
              
              
              -
              
              
              -
              
              
              -
              
              
              (100,000
              )Payments
                  on capital lease obligations
              
              
              (9,622
              )
              
              (8,542
              )
              
              (19,048
              )
              
              (17,191
              )Payments
                  to affiliate
              
              
              (250,000
              )
              
              -
              
              
              (2,750,000
              )
              
              -Distributions
              
              
              -
              
              
              -
              
              
              -
              
              
              (749,554
              )NET
                  CASH USED IN FINANCING ACTIVITIES
              
              
              (259,622
              )
              
              (8,542
              )
              
              (2,769,048
              )
              
              (766,745
              )NET
                  INCREASE (DECREASE) IN CASH
              
              
              886,339
              
              
              (834,270
              )
              
              1,034,496
              
              
              458,387CASH
                  - BEGINNING OF PERIOD
              
              
              2,423,192
              
              
              3,084,214
              
              
              2,275,035
              
              
              1,791,557CASH
                  - END OF PERIOD
              
              $
              3,309,531
              
              $
              2,249,944
              
              $
              3,309,531
              
              $
              2,249,944PAYMENTS
                  OF:Income
                  tax
              
              $
              150,000
              
              $
              364,063
              
              $
              150,000
              
              $
              364,063Interest
              
              $
              5,073
              
              $
              3,518
              
              $
              508,781
              
              $
              6,930NONCASH
                  INVESTING AND FINANCING ACTIVITIES:Conversion
                  of preferred stock to common stock
              
              $
              -
              
              $
              1,483
              
              $
              -
              
              $
              1,483Conversion
                  of cashless exercise warrants to shares ofcommon
                  stock
              
              $
              -
              
              $
              -
              
              $
              130
              
              $
              -Income
                  tax withheld by clients but used as a credit in theincome
                  tax return of a stockholder (noncash distribution)
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              84,561Income
                  tax withheld by clients to be used as a credit inthe
                  Company's income tax return
              
              $
              45,212
              
              $
              -
              
              $
              53,573
              
              $
              -Debt
                  incurred in the acquisition of certain assets from avalidation
                  company
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              200,000Debt
                  payable to officer originated in the acquisition ofPlaza
                  Plaza, net of $1,025,000 imputed interest
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              7,225,000




See
      notes
      to financial statements.


5


**PHARMA-BIO
      SERV, INC.**


**Consolidated
      Statement of Changes in Stockholders’ Equity (Unaudited)**


**For
      the Six-Month Period Ended April 30, 2007**


**Additional****Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Paid-in**
              
              **Retained****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Earnings**
              
              **Total**BALANCE
                  AT OCTOBER 31, 2006
              
              
              18,315,001
              
              $
              1,831
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              145,227
              
              $
              147,058CASHLESS
                  CONVERSION OF WARRANTSTO
                  SHARES OF COMMON STOCK
              
              
              1,300,538
              
              
              130
              
              
              -
              
              
              -
              
              
              -
              
              
              (130
              )
              
              -STOCK-BASED
                  COMPENSATION
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65,374
              
              
              
              
              
              65,374NET
                  INCOME
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              847,728
              
              
              847,728BALANCE
                  AT APRIL 30, 2007
              
              
              19,615,539
              
              $
              1,961
              
              
              -
              
              $
              -
              
              $
              65,374
              
              $
              992,825
              
              $
              1,060,160




See
      notes
      to financial statements.




6




**PHARMA-BIO
      SERV, INC.**


**Notes
      to Consolidated Financial Statements (Unaudited)**


**For
      the Three-Month Periods and the Six-Months Periods Ended April 30, 2007 and
      2006**




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




**B** **ASIS
      OF** **P** **RESENTATION**





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 and the United States under the
      name
      of Pharma Serv and is engaged in providing technical compliance consulting
      services primarily to the pharmaceutical, chemical, medical device 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 that is accounted
      for as a reverse acquisition. Although Pharma-Bio, then known as Lawrence,
      is
      the corporation that made the acquisition, for accounting purposes, Plaza is
      treated as the acquiring company. As a result, the financial statements reflect
      the results of operations and cash flows of Plaza prior to January 25, 2006
      and
      the consolidated financial position and results of operations of Pharma-Bio
      and
      Plaza from and after January 25, 2006.





All
      intercompany transactions and balances have been eliminated in
      consolidation.





The
      unaudited interim financial statements for the three-month periods and the
      six-month periods ended on April 30, 2007 and 2006 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.




**R** **EVERSE** **A** **CQUISITION**




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, the Plaza Agreement provides for the Company to make three
      annual payments to Ms. Plaza, each in the amount of $2,750,000, payable on
      January 25, 2007, 2008 and 2009. See Note G with respect to payments made and
      obligations due to affiliate.




At
      the
      closing, all of the present 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.





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.




7





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.





**S** **UMMARY
      OF** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES**





**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 to affiliate): cash, accounts receivable,
      accounts payable and accrued liabilities, are considered reasonable estimates
      of
      fair value due to the short-term nature. Management believes, based on current
      rates, that the fair value of its obligations under capital leases and amounts
      due to affiliate approximate the carrying amount.





**Revenue
      Recognition**





Revenue
      is primarily derived from: (1) time and materials contracts (representing
      approximately 90% of total revenues), which is recognized by applying the
      proportional performance model, whereby revenue is recognized as performance
      occurs, and (2) short-term fixed-fee contracts or "not to exceed" contracts
      (approximately 10% of total revenues), which revenue is recognized similarly,
      except that certain milestones also have to be reached before revenue is
      recognized. 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.
      Due to the nature of the Company’s customers, 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.




