UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q





(Mark
One)


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




For the
quarterly period ended July 31, 2010




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




For the
transition period from _____________ to ______________




Commission
File No. 000-50956




PHARMA-BIO
SERV, INC.


(Exact
Name of Registrant as Specified in Its Charter)




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





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





787-278-2709


(Registrant’s
Telephone Number, Including Area Code)





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





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





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




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





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





The
number of shares of the registrant’s common stock outstanding as of September
10, 2010 was 20,751,215.







PHARMA-BIO
SERV, INC.


FORM
10-Q


FOR
THE QUARTER ENDED JULY 31, 2010





TABLE
OF CONTENTS


PagePART
      I FINANCIAL INFORMATIONItem
      1 – Financial StatementsCondensed
      Consolidated Balance Sheets as of July 31, 2010 and October 31, 2009
      (unaudited)
                3Condensed
      Consolidated Statements of Income for the three-month and nine-month
      periods ended July 31, 2010 and 2009 (unaudited)
                4Condensed
      Consolidated Statements of Cash Flows for the three-month and nine-month
      periods ended July 31, 2010 and 2009 (unaudited)
                5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                6Item
      2 - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                12Item
      4 – Controls and Procedures
                17PART
      II OTHER INFORMATIONItem
      1 – Legal Proceedings
                18Item
      6 – Exhibits
                18SIGNATURES
                19


-2-





PART
I – FINANCIAL INFORMATION




Item 1.        FINANCIAL
STATEMENTS


PHARMA-BIO
SERV, INC.


Condensed
Consolidated Balance Sheets


(Unaudited)





July 31,
                      2010*
                    
                    
                    October 31,
                      2009**ASSETS:Current
      assetsCash
      and cash equivalents
                    
                    $
                    1,929,126
                    
                    
                    $
                    2,051,874Accounts
      receivable
                    
                    
                    2,711,208
                    
                    
                    
                    2,034,963Other
                    
                    
                    284,950
                    
                    
                    
                    298,830Total
      current assets
                    
                    
                    4,925,284
                    
                    
                    
                    4,385,667Property
      and equipment
                    
                    
                    1,377,819
                    
                    
                    
                    1,567,145Other
      assets
                    
                    
                    41,724
                    
                    
                    
                    69,469Total
      assets
                    
                    $
                    6,344,827
                    
                    
                    $
                    6,022,281LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesCurrent
      portion-obligations under capital leases
                    
                    $
                    17,873
                    
                    
                    $
                    43,737Accounts
      payable and accrued expenses
                    
                    
                    1,193,525
                    
                    
                    
                    1,112,739Income
      taxes payable
                    
                    
                    226,439
                    
                    
                    
                    140,443Total
      current liabilities
                    
                    
                    1,437,837
                    
                    
                    
                    1,296,919Obligations
      under capital leases, less current portion
                    
                    
                    58,529
                    
                    
                    
                    62,385Total
      liabilities
                    
                    
                    1,496,366
                    
                    
                    
                    1,359,304Stockholders'
      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
                    
                    
                    636,056
                    
                    
                    
                    602,508Retained
      earnings
                    
                    
                    4,257,565
                    
                    
                    
                    4,068,817Accumulated
      other comprehensive loss
                    
                    
                    (47,235
                    )
                    
                    
                    (10,423
                    )Total
      stockholders' equity
                    
                    
                    4,848,461
                    
                    
                    
                    4,662,977Total
      liabilities and stockholders' equity
                    
                    $
                    6,344,827
                    
                    
                    $
                    6,022,281





*
            Unaudited.


**
            Condensed
      from audited financial statements.





See notes
to condensed consolidated financial statements.


-3-


PHARMA-BIO
SERV, INC.


Condensed
Consolidated Statements of Income


(Unaudited)





Three months ended July 31,
                
                
                Nine months ended July 31,2010
                
                
                2009
                
                
                2010
                
                
                2009REVENUES
                
                $
                2,926,207
                
                
                $
                2,626,531
                
                
                $
                8,256,550
                
                
                $
                8,659,944COST
      OF SERVICES
                
                
                2,037,708
                
                
                
                1,753,351
                
                
                
                5,860,133
                
                
                
                5,732,323GROSS
      PROFIT
                
                
                888,499
                
                
                
                873,180
                
                
                
                2,396,417
                
                
                
                2,927,621SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                683,740
                
                
                
                710,050
                
                
                
                2,064,029
                
                
                
                2,208,698INCOME
      FROM OPERATIONS
                
                
                204,759
                
                
                
                163,130
                
                
                
                332,388
                
                
                
                718,923OTHER
      INCOME (EXPENSE):Interest
      expense
                
                
                (1,497
                )
                
                
                (4,484
                )
                
                
                (4,194
                )
                
                
                (50,811
                )Interest
      income
                
                
                2,969
                
                
                
