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 April 30, 2009




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




For the
transition period from _____________ to ______________




Commission
File No. 000-50956




PHARMA-BIO
SERV, INC.


(Exact
Name of Registrant as Specified in Its Charter)




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





Pharma-Bio
      Serv Building,
              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 ý
No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes  ̈ 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 companyý





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





The
number of shares of the registrant’s common stock outstanding as of June 12,
2009 was 20,751,215.














PHARMA-BIO
SERV, INC.


FORM
10-Q


FOR
THE QUARTER ENDED APRIL 30, 2009





TABLE
OF CONTENTS


PagePART
      I FINANCIAL INFORMATIONItem
      1 – Financial StatementsCondensed
      Consolidated Balance Sheets as of April 30, 2009 and October 31, 2008
      (unaudited)
                
                
                3Condensed
      Consolidated Statements of Income for the three-month periods and
      six-month periods ended April 30, 2009 and 2008
(unaudited)
                
                
                4Condensed
      Consolidated Statements of Cash Flows for the three-month periods and the
      six-month periods ended April 30, 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)





ASSETS:
                                    
                                    April
      30,
                                      2009
      *
                                    
                                    
                                    October
      31,
                                      2008
      **Current
      assetsCash
      and cash equivalents
                                    
                                    $
                                    1,979,990
                                    
                                    
                                    $
                                    3,087,990Accounts
      receivable
                                    
                                    
                                    2,277,232
                                    
                                    
                                    
                                    3,245,153Other
                                    
                                    
                                    172,001
                                    
                                    
                                    
                                    194,108Total
      current assets
                                    
                                    
                                    4,429,223
                                    
                                    
                                    
                                    6,527,251Property
      and equipment
                                    
                                    
                                    1,504,348
                                    
                                    
                                    
                                    1,521,575Other
      assets
                                    
                                    
                                    125,054
                                    
                                    
                                    
                                    63,127Total
      assets
                                    
                                    $
                                    6,058,625
                                    
                                    
                                    $
                                    8,111,953LIABILITIES AND STOCKHOLDERS’
      EQUITY:Current
      liabilitiesCurrent
      portion-obligations under capital leases
                                    
                                    $
                                    41,169
                                    
                                    
                                    $
                                    45,318Accounts
      payable and accrued expenses
                                    
                                    
                                    915,471
                                    
                                    
                                    
                                    1,189,705Due
      to affiliate
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    2,706,892Income
      taxes payable
                                    
                                    
                                    146,996
                                    
                                    
                                    
                                    48,324Total
      current liabilities
                                    
                                    
                                    1,603,636
                                    
                                    
                                    
                                    3,990,239Obligations
      under capital leases, less current portion
                                    
                                    
                                    79,239
                                    
                                    
                                    
                                    69,934Total
      liabilities
                                    
                                    
                                    1,682,875
                                    
                                    
                                    
                                    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
                                    
                                    
                                    576,303
                                    
                                    
                                    
                                    540,337Retained
      earnings
                                    
                                    
                                    3,821,457
                                    
                                    
                                    
                                    3,534,060Accumulated
      other comprehensive loss
                                    
                                    
                                    (24,085
                                    )
                                    
                                    
                                    (24,692
                                    )Total
      stockholders' equity
                                    
                                    
                                    4,375,750
                                    
                                    
                                    
                                    4,051,780Total
      liabilities and stockholders' equity
                                    
                                    $
                                    6,058,625
                                    
                                    
                                    $
                                    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 April 30,
                                  
                                  
                                  Six months ended April 30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008REVENUES
                                  
                                  $
                                  3,139,897
                                  
                                  
                                  $
                                  3,697,793
                                  
                                  
                                  $
                                  6,033,413
                                  
                                  
                                  $
                                  7,302,096COST
      OF SERVICES
                                  
                                  
                                  1,944,190
                                  
                                  
                                  
                                  2,339,994
                                  
                                  
                                  
                                  3,978,972
                                  
                                  
                                  
                                  4,581,876GROSS
      PROFIT
                                  
                                  
                                  1,195,707
                                  
                                  
                                  
                                  1,357,799
                                  
                                  
                                  
                                  2,054,441
                                  
                                  
                                  