8





**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**





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




Depreciation
      of owned assets, and amortization of assets under capital leases and leasehold
      improvements, are provided using the straight-line basis over the shorter of
      the
      estimated useful lives of the assets or the lease term. Major renewals and
      betterments that extend the life of the assets are capitalized, while
      expenditures for repairs and maintenance are expensed when
      incurred.




The
      Company evaluates for impairment its long-lived assets to be held and used,
      and
      long-lived assets to be disposed of, whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be
      recoverable.





**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.





**Stock-based
      compensation**





Effective
      November 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), and Staff Accounting Bulletin No. 107
      (“SAB 107”) using the modified prospective method, which results in the
      provisions of SFAS 123R being applied to the consolidated financial statements
      on a prospective basis. Under the modified prospective recognition method,
      restatement of consolidated income from prior periods is not required, and
      accordingly, the Company has not provided such restatements. Under the modified
      prospective provisions of SFAS 123R, compensation expense is recorded for the
      unvested portion of previously granted awards that were outstanding on
      November 1, 2006 and all subsequent awards. SFAS 123R requires that all
      stock-based compensation expense be recognized in the financial statements
      based
      on the fair value of the awards. Stock-based compensation cost is measured
      at
      the grant date based on the fair value of the award and is recognized as expense
      over the requisite service period, which generally represents the vesting
      period, and includes an estimate of awards that will be forfeited. The Company
      calculates the fair value of stock options using the Black-Scholes
      option-pricing model at grant date. SFAS 123R also amends SFAS No. 95,
“Statement of Cash Flows”, to require that excess tax benefits related to
      stock-based compensation be reflected as cash flows from financing activities
      rather than cash flows from operating activities. The Company does not recognize
      such cash flow from financing activities since there has been no tax benefit
      related to the stock-based compensation.




9





As
      required under the new standards, stock option compensation expense is based
      on
      the anticipated vesting of the options. Forfeitures estimated when recognizing
      compensation expense are adjusted when actual forfeitures differ from the
      estimate.




**Income
      per Share of Common Stock**





Basic
      income per share of common stock 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
      1,150,000 shares received by the former stockholder of Plaza and the 600,000
      shares received by San Juan Holdings, Inc., and (ii) for the period after the
      transaction, the number of shares outstanding represented the outstanding 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 common stock
      purchase 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 shares of common stock outstanding (basic and diluted) were
      calculated using the treasury stock method for the respective
      periods.





**NOTE
      B - RECENT ACCOUNTING PRONOUNCEMENTS**




1.
      In
      February 2007, the Financial Accounting Standards Board (FASB) issued Statement
      No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an Amendment of FASB Statement No. 115”. This Statement permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value. The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. This Statement is expected to expand the
      use of fair value measurement, which is consistent with the FASB’s long-term
      measurement objectives for accounting for financial
      instruments.




This
      Statement is effective as of the beginning of an entity’s first fiscal year that
      begins after November 15, 2007. Early adoption is permitted as of the beginning
      of a fiscal year that begins on or before November 15, 2007, provided the entity
      also elects to apply the provisions of FASB Statement No. 157, “ Fair
      Value Measurements”.




Management
      does not expect that the application of this standard will have any significant
      effect on the Company's financial statements.




10





2.
      In
      September 2006, the FASB published Statement No. 157 “Fair Value Measurement”.
      This Statement defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements, the
      FASB having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, this Statement does
      not require any new fair value measurements. However, for some entities, the
      application of this Statement will change current practice. The changes to
      current practice resulting from the application of this Statement relate to
      the
      definition of fair value, the methods used to measure fair value, and the
      expanded disclosures about fair value measurements.




This
      Statement is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. Earlier application is encouraged, provided that the reporting entity
      has
      not yet issued financial statements for that fiscal year, including financial
      statements for an interim period within that fiscal year. The provisions of
      this
      Statement should be applied prospectively as of the beginning of the fiscal
      year
      in which this Statement is initially applied, except for certain exceptions
      stated in the Statement.




The
      implementation of this Statement will have no significant effect on the
      Company’s financial statements.




3.
      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 significant effect on the Company's results of
      operations or its financial condition.




4.
      Other
      recently issued FASB Statements or Interpretations, SEC Staff Accounting
      Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been
      implemented or are not applicable to the Company.




**NOTE
      C - CAPITAL TRANSACTIONS**





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.





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.




11





Each
      share of series A preferred stock 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
      (January 25, 2011) 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.





In
      January 2004, Pharma-Bio issued warrants to purchase 800,000 shares of common
      stock at $0.12 per share (1,600,000 shares at $0.06 per share, subsequent to
      the
      stock distribution effected on January 24, 2006). The warrants may also be
      converted into shares of common stock on a cashless basis under certain
      conditions, but on a reduced number of shares. The warrants expire on January
      16, 2014. In January 2007, warrants to purchase a total of 1,350,400 shares
      of
      common stock were converted to 1,300,539 shares of common stock pursuant to
      the
      cashless exercise provisions. As of April 30, 2007, warrants to purchase 249,600
      shares remain outstanding.





**NOTE
      D - PROPERTY & EQUIPMENT**





The
      balance of property and equipment as of April 30, 2007 consists of:





**Useful
                life**
              **(years)**
            
            **Amount**Vehicles
            
            
            5
            
            $
            221,434Computers
            
            
            3
            
            
            180,758Equipment
            
            
            3
            
            
            120,505Furniture
                and fixtures
            
            
            10
            
            
            68,509Total
            
            
            
            
            
            591,206Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (276,722
            )Property
                and equipment, net
            
            
            
            
            $
            314,484





**NOTE
      E - OTHER ASSETS**





At
      April
      30, 2007, non-current other assets include the following:




12





Intangible
                assets:Covenant
                not to compete
            
            $
            71,667Customer-related
                intangibles
            
            
            83,333Other
                assets
            
            
            13,391$
            168,391




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 five-year term of the non-competition
      covenant.