                4,988
                
                
                
                11,933
                
                
                
                20,971Gain
      on disposition of property and equipment
                
                
                -
                
                
                
                -
                
                
                
                1,920
                
                
                
                6,0811,472
                
                
                
                504
                
                
                
                9,659
                
                
                
                (23,759
                )INCOME
      BEFORE TAXES
                
                
                206,231
                
                
                
                163,634
                
                
                
                342,047
                
                
                
                695,164INCOME
      TAXES
                
                
                84,822
                
                
                
                110,345
                
                
                
                153,299
                
                
                
                354,478NET
      INCOME
                
                $
                121,409
                
                
                $
                53,289
                
                
                $
                188,748
                
                
                $
                340,686BASIC
      EARNINGS PER COMMON SHARE
                
                $
                0.006
                
                
                $
                0.003
                
                
                $
                0.009
                
                
                $
                0.016DILUTED
      EARNINGS PER COMMON SHARE
                
                $
                0.005
                
                
                $
                0.002
                
                
                $
                0.008
                
                
                $
                0.015WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC
                
                
                20,751,215
                
                
                
                20,751,215
                
                
                
                20,751,215
                
                
                
                20,751,215WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –
      DILUTED
                
                
                22,442,800
                
                
                
                22,461,517
                
                
                
                22,371,847
                
                
                
                22,287,638





See notes
to condensed consolidated financial statements.


-4-


PHARMA-BIO
SERV, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


Three months ended July 31,
                              
                              
                              Nine months ended July 31,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                              
                              $
                              121,409
                              
                              
                              $
                              53,289
                              
                              
                              $
                              188,748
                              
                              
                              $
                              340,686Adjustments
      to reconcile net income to net cash provided by operating
      activities:Gain
      on disposition of property and equipment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,920
                              )
                              
                              
                              (6,081
                              )Stock-based
      compensation
                              
                              
                              4,830
                              
                              
                              
                              11,290
                              
                              
                              
                              33,548
                              
                              
                              
                              47,256Depreciation
      and amortization
                              
                              
                              79,523
                              
                              
                              
                              71,370
                              
                              
                              
                              242,312
                              
                              
                              
                              236,900Imputed
      interest expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              43,108Decrease
      (increase) in accounts receivable
                              
                              
                              (849,220
                              )
                              
                              
                              45,065
                              
                              
                              
                              (701,547
                              )
                              
                              
                              1,078,501Decrease
      (increase) in other assets
                              
                              
                              (65,840
                              )
                              
                              
                              (99,726
                              )
                              
                              
                              26,759
                              
                              
                              
                              (63,329
                              )Increase  in
      liabilities
                              
                              
                              123,108
                              
                              
                              
                              208,442
                              
                              
                              
                              186,656
                              
                              
                              
                              8,578NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
                              
                              
                              (586,190
                              )
                              
                              
                              289,730
                              
                              
                              
                              (25,444
                              )
                              
                              
                              1,685,619CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                              
                              
                              (7,562
                              )
                              
                              
                              (115,745
                              )
                              
                              
                              (27,617
                              )
                              
                              
                              (211,556
                              )Payments
      for business assets acquisition
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (150,394
                              )Proceeds
      from sale of property and equipment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              12,400NET
      CASH USED IN INVESTING ACTIVITIES
                              
                              
                              (7,562
                              )
                              
                              
                              (115,745
                              )
                              
                              
                              (27,617
                              )
                              
                              
                              (349,550
                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on obligations under capital lease
                              
                              
                              (11,751
                              )
                              
                              
                              (5,691
                              )
                              
                              
                              (38,378
                              )
                              
                              
                              (25,978
                              )Payments
      to affiliate
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (2,250,000
                              )NET
      CASH USED IN FINANCING ACTIVITIES
                              
                              
                              (11,751
                              )
                              
                              
                              (5,691
                              )
                              
                              
                              (38,378
                              )
                              
                              
                              (2,275,978
                              )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                              
                              
                              (14,653
                              )
                              
                              
                              2,128
                              
                              
                              
                              (31,309
                              )
                              
                              
                              2,331NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                              
                              
                              (620,156
                              )
                              
                              
                              170,422
                              
                              
                              
                              (122,748
                              )
                              
                              
                              (937,578
                              )CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                              
                              
                              2,549,282
                              
                              
                              
                              1,979,990
                              
                              
                              
                              2,051,874
                              
                              
                              
                              3,087,990CASH
      AND CASH EQUIVALENTS – END OF PERIOD
                              
                              $
                              1,929,126
                              
                              
                              $
                              2,150,412
                              
                              
                              $
                              1,929,126
                              
                              
                              $
                              2,150,412SUPPLEMENTAL
      DISCLOURES OF
                                CASH FLOWS INFORMATION:Cash
      paid during the period for:Income
      taxes
                              
