UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q





(Mark
One)


x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended July 31, 2009




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from _____________ to ______________




Commission
File No. 000-50956




PHARMA-BIO
SERV, INC.


(Exact
Name of Registrant as Specified in Its Charter)




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





Pharma-Bio
      Serv Building,
              Industrial
      Zone Lot 14, Barrio Higuillar,
              Dorado,
      Puerto Rico
            00646
              (Zip
      Code)(Address
      of Principal Executive Offices)





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





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





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





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




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            Smaller
      reporting companyx





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





The
number of shares of the registrant’s common stock outstanding as of September
11, 2009 was 20,751,215.










PHARMA-BIO
SERV, INC.


FORM
10-Q


FOR
THE QUARTER ENDED JULY 31, 2009





TABLE
OF CONTENTS


PagePART
      I FINANCIAL INFORMATIONItem
      1 – Financial Statements
                
                
                3Condensed
      Consolidated Balance Sheets as of July 31, 2009 and October 31, 2008
      (unaudited)
                
                
                3Condensed
      Consolidated Statements of Income for the three-month periods and
      nine-month periods ended July 31, 2009 and 2008
(unaudited)
                
                
                4Condensed
      Consolidated Statements of Cash Flows for the three-month periods and the
      nine-month periods ended July 31, 2009 and 2008
(unaudited)
                
                
                5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                
                
                6Item
      2 - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                
                
                12Item
      4 – Controls and Procedures
                
                
                17PART
      II OTHER INFORMATIONItem
      1 – Legal Proceedings
                
                
                18Item
      6 – Exhibits
                
                
                18SIGNATURES
                
                
                19




-2-




PART
I – FINANCIAL INFORMATION




Item 1.
            FINANCIAL
      STATEMENTS


PHARMA-BIO
SERV, INC.


Condensed
Consolidated Balance Sheets


(Unaudited)





July 31,
                                                          2009*
                                                        
                                                        
                                                        October 31,
                                                          2008**ASSETS:Current
      assetsCash
      and cash equivalents
                                                        
                                                        $
                                                        2,150,412
                                                        
                                                        
                                                        $
                                                        3,087,990Accounts
      receivable
                                                        
                                                        
                                                        2,242,707
                                                        
                                                        
                                                        
                                                        3,245,153Other
                                                        
                                                        
                                                        284,874
                                                        
                                                        
                                                        
                                                        194,108Total
      current assets
                                                        
                                                        
                                                        4,677,993
                                                        
                                                        
                                                        
                                                        6,527,251Property
      and equipment
                                                        
                                                        
                                                        1,553,880
                                                        
                                                        
                                                        
                                                        1,521,575Other
      assets
                                                        
                                                        
                                                        107,997
                                                        
                                                        
                                                        
                                                        63,127Total
      assets
                                                        
                                                        $
                                                        6,339,870
                                                        
                                                        
                                                        $
                                                        8,111,953LIABILITIES AND STOCKHOLDERS’
      EQUITY:Current
      liabilitiesCurrent
      portion-obligations under capital leases
                                                        
                                                        $
                                                        47,610
                                                        
                                                        
                                                        $
                                                        45,318Accounts
      payable and accrued expenses
                                                        
                                                        
                                                        1,120,225
                                                        
                                                        
                                                        
                                                        1,189,705Due
      to affiliate
                                                        
                                                        
                                                        500,000
                                                        
                                                        
                                                        
                                                        2,706,892Income
      taxes payable
                                                        
                                                        
                                                        157,444
                                                        
                                                        
                                                        
                                                        48,324Total
      current liabilities
                                                        
                                                        
                                                        1,825,279
                                                        
                                                        
                                                        
                                                        3,990,239Obligations
      under capital leases, less current portion
                                                        
                                                        
                                                        67,107
                                                        
                                                        
                                                        
                                                        69,934Total
      liabilities
                                                        
                                                        
                                                        1,892,386
                                                        
                                                        
                                                        
                                                        4,060,173Stockholders'
      equity:Preferred
      Stock, $0.0001 par value; authorized 10,000,000 shares; none
      outstanding
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Common
      Stock, $0.0001 par value; authorized 50,000,000 shares; issued and
      outstanding 20,751,215 shares
                                                        
                                                        
                                                        2,075
                                                        
                                                        
                                                        
                                                        2,075Additional
      paid-in capital
                                                        
                                                        
                                                        587,593
                                                        
                                                        
                                                        
                                                        540,337Retained
      earnings
                                                        
                                                        
                                                        3,874,746
                                                        
                                                        
                                                        
                                                        3,534,060Accumulated
      other comprehensive loss
                                                        
                                                        
                                                        (16,930
                                                        )
                                                        
                                                        
                                                        (24,692
                                                        )Total
      stockholders' equity
                                                        
                                                        
                                                        4,447,484
                                                        
                                                        
                                                        
                                                        4,051,780Total
      liabilities and stockholders' equity
                                                        
                                                        $
                                                        6,339,870
                                                        
                                                        
                                                        $
                                                        8,111,953




*
            Unaudited.**
            Condensed
      from audited financial statements.





See notes
to condensed consolidated financial statements.


-3-





PHARMA-BIO
SERV, INC.