Customer-related
      intangible assets consist mainly of a customer list that 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 three years.





All
      of
      the intangible assets were originated in January 2006, therefore, there was
      no
      amortization of intangible assets in prior periods. The amortization expense
      for
      each of the three-month periods ended April 30, 2007 and 2006 amounted to
      $17,500, and for the six-month periods ended April 30, 2007 and 2006 amounted
      to
      $35,000 and $25,000, 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 was effective for taxable years commencing
      after December 31, 2004 and ending on or before December 31, 2006; however,
      on
      November 10, 2006, Puerto Rico Act No. 244 was approved to impose the additional
      2.5% special tax to taxable years commencing after December 31, 2004 and before
      January 1, 2007. Therefore, the Company's maximum effective tax rate will be
      41.5% for its fiscal years ending on October 31, 2006 and October 31, 2007,
      and
      39% thereafter.





The
      operations carried out by the Company’s subsidiary in the United States (which
      are presently not significant) are taxed in the United States. With certain
      limitations, the Company receives a credit on its Puerto Rico tax for the
      federal income tax paid. Also, upon distribution of earnings by the Puerto
      Rican
      subsidiary to its parent those dividends are taxed at the federal level,
      however, the parent is able to receive a credit for the taxes paid by the
      subsidiary on its operations in Puerto Rico, to the extent of the federal taxes
      that result from those earnings (determined at rates which are normally lower
      than in Puerto Rico). As a result, the income tax expense of the Company, under
      its present corporate structure, would normally be the Puerto Rico taxes on
      operations in said jurisdiction, plus 10% withholding in Puerto Rico from
      dividends paid to the Puerto Rican subsidiary’s parent, plus federal taxes on
      operations in the United States.





The
      Company has not recognized deferred income taxes on $1,067,445 of undistributed
      earnings of its Puerto Rican subsidiary, since such earnings are considered
      to
      be reinvested indefinitely. If the earnings were distributed in the form of
      dividends, the Company would be subject to a $106,745 tollgate tax.





The
      income tax expense 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.




13





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




**Three
                months**
              **ended
                April 30,**
            
            **Six
                months**
              **ended
                April 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Theoretical
                income tax expense by application of statutory rates to the book
                pre-tax
            
            $
            375,184
            
            $
            362,527
            
            $
            618,113
            
            $
            742,437Permanent
                differences:Effect
                of income subject to taxation under Subchapter N (taxable income
                taxed to
                stockholders)
            
            
            -
            
            
            -
            
            
            -
            
            
            (358,037
            )Other
                permanent differences
            
            
            10,561
            
            
            35,778
            
            
            23,587
            
            
            35,778Income
                tax expense
            
            $
            385,745
            
            $
            398,305
            
            $
            641,700
            
            $
            420,178




Because
      Plaza was treated as an N Corporation under the Puerto Rico Internal Revenue
      Code through January 24, 2006, its income was taxed to its stockholder through
      said date, and Plaza did not pay income tax. Had income tax been paid at the
      statutory rate, the Company’s net income would have been $1,010,790, or $0.39
      per share (basic) and $0.07 per share (diluted), for the six months ended April
      30, 2006.





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





On
      January 25, 2006, pursuant to the Plaza Agreement, Elizabeth Plaza, as the
      sole
      stockholder of Plaza 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
      agreed to pay Ms. 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. However, in January 2007, Elizabeth Plaza
      agreed to accept the first installment of $2,750,000 in two payments, one of
      $2,500,000 in January 2007 and the second of $250,000 in February 2007. The
      April 30, 2007 outstanding payments are due as follows:





**Twelve
                months ending April 30,**
            
            **Amount**2008
            
            $
            2,750,0002009
            
            
            2,750,000Total
                payments
            
            
            5,500,000Less:
                imputed interest
            
            
            (436,310
            )Present
                value of total payments
            
            
            5,063,690Less:
                current portion
            
            
            (2,613,225
            )Long-term
                portion
            
            $
            2,450,465





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.




14




The
      Plaza
      Agreement also 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 was taxed to Ms. Plaza. The income tax payable by Ms. Plaza for Plaza's
      taxable income for that 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.




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 Ms. Plaza,
      as
      the Company's sole 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 non-cash distributions.




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. The Company 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.





**NOTE
      H - COMMITMENTS**




**C** **ONTRACTS**





On
      January 25, 2006, the Company entered into employment agreements with Elizabeth
      Plaza and Nelida Plaza. The agreement with Elizabeth Plaza initially provided
      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. In
      January 2007, Elizabeth Plaza’s employment agreement was amended to extend her
      employment term through December 31, 2007, and the consulting term will
      immediately commence following the employment term and end on January 31,
      2009.




15





The
      Company's agreement with Nélida 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.





**Lease
      commitments**





**Capitalized
      lease obligations** -As of
      April 30, 2007, the Company leases vehicles under non-cancelable capital leases
      with a cost of $221,434 (accumulated depreciation of $77,932). Depreciation
      expense for these assets amounted to $11,072 and $11,589 in the three-month
      periods ended April 30, 2007 and 2006, 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 April
      30,
      2007:





**Twelve
                months ending April 30,**
            
            **Amount**2008
            
            $
            48,2402009
            
            
            48,2402010
            
            
            69,9742011
            
            
            9,385Total
                minimum lease payments
            
            
            175,839Less:
                Amount of imputed interest
            
            
            (14,366
            )Present
                value of minimum lease payments
            
            
            161,473Current
                portion of obligation under capital leases
            
            
            (40,430
            )Long-term
                portion
            
            $
            121,043




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




**Description**
            
            **Monthly
                Rent**
            
            **Commitment
                Term**Headquarter
                offices and laboratory testing facilities
            
            $
            18,750
            
            
            Ending
                in January 2012, with one five year renewal optionHousing
                for employees
            
            $
            1,850
            
            
            On
                a month to month basisLimerick
                office space
            
            $
            1,000
            
            
            Ending
                in July 2007




The
      first
      lease listed in the table is with an affiliate of the chief executive officer.
      In February 2007, the Company and the affiliate rescinded a former lease
      agreement and entered into a new agreement. The monthly payments under the
      new
      lease agreement, which amount to $18,750, will increase by 5% annually. The
      new
      agreement also requires the payment of utilities, property taxes, insurance
      and
      a portion of expenses incurred by the affiliate in connection with the
      maintenance of common areas. The Company paid a monthly rental of $3,200 under
      the lease agreement of its former main resources facilities.