                              $
                              52,200
                              
                              
                              $
                              99,897
                              
                              
                              $
                              67,668
                              
                              
                              $
                              289,904Interest
                              
                              $
                              1,497
                              
                              
                              $
                              4,485
                              
                              
                              $
                              4,194
                              
                              
                              $
                              7,703SUPPLEMENTARY
      SCHEDULES OF NON-CASHINVESTING AND
      FINANCING ACTIVITIES:Income
      tax withheld by clients to be used as a credit in the Company’s income tax
      return
                              
                              $
                              576
                              
                              
                              $
                              -
                              
                              
                              $
                              4,030
                              
                              
                              $
                              18,924Obligations
      under capital lease incurred for the acquisition of a
    vehicle
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              31,918
                              
                              
                              $
                              58,970Property
      and equipment with accumulated depreciation of $12,355 and $98,334
      disposed during the nine month periods ended in July 31, 2010, and 2009,
      respectively.
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              33,695
                              
                              
                              $
                              138,180





See notes
to condensed consolidated financial statements.


-5-


PHARMA-BIO
SERV, INC.


Notes
To Condensed Consolidated Financial Statements


July
31, 2010


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





Pharma-US
is a wholly owned subsidiary. As of July 31, 2010, it 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, 2009 is
derived from audited consolidated financial statements but does not include all
disclosures required by generally accepted accounting principles. The unaudited
interim condensed consolidated financial statements, include all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the financial position and
results of operations and cash flows for the interim periods. The results of
operations for the nine months ended July 31, 2010 are not necessarily
indicative of expected results for the full 2010 fiscal year.




The
accompanying financial data as of July 31, 2010, and for the three-month and
nine-month periods ended July 31, 2010 and 2009, 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,
2009.





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): 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
approximates the carrying amount.


-6-


Revenues
Recognition





Revenues
are primarily derived from: (1) time and materials contracts (representing over
80% of total revenues), which is recognized by applying the proportional
performance model, whereby revenue is recognized as performance occurs, (2)
short-term fixed-fee contracts or "not to exceed" contracts, which revenue is
recognized similarly, except that certain milestones also have to be reached
before revenue is recognized, and (3) laboratory testing  which is
mainly recognized as the testing is completed and certified (normally within
days of sample receipt from customer). If the Company determines that a contract
will result in a loss, the Company recognizes the estimated loss in the period
in which such determination is made.




Cash
Equivalents




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





Accounts
Receivable




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





Income
Taxes




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





Property
and equipment




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




Depreciation
and amortization of owned assets are provided for, when placed in service, in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, using straight-line basis. Assets under capital
leases and leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or initial lease term. Major renewals and
betterments that extend the life of the assets are capitalized, while
expenditures for repairs and maintenance are expensed when incurred. As of July
31, 2010 and October 31, 2009, the accumulated depreciation and amortization
amounted to $875,706 and $660,750, 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





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





Income
Per Share of Common Stock




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




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 or loss.





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 or loss,
while gains and losses resulting from the remeasurement of intercompany
receivables from those international subsidiaries for which the Company
anticipates settlement in the foreseeable future are recorded in the
consolidated statements of operations. The net gains and losses recorded in the
condensed consolidated statements of income were not significant for the periods
presented.





Reclassifications





Certain
reclassifications have been made to the July 31, 2009 condensed consolidated
financial statements to conform them to the July 31, 2010 condensed consolidated
financial statements presentation. Such reclassifications do not affect net
income as previously reported.





NOTE
B - RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS





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


-8-




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




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




4. Other
recently issued FASB guidance and SEC Staff Accounting Bulletins have either
been implemented or are not applicable to the Company.





NOTE
C - INCOME TAXES





The
Company adopted guidance from the FASB related to Accounting for Uncertainty in Income
Taxes which includes a two-step approach to recognizing, de-recognizing
and measuring uncertain tax positions. As of July 31, 2010, the Company had no
significant uncertain tax positions that would be reduced as a result of a lapse
of the applicable statute of limitations.





On July
2008, Pharma-Bio and Pharma-PR obtained a Grant of Industrial Tax Exemption
(“the Grant”) from the Puerto Rico Industrial Development Company pursuant to
the terms and conditions set forth in Act No. 135 of December 2, 1997, as
amended. The Grant provides relief on various Puerto Rico taxes, including
income tax, mostly for the Company's microbiological and chemical laboratory
testing facility and service activities outside of Puerto Rico. For the nine
months ended in July 31, 2010 and 2009, these activities had no taxable income.
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.





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 2027
while for Pharma-IR are available indefinitely.


-9-


The
statutory income tax rate differs from the effective rate mainly due to income
tax permanent differences between financial and tax books income.





The
Company files income tax returns in the United States (federal and various
states jurisdictions), Puerto Rico and Ireland. The 2004 through 2009 tax years
are open and may be subject to potential examination in one or more
jurisdictions. The Company is not currently under 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%. The last
installment was paid in full during fiscal year 2009.





