**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 
 **FORM
        10-QSB**
 
 (Mark
        One)
 
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
                  ACT OF 1934
  For
        the
        quarterly period ended January 31, 2007
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
                  ACT OF 1934
  For
        the
        transition period from ____________ to ____________
 
 Commission
        File No. 000-50956
 
 PHARMA-BIO
        SERV, INC.
 (Name
        of
        small business issuer as specified in its charter)
 
 Delaware
              20-0653570(State
                  of Incorporation)
              (I.R.S.
                  Employer
                Identification
                  No.)
 
 373
        Méndez Vigo, Suite 110, Dorado, Puerto Rico 00646
 (Address
        of principal executive offices)
 
 787-278-2709
 (Issuer's
        telephone number)
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days.
 x yes o no
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). o yes x no
 
 The
        number of shares outstanding of the registrant's Common Stock as of March
        15,
        2007 was 19,615,539.
   1
  
 
 **PHARMA-BIO
        SERV, INC.**
 
 **FORM
        10-QSB**
 
 **FOR
        THE QUARTER ENDED JANUARY 31, 2007**
  **TABLE
        OF CONTENTS**
 
 PagePART
                  I FINANCIAL INFORMATIONItem
                  1 - Financial StatementsConsolidated
                  Balance Sheet as of January 31, 2007 (unaudited)
              
              
              3Consolidated
                  Statements of Income for the three-month periods ended January
                  31, 2007
                  and 2006 (unaudited)
              
              
              4Consolidated
                  Statements of Cash Flows for the three-month periods ended January
                  31,
                  2007 and 2006 (unaudited)
              
              
              5Consolidated
                  Statement of Changes in Stockholders’ Equity for the three-month period
                  ended January 31, 2007 (unaudited)
              
              
              6Notes
                  to Consolidated Financial Statements (unaudited)
              
              
              7Item
                  2 - Management's Discussion and Analysis of Financial Condition
                  and
                  Results of Operation
              
              
              20Item
                  3 - Controls and Procedures
              
              
              27PART
                  II OTHER INFORMATIONItem
                  6 - Exhibits
              
              
              27
   2
  
  **PHARMA-BIO
        SERV, INC.**
 **Consolidated
        Balance Sheet (Unaudited)**
 **As
        of January 31, 2007**
 
 Assets:Current
                    assetsCash and cash equivalents
                
                $
                2,423,192Accounts receivable
                
                
                4,039,843Other
                
                
                208,670Total
                    current assets
                
                
                6,671,705Property
                    and equipment
                
                
                348,083Other
                    assets, mainly intangible assets
                
                
                185,767Total
                    Assets
                
                $
                7,205,555Liabilities
                    and Stockholders' Equity:Current liabilitiesCurrent portion-obligations under capital leases
                
                $
                39,651Accounts payable and accrued expenses
                
                
                1,118,628Due to affiliate - current
                
                
                2,818,744Income taxes
                
                
                168,764Total
                    current liabilities
                
                
                4,145,787Long-term
                    liabilitiesDue to affiliate
                
                
                2,412,828Other long-term liabilities
                
                
                131,444Total
                    long-term liabilities
                
                
                2,544,272Total
                    Liabilities
                
                
                6,690,059Stockholders'
                    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 19,615,539 shares
                
                
                1,961Additional
                    paid-in capital
                
                
                39,022Retained
                    earnings
                
                
                474,513Total
                    Stockholders' Equity
                
                
                515,496Total
                    Liabilities and Stockholders' Equity
                
                $
                7,205,555
 See
        notes
        to financial statements.
 