In
      June
      2006, the Company entered into a lease agreement for office facilities in
      Limerick, Pennsylvania, at a monthly rental of $1,000. The lease term expires
      on
      July 31, 2007. The 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.




16





Rent
      expense during the three-month periods ended April 30, 2007 and 2006 amounted
      to
      $70,913 and $26,400, respectively, and $89,063 and $52,700 for the six-month
      period ended April 30, 2007 and 2006, respectively.





**NOTE
      I - STOCK OPTIONS AND STOCK-BASED COMPENSATION**





In
      October 2005, the Company's board of directors adopted, and on April 25, 2006,
      the Company’s stockholders approved, the 2005 Long-Term Incentive Plan, covering
      2,500,000 shares of common stock. The 2005 plan provides for the grant of
      incentive and non-qualified options, stock grants, stock appreciation rights
      and
      other equity-based incentives to employees, including officers, 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 for 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 provided 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; however, on April
      19, 2007, the stockholders amended the plan to increase the number of options
      granted to its independent directors annually from 5,000 to 10,000 shares of
      common stock. On April 19, 2007, the stockholders also amended the plan to
      provide for a grant to purchase 5,000 shares of common stock at the market
      price
      to each advisory board member on the date of his or her election and a grant
      of
      5,000 options to each of them annually. 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 these provisions, the Company has
      granted options to purchase 25,000 shares at $0.7344 per share and 5,000 shares
      at $0.75 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
      at least 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.
      The Company subsequently granted options to purchase other 648,724 shares to
      employees, independent directors and an independent contractor. The new options
      have a weighted average exercise price of approximately $0.76, a term of five
      years and are exercisable in installments. As of April 30, 2007, there were
      approximately outstanding options to purchase 1,429,519 shares of common stock,
      since some options expired because of employment terminations.




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




**Three
                months ended**
              **April
                30, 2007**
            
            **Six
                  months ended****April
                30, 2007**Stock-based
                compensation expense:Cost
                of services
            
            $
            10,184
            
            $
            42,090Selling,
                general and administrative
            
            
            16,168
            
            
            23,284Stock-based
                compensation before tax
            
            
            26,352
            
            
            65,374Income
                tax benefit
            
            
            —
            
            
            —Net
                stock-based compensation expense
            
            $
            26,352
            
            $
            65,374Effect
                on earnings per share:Basic
                earnings per share
            
            $
            (0.001
            )
            $
            (0.003
            )Diluted
                earnings per share
            
            $
            (0.001
            )
            $
            (0.003
            )





17




Prior
      to
      the adoption of SFAS 123R and SAB 107, the Company followed APB 25, and
      compensation cost related to employee stock options was generally not recognized
      because options were granted with exercise prices equal to or greater than
      the
      fair market value at the date of grant. Had compensation cost for the stock
      option plans been determined based on the fair value at the grant date for
      awards in the three-month and six-month periods ended April 30, 2006, consistent
      with the provisions of SFAS No. 123R, the effect on Company’s net income
      and earnings per share would not have been significant.





The
      fair
      value of each stock option granted prior to November 1, 2006 was estimated
      at
      $0.60 by the Company’s investment bankers based on its valuation given that the
      Company’s stock had not yet traded and given that the value of the options
      cannot exceed the market price of the common stock ($0.7344) in the most recent
      issuance of securities by the Company, which was its January 2006 private
      placement.





The
      fair
      value of each stock option granted on or after November 1, 2006 was estimated
      on
      the date of grant using the Black-Scholes option pricing model using the
      following weighted average assumptions (expected volatility is based upon the
      historical volatility of the Company’s stock price):





Expected
                dividend yield
            
            
            0.0
            %Expected
                stock price volatility
            
            
            10
            %Risk
                free interest rate
            
            
            4.7
            %Expected
                life of options
            
            
            2.65
                yearsWeighted
                average fair value per share of options granted during the six-month
                period ended April 30, 2007
            
            $
            0.1506





As
      of
      November 1, 2006 there were outstanding options to acquire 1,348,090 shares
      of
      common stock. During the three month period ended January 31, 2007, the Company
      granted options to purchase 5,000 shares of common stock to each of its three
      independent directors and an option to purchase 50,000 shares to its new general
      manager. No options were exercised or expired during the six-month period ended
      April 30, 2007. Therefore, as of April 30, 2007, there were outstanding options
      to purchase 1,413, 909 shares. The weighted average of the remaining contractual
      life of the outstanding stock options is 4 years and the weighted average
      exercise price is $0.7467.