NOTE
E – WARRANTS





At July
31, 2010 and October 31, 2009 the Company had outstanding warrants to purchase
10,079,991 and 11,053,216 shares of the Company’s common stock, respectively, 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. An
aggregate of 973,225 of Series C Common Stock Purchase Warrants of the Company
with an exercise price of $0.7344 expired on January 24, 2010.





NOTE
F – EARNINGS PER SHARE





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





Three months
                    ended July 31,
                  
                  
                  Nine months
                    ended July 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income available to common equity holders - used to compute basic and
      diluted earning per share
                  
                  $
                  121,409
                  
                  
                  $
                  53,289
                  
                  
                  $
                  188,748
                  
                  
                  $
                  340,686Weighted
      average number of common shares - used to compute basic earning per share
                  
                  
                  20,751,215
                  
                  
                  
                  20,751,215
                  
                  
                  
                  20,751,215
                  
                  
                  
                  20,751,215Effect
      of warrants to purchase common stock
                  
                  
                  1,691,585
                  
                  
                  
                  1,710,302
                  
                  
                  
                  1,620,632
                  
                  
                  
                  1,536,423Effect
      of options to purchase common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Weighted
      average number of shares - used to compute diluted earnings per
      share
                  
                  
                  22,442,800
                  
                  
                  
                  22,461,517
                  
                  
                  
                  22,371,847
                  
                  
                  
                  22,287,638





Warrants
for the purchase of 7,999,400 shares of common stock for the three-month and
nine-month periods ended in July 31, 2010, and 8,972,625 for the three-month and
nine-month periods ended in July 31, 2009, were not included in computing
diluted earnings per share because their effects were antidilutive. In addition,
options for the purchase of 1,267,882 shares of common stock for the three-month
and nine-month periods ended in July 31, 2010, and 1,347,913 for the three-month
and nine-month periods ended in July 31, 2009, were not included in computing
diluted earnings per share because their effects were also
antidilutive.




-10-


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.
No losses have been experienced or are expected on these accounts.





Accounts
receivable and revenues





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





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





The
Company provided a substantial portion of its services to three customers, which
accounted for 10% or more of its revenues in either of the three-month and
nine-month periods ended July 31, 2010 or 2009. During the three months ended
July 31, 2010, revenues from these customers were 21%, 16% and 6%, or a total of
43%, as compared to the same period last year for 11%, 19% and 8%, or a total of
38%, respectively. For the nine months ended July 31, 2010 revenues from these
customers were 21%, 14% and 10%, or a total of 45%, as compared to the same
period last year for 7%, 23% and 8%, or a total of 38%, respectively. At July
31, 2010 amounts due from these customers represented 39% of the Company’s total
accounts receivable balance.




NOTE H - SEGMENT
DISCLOSURES





The
Company’s segments are based on the organizational structure for which financial
results are regularly evaluated by the Company’s chief operating decision maker
to determine resource allocation and assess performance. Each reportable segment
is managed by its own management team and reports to executive management. The
Company has two reportable segments: (i) Puerto Rico and United States
consulting, and (ii) Ireland consulting. Both reportable segments provide
technical compliance consulting service primarily to the pharmaceutical,
chemical, medical device and biotechnology industries in their respective
markets.





The
following table presents information about the reported revenue from services
and earnings from operations of the Company for the three and nine month periods
ended in July 31, 2010 and 2009. There is no intersegment revenue for the
mentioned periods. Corporate expenses that support the operating units have been
allocated to the segments. Asset information by reportable segment is not
presented, since the Company does not produce such information internally, nor
does it use such data to manage its business.





Three months ended July 31,
                      
                      
                      Nine months ended July 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009REVENUES:Puerto
      Rico and United States consulting
                      
                      $
                      2,043,428
                      
                      
                      $
                      2,040,676
                      
                      
                      $
                      5,829,619
                      
                      
                      $
                      7,175,171Ireland
      consulting
                      
                      
                      600,616
                      
                      
                      
                      287,198
                      
                      
                      
                      1,723,188
                      
                      
                      
                      613,916Other
      segments1
                      
                      
                      282,163
                      
                      
                      
                      298,657
                      
                      
                      
                      703,743
                      
                      
                      
                      870,857Total
      consolidated revenues
                      
                      $
                      2,926,207
                      
                      
                      $
                      2,626,531
                      
                      
                      $
                      8,256,550
                      
                      
                      $
                      8,659,944INCOME
      (LOSS) BEFORE TAXES:Puerto
      Rico and United States consulting
                      
                      $
                      236,656
                      
                      
                      $
                      261,309
                      
                      
                      $
                      618,846
                      
                      
                      $
                      956,193Ireland
      consulting
                      
                      
                      16,607
                      
                      
                      