Condensed
Consolidated Statements of Income


(Unaudited)





Three months ended July 31,
                                          
                                          
                                          Nine months ended July 31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008REVENUES
                                          
                                          $
                                          2,626,531
                                          
                                          
                                          $
                                          4,191,873
                                          
                                          
                                          $
                                          8,659,944
                                          
                                          
                                          $
                                          11,493,969COST
      OF SERVICES
                                          
                                          
                                          1,753,351
                                          
                                          
                                          
                                          2,547,992
                                          
                                          
                                          
                                          5,732,323
                                          
                                          
                                          
                                          7,129,868GROSS
      PROFIT
                                          
                                          
                                          873,180
                                          
                                          
                                          
                                          1,643,881
                                          
                                          
                                          
                                          2,927,621
                                          
                                          
                                          
                                          4,364,101SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                                          
                                          
                                          710,050
                                          
                                          
                                          
                                          802,194
                                          
                                          
                                          
                                          2,208,698
                                          
                                          
                                          
                                          2,304,118INCOME
      FROM OPERATIONS
                                          
                                          
                                          163,130
                                          
                                          
                                          
                                          841,687
                                          
                                          
                                          
                                          718,923
                                          
                                          
                                          
                                          2,059,983OTHER
      INCOME (EXPENSES):Interest
      expense
                                          
                                          
                                          (4,484
                                          )
                                          
                                          
                                          (46,670
                                          )
                                          
                                          
                                          (50,811
                                          )
                                          
                                          
                                          (179,988
                                          )Interest
      income
                                          
                                          
                                          4,988
                                          
                                          
                                          
                                          11,492
                                          
                                          
                                          
                                          20,971
                                          
                                          
                                          
                                          69,364Gain
      on disposition of property and equipment
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          6,081
                                          
                                          
                                          
                                          -504
                                          
                                          
                                          
                                          (35,178
                                          )
                                          
                                          
                                          (23,759
                                          )
                                          
                                          
                                          (110,624
                                          )INCOME
      BEFORE TAXES
                                          
                                          
                                          163,634
                                          
                                          
                                          
                                          806,509
                                          
                                          
                                          
                                          695,164
                                          
                                          
                                          
                                          1,949,359INCOME
      TAXES
                                          
                                          
                                          110,345
                                          
                                          
                                          
                                          291,631
                                          
                                          
                                          
                                          354,478
                                          
                                          
                                          
                                          806,574NET
      INCOME
                                          
                                          $
                                          53,289
                                          
                                          
                                          $
                                          514,878
                                          
                                          
                                          $
                                          340,686
                                          
                                          
                                          $
                                          1,142,785BASIC
      EARNINGS PER COMMON SHARE
                                          
                                          $
                                          0.003
                                          
                                          
                                          $
                                          0.026
                                          
                                          
                                          $
                                          0.016
                                          
                                          
                                          $
                                          0.058DILUTED
      EARNINGS PER COMMON SHARE
                                          
                                          $
                                          0.002
                                          
                                          
                                          $
                                          0.023
                                          
                                          
                                          $
                                          0.015
                                          
                                          
                                          $
                                          0.052WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC
                                          
                                          
                                          20,751,215
                                          
                                          
                                          
                                          19,892,186
                                          
                                          
                                          
                                          20,751,215
                                          
                                          
                                          
                                          19,708,428WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –
      DILUTED
                                          
                                          
                                          22,461,517
                                          
                                          
                                          
                                          22,210,816
                                          
                                          
                                          
                                          22,287,638
                                          
                                          
                                          
                                          22,153,259




See notes
to condensed consolidated financial statements.


-4-


PHARMA-BIO
SERV, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Three months ended July 31,
                                                                
                                                                
                                                                Nine months ended July 31,2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                                                
                                                                $
                                                                53,289
                                                                
                                                                
                                                                $
                                                                514,878
                                                                
                                                                
                                                                $
                                                                340,686
                                                                
                                                                
                                                                $
                                                                1,142,785Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Gain
      on disposition of property and equipment
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (6,081
                                                                )
                                                                
                                                                
                                                                -Stock-based
      compensation
                                                                
                                                                
                                                                11,290
                                                                
                                                                
                                                                
                                                                41,954
                                                                
                                                                
                                                                
                                                                47,256
                                                                
                                                                
                                                                
                                                                116,972Depreciation
      and amortization
                                                                
                                                                
                                                                71,370
                                                                
                                                                
                                                                
                                                                54,046
                                                                
                                                                
                                                                
                                                                236,900
                                                                
                                                                
                                                                
                                                                157,745Imputed
      interest expense
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                44,600
                                                                
                                                                
                                                                
                                                                43,108
                                                                
                                                                
                                                                
                                                                173,766Decrease
      (increase) in accounts receivable
                                                                
                                                                
                                                                45,065
                                                                
                                                                
                                                                
                                                                (866,618
                                                                )
                                                                
                                                                
                                                                1,078,501
                                                                
                                                                
                                                                
                                                                (540,304
                                                                )(Increase)
      decrease in other assets
                                                                
                                                                
                                                                (99,726
                                                                )
                                                                
                                                                
                                                                (60,453
                                                                )
                                                                
                                                                
                                                                (63,329
                                                                )
                                                                
                                                                
                                                                36,331Increase
      (decrease) in liabilities
                                                                
                                                                
                                                                208,442
                                                                
                                                                
                                                                
                                                                (210,727
                                                                )
                                                                
                                                                
                                                                8,578
                                                                
                                                                
                                                                
                                                                (528,861
                                                                )NET
      CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES
                                                                
                                                                
                                                                289,730
                                                                
                                                                
                                                                
                                                                (482,320
                                                                )
                                                                
                                                                
                                                                1,685,619
                                                                
                                                                
                                                                
                                                                558,434CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                                                                
                                                                
                                                                (115,745
                                                                )
                                                                
                                                                
                                                                (41,128
                                                                )
                                                                
                                                                
                                                                (211,556
                                                                )
                                                                
                                                                
                                                                (742,598
                                                                )Payments
      for business assets acquisition
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (150,394
                                                                )
                                                                
                                                                
                                                                -Proceeds
      from sale of property and equipment
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                12,400
                                                                
                                                                
                                                                
                                                                -NET
      CASH USED IN INVESTING ACTIVITIES
                                                                
                                                                
                                                                (115,745
                                                                )
                                                                
                                                                
                                                                (41,128
                                                                )
                                                                
                                                                
                                                                (349,550
                                                                )
                                                                
                                                                
                                                                (742,598
                                                                )CASH
      FLOW FROM FINANCING ACTIVITIES:Payments
      on obligations under capital lease
                                                                