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 files 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 and a money
      market 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, and the related receivables, are concentrated in the
      pharmaceutical industry in Puerto Rico. A small number of customers have
      accounted for a significant percentage of its revenue. In spite of the fact
      that
      just a few customers represent a significant source of revenue, the Company’s
      functions are not a continuous process, accordingly, the client base for which
      the Company’s services are typically rendered, on a project-by-project basis,
      changes regularly. The following table sets forth information as to revenues
      (dollars in thousands) and percentage of revenues for the Company's principal
      clients, all of which are pharmaceutical companies:




**Three
                months ended April 30,**
            
            **Six
                months ended April 30,****Customer**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**GlaxoSmithKline
            
            $
            1,102
            (26.4%)
            $
            1,166
            (30.6%)
            $
            2,363
            (30.3%)
            $
            1,796
            (24.9%)Schering-Plough
            
            
            236
            (5.6%)
            
            789
            (20.7%)
            
            460
            (5.9%)
            
            2,097
            (29.1%)Johnson
                & Johnson
            
            
            977
            (23.4%)
            
            321
            (8.4%)
            
            1,723
            (22.1%)
            
            589
            (8.2%)Lilly
                del Caribe
            
            
            206
            (4.9%)
            
            399
            (10.5%)
            
            508
            (6.5%)
            
            783
            (10.9%)Total
            
            $
            2,521
            (60.3%)
            $
            2,675
            (70.3%)
            $
            5,054
            (64.8%)
            $
            5,265
            (73.1%)




GlaxoSmithKline,
      Schering-Plough, Johnson & Johnson, and Lilly del Caribe had outstanding
      balances at April 30, 2007 representing 17%, 10%, 19% 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, Schering-Plough 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:




**Six
                Month Periods Ended April 30,**
            
            **Revenues**2007
            
            $
            38,7392006
            
            $
            1,462,923




The
      receivables at April 30, 2007 from the closed facility amounted to approximately
      $16,500, but the credit risk exposure on these receivables is not significant.
      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 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 April 30, 2007 and 2006 were $14,953 and $11,540,
      respectively. Contributions for the six months ended April 30, 2007 and 2006
      were $28,554 and $21,805, respectively.




19




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





The
      following discussion of our results of operations and financial condition should
      be read in conjunction with the financial statements 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**





We
      are 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 States dedicated validation
      and compliance consulting firms and large publicly traded and private domestic
      and foreign engineering and consulting firms. We provide a broad range of
      compliance and validation consulting services. We market our 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. Our staff includes more than 150 experienced engineering and life
      science professionals, and includes former quality assurance managers or
      directors, and experienced and well-trained professionals with bachelors,
      masters and doctorate degrees in health sciences and engineering.





Our
      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 us cannot exceed a stated amount. For time and materials
      contracts, our revenue is principally a function of the number of its compliance
      and validation professional employees and the number of hours billed per
      professional. To the extent that our revenue is based on fixed-fee or "not
      to
      exceed" contracts, our ability to operate profitably is dependent upon our
      ability to estimate accurately the costs that we will incur on a project and
      to
      management and monitoring progress. If we underestimate our costs on any
      contract, we would sustain a loss on the contract.





We
      believe 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 our 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 the clients; and (d) expand our market presence into the United States,
      Latin America and Europe in order to respond to the international validation
      and
      compliance demands of our clients. Since our business is conducted mainly in
      Puerto Rico, our business may be affected to the extent that the Puerto Rico’s
      economic problems affect the decision of our customers and potential customers
      to locate in Puerto Rico or to continue or expand their existing operations,
      as
      well as the continued presence in Puerto Rico of an office of the federal Food
      and Drug Administration and the continuation of tax benefits available to our
      customers under the Puerto Rico Internal Revenue Code, which are scheduled
      to
      expire at the end of 2007, although there are proposals in the Puerto Rico
      legislature to extend the existing benefits until a new law is drafted and
      approved.





Our
      business has been dependent upon a small number of clients. For the three-month
      and six-month periods ended April 30, 2007, two customers accounted for
      approximately 50% of revenues. For the three-month and the six-month periods
      ended April 30, 2006, one of these two customers, together with another customer
      accounted for approximately 52% of revenues. In spite of the fact that just
      a
      few customers represent a significant source of revenue, our functions are
      not a
      continuous process, accordingly, the client base for which our services are
      typically rendered, on a project-by-project basis, changes regularly.




20


However,
      the loss of or significant reduction in the scope of work performed for any
      major customer could impair our ability to operate profitably. In particular,
      we
      had a contract with one of our largest customers which expired on December
      31,
      2005. Although this contract was divided in a number of 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:




**Three
                months ended April 30,**
            
            **Six
                months ended April 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Operating
                facility
            
            $
            235,475
            
            $
            236,692
            
            $
            421,298
            
            $
            634,221Closed
                facility
            
            
            -
            
            
            551,832
            
            
            38,739
            
            
            1,462,923Total
            
            $
            235,475
            
            $
            788,524
            
            $
            460,037
            
            $
            2,097,144





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 that 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 a decline in revenues
      and a related decline in gross margin during the affected periods.





On
      January 9, 2006, we acquired, for $300,000, from the individual who served
      as
      our executive vice president and chief operating officer from February 1, 2006
      to March 31, 2006, certain assets of Integrated Validation Service, a United
      States-based business that performs consulting services for the pharmaceutical
      and biotech industries. These assets include a client list and the validation
      compliance service business that was operated by that individual. We also hired
      nine former employees of the business. This acquisition was made pursuant to
      our
      strategy to expand our operations beyond Puerto Rico with a view to lessening
      our dependence upon a small number of Puerto Rico pharmaceutical companies.
      We
      cannot give assurance that any significant revenues will be derived from these
      operations. Revenues from these operations were as follows:





**Period**
            
            **Amount**Three
                months ended April 30, 2007
            
            $
            342,507Three
                months ended April 30, 2006
            
            
            264,216Six
                months ended April 30, 2007
            
            
            533,221Six
                months ended April 30, 2006
            
            
            356,837





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





On
      January 25, 2006, Pharma-Bio acquired Plaza in a transaction which was accounted
      for as a reverse acquisition, with Plaza being deemed the accounting acquirer.
      Pursuant to the acquisition agreement, we paid Elizabeth Plaza, the sole
      stockholder of Plaza, $10,000,000 plus 1,150,000 shares of Pharma-Bio's common
      stock. In addition, Ms. Plaza is to receive three installments, each in the
      amount of $2,750,000, payable on January 25, 2007, 2008 and 2009. In January
      2007, Elizabeth Plaza agreed to accept the first installment of $2,750,000
      in
      two payments, one in the amount of $2,500,000 in January 2007 and the second
      in
      the amount of $250,000 in February 2007. The second installment due in January
      2008, net of imputed interest, is a current liability at April 30, 2007, and
      is
      a significant factor in the reduction in the Company's working capital, as
      discussed under "Liquidity and Capital Resources."