                      (44,989
                      )
                      
                      
                      4,358
                      
                      
                      
                      (113,717
                      )Other
      segments1
                      
                      
                      (47,032
                      )
                      
                      
                      (52,686
                      )
                      
                      
                      (281,157
                      )
                      
                      
                      (147,312
                      )Total
      consolidated income before taxes
                      
                      $
                      206,231
                      
                      
                      $
                      163,634
                      
                      
                      $
                      342,047
                      
                      
                      $
                      695,164





1
                Other
      segments represent activities that fall below the reportable threshold and
      are carried out in Puerto and United States. These activities include a
      microbiological and chemical laboratory testing division, a technical
      seminars/training division, an information technology services and
      consulting division, and corporate headquarters, as
      applicable.




-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.  See Note H “Segment Disclosures” in the financial statements
included under Part I of this Quarterly Report on Form 10-Q for information
regarding our two reportable segments.  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, 2009. 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,
2009.
 
 Overview
 
 We are a
compliance and technology transfer services consulting firm with a laboratory
testing facility with headquarters in Puerto Rico, servicing the Puerto Rico,
United States and Europe markets. The compliance consulting service sector in
those markets consists of local compliance and validation consulting firms,
United States dedicated validation and compliance consulting firms and large
publicly traded and private domestic and foreign engineering and consulting
firms. We provide a broad range of compliance related consulting services. We
also provide microbiological testing services and recently commenced providing
chemical testing services through our laboratory testing facility (“Lab”) in
Puerto Rico. We also provide information technology consulting services and
technical trainings/seminars, which services are not currently significant to
our operating results. We market our services to pharmaceutical, chemical,
biotechnology and medical devices, and allied products companies in Puerto Rico,
the United States and Europe. Our staff includes more than 125 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.
 
 During
fiscal 2006 and 2008, respectively, we expanded the markets we serve from Puerto
Rico to the United States and Ireland. Our Ireland operation, with an
Ireland-based management team reporting to our headquarters, has established a
network of potential key customers and contacts that serve as the base for our
sales target and opportunities. We are also actively pursuing to further expand
our United States market.
 
 We have
plans to further penetrate the markets we currently serve. We market our
services with an active presence in industry trade shows, professional
conventions, industry publications and company provided seminars to the
industry. Our senior management is also actively involved in the marketing
process, especially in marketing to major accounts. Our senior management and
staff also concentrate on developing new business opportunities and focus on the
larger customer accounts (by number of professionals or dollar volume) and
responding to prospective customers’ requests for proposals.
 
 While our
core business is US Food and Drug Administration (“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, we expanded our
portfolio of services to include a laboratory testing facility, an information
technology consulting practice and a training center that provides
seminars/trainings to the industry.
 
 Our Lab,
located in Puerto Rico, with an investment of $1.25 million for microbiology
testing, commenced operations in early fiscal 2009. The Lab incorporates the
latest technology and test methodologies meeting pharmacopoeia industry
standards and regulations. It currently offers microbiological testing and
related services to our core industries already serviced, as well as the
cosmetic and food industries. The Lab is expanding its services to include
chemical and environmental testing at an approximate investment of $280,000,
which was partially incurred during fiscal year 2009 and will be further
incurred in fiscal year 2010.
 
 We
identified the industry need for, 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/training to the industry through
our “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 operation
is not currently significant to our operating results, our goal is to broaden
the portfolio of services that we can provide to our customer base and also
target other potential customers in other industries.
 
 In line
with the strategy to penetrate the US market, on September 1, 2010, we obtained
the renewal of the certification as a "minority-controlled company" as defined
by the National Minority Supplier Development Council and Growth Initiative
("NMSDC"). The certification allows us to participate in corporate diversity
programs available from various potential customers in the United States and
Puerto Rico.
 
 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 have undergone a recession and that has affected our operation and
business growth.
 
 The
reduction in operations of some of our clients, mostly triggered by the global
economic recession and the industry worldwide consolidation, continues to affect
our revenues and our growth plans for fiscal 2010. For the nine-month period
ended July 31, 2010 our total net revenues decreased by approximately $0.4
million or 4.7%, when compared to the same period last year. In order to
maintain volume in the markets we serve and ensure we are price competitive, we
continue to adjust our pricing and gross margin structure accordingly. In
addition, since fiscal year 2009 we implemented cost containment measures and
have refocused the overall operations strategy to reduce our overhead costs.
These factors have led our nine-month period ended July 31, 2010 net income to
be approximately $189,000, a decline of $152,000 when compared with the same
period last year.
 
 The
following table sets forth information as to our revenue for the three-month and
nine-month periods ended July 31, 2010 and 2009, by geographic regions (dollars
in thousands).
 