                                  2,720,220SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                                  
                                  
                                  789,732
                                  
                                  
                                  
                                  686,014
                                  
                                  
                                  
                                  1,498,648
                                  
                                  
                                  
                                  1,501,924INCOME
      FROM OPERATIONS
                                  
                                  
                                  405,975
                                  
                                  
                                  
                                  671,785
                                  
                                  
                                  
                                  555,793
                                  
                                  
                                  
                                  1,218,296OTHER
      INCOME (EXPENSES):Interest
      expense
                                  
                                  
                                  (1,711
                                  )
                                  
                                  
                                  (45,208
                                  )
                                  
                                  
                                  (46,327
                                  )
                                  
                                  
                                  (133,318
                                  )Interest
      income
                                  
                                  
                                  4,888
                                  
                                  
                                  
                                  14,457
                                  
                                  
                                  
                                  15,983
                                  
                                  
                                  
                                  57,872(Loss)
      gain on disposition of property and equipment
                                  
                                  
                                  (1,869
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,081
                                  
                                  
                                  
                                  -1,308
                                  
                                  
                                  
                                  (30,751
                                  )
                                  
                                  
                                  (24,263
                                  )
                                  
                                  
                                  (75,446
                                  )INCOME
      BEFORE TAXES
                                  
                                  
                                  407,823
                                  
                                  
                                  
                                  641,034
                                  
                                  
                                  
                                  531,530
                                  
                                  
                                  
                                  1,142,850INCOME
      TAXES
                                  
                                  
                                  139,332
                                  
                                  
                                  
                                  295,850
                                  
                                  
                                  
                                  244,133
                                  
                                  
                                  
                                  514,943NET
      INCOME
                                  
                                  $
                                  267,951
                                  
                                  
                                  $
                                  345,184
                                  
                                  
                                  $
                                  287,397
                                  
                                  
                                  $
                                  627,907BASIC
      EARNINGS PER COMMON SHARE
                                  
                                  $
                                  0.013
                                  
                                  
                                  $
                                  0.018
                                  
                                  
                                  $
                                  0.014
                                  
                                  
                                  $
                                  0.032DILUTED
      EARNINGS PER COMMON SHARE
                                  
                                  $
                                  0.012
                                  
                                  
                                  $
                                  0.015
                                  
                                  
                                  $
                                  0.013
                                  
                                  
                                  $
                                  0.028WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC
                                  
                                  
                                  20,751,215
                                  
                                  
                                  
                                  19,615,539
                                  
                                  
                                  
                                  20,751,215
                                  
                                  
                                  
                                  19,615,539WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –
      DILUTED
                                  
                                  
                                  22,209,699
                                  
                                  
                                  
                                  22,075,707
                                  
                                  
                                  
                                  22,262,305
                                  
                                  
                                  
                                  22,114,006









See notes
to condensed consolidated financial statements.


-4-













PHARMA-BIO
SERV, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Three months ended April 30,
                                            
                                            
                                            Six months ended April 30,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2009
                                            
                                            
                                            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                            
                                            $
                                            267,951
                                            
                                            
                                            $
                                            345,184
                                            
                                            
                                            $
                                            287,397
                                            
                                            
                                            $
                                            627,907Adjustments
      to reconcile net income to net cash provided by operating
      activities:Loss
      (gain) on disposition of property and equipment
                                            
                                            
                                            1,868
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (6,081
                                            )
                                            
                                            
                                            -Stock-based
      compensation
                                            
                                            
                                            18,190
                                            
                                            
                                            
                                            41,705
                                            
                                            
                                            
                                            35,966
                                            
                                            
                                            
                                            75,018Depreciation
      and amortization
                                            
                                            
                                            72,865
                                            
                                            
                                            
                                            53,272
                                            
                                            
                                            
                                            165,530
                                            
                                            
                                            
                                            103,699Imputed
      interest expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            42,911
                                            
                                            
                                            
                                            43,108
                                            
                                            
                                            
                                            129,166(Increase)
      decrease in accounts receivable
                                            
                                            
                                            (485
                                            )
                                            
                                            
                                            (73,914
                                            )
                                            