21


**Critical
      Accounting Policies and Estimates**





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




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 - We recognize revenues from time and material contracts by applying
      the proportional performance model, whereby revenue is recognized as performance
      occurs. In the case of fixed-fee or “not to exceed” contracts, which are
      generally short-term contracts, revenue is recognized similarly, except that
      certain milestones also have to be reached before revenue is recognized. With
      respect to fixed-fee contracts, revenue is recognized based on the percentage
      that services rendered bears to the estimated services to be performed over
      the
      contract. If we determine that a fixed-fee or “not to exceed” contract will
      result in a loss, we recognize the estimated loss in the period in which such
      determination is made.





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




Depreciation
      of owned assets, and amortization of assets under capital leases and leasehold
      improvements, are provided using the straight-line basis over the shorter of
      the
      estimated useful lives of the assets or the lease term. Major renewals and
      betterments that extend the life of the assets are capitalized, while
      expenditures for repairs and maintenance are expensed when
      incurred.




We
      evaluate for impairment our long-lived assets to be held and used, and
      long-lived assets to be disposed of, whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be
      recoverable.





Income
      Taxes — We
      elected from our inception until January 25, 2006, 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 we paid no income taxes since the taxable income was taxed
      to our stockholder. Under the provisions of the Puerto Rico Code, we paid the
      Puerto Rico Secretary of Treasury, on behalf of its stockholder, an amount
      equal
      to 33% of our taxable income. These payments, and any income tax withheld,
      are
      included in the amount of distributions to stockholder in our financial
      statements.




Commencing
      with the acquisition of Plaza on January 25, 2006, we are taxed based on our
      taxable income under the applicable provisions of the Puerto Rico Code and
      the
      Internal Revenue Code.





The
      undistributed earnings of our subsidiary, Plaza Consulting Group, Inc., are
      included in the consolidated financial statements. Since we consider to reinvest
      Plaza’s current undistributed earnings indefinitely, we do not recognize
      deferred income taxes on said earnings.




22


Concentration
      of credit risk — Financial instruments which potentially subject us to
      concentrations of credit risk consist principally of cash deposits and trade
      accounts receivable. We maintain our cash deposits in a bank account and an
      uninsured money market account. While we attempt to limit any financial
      exposure, our deposit balances in our bank account normally exceed federally
      insured limits; however, no losses have been experienced on these
      accounts.




Our
      revenues are concentrated in the pharmaceutical industry in Puerto Rico.
      Approximately $2.5 million, or 60.3%, of the revenues in the three month period
      ended April 30, 2007 were generated by four customers. The same customers had
      an
      outstanding balance at April 30, 2007 representing 55.1% of the total
      receivables. Approximately $2.7 million, or 70.3% of revenue, for the three
      month period ended April 30, 2006, was generated by these four customers. These
      four customers had outstanding balances at April 30, 2006 representing 78.7%
      of
      the total receivables. We assess the financial strength of our clients and,
      as a
      consequence, believe that our trade accounts receivable credit risk exposure
      is
      limited.




Retirement
      Plan — We 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.
      We make contributions to this plan as required by the provisions of the plan
      document, amounting to $14,953 and $11,540 for the three month periods ended
      April 30, 2007 and 2006, respectively.





Stock
      Option Plan —During the year ended October 31, 2004, we granted stock options
      with an exercise price equal to the book value of the common stock as of October
      31, 2003, which we deemed to be the fair value of our common stock. The options
      expired ten years from the date of grant and generally vested over a three-year
      period. In connection with our acquisition of Plaza, these options were
      cancelled and we granted the option holders options to purchase an aggregate
      of
      776,186 shares of common stock in respect of the cancelled options and we issued
      options to purchase an additional 623,814 shares of common stock to employees
      of
      Plaza, including those whose options were cancelled. We have subsequently
      granted options to purchase other 523,724 shares to employees and options to
      purchase 125,000 shares to independent directors and an independent contractor.
      However, as of April 30, 2007, there were outstanding options to purchase
      1,429,519 shares of common stock. Most of our outstanding options have an
      exercise price of $0.7344, a term of five years and are exercisable in
      installments. The average exercise price of such options is $0.75.





Stock-based
      compensation — Effective November 1, 2006, we adopted the provisions of
      SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), and Staff Accounting
      Bulletin No. 107 (“SAB 107”) using the modified prospective method, which
      results in the provisions of SFAS 123R being applied to the consolidated
      financial statements on a prospective basis. Under the modified prospective
      recognition method, restatement of consolidated income from prior periods is
      not
      required, and accordingly, we have not provided such restatements. Under the
      modified prospective provisions of SFAS 123R, compensation expense is recorded
      for the unvested portion of previously granted awards that were outstanding
      on
      November 1, 2006 and all subsequent awards. SFAS 123R requires that all
      stock-based compensation expense be recognized in the financial statements
      based
      on the fair value of the awards. Stock-based compensation cost is measured
      at
      the grant date based on the fair value of the award and is recognized as expense
      over the requisite service period, which generally represents the vesting
      period, and includes an estimate of awards that will be forfeited. We calculate
      the fair value of stock options using the Black-Scholes option-pricing model
      at
      grant date. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,”
to require that excess tax benefits related to stock-based compensation be
      reflected as cash flows from financing activities rather than cash flows from
      operating activities. We do not recognize such cash flow from financing
      activities since there has been no tax benefit related to the stock-based
      compensation.