 Three months ended July 31,
                            
                            
                            Nine months endedJuly 31,Revenues by Region:
                            
                            2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Puerto
      Rico
                            
                            $
                            1,940
                            
                            
                            
                            66.3
                            %
                            
                            $
                            1,934
                            
                            
                            
                            73.6
                            %
                            
                            $
                            5,567
                            
                            
                            
                            67.4
                            %
                            
                            $
                            6,388
                            
                            
                            
                            73.8
                            %United
      States
                            
                            
                            386
                            
                            
                            
                            13.2
                            %
                            
                            
                            405
                            
                            
                            
                            15.5
                            %
                            
                            
                            966
                            
                            
                            
                            11.7
                            %
                            
                            
                            1,658
                            
                            
                            
                            19.1
                            %Ireland
                            
                            
                            600
                            
                            
                            
                            20.5
                            %
                            
                            
                            287
                            
                            
                            
                            10.9
                            %
                            
                            
                            1,723
                            
                            
                            
                            20.9
                            %
                            
                            
                            614
                            
                            
                            
                            7.1
                            %$
                            2,926
                            
                            
                            
                            
                            
                            
                            $
                            2,626
                            
                            
                            
                            
                            
                            
                            $
                            8,256
                            
                            
                            
                            
                            
                            
                            $
                            8,660
 
 Weak
economies where we do business and worldwide industry consolidations continue to
be unfavorable factors affecting fiscal year 2010. These factors and the impact
over the industry, if any, of the recently enacted US health care reform
(Patient Protection and Affordable Care Act)remain as industry
uncertainties that might adversely affect our future performance. We believe
that our future profitability and liquidity will be highly dependent on 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 then current industry
trends.
  -13-
  Results
of Operations
 
 The
following table sets forth our statements of operations for the three-month and
nine-month periods ended July 31, 2010 and 2009, (dollars in thousands) and as a
percentage of revenue:
 
 Three months ended July 31,
                  
                  
                  Nine months endedJuly 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenues
                  
                  $
                  2,926
                  
                  
                  
                  100.0
                  %
                  
                  $
                  2,626
                  
                  
                  
                  100.0
                  %
                  
                  $
                  8,256
                  
                  
                  
                  100.0
                  %
                  
                  $
                  8,660
                  
                  
                  
                  100.0
                  %Cost
      of services
                  
                  
                  2,038
                  
                  
                  
                  69.7
                  %
                  
                  
                  1,753
                  
                  
                  
                  66.8
                  %
                  
                  
                  5,860
                  
                  
                  
                  71.0
                  %
                  
                  
                  5,732
                  
                  
                  
                  66.2
                  %Gross
      profit
                  
                  
                  888
                  
                  
                  
                  30.3
                  %
                  
                  
                  873
                  
                  
                  
                  33.2
                  %
                  
                  
                  2,396
                  
                  
                  
                  29.0
                  %
                  
                  
                  2,928
                  
                  
                  
                  33.8
                  %Selling,
      general and administrative costs
                  
                  
                  683
                  
                  
                  
                  23.3
                  %
                  
                  
                  710
                  
                  
                  
                  27.0
                  %
                  
                  
                  2,064
                  
                  
                  
                  25.0
                  %
                  
                  
                  2,209
                  
                  
                  
                  25.5
                  %Interest
      expense
                  
                  
                  2
                  
                  
                  
                  0.1
                  %
                  
                  
                  5
                  
                  
                  
                  0.2
                  %
                  
                  
                  4
                  
                  
                  
                  0.0
                  %
                  
                  
                  51
                  
                  
                  
                  0.6
                  %Interest
      income
                  
                  
                  3
                  
                  
                  
                  -0.1
                  %
                  
                  
                  5
                  
                  
                  
                  -0.2
                  %
                  
                  
                  12
                  
                  
                  
                  -0.1
                  %
                  
                  
                  21
                  
                  
                  
                  -0.2
                  %Gain
      on disposition of property
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  2
                  
                  
                  
                  0.0
                  %
                  
                  
                  6
                  
                  
                  
                  -0.1
                  %Income
      before income taxes
                  
                  
                  206
                  
                  
                  
                  7.0
                  %
                  
                  
                  163
                  
                  
                  
                  6.2
                  %
                  
                  
                  342
                  
                  
                  
                  4.1
                  %
                  
                  
                  695
                  
                  
                  
                  8.0
                  %Income
      tax expense
                  
                  
                  85
                  
                  
                  
                  2.9
                  %
                  
                  
                  110
                  
                  
                  
                  4.2
                  %
                  
                  
                  153
                  
                  
                  
                  1.9
                  %
                  
                  
                  354
                  
                  
                  
                  4.1
                  %Net
      income
                  
                  
                  121
                  
                  
                  
                  4.1
                  %
                  
                  
                  53
                  
                  
                  
                  2.0
                  %
                  
                  
                  189
                  
                  
                  
                  2.2
                  %
                  
                  
                  341
                  
                  
                  
                  3.9
                  %
 
 Revenues. Revenues
for the three months ended July 31, 2010 were $2.9 million, a net increase of
approximately $0.3 million or 11.4%, when compared to the same period last year.
The improvement is mainly attributable to the increase of approximately $0.3
million in consulting service revenue from the Ireland operation. All other
divisions sustained no significant variance when compared to the same period
last year.
 