                                            
                                            1,033,436
                                            
                                            
                                            
                                            326,314Decrease
      in other assets
                                            
                                            
                                            76,730
                                            
                                            
                                            
                                            42,575
                                            
                                            
                                            
                                            36,397
                                            
                                            
                                            
                                            96,783Increase
      (decrease) in liabilities
                                            
                                            
                                            23,622
                                            
                                            
                                            
                                            (502,674
                                            )
                                            
                                            
                                            (199,864
                                            )
                                            
                                            
                                            (395,346
                                            )NET
      CASH PROVIDED (USED) BY OPERATING ACTIVITIES
                                            
                                            
                                            460,741
                                            
                                            
                                            
                                            (50,941
                                            )
                                            
                                            
                                            1,395,889
                                            
                                            
                                            
                                            963,541CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                                            
                                            
                                            (37,693
                                            )
                                            
                                            
                                            (180,215
                                            )
                                            
                                            
                                            (95,811
                                            )
                                            
                                            
                                            (624,257
                                            )Payments
      for business assets acquisition
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (150,394
                                            )
                                            
                                            
                                            -Proceeds
      from sale of property and equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            12,400
                                            
                                            
                                            
                                            -NET
      CASH USED IN INVESTING ACTIVITIES
                                            
                                            
                                            (37,693
                                            )
                                            
                                            
                                            (180,215
                                            )
                                            
                                            
                                            (233,805
                                            )
                                            
                                            
                                            (624,257
                                            )CASH
      FLOW FROM FINANCING ACTIVITIES:Payments
      on obligations under capital lease
                                            
                                            
                                            (9,253
                                            )
                                            
                                            
                                            (11,777
                                            )
                                            
                                            
                                            (20,287
                                            )
                                            
                                            
                                            (21,982
                                            )Payments
      to affiliate
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,750,000
                                            )
                                            
                                            
                                            (2,250,000
                                            )
                                            
                                            
                                            (2,750,000
                                            )NET
      CASH USED IN FINANCING ACTIVITIES
                                            
                                            
                                            (9,253
                                            )
                                            
                                            
                                            (2,761,777
                                            )
                                            
                                            
                                            (2,270,287
                                            )
                                            
                                            
                                            (2,771,982
                                            )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                            
                                            
                                            1,298
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            203
                                            
                                            
                                            
                                            -NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                            
                                            
                                            415,093
                                            
                                            
                                            
                                            (2,992,933
                                            )
                                            
                                            
                                            (1,108,000
                                            )
                                            
                                            
                                            (2,432,698
                                            )CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                                            
                                            
                                            1,564,897
                                            
                                            
                                            
                                            5,352,601
                                            
                                            
                                            
                                            3,087,990
                                            
                                            
                                            
                                            4,792,366CASH
      AND CASH EQUIVALENTS – END OF PERIOD
                                            
                                            $
                                            1,979,990
                                            
                                            
                                            $
                                            2,359,668
                                            
                                            
                                            $
                                            1,979,990
                                            
                                            
                                            $
                                            2,359,668SUPPLEMENTAL
      DISCLOURES OF
                                              CASH FLOW
      INFORMATION:Cash
      paid during the period for:Income
      taxes
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            372,067
                                            
                                            
                                            $
                                            190,007
                                            
                                            
                                            $
                                            372,067Interest
                                            
                                            $
                                            1,711
                                            
                                            
                                            $
                                            347,431
                                            
                                            
                                            $
                                            3,218
                                            
                                            
                                            $
                                            349,285SUPPLEMENTARY
      SCHEDULES OF NON-CASH
                                              INVESTING
      AND FINANCING ACTIVITIES:Accounts
      payable incurred in projects in process
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            72,212
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            161,518Income
      tax withheld by clients to be used as a credit in the Company’s income tax
      return
                                            
                                            $
                                            14,911
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            18,924
                                            
                                            
                                            $
                                            -Obligations
      under capital lease incurred for the acquisition of a
    vehicle
                                            
                                            $
                                            58,970
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            58,970
                                            
                                            
                                            $
                                            33,695Property
      and equipment with accumulated depreciation of $70,790 and $98,334
      disposed during the three and six month periods ended in April 30, 2009,
      respectively
                                            
                                            $
                                            106,185
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            138,180
                                            
                                            
                                            $
                                            -





See notes
to condensed consolidated financial statements.