                                                                
                                                                (5,691
                                                                )
                                                                
                                                                
                                                                (12,004
                                                                )
                                                                
                                                                
                                                                (25,978
                                                                )
                                                                
                                                                
                                                                (33,986
                                                                )Proceeds
      from issuance of common stock
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                382,861
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                382,861Payments
      to affiliate
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (2,250,000
                                                                )
                                                                
                                                                
                                                                (2,750,000
                                                                )NET
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
                                                                
                                                                
                                                                (5,691
                                                                )
                                                                
                                                                
                                                                370,857
                                                                
                                                                
                                                                
                                                                (2,275,978
                                                                )
                                                                
                                                                
                                                                (2,401,125
                                                                )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                                                
                                                                
                                                                2,128
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2,331
                                                                
                                                                
                                                                
                                                                -NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                
                                                                
                                                                170,422
                                                                
                                                                
                                                                
                                                                (152,591
                                                                )
                                                                
                                                                
                                                                (937,578
                                                                )
                                                                
                                                                
                                                                (2,585,289
                                                                )CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                                                                
                                                                
                                                                1,979,990
                                                                
                                                                
                                                                
                                                                2,359,668
                                                                
                                                                
                                                                
                                                                3,087,990
                                                                
                                                                
                                                                
                                                                4,792,366CASH
      AND CASH EQUIVALENTS – END OF PERIOD
                                                                
                                                                $
                                                                2,150,412
                                                                
                                                                
                                                                $
                                                                2,207,077
                                                                
                                                                
                                                                $
                                                                2,150,412
                                                                
                                                                
                                                                $
                                                                2,207,077SUPPLEMENTAL DISCLOURES OF CASH FLOW
      INFORMATION:Cash
      paid during the period for:Income
      taxes
                                                                
                                                                $
                                                                99,897
                                                                
                                                                
                                                                $
                                                                616,981
                                                                
                                                                
                                                                $
                                                                289,904
                                                                
                                                                
                                                                $
                                                                1,005,323Interest
                                                                
                                                                $
                                                                4,485
                                                                
                                                                
                                                                $
                                                                2,070
                                                                
                                                                
                                                                $
                                                                7,703
                                                                
                                                                
                                                                $
                                                                351,356SUPPLEMENTARY SCHEDULES OF NON-CASH INVESTING AND
      FINANCING ACTIVITIES:Accounts
      payable incurred in projects in process
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                84,306Income
      tax withheld by clients to be used as a credit in the Company’s income tax
      return
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                18,924
                                                                
                                                                
                                                                $
                                                                -Obligations
      under capital lease incurred for the acquisition of a
    vehicle
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                58,970
                                                                
                                                                
                                                                $
                                                                33,695Property
      and equipment with accumulated depreciation of $98,334 disposed during the
      nine month period ended in July 31, 2009
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                138,180
                                                                
                                                                
                                                                $
                                                                -





See notes
to condensed consolidated financial statements.


-5-


PHARMA-BIO
SERV, INC.


Notes
To Condensed Consolidated Financial Statements


July
31, 2009


(Unaudited)





NOTE
A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





ORGANIZATION





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





Pharma-US
is a wholly owned subsidiary, which was organized in Delaware in July 2008. As
of July 31, 2009, this subsidiary was in development stage and has not incurred
significant revenues or expenses.





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





The
condensed consolidated balance sheet of the Company as of October 31, 2008 is
derived from audited consolidated financial statements but does not include all
disclosures required by generally accepted accounting principles. The unaudited
interim condensed consolidated financial statements, include all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the financial position and
results of operations and cash flows for the interim periods. The results of
operations for the nine months ended July 31, 2009 are not necessarily
indicative of expected results for the full 2009 fiscal year.




The
accompanying financial data as of July 31, 2009, and for the three-month and
nine-month periods ended July 31, 2009 and 2008 has been prepared by us, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally
contained in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes contained in our audited Consolidated Financial
Statements and the notes thereto for the fiscal year ended October 31,
2008.





Consolidation





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





Use
of Estimates





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





Fair
Value of Financial Instruments





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


-6-





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
(representing approximately 10% of total revenues), which revenue is recognized
similarly, except that certain milestones also have to be reached before revenue
is recognized. 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
Equivalents




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





Accounts
Receivable




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





Income
Taxes




The
Company follows the provisions of Statement of Financial Accounting Standards
Board No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach method of accounting for income taxes. This method measures
deferred income taxes by applying enacted statutory rates in effect at the
balance sheet date to the differences between the tax basis of assets and
liabilities and their reported amounts on the financial statements. The
resulting deferred tax assets or liabilities are adjusted to reflect changes in
tax laws as they occur. A valuation allowance is provided when it is more likely
than not that a deferred tax asset will not be realized.





Property
and equipment




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





Depreciation
and amortization of owned assets are provided for, when placed in service, in an
amount sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, using a straight-line basis. Assets under capital
leases and leasehold improvements are amortized, over the shorter of the
estimated useful lives of the assets or initial lease term. Major renewals and
betterments that extend the life of the assets are capitalized, while
expenditures for repairs and maintenance are expensed when incurred. As of July
31, 2009 and October 31, 2008, the accumulated depreciation and amortization
amounted to $595,318 and $480,085, respectively.




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





Intangible
assets





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


-7-





Stock-based
Compensation





SFAS 123R
requires that all stock-based compensation expense be recognized in the
consolidated 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.