 For the
nine-month period ended July 31, 2010 revenues were $8.3 million, a net decrease
of approximately $0.4 million or 4.7% from the comparable nine-month period last
year. The reduction is mainly attributable to the decrease in Puerto Rico and
the United States market consulting service revenues of $0.6 million and $0.7
million, respectively, decrease in Lab revenue for approximately $0.1 million,
partially offset by a net increase of $1.1 million generated by the Ireland
consulting operation.
 
 Decreases
in the Puerto Rico and United States 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. The increase in
the Ireland operation is mostly attributable to consulting volume acquired from
one customer.
 
 Cost of Services; gross
margin. Although the aggregate dollar gross margin for the three-month
period ended in July 31, 2010 reflected no significant variance, the gross
margin had a net reduction of 2.9 percentage points when compared to the same
period last year. The decrease is mainly attributable to the gross margin
decline in the Ireland consulting business.
 
 The gross
margin for the nine-month period ended in July 31, 2010 reflected a net
reduction of 4.8 percentage points when compared to the same period last year.
The decline is mainly attributable to reduced margins attained by our Lab and
consulting business by 3.1 and 1.7 percentage points, respectively.
 
 The net
decline in the gross margin ratio for the three-month and nine-month periods
ended in July 31, 2010, as compared to last year, is mainly attributable to the
Lab’s low gross margin yield as a function of billings versus fixed costs of
services, and low consulting margins mostly attained by our Ireland
operation.
 
 Selling, General and
Administrative Expenses. Selling, general and administrative expenses for
the three and nine month periods ended July 31, 2010 were approximately $0.7 and
$2.1 million, respectively, a net reduction in expenses of approximately $27,000
and $145,000, respectively, as compared to the same periods last
year.
 
 The
reduction in selling, general and administrative expenses is mainly attributable
to cost containment measures adopted since fiscal year 2009 affecting mostly our
headquarter operations.
 
 Interest Expense. The
interest expense favorable variance for the nine month period ended in July 31,
2010 as compared to the same period last year was approximately $47,000. Until
January 2009 we recognized 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 obligation ceased
when the final installment related to this agreement was made in fiscal year
2009. The expense decreased as annual payments were made through fiscal year
2009.
  -14-
  Income Taxes Expense.
The decrease in income taxes expense is attributable to the decrease of income
before income tax. The statutory income tax rate differs to the effective rate
mainly due to income tax permanent differences between financial and taxable
books income.
 
 Net Income. Our net
income for the three months ended July 31, 2010 was approximately $121,000, an
improvement of $68,000 or an increase in profit margin of 2.1 percentage points,
when compared to the same period last year. The slight improvement is mainly
attributable to small favorable variances in gross margin, selling general and
administrative expenses and income tax expense.
 
 Net
Income for the nine months ended July 31, 2010 was approximately $189,000, a
decline of $152,000, or a reduction in profit margin of 1.6 percentage points,
when compared to the same period last year. Net income was affected by prior
quarters decrease in overall gross margin, 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.
 
 For the
three months ended in July 31, 2010, earnings per common share basic and diluted
were $0.006 and $0.005, respectively, an improvement of $0.003 for each period
when compared to the same period last year. For the nine months ended in July
31, 2010, earnings per common share basic and diluted were $0.009 and $0.008,
respectively, a decline of $0.007 for each period when compared to the same
period last year.
 
 Liquidity
and Capital Resources
 
 Liquidity
is a measure of our ability to meet potential cash requirements, including
planned capital expenditures. For the nine months ended July 31, 2010, we
generated a working capital increase of approximately $0.4 million.
 
 Our
primary cash needs consist of the payment of compensation to our professional
staff, overhead expenses, and statutory taxes. Management believes that based on
current level of operations and cash flows from operations, the collectability
of high quality customer receivables will be sufficient to fund anticipated
expenses and satisfy other possible long-term contractual commitments for the
next twelve months.
 
 To the
extent that we pursue possible opportunities to expand our operations, either by
acquisition or by the establishment of operations in a new locale, we will incur
additional overhead, and there may be a delay between the period we commence
operations and our generation of net cash flow from operations.
 
 While
uncertainties relating to the current local and global economic condition,
competition, the industries and geographical regions served by us and other
regulatory matters exist within the consulting services industry, management is
not aware of any trends or events likely to have a material adverse effect on
liquidity in the near term.
 
 Off-Balance
Sheet Arrangements
  We were
not involved in any significant off-balance sheet arrangement during the nine
months ended July 31, 2010.
 