-5-











PHARMA-BIO
SERV, INC.


Notes
To Condensed Consolidated Financial Statements


April
30, 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 April 30, 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 six months ended April 30, 2009 are not necessarily
indicative of expected results for the full 2009 fiscal year.




The
accompanying financial data as of April 30, 2009, and for the three-month and
six-month periods ended April 30, 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 April
30, 2009 and October 31, 2008, the accumulated depreciation and amortization
amounted to $528,948 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 April 30, 2008 condensed consolidated
financial statements to conform them to the April 30, 2009 condensed
consolidated financial statements presentation. Such reclassifications do not
affect net income as previously reported.








NOTE
B - RECENT ACCOUNTING PRONOUNCEMENTS





1. 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.


-8-














2. 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.





3. 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.





4. 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.





5. 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





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 to the effective rate mainly due to the new
operation in Ireland which doesn’t 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 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 April 30, 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.





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 an advance payment of $2,250,000 over the final
installment due on January 25, 2009. The Company expects to pay the remaining
balance during fiscal year 2009. As of April 30, 2009 and October 31, 2008 the
outstanding installment balances were:





April
      30,
                      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 April
30, 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.





-10-











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








NOTE
F – EARNINGS PER SHARE





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





Three
      months
                            ended April
      30,
                          
                          
                          Six
      months
                            ended
      April 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Net
      income available to common equity holders - used to compute basic and
      diluted earning per share
                          
                          $
                          267,951
                          
                          
                          $
                          345,184
                          
                          
                          $
                          287,397
                          
                          
                          $
                          627,907Weighted
      average number of common shares - used to compute basic earning per share
                          
                          
                          20,751,215
                          
                          
                          
                          19,615,539
                          
                          
                          
                          20,751,215
                          
                          
                          
                          19,615,539Effect
      of warrants to purchase common stock
                          
                          
                          1,458,484
                          
                          
                          
                          2,460,168
                          
                          
                          
                          1,511,090
                          
                          
                          
                          2,497,167Effect
      of options to purchase common stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,300Weighted
      average number of shares - used to compute diluted earnings per
      share
                          
                          
                          22,209,699
                          
                          
                          
                          22,075,707
                          
                          
                          
                          22,262,305
                          
                          
                          
                          22,114,006





Warrants
for the purchase of 8,972,625 shares of common stock for the three-month and
six-month periods ended in April 30, 2009, and 9,439,292 shares for the
three-month and six-month periods ended in April 30, 2008, were not included in
computing diluted earnings per share because their effects were antidilutive. In
addition, options for the purchase of 1,436,944 shares of common stock for the
three-month and six-month periods ended in April 30, 2009, and 1,506,772 and
1,266,772 shares for the three-month and six-month periods ended in April 30,
2008, respectively, 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 four customers, which
accounted for 10% or more of its revenues in either of the three-month and
six-month periods ended April 30, 2009 or 2008. During the three months ended
April 30, 2009, revenues from these customers were 22%, 22%, 11% and 9%, or a
total of 64%, as compared to the same period last year for 26%, 30%, 8% and 8%,
or a total of 72%, respectively. For the six months ended April 30, 2009
revenues from these customers were 25%, 23%, 11% and 8%, or a total of 67%, as
compared to the same period last year for 27%, 27%, 7% and 11%, or a total of
72%, respectively. At April 30, 2009 amounts due from these customers
represented 51% 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 105 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. In the other hand, we are actively seeking 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 Director 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 will be marketing
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 will
provide 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 to be 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, we applied and on July
1, 2008 received certification as a "minority-controlled company" as defined by
the National Minority Supplier Development Council and Growth Initiative
("NMSDC"). The certification will allow 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,
2009.





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
six months period ended in April 30, 2009 our total net revenues decreased by
approximately $1.3 million or 17.4%, 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 are
refocusing 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 six months period ended
April 30, 2009 to be approximately $287,000, a decline of $341,000 or a
reduction in profit margin of 3.8 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
six-month periods ended April 30, 2009 and 2008, by geographic regions (dollars
in thousands).