Income
Per Share of Common Stock




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




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





Foreign
Operations





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





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





Reclassifications





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





NOTE
B - RECENT ACCOUNTING PRONOUNCEMENTS





1. In
June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles—a replacement of FASB Statement
No. 162 ” (“SFAS 168”), which will be effective for interim and
annual periods ending after September 15, 2009. The FASB Accounting
Standards Codification (“Codification”) will become the source of authoritative
GAAP recognized by the FASB. Rules and interpretive releases of the Securities
and Exchange Commission (“SEC”) under authority of federal securities laws
continue to be sources of authoritative GAAP for SEC registrants. All existing
FASB accounting standards and guidance are superseded as described in SFAS 168.
Subsequently, instead of issuing new accounting standards in the form of
statements, FASB staff positions, and Emerging Issues Task Force (“EITF”)
abstracts, the FASB will issue Accounting Standards Updates that will update the
Codification. Adoption of the Codification will not have a significant impact on
our financial statements.


-8-





2. In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141R, Business
Combinations (“SFAS 141R”). SFAS 141R requires: the assets acquired and
liabilities assumed to be measured at fair value as of the acquisition date;
liabilities related to contingent consideration to be remeasured at fair value
at each subsequent reporting period; and acquisition-related costs to be
expensed as these are incurred. SFAS 141R also requires additional disclosures
of information surrounding a business combination. The provisions of SFAS 141R
are effective for fiscal years beginning on or after December 15, 2008 and
apply to business combinations that are completed on or after the date of
adoption. The Company has not yet adopted this pronouncement, but expects that
the nature and magnitude of the specific effects will depend upon the nature,
terms and size of the acquisitions the Company completes after the effective
date, if any.





3. In
December 2007, the FASB issued Statement No. 160 “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51”. This Statement
applies to all entities that prepare consolidated financial statements, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited.





4. In
February 2007, the 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. The application of this standard had no significant effect on the
Company's consolidated financial statements.





5. In
September 2006, the FASB issued 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. 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 application of this standard had no significant effect on
the Company's consolidated financial statements.





6. 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 - INCOME TAXES





The
Company adopted the provisions of FIN 48 which includes a two-step approach to
recognizing, de-recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS 109. As of July 31, 2009, the Company had no significant
uncertain tax positions that would be reduced as a result of a lapse of the
applicable statute of limitations.





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




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


-9-





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





The
Company has not recognized deferred income taxes on 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 tollgate tax.





Pharma-Bio
and Pharma-IR have unused operating losses which result in a potential deferred
tax asset. However, an allowance has been provided covering the total amount of
such balance since it is uncertain whether the net operating losses can be used
to offset future taxable income before their expiration dates. Realization of
future tax benefits related to a deferred tax asset is dependent on many
factors, including the company’s ability to generate taxable income.
Accordingly, the income tax benefit will be recognized when realization is
determined to be more probable than not. These net operating losses are
available to offset future taxable income which expires for Pharma-Bio in 2026
while for Pharma-IR are available indefinitely.





The
statutory income tax rate differs from the effective rate mainly due to the new
operation in Ireland which does not have previous taxable income where its
current net operating losses could be carried back and derive a tax benefit. As
previously mentioned, it is company policy to recognize tax benefits of net
operating loss carryforwards when realization is determined to be more probable
than not.





The
Company files income tax returns in the United States (federal and various
states jurisdictions), Puerto Rico and Ireland. The 2003 through 2008 tax years
are open and may be subject to potential examination in one or more
jurisdictions. The Company is not currently under income tax
examination.





NOTE
D - DUE TO AFFILIATE





Pursuant
to a plan and agreement of merger dated January 25, 2006, the Company agreed to
pay its then sole stockholder of Pharma-PR three installments of $2,750,000 on
January 25, 2007, 2008 and 2009, including imputed interest of 6.72%. In January
2009, the Company made a payment of $2,250,000 towards the final installment due
on January 25, 2009. The Company expects to pay the remaining balance during
fiscal year 2009. As of July 31, 2009 and October 31, 2008 the outstanding
installment balances were:





July 31,
                          2009
                        
                        
                        October 31,
                          2008Amount
      due within the year ended October 31, 2009
                        
                        $
                        500,000
                        
                        
                        $
                        2,750,000Less
      imputed interest
                        
                        
                        -
                        
                        
                        
                        (43,108
                        )Present
      value of amount due
                        
                        
                        500,000
                        
                        
                        
                        2,706,892Current
      portion
                        
                        
                        (500,000
                        )
                        
                        
                        (2,706,892
                        )Long-term
      portion
                        
                        $
                        -
                        
                        
                        $
                        -





NOTE
E – WARRANTS





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





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


-10-





NOTE
F – EARNINGS PER SHARE





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





Three months
                                        ended July 31,
                                      
                                      
                                      Nine months
                                        ended July 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Net
      income available to common equity holders - used to compute basic and
      diluted earning per share
                                      
                                      $
                                      53,289
                                      
                                      
                                      $
                                      514,878
                                      
                                      
                                      $
                                      340,686
                                      
                                      
                                      $
                                      1,142,785Weighted
      average number of common shares - used to compute basic earning per share
                                      
                                      
                                      20,751,215
                                      
                                      
                                      
                                      19,892,186
                                      
                                      
                                      
                                      20,751,215
                                      
                                      
                                      
                                      19,708,428Effect
      of warrants to purchase common stock
                                      
                                      
                                      1,710,302
                                      
                                      
                                      
                                      2,318,630
                                      
                                      
                                      
                                      1,536,423
                                      
                                      
                                      
                                      2,444,831Effect
      of options to purchase common stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Weighted
      average number of shares - used to compute diluted earnings per
      share
                                      
                                      
                                      22,461,517
                                      
                                      
                                      
                                      22,210,816
                                      
                                      
                                      
                                      22,287,638
                                      
                                      
                                      
                                      22,153,259





Warrants
for the purchase of 8,972,625 shares of common stock for the three-month and
nine-month periods ended in July 31, 2009 and 2008, were not included in
computing diluted earnings per share because their effects were antidilutive. In
addition, options for the purchase of 1,347,913 shares of common stock for the
three-month and nine-month periods ended in July 31, 2009, and 1,506,772 shares
of common stock for the three-month and nine-month periods ended in July 31,
2008, were not included in computing diluted earnings per share because their
effects were also antidilutive.