 Critical
Accounting Policies and Estimates
 
 There
were no material changes during the nine months ended July 31, 2010 to the
critical accounting policies reported in our Annual Report on Form 10-K for the
fiscal year ended October 31, 2009.
 
 New
Accounting Pronouncements
 
 There
were no new accounting standards, issued since our filing of the Annual Report
on Form 10-K for the fiscal year ended October 31, 2009, which could have a
significant effect on our condensed consolidated financial
statements.
  -15-
  Forward-Looking
Statements
 
 Our
business, financial condition, results of operations, cash flows and prospects,
and the prevailing market price and performance of our common stock, may be
adversely affected by a number of factors, including the matters discussed
below. Certain statements and information set forth in this Quarterly Report on
Form 10-Q, as well as other written or oral statements made from time to time by
us or by our authorized executive officers on our behalf, constitute
“forward-looking statements” within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. These statements include all
statements other than those made solely with respect to historical fact and
identified by words such as “believes”, “anticipates”, “expects”, “intends” and
similar expressions, but such words are not the exclusive means of identifying
such statements. We intend for our forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and we set forth this
statement and these risk factors in order to comply with such safe harbor
provisions. You should note that our forward-looking statements speak only as of
the date of this Quarterly Report on Form 10-Q or when made and we undertake no
duty or obligation to update or revise our forward-looking statements, whether
as a result of new information, future events or otherwise. Although we believe
that the expectations, plans, intentions and projections reflected in our
forward-looking statements are reasonable, such statements are subject to known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. The risks, uncertainties and other factors that our stockholders and
prospective investors should consider include the following:
 
 ·
              Because
      our business is concentrated in the pharmaceutical industry, any changes
      in that industry could impair our ability to generate revenue and realize
      a profit.·
              Because
      our business is dependent upon a small number of clients, the loss of a
      major client could impair our ability to operate
    profitably.·
              Customer
      procurement and sourcing practices intended to reduce costs could have an
      adverse affect on our margins and profitability.·
              Since
      our business is dependent upon the development and enhancement of patented
      pharmaceutical products or processes by our clients, the failure of our
      clients to obtain and maintain patents could impair our ability to operate
      profitably.·
              We
      may be unable to pass on increased labor costs to our
    clients.·
              Consolidation
      in the pharmaceutical industry may have a harmful effect on our
      business.·
              Because
      the pharmaceutical industry is subject to government regulations and
      specialized laws, changes in government regulations and laws 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.·
              The
      economy and local governments’ financial status, may affect the
      willingness of businesses to commence or expand operations in the markets
      we serve.·
              Other
      factors, including economic factors, may affect the decision of businesses
      to continue or expand their operations in the markets we
      serve.·
              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 which we currently do not serve.·
              If
      we identify a proposed acquisition, we may require substantial cash to
      fund the cost of the acquisition.·
              If
      we make any acquisitions, they may disrupt or have a negative impact on
      our business.·
              Because
      there is a limited market in our common stock, stockholders may have
      difficulty in selling our common stock and our common stock may be subject
      to significant price swings.·
              Our
      quarterly revenues, operating results and profitability will vary from
      quarter to quarter, which may result in increased volatility of our stock
      price.·
              The
      issuance of securities, whether in connection with an acquisition or
      otherwise, may result in significant dilution to our
      stockholders.·
              Additional
      Sarbanes-Oxley requirements relating to our internal accounting control
      may affect us adversely if they are imposed in the
  future.
  -16-
  ITEM
4. CONTROLS AND PROCEDURES.
 
 Evaluation
of Disclosure Controls and Procedures
 
 We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this Quarterly Report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this Quarterly Report.
  Changes
in Internal Control Over Financial Reporting
  Based on
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
there has been no change in our internal control over financial reporting during
our last fiscal quarter identified in connection with that evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
  -17-
  PART
II– OTHER INFORMATION
  ITEM
1.  LEGAL PROCEEDINGS.
 
 From time
to time, we may be a party to legal proceedings incidental to our business. We
do not believe that there are any proceedings threatened or pending against us,
which, if determined adversely to us, would have a material effect on our
financial position or results of operations and cash flows.
  ITEM
6.  EXHIBITS
 
 (a)
Exhibits:
 
 10.1
              Employment
      Agreement Amendment, effective as of July 1, 2010, 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 July 8,
    2010).*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.
 
 *  Management contract or
compensatory plan contract or arrangement.
  -18-
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  PHARMA-BIO SERV,
      INC./s/
      Elizabeth PlazaElizabeth
      PlazaChief
      Executive Officer(Principal
      Executive Officer)/s/
      Pedro J. LasantaPedro
      J. LasantaChief
      Financial Officer(Principal
      Financial Officer and Principal Accounting
                    Officer)Dated:
      September 14, 2010
  -19-