As
      required under the new standards, stock option compensation expense is based
      on
      the anticipated vesting of the options. Forfeitures estimated when recognizing
      compensation expense are adjusted when actual forfeitures differ from the
      estimate.





23


Fair
      value of financial instruments - The carrying value of our 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. We believe, based on current
      rates, that the fair value of its obligations under capital leases approximates
      the carrying amount.




Use
      of
      estimates - The preparation of financial statements in conformity with
      accounting principles generally accepted in the United States of America (GAAP),
      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.




**New
      Accounting Pronouncements**




In
      February 2007, the Financial Accounting Standards Board (FASB) issued Statement
      No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an Amendment of FASB Statement No. 115”. This Statement permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value. The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. This Statement is expected to expand the
      use of fair value measurement, which is consistent with the FASB’s long-term
      measurement objectives for accounting for financial instruments. This Statement
      is effective as of the beginning of an entity’s first fiscal year that begins
      after November 15, 2007. Early adoption is permitted as of the beginning of
      a
      fiscal year that begins on or before November 15, 2007, provided the entity
      also
      elects to apply the provisions of FASB Statement No. 157, “ Fair
      Value Measurements”. We do not expect that the application of this standard will
      have any significant effect on our financial statements.




In
      September 2006, the FASB published Statement No. 157 “Fair Value Measurement”.
      This Statement defines fair value, establishes a framework for measuring fair
      value in accordance with GAAP, and expands disclosures about fair value
      measurements. This Statement applies under other accounting pronouncements
      that
      require or permit fair value measurements, the FASB having previously concluded
      in those accounting pronouncements that fair value is the relevant measurement
      attribute. Accordingly, this Statement does not require any new fair value
      measurements. However, for some entities, the application of this Statement
      will
      change current practice. The changes to current practice resulting from the
      application of this Statement relate to the definition of fair value, the
      methods used to measure fair value, and the expanded disclosures about fair
      value measurements. This Statement is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Earlier application is encouraged, provided that the
      reporting entity has not yet issued financial statements for that fiscal year,
      including financial statements for an interim period within that fiscal year.
      The provisions of this Statement should be applied prospectively as of the
      beginning of the fiscal year in which this Statement is initially applied,
      except for certain exceptions stated in the Statement. The implementation of
      this Statement will have no significant effect on our financial
      statements.




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. We do not expect that the application of this
      standard will have any significant effect on our results of operations or
      financial condition.




24


Other
      recently issued FASB Statements or Interpretations, SEC Staff Accounting
      Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been
      implemented or are not applicable to the Company.





**Results
      of Operations**





The
      following table sets forth our statements of operations for the three months
      ended April 30, 2007 and 2006, in dollars (dollars in thousands) and as a
      percentage of revenue:




Three
                months ended April 30,
            
            Six
                months ended April 30,2007
            
            2006
            
            2007
            
            2006Revenue
            
            $
            4,181
            
            
            100.0
            %
            $
            3,805
            
            
            100.0
            %
            $
            7,799
            
            
            100.0
            %
            $
            7,209
            
            
            100.0
            %Cost
                of revenue
            
            
            2,362
            
            
            56.5
            %
            
            2,233
            
            
            58.7
            %
            
            4,530
            
            
            58.1
            %
            
            4,266
            
            
            59.2
            %Gross
                profit
            
            
            1,819
            
            
            43.5
            %
            
            1,572
            
            
            41.3
            %
            
            3,269
            
            
            41.9
            %
            
            2,943
            
            
            40.8
            %Selling,
                general and administrative costs
            
            
            830
            
            
            19.9
            %
            
            567
            
            
            14.9
            %
            
            1,566
            
            
            20.1
            %
            
            1,020
            
            
            14.1
            %Interest
                expense
            
            
            85
            
            
            2.0
            %
            
            131
            
            
            3.4
            %
            
            214
            
            
            2.7
            %
            
            134
            
            
            1.9
            %Income
                before income taxes
            
            
            904
            
            
            21.6
            %
            
            874
            
            
            23.0
            %
            
            1,489
            
            
            19.1
            %
            
            1,789
            
            
            24.8
            %Income
                tax expense1
            
            
            386
            
            
            9.2
            %
            
            399
            
            
            10.5
            %
            
            642
            
            
            8.2
            %
            
            420
            
            
            5.8Net
                income1
            
            $
            518
            
            
            12.4
            %
            $
            475
            
            
            12.5
            %
            $
            847
            
            
            10.9
            %
            $
            1,369
            
            
            19.0
            %








(1)
            Plaza
                was treated as an N Corporation under the Puerto Rico Internal Revenue
                Code, which is similar to an S Corporation under the United States
                Internal Revenue Code, prior to the reverse acquisition. As a result,
                Plaza did not pay any income tax through January 25, 2006. 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 six-month
                period
                ended April 30, 2006, the Company income before income taxes would
                have
                been taxed at a 41.5% rate, the income tax expense and the net income
                would have amounted to approximately $1,011,000 (14.0%).





Revenues .
      Revenues for the quarter ended April 30, 2007 (the “April 2007 quarter”) were
      $4.2 million, an increase of approximately $0.4 million, or 9.9%, compared
      to
      the revenues for the quarter ended April 30, 2006 (the “April 2006 quarter”). We
      increased our revenue notwithstanding a decline in revenue of approximately
      $0.6
      million from a major customer following the completion of a contract with that
      customer. This customer significantly reduced the scope of its operations by
      closing one of its two facilities in Puerto Rico and reduced personnel at the
      second. This decrease in revenue from this customer was offset mainly by an
      increase of approximately $.7 million from one customer that generated revenues
      of $0.3 million in the April 2006 quarter.