NOTE
G - CONCENTRATIONS OF RISK




Cash
and cash equivalents





The
Company maintains cash deposits in an FDIC insured bank and in a money market
obligations trust, registered under the US Investment Company Act of 1940, as
amended. The bank deposit balances frequently exceed federally insured limits.
The money market fund is insured until September 18, 2009 under the United
States Treasury Temporary Guarantee Program. No losses have been experienced or
are expected on these accounts.





Accounts
receivable and revenues





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





The
Company's revenues, and the related receivables, are concentrated in the
pharmaceutical industry in Puerto Rico, the United States of America and
Ireland. Although 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 services are typically rendered, on a project-by-project basis,
changes regularly.





The
Company provided a substantial portion of its services to three customers, which
accounted for 10% or more of its revenues in the three-month and nine-month
periods ended July 31, 2009 and 2008. During the three months ended July 31,
2009, revenues from these customers were 22%, 17%, and 9%, or a total of 48%, as
compared to the same period last year for 28%, 31%, and 9%, or a total of 68%,
respectively. For the nine months ended July 31, 2009 revenues from these
customers were 24%, 21%, and 11%, or a total of 56%, as compared to the same
period last year for 27%, 29%, and 8%, or a total of 64%, respectively. At July
31, 2009 amounts due from these customers represented 41% of the Company’s total
accounts receivable balance.


-11-


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
included under Part I Item 1 of this Quarterly Report on Form 10-Q. In addition,
reference should be made to our audited Consolidated Financial Statements and
notes thereto and related Management’s Discussion and Analysis appearing in our
Annual Report on Form 10-K for the year ended October 31, 2008. 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” below and the “Risk
Factors” section in our Annual Report on Form 10-K for the year ended October
31, 2008.
 
 Overview
 
 We are a
compliance services consulting firm with headquarters in Puerto Rico, servicing
the Puerto Rico, United States and Europe markets. The compliance consulting
service sector in those markets consists of local compliance and validation
consulting firms, United States dedicated validation and compliance consulting
firms and large publicly traded and private domestic and foreign engineering and
consulting firms. We provide a broad range of compliance related consulting
services. We market our services to pharmaceutical, chemical, biotechnology and
medical devices, and allied products companies in Puerto Rico, the United States
and Europe. Our staff includes more than 110 experienced engineering and life
science professionals, and includes former quality assurance managers or
directors, and experienced and trained professionals with bachelors, masters and
doctorate degrees in health sciences and engineering.
 
 We
expanded the markets we serve from Puerto Rico to the United States and Ireland.
We have offices in the United States and Ireland markets since fiscal years 2006
and 2008, respectively. The recently established Ireland operation, with an
Ireland based management team reporting to our headquarters, has established a
network of potential key customers and contacts that serve as the base for our
sales target and opportunities. We are actively pursuing to further expand our
US market. Since the end of our first quarter of the current fiscal year we have
strengthened the US operation.  Senior management and a recently hired
Business Development Manager for the US operation have been leading the efforts
for the US market expansion.
 
 We have
plans to further penetrate the markets we currently serve. We market our
services with an active presence in industry trade shows, professional
conventions, industry publications and company provided seminars to the
industry.  Our senior management is also actively involved in the
marketing process, especially in marketing to major accounts. Our senior
management and staff also concentrate on developing new business opportunities
and focus on the larger customer accounts (by number of professionals or dollar
volume) and responding to prospective customers’ requests for
proposals.
 
 While our
core business is FDA and international agencies regulatory compliance related
services, we feel that our clients are in need of other services that we can
provide and allow us to present the company as a global solution provider with a
portfolio of integrated services that will bring value added solutions to our
customers.  Accordingly, in fiscal year 2009 we have expanded our
portfolio of services to include a microbiological testing laboratory, an
information technology consulting practice and a training center that provides
seminars/trainings to the industry.
 
 Our new
microbiological laboratory (“Lab”) located in Puerto Rico, with an investment of
$1.3 million, incorporates the latest technology and test methodologies meeting
pharmacopoeia industry standards and regulations. The Lab offers microbiological
testing and related services to our core industries already serviced as well as
the cosmetic and food industries. We have plans to expand our Lab services to
include chemistry and environmental testing at an approximate investment of
$185,000 which is being incurred during the second half of fiscal year
2009.
 
 During
2008, we identified the industry need, and the opportunity to provide, technical
seminars/trainings that will incorporate the latest regulatory trends and
standards as well as other related areas. A network of leading industry
professional experts in their field, which includes resources of our own, were
identified and teamed to provide these seminars/trainings to the industry
through our newly created “Pharma Serv Academy” division. Our goal is to provide
these services and market our company in the markets we currently serve as well
as others.
  -12-
 
 In
December 2008, we acquired the operations and assets of Integratek Corp.
(“Integratek”), an information technology services and consulting firm based in
Puerto Rico. Integratek provides a variety of information technology services
such as web pages and portals development, digital art design, intranets,
extranets, software development including database integration, Windows and web
applications development, software technical training and learning management
systems, technology project management, and compliance consulting services,
among others.  Integratek is a Microsoft Certified Partner and a
reseller for technology products from leading vendors in the market. Although
this acquired operation is currently small, our goal is to broaden the portfolio
of services that we can provide to our customer base and also target other
potential customers in other industries.
 
 In line
with the strategy to penetrate the United States market, on July 1, 2009 we
obtained the renewal of the certification as a "minority-controlled company" as
defined by the National Minority Supplier Development Council and Growth
Initiative ("NMSDC"). The certification allows us to participate in corporate
diversity programs available from various potential customers in the United
States and Puerto Rico. The certification is subject to renewal on July 1,
2010.
 