Three months ended
      April 30,
                        
                        Six months ended
      April 30,Revenues by Region:
                        
                        2009
                        
                        2008
                        
                        2009
                        
                        2008Puerto
      Rico
                        
                        $
                        2,312
                        
                        73.6
                        %
                        $
                        2,561
                        69.3
                        %
                        $
                        4,454
                        73.8
                        %
                        $
                        5,285
                        72.4
                        %United
      States
                        
                        
                        651
                        
                        20.7
                        %
                        
                        1,111
                        30.0
                        %
                        
                        1,252
                        20.8
                        %
                        
                        1,991
                        27.2
                        %Ireland
                        
                        
                        177
                        
                        5.7
                        %
                        
                        26
                        0.7
                        %
                        
                        327
                        5.4
                        %
                        
                        26
                        0.4
                        %$
                        3,140
                        
                        
                        
                        $
                        3,698
                        
                        
                        $
                        6,033
                        
                        
                        $
                        7,302





We
believe 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
six month periods ended April 30, 2009 and 2008, (dollars in thousands) and as a
percentage of revenue:





Three months ended
      April 30,
                                
                                Six months ended
      April 30,2009
                                
                                2008
                                
                                2009
                                
                                2008Revenues
                                
                                $
                                3,140
                                
                                100.0
                                %
                                $
                                3,698
                                100.0
                                %
                                $
                                6,033
                                
                                100.0
                                %
                                $
                                7,302
                                100.0
                                %Cost
      of services
                                
                                
                                1,944
                                
                                61.9
                                %
                                
                                2,340
                                63.3
                                %
                                
                                3,979
                                
                                66.0
                                %
                                
                                4,582
                                62.7
                                %Gross
      profit
                                
                                
                                1,196
                                
                                38.1
                                %
                                
                                1,358
                                36.7
                                %
                                
                                2,054
                                
                                34.0
                                %
                                
                                2,720
                                37.3
                                %Selling,
      general and administrative costs
                                
                                
                                790
                                
                                25.2
                                %
                                
                                686
                                18.6
                                %
                                
                                1,499
                                
                                24.8
                                %
                                
                                1,502
                                20.6
                                %Interest
      expense
                                
                                
                                2
                                
                                0.1
                                %
                                
                                45
                                1.2
                                %
                                
                                46
                                
                                0.8
                                %
                                
                                133
                                1.8
                                %Interest
      income
                                
                                
                                5
                                
                                -0.2
                                %
                                
                                14
                                -0.4
                                %
                                
                                16
                                
                                -0.3
                                %
                                
                                58
                                -0.8
                                %Loss
      (Gain) on disposition of property
                                
                                
                                2
                                
                                0.1
                                %
                                
                                -
                                0.0
                                %
                                
                                (6
                                )
                                -0.1
                                %
                                
                                -
                                0.0
                                %Income
      before income taxes
                                
                                
                                407
                                
                                12.9
                                %
                                
                                641
                                17.3
                                %
                                
                                531
                                
                                8.8
                                %
                                
                                1,143
                                15.7
                                %Income
      tax expense
                                
                                
                                139
                                
                                4.4
                                %
                                
                                296
                                8.0
                                %
                                
                                244
                                
                                4.0
                                %
                                
                                515
                                7.1
                                %Net
      income
                                
                                
                                268
                                
                                8.5
                                %
                                
                                345
                                9.3
                                %
                                
                                287
                                
                                4.8
                                %
                                
                                628
                                8.6
                                %





Revenues. Revenues
for the three months ended April 30, 2009 were $3.1 million, a decrease of
approximately $0.6 million or 15.1%, when compared to the same period last year.
The reduction is mainly attributable to the decrease of approximately $0.7
million and $0.5 million in the Puerto Rico and the United States market
consulting service revenue, respectively, partially offset by $0.4 million
derived from our new Lab operation and $0.2 million generated by the Ireland
consulting operation.





For the
six-month period ended April 30, 2009 revenues were $6 million, a net decrease
of approximately $1.3 million or 17.4% from the comparable six-month period last
year. The reduction is mainly attributable to the decrease in Puerto Rico and
the United States market consulting service revenues of $1.4 million and $0.7
million, respectively, partially offset by $0.5 million in new business from our
Lab and $0.3 million generated by the Ireland consulting operation.