There
      was
      an increase in revenue of $0.6, or 8.2%, in the six-month period ended April
      30,
      2007 (the “April 2007 period”) from the comparable six-month period of the prior
      year (the “April 2006 period”). Although there was a decline in revenue from the
      customer referred to in the preceding paragraph of approximately $1.6 million
      in
      the April 2007 period from the April 2006 period , there was an increase in
      revenue of approximately $1.7 from two other customers that generated $4.1
      million in the April 2007 period as compared with $2.4 for the April 2006
      period.





Cost
      of Revenues; Gross Margin .
      The
      gross margin increased from 41.3% to 43.5% during the April 2007 quarter as
      compared to the April 2006 quarter and from 40.8% in the April 2006 period
      to
      41.9% in the April 2007 period. The increase in gross margin for both the April
      2007 quarter and the April 2007 period was attributable to a higher proportion
      of independent contractors to employees, which resulted in savings in our cost
      of services.





25


Selling,
      General and Administrative Expenses .
      Selling, general and administrative expenses were approximately $830,000 during
      the April 2007 quarter, an increase of $263,000, or 46.4%, from the selling,
      general and administrative expenses of $567,000 in the April 2006 quarter.
      The
      selling, general and administrative expenses for the April 2007 period increased
      by $546,000 as compared with said expenses for the April 2006 period. Such
      increases resulted from expenses related to an expansion of our executive staff,
      an increase in the monthly lease payments of our main office and to expenses
      of
      an office we opened in Pennsylvania in early January 2006. Prior to January
      2006, our chief executive officer, Elizabeth Plaza, was our sole stockholder
      and
      she did not receive any salary prior to January 2006.





Interest
      Expense .
      Since
      January 25, 2006 and up to January 2007, we recognized approximately $125,000
      quarterly reflecting imputed interest expense incurred in connection with the
      long-term obligations to Ms. Plaza which originated as a result of the reverse
      acquisition. Because of the payment of the first installment of these
      obligations, the quarterly imputed interest expense on the obligations to Ms.
      Plaza decreased to approximately $82,000.





Income
      Tax Expense .
      The
      income tax expense for the April 2007 quarter was $386,000, a decrease of
      approximately $13,000 as compared to the income tax expense for the April 2006
      quarter. The decrease resulted primarily from a decrease of certain
      nondeductible expenses for tax return purposes.





The
      increase of $222,000 in the income tax expense for the April 2007 period as
      compared to the expense of $420,000 for the April 2006 period resulted primarily
      from a change in our tax status. We became a regular corporation taxpayer
      effective January 25, 2006. Prior to that date, we did not pay taxes pursuant
      to
      the provisions of Subchapter N of Subtitle A of the Puerto Rico Internal Revenue
      Code, which is similar to Subchapter S of the United States Internal Revenue
      Code in that our taxable income was taxed to the stockholder.




Net
      Income .
      As a
      result of the increase in the selling, general and administrative expenses
      and
      the income tax expense, which was partially offset by an increase in gross
      profit, our:





·
            net
                income for the April 2007 quarter increased to approximately $518,000,
                or
                $0.03 per share (basic) and $0.02 (diluted), an increase of approximately
                $43,000, or 9%, from net income of $475,000, or $0.14 per share (basic)
                and $0.02 per share (diluted), for the April 2006
                quarter.





·
            net
                income for the April 2007 period decreased to approximately $848,000,
                or
                $0.04 per share (basic and diluted), a decline of approximately $522,000,
                or 38.1%, from net income of $1,369,000, or $0.53 per share (basic)
                and
                $0.10 per share (diluted), for the April 2006 period. The basic and
                diluted income per share amounts were 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, 2006,
                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.





**Liquidity
      and Capital Resources**





Liquidity
      is a measure of our ability to meet potential cash requirements, including
      planned capital expenditures. At April 30, 2007, we had working capital of
      approximately $3.1 million, a decrease of $1.5 million from the working capital
      of $4.6 at October 31, 2006. Although we generated approximately $3.8 million
      from operations during the April 2007 period, this increase was offset by a
      payment of $2.75 million made to Elizabeth Plaza in connection with the
      acquisition of Plaza. At April 30, 2007, we have a $2.6 million short term
      and a
      $2.5 million long term obligations, both net of imputed interest, to Ms. Plaza
      for two payments of $2.75 million each due in January 2008 and 2009,
      respectively.





26


Our
      primary cash needs consist of payments of compensation to professional
      employees, overhead expenses and payments due to Ms. Plaza pursuant to the
      terms
      of the acquisition of Plaza. 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 pursuant to the
      agreement relating to the acquisition of Plaza, for the next twelve
      months.





We
      are
      pursuing possible opportunities of expanding our operations beyond Puerto Rico.
      To the extent that we are able to expand our operations, either by acquisition
      or by the establishment of operations in a new country, we will incur additional
      overhead, and there may be a delay between the period we commence operations
      and
      our generation of cash flow from operations.





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.





**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 our Form 10-KSB for the year ended October 31, 2006 and in our
      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.
      We
      assume 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.





27


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.





**PART
      II. OTHER INFORMATION**





**Item
      5. Other Information**





On
      April
      3, 2006, we entered into an employment agreement with our chief financial
      officer pursuant to which we paid him an annual salary of $80,000. The agreement
      expired on April 3, 2007. The chief financial officer is continuing to serve
      in
      that capacity on an at-will basis.





**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




28


**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
                Plaza
              Chief
                Executive Officer/s/
                Manuel O. MoreraManuel
                O. Morera
              Chief
                Financial OfficerDated:
                June 14, 2007





29