 On July
2008, Pharma-Bio and Pharma-PR obtained a Grant of Industrial Tax Exemption
(“the Grant”) from the Puerto Rico Industrial Development Company pursuant to
the terms and conditions set forth in Act No. 135 of December 2, 1997, as
amended. The Grant provides relief on various Puerto Rico taxes, including
income tax, mostly for our new Lab and service activities outside of Puerto
Rico. The Grant is effective as of September 1, 2007 and covers a ten year
period. Activities covered by the Grant are subject to a reduced income tax rate
of 7%.
 
 Although
we believe we have instituted the right strategies to be profitable and seek
growth, we cannot control the fact that the industry and the local and global
economies are undergoing a recession and that has affected our operation and
business growth.
 
 The
global economic recession and the industry worldwide consolidation continue to
affect our fiscal year 2009 revenues and our growth plans.  For the
nine months period ended in July 31, 2009 our total net revenues decreased by
approximately $2.8 million or 24.7%, when compared to the same period last year.
In order to maintain volume in the markets we serve and ensure we are price
competitive, we have adjusted our pricing and gross margin structure
accordingly. In addition, we implemented cost containment measures and have
refocused the overall operations strategy to reduce our overhead costs. Among
others, we have reduced management salaries, including those of our headquarters
team. These factors have lead our net income for the nine months period ended
July 31, 2009 to be approximately $341,000, a decline of $802,000 or a reduction
in profit margin of 6.1 percentage points when compared to the same period last
year.
 
 The
following table sets forth information as to our revenue for the three-month and
nine-month periods ended July 31, 2009 and 2008, by geographic regions (dollars
in thousands).
 
 Three months endedJuly 31,
                              
                              
                              Nine months endedJuly 31,Revenues by Region:
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Puerto
      Rico
                              
                              $
                              1,934
                              
                              
                              
                              73.6
                              %
                              
                              $
                              2,888
                              
                              
                              
                              68.9
                              %
                              
                              $
                              6,388
                              
                              
                              
                              73.8
                              %
                              
                              $
                              8,173
                              
                              
                              
                              71.1
                              %United
      States
                              
                              
                              405
                              
                              
                              
                              15.5
                              %
                              
                              
                              1,218
                              
                              
                              
                              29.0
                              %
                              
                              
                              1,658
                              
                              
                              
                              19.1
                              %
                              
                              
                              3,209
                              
                              
                              
                              27.9
                              %Ireland
                              
                              
                              287
                              
                              
                              
                              10.9
                              %
                              
                              
                              86
                              
                              
                              
                              2.1
                              %
                              
                              
                              614
                              
                              
                              
                              7.1
                              %
                              
                              
                              112
                              
                              
                              
                              1.0
                              %$
                              2,626
                              
                              
                              
                              
                              
                              
                              $
                              4,192
                              
                              
                              
                              
                              
                              
                              $
                              8,660
                              
                              
                              
                              
                              
                              
                              $
                              11,494
 
 We
believe the remainder of our fiscal year 2009 profitability and liquidity is
going to be highly dependent of the effect the global economy, changes in tax
laws and worldwide industry consolidations will have over our operations, and
our ability to seek service opportunities and adapt to the current industry
trends.
  -13-
  Results
of Operations
 
 The
following table sets forth our statements of operations for the three-month and
nine month periods ended July 31, 2009 and 2008, (dollars in thousands) and as a
percentage of revenue:
 
 Three months endedJuly 31,
                    
                    
                    Nine months endedJuly 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenues
                    
                    $
                    2,626
                    
                    
                    
                    100.0
                    %
                    
                    $
                    4,192
                    
                    
                    
                    100.0
                    %
                    
                    $
                    8,660
                    
                    
                    
                    100.0
                    %
                    
                    $
                    11,494
                    
                    
                    
                    100.0
                    %Cost
      of services
                    
                    
                    1,753
                    
                    
                    
                    66.8
                    %
                    
                    
                    2,548
                    
                    
                    
                    60.8
                    %
                    
                    
                    5,732
                    
                    
                    
                    66.2
                    %
                    
                    
                    7,130
                    
                    
                    
                    62.0
                    %Gross
      profit
                    
                    
                    873
                    
                    
                    
                    33.2
                    %
                    
                    
                    1,644
                    
                    
                    
                    39.2
                    %
                    
                    
                    2,928
                    
                    
                    
                    33.8
                    %
                    
                    
                    4,364
                    
                    
                    
                    38.0
                    %Selling,
      general and administrative costs
                    
                    
                    710
                    
                    
                    
                    27.0
                    %
                    
                    
                    802
                    
                    
                    
                    19.1
                    %
                    
                    
                    2,209
                    
                    
                    
                    25.5
                    %
                    
                    
                    2,304
                    
                    
                    
                    20.0
                    %Interest
      expense
                    
                    
                    5
                    
                    
                    
                    0.2
                    %
                    
                    
                    46
                    
                    
                    
                    1.1
                    %
                    
                    
                    51
                    
                    
                    
                    0.6
                    %
                    
                    
                    180
                    
                    
                    
                    1.6
                    %Interest
      income
                    
                    
                    5
                    
                    
                    
                    -0.2
                    %
                    
                    
                    11
                    
                    
                    
                    -0.3
                    %
                    
                    
                    21
                    
                    
                    
                    -0.2
                    %
                    
                    
                    69
                    
                    
                    
                    -0.6
                    %Loss
      (gain) on disposition of property
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    (6
                    )
                    
                    
                    -0.1
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Income
      before income taxes
                    
                    
                    163
                    
                    
                    
                    6.2
                    %
                    
                    
                    807
                    
                    
                    
                    19.3
                    %
                    
                    
                    695
                    
                    
                    
                    8.0
                    %
                    
                    
                    1,949
                    
                    
                    
                    17.0
                    %Income
      tax expense
                    
                    
                    110
                    
                    
                    
                    4.2
                    %
                    
                    
                    292
                    
                    
                    
                    7.0
                    %
                    
                    
                    354
                    
                    
                    
                    4.1
                    %
                    
                    
                    806
                    
                    
                    
                    7.0
                    %Net
      income
                    
                    
                    53
                    
                    
                    
                    2.0
                    %
                    
                    
                    515
                    
                    
                    
                    12.3
                    %
                    
                    
                    341
                    
                    
                    
                    3.9
                    %
                    
                    
                    1,143
                    
                    
                    
                    10.0
                    %
 
 Revenues. Revenues
for the three months ended July 31, 2009 were $2.6 million, a decrease of
approximately $1.6 million or 37.3%, when compared to the same period last year.
The reduction is mainly attributable to the decrease of approximately $1.3
million and $0.8 million in the Puerto Rico and the United States market
consulting service revenue, respectively, partially offset by $0.2 million
generated by the Ireland consulting operation, $0.2 million derived from our new
Lab operation and $0.1 million from the Integratek division.
 