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 gross margin increased by 1.4 percentage points in the
three-month period ended in April 30, 2009 when compared to the same periods
last year. The favorable gross margin gain is attributable to our new Lab
operation. The overall gross margin ratio for other operations remained
unchanged.





The gross
margin for the six-month period ended in April 30, 2009 reflected a net
reduction of 3.3 percentage points when compared to the same period last year.
The decline is mainly attributable to reduced margins attained in the first
quarter of fiscal year 2009, as compared to last year, because of our strategy
to maintain volume in the market we serve by keeping our pricing
competitiveness, 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 months ended in April 30, 2009 were approximately $790,000, a net
increase of approximately $104,000 as compared to the same period last year. The
variance is mainly attributable to our new Integratek, Lab, Pharma Serv Academy
and Ireland operations. Expenses incurred leading our strategy to further
penetrate the US market absorbed the savings attained in salary adjustments of
our management team and other cost containment measures
implemented.





Selling,
general and administrative expenses for the six months ended in April 30, 2009
and 2008 were approximately $1.5 million. New operations expenses generated by
Integratek, Lab, Pharma Serv Academy and Ireland divisions were absorbed by the
savings obtained from the cost containment measures mostly derived from our
first quarter of fiscal year 2009. The expense containment measures were
implemented since the second quarter of last fiscal year and continued in the
current fiscal year.





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 six months periods ended in April 30, 2009 as compared to the
same periods last year were approximately $43,000 and $87,000,
respectively.





-14-








Income Taxes Expense.
The decrease on 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 six month periods ended April 30, 2009 were
approximately $268,000 and $287,000, respectively, a decline of $77,000 and
$341,000 or a reduction in profit margin of 0.8 and 3.8 percentage points,
respectively, when compared to the same periods last year.





For the
three months period ended in April 30, 2009, earnings per common share basic and
diluted were $0.013 and $0.012, a decline of $0.005 and $0.003, respectively,
when compared to the same period last year. For the six months period ended in
April 30, 2009, earnings per common share basic and diluted were $0.014 and
$0.013, a decline of $0.018 and $0.015, 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 six months ended April 30, 2009, we have
generated cash flow from operations of approximately $1.4 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. If our profitability and liquidity improves, during
fiscal year 2009 we expect to pay from working capital the remaining balance of
$500,000.





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





Our
primary cash needs consist of the payment of compensation to our professional
staff, overhead expenses, statutory taxes, and payments pursuant to the
agreement terms for the acquisition of Pharma-PR.





Management
believes that with improved levels 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 our
obligations to pay the installment payments due in connection with the
acquisition of Integratek, for the next twelve months.





While
uncertainties relating to the current local and global economic condition,
competition, the industries and geographical regions served by us and other
regulatory matters exist within the consulting services industry, management is
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 six
months ended April 30, 2009.





Critical
Accounting Policies and Estimates





There
were no material changes during the six months ended April 30, 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.





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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.





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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:







10.1
            Second
      Amendment to Employment Agreement, dated March 11, 2009, by and between
      the Company and Elizabeth Plaza (incorporated by reference to Exhibit 10.1
      of the Company’s Current Report on Form 8-K filed on March 17,
      2009).10.2
            Third
      Amendment to Employment Agreement, dated March 11, 2009, by and between
      the Company and Elizabeth Plaza (incorporated by reference to Exhibit 10.2
      of the Company’s Current Report on Form 8-K filed on March 17,
      2009).10.3
            Amendment
      to Employment Agreement, dated March 11, 2009, by and between the Company
      and Pedro J. Lasanta (incorporated by reference to Exhibit 10.3 of the
      Company’s Current Report on Form 8-K filed on March 17,
    2009).10.4
            Amendment
      to Employment Agreement, dated March 11, 2009, by and between the Company
      and Nelida Plaza (incorporated by reference to Exhibit 10.4 of the
      Company’s Current Report on Form 8-K filed on March 17,
    2009).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:
      June 15, 2009







-19-