 For the
nine-month period ended July 31, 2009 revenues were $8.7 million, a net decrease
of approximately $2.8 million or 24.7% from the comparable nine-month period
last year. The reduction is mainly attributable to the decrease in Puerto Rico
and the United States market consulting service revenues of $2.6 million and
$1.5 million, respectively, partially offset by $0.5 million generated by the
Ireland consulting operation, $0.6 million in new business from our Lab and $0.2
million from our Integratek division.
 
 Decreases
in the service revenue are mostly due to the global economic recession and the
closing of, or decrease in, operations of some pharmaceutical plants, triggered
by operations consolidation.
 
 Cost of Services; gross
margin. The overall gross margin for the three-month period ended in July
31, 2009 reflected a gross margin reduction of 6.0 percentage points when
compared to the same period last year. The decrease is attributable to the
effect over gross margin of the consulting and Lab operations by 3.4 and 2.6
percentage points, respectively.
 
 The gross
margin for the nine-month period ended in July 31, 2009 reflected a net
reduction of 4.2 percentage points when compared to the same period last year.
The decrease is attributable to the effect over gross margin of 3.0 and 1.2
percentage points from the consulting and Lab operations,
respectively.
 
 The
decline in gross margin ratios for the three and nine month periods ended in
July 31, 2009, as compared to last year, is mainly attributable to our strategy
to maintain volume in the consulting market we serve by keeping our prices
competitive, and the Lab’s low gross margin yield as a function of billings
versus fixed costs of services.
 
 Selling, General and
Administrative Expenses. Selling, general and administrative expenses for
the three and nine month periods ended in July 31, 2009 were approximately
$710,000 and $2.2 million, respectively, a net reduction in expenses of
approximately $92,000 and $95,000, respectively, as compared to the same periods
last year.
 
 The
reduction in selling general and administrative expenses for the three and nine
month periods ended in July 31, 2009, as compared to last year, is mainly
attributable to the net savings attained in salary adjustments to our management
team and other cost containment measures implemented, partially offset by
expenses incurred by our new Integratek, Lab, Pharma Serv Academy and Ireland
operations.
 
 Interest Expense. We
have been recognizing imputed interest expense incurred in connection with the
long-term obligations originated pursuant to a plan and agreement of merger
dated January 25, 2006 for the acquisition of Pharma-PR. This expense decreases
as annual payments are made through fiscal year 2009. Interest expense savings
for the three and nine months periods ended in July 31, 2009 as compared to the
same periods last year were approximately $41,000 and $129,000,
respectively.
  -14-
 
 Income Taxes Expense.
The decrease in income taxes expense is attributable to the decrease of income
before income tax. The statutory income tax rate differs to the effective rate
mainly due to the new operation in Ireland which does not have previous taxable
income where its current net operating loss could be carried back and derive a
tax benefit. Income tax benefits will be recognized when realization is
determined to be more probable than not. Realization of future tax benefits is
dependent on many factors, including the tax activity ability to generate
taxable income.
  Net Income. Our net
income for the three and nine month periods ended July 31, 2009 were
approximately $53,000 and $341,000, respectively, a decline of $462,000 and
$802,000 or a reduction in profit margin of 10.3 and 6.1 percentage points,
respectively, when compared to the same periods last year.
 
 For the
three months period ended in July 31, 2009, earnings per common share basic and
diluted were $0.003 and $0.002, a decline of $0.023 and $0.021, respectively,
when compared to the same period last year. For the nine months period ended in
July 31, 2009, earnings per common share basic and diluted were $0.016 and
$0.015, a decline of $0.042 and $0.037, respectively, when compared to the same
period last year.
 
 Our net
income was affected by the decrease in overall gross margin, new operations
selling general and administrative expenses partially offset by cost containment
measures, favorable variances in interest expense, and the reduction of income
tax expense due to the decline in taxable income.
 
 Liquidity
and Capital Resources
 
 Liquidity
is a measure of our ability to meet potential cash requirements, including
planned capital expenditures. For the nine months ended July 31, 2009, we have
generated cash flow from operations of approximately $1.7 million and sustain
working capital of approximately $2.8 million, notwithstanding within that
period we have made a partial payment of $2.25 million related to the final
$2.75 million installment due in January 2009 pursuant to the 2006 Pharma-PR
acquisition agreement. During the remainder of fiscal year 2009 we expect to pay
from working capital the remaining balance of $500,000 related to the Pharma-PR
acquisition agreement and $50,000 pertaining to the acquisition of
Integratek.
 
 Our
primary cash needs consist of the payment of compensation to our professional
staff, overhead expenses, statutory taxes, and payments pursuant to the
agreement terms for the acquisition of Pharma-PR and Integratek.
 
 Management
believes that with the current level of operations and cash flows from
operations, the collectability of high quality customer receivables will be
sufficient to fund anticipated expenses and satisfy other possible long-term
contractual commitments, including our obligations to pay the balance of the
final installment due in connection with the acquisition of Pharma-PR and the
acquisition of Integratek, for the next twelve months.
 
 To the
extent that we pursue possible opportunities to expand our operations, either by
acquisition or by the establishment of operations in a new locale, we will incur
additional overhead, and there may be a delay between the period we commence
operations and our generation of net cash flow from operations.
 
 While
uncertainties relating to the current local and global economic condition,
competition, the industries and geographical regions served by us and other
regulatory matters that exist within the consulting services industry,
management is implementing marketing and cost containment strategies to seek and
improve our sales, current liquidity and profitability trend.
 
 Off-Balance
Sheet Arrangements
  We were
not involved in any significant off-balance sheet arrangement during the nine
months ended July 31, 2009.
 
 Critical
Accounting Policies and Estimates
 
 There
were no material changes during the nine months ended July 31, 2009 to the
critical accounting policies reported in our Annual Report on Form 10-K for the
fiscal year ended October 31, 2008.
 
 New
Accounting Pronouncements
 
 There
were no new accounting pronouncements, issued since our filing of the Annual
Report on Form 10-K for the fiscal year ended October 31, 2008, which could have
a significant effect on our condensed consolidated financial
statements.
  -15-
 
 Forward-Looking
Statements
  Our
business, financial condition, results of operations, cash flows and prospects,
and the prevailing market price and performance of our common stock, may be
adversely affected by a number of factors, including the matters discussed
below. Certain statements and information set forth in this Quarterly Report on
Form 10-Q, as well as other written or oral statements made from time to time by
us or by our authorized executive officers on our behalf, constitute
“forward-looking statements” within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These statements include all
statements other than those made solely with respect to historical fact and
identified by words such as “believes”, “anticipates”, “expects”, “intends” and
similar expressions, but such words are not the exclusive means of identifying
such statements.  We intend for our forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and we set forth this
statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of
the date of this Quarterly Report on Form 10-Q or when made and we undertake no
duty or obligation to update or revise our forward-looking statements, whether
as a result of new information, future events or otherwise. Although we believe
that the expectations, plans, intentions and projections reflected in our
forward-looking statements are reasonable, such statements are subject to known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. The risks, uncertainties and other factors that our stockholders and
prospective investors should consider include, but are not limited to, the
following:
  ·
              Because
      our business is concentrated in the pharmaceutical industry in Puerto
      Rico, any changes in that industry could impair our ability to generate
      revenue and realize a profit.·
              Because
      our business is dependent upon a small number of clients, the loss of a
      major client could impair our ability to operate
    profitably.·
              Since
      our business is dependent upon the development and enhancement of patented
      pharmaceutical products or processes by our clients, the failure of our
      clients to obtain and maintain patents could impair our ability to operate
      profitably.·
              We
      may be unable to pass on increased labor costs to our
    clients.·
              Our
      cash requirements include payments due from our reverse merger
      transaction.·
              Consolidation
      in the pharmaceutical industry may have a harmful effect on our
      business.·
              Because
      the pharmaceutical industry is subject to government regulations, changes
      in government regulations relating to this industry may affect the need
      for our services.·
              Changes
      in tax benefits may affect the willingness of companies to continue or
      expand their operations where we do business.·
              Puerto
      Rico’s economy, including its governmental financial crisis, may affect
      the willingness of businesses to commence or expand operations in Puerto
      Rico.·
              Other
      factors, including economic factors, may affect the decision of businesses
      to continue or expand their operations in Puerto Rico.·
              If
      we are unable to protect our clients’ intellectual property, our ability
      to generate business will be impaired.·
              We
      may be subject to liability if our services or solutions for our clients
      infringe upon the intellectual property rights of
  others.·
              We
      may be held liable for the actions of our employees or contractors when on
      assignment.·
              To
      the extent that we perform services pursuant to fixed-price or
      incentive-based contracts, our cost of services may exceed our revenue on
      the contract.·
              Because
      most of our contracts may be terminated on little or no advance notice,
      our failure to generate new business could impair our ability to operate
      profitably.·
              Because
      we are dependent upon our management, our ability to develop our business
      may be impaired if we are not able to engage skilled
      personnel.·
              We
      may not be able to continue to grow unless we consummate acquisitions or
      enter markets outside of Puerto Rico.·
              If
      we identify a proposed acquisition, we may require substantial cash to
      fund the cost of the acquisition.·
              If
      we make any acquisitions, they may disrupt or have a negative impact on
      our business.·
              Because
      of our cash requirements, we may be unable to pay
    dividends.·
              Because
      there is a limited market in our common stock, stockholders may have
      difficulty in selling our common stock and our common stock may be subject
      to significant price swings.·
              Our
      quarterly revenues, operating results and profitability will vary from
      quarter to quarter, which may result in increased volatility of our stock
      price.·
              The
      issuance of securities, whether in connection with an acquisition or
      otherwise, may result in significant dilution to our
      stockholders.
  -16-
 
 ITEM
4. CONTROLS AND PROCEDURES.
 
 Evaluation
of Disclosure Controls and Procedures
 
 We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this Quarterly Report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this Quarterly Report.
  Changes
in Internal Control Over Financial Reporting
  Based on
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
there has been no change in our internal control over financial reporting during
our last fiscal quarter identified in connection with that evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
  -17-
 
 PART
II– OTHER INFORMATION
 
 ITEM
1.  LEGAL PROCEEDINGS.
 
 From time
to time, we may be a party to legal proceedings incidental to our
business.  We do not believe that there are any proceedings threatened
or pending against us, which, if determined adversely to us, would have a
material effect on our financial position or results of operations and cash
flows.
  ITEM
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.
  -18-
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  PHARMA-BIO SERV,
      INC./s/ Elizabeth PlazaElizabeth
      PlazaChief
      Executive Officer(Principal
      Executive Officer)/s/ Pedro J. LasantaPedro
      J. LasantaChief
      Financial Officer(Principal
      Financial Officer and Principal Accounting
                Officer)Dated:
      September 14, 2009
  -19-