  3
  
 **PHARMA-BIO
        SERV, INC.**
 **Consolidated
        Statements of Income (Unaudited)**
 **For
        the Three-Month Periods Ended January 31, 2007 and
        2006**
 **2007**
                
                **2006**REVENUES
                
                $
                3,618,330
                
                $
                3,404,182COST
                    OF SERVICES
                
                
                2,167,128
                
                
                2,033,339GROSS
                    PROFIT
                
                
                1,451,202
                
                
                1,370,843SELLING,
                      GENERAL AND
                    ADMINISTRATIVE
                      EXPENSES
                
                
                736,585
                
                
                455,398INTEREST
                    EXPENSE
                
                
                129,246
                
                
                -INCOME
                    BEFORE INCOME TAX
                
                
                585,371
                
                
                915,445INCOME
                    TAX
                
                
                255,955
                
                
                21,873NET
                    INCOME
                
                $
                329,416
                
                $
                893,572BASIC
                    EARNINGS PER COMMON SHARE
                
                $
                0.02
                
                $
                0.50DILUTED
                    EARNINGS PER COMMON SHARE
                
                $
                0.01
                
                $
                0.16WEIGHTED
                    AVERAGE NUMBER OF COMMON
                  SHARES
                    OUTSTANDING - BASIC
                
                
                18,724,953
                
                
                1,791,985WEIGHTED
                      AVERAGE NUMBER OF COMMON
                    SHARES
                      OUTSTANDING - DILUTED
                
                
                22,231,227
                
                
                5,417,925
 See
        notes
        to financial statements.
 
 
 4
 
 
 **PHARMA-BIO
        SERV, INC.**
 **Consolidated
        Statements of Cash Flows (Unaudited)**
 **For
        the Three-Month Periods Ended January 31, 2007 and
        2006**
 **2007**
                
                **2006**CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income for the period
                
                $
                329,416
                
                $
                893,572Loss
                    on disposition of property and equipment
                
                
                19,863
                
                
                3,664Stock-based
                    compensation
                
                
                39,022
                
                
                -Depreciation
                    and amortization
                
                
                54,497
                
                
                30,144Imputed
                    interest expense
                
                
                126,611
                
                
                -Decrease
                    in accounts receivable
                
                
                1,761,246
                
                
                1,481,792Decrease
                    (increase) in other assets
                
                
                48,660
                
                
                (150,305
                )Increase
                    (decrease) in liabilities
                
                
                288,489
                
                
                (149,922
                )NET
                    CASH PROVIDED BY OPERATING ACTIVITIES
                
                
                2,667,804
                
                
                2,108,945CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of property and equipment
                
                
                (10,221
                )
                
                (87,028
                )Cash
                    acquired as part of the acquisition of Plaza
                
                
                -
                
                
                28,943NET
                    CASH USED IN INVESTING ACTIVITIES
                
                
                (10,221
                )
                
                (58,085
                )CASH
                    FLOW FROM FINANCING ACTIVITIES:Net
                    proceeds from the sale of preferred stock
                
                
                -
                
                
                10,000,000Payment
                    for purchase of Plaza stock
                
                
                -
                
                
                (9,900,000
                )Payment
                    for non-compete covenant
                
                
                -
                
                
                (100,000
                )Payments
                    on capital lease obligations
                
                
                (9,426
                )
                
                (8,649
                )Payment
                    to affiliate
                
                
                (2,500,000
                )
                
                -Distributions
                    to stockholder
                
                
                -
                
                
                (749,554
                )NET
                    CASH USED IN FINANCING ACTIVITIES
                
                
                (2,509,426
                )
                
                (758,203
                )NET
                    INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                148,157
                
                
                1,292,657CASH
                    AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                
                
                2,275,035
                
                
                1,791,557CASH
                    AND CASH EQUIVALENTS - END OF PERIOD
                
                $
                2,423,192
                
                $
                3,084,214PAYMENTS
                    OF:Income
                    tax
                
                $
                -
                
                $
                -Interest
                
                $
                503,708
                
                $
                3,412NONCASH
                    INVESTING AND FINANCING ACTIVITIES:Conversion
                    of cashless exercise warrants to shares of
                  common
                    stock
                
                $
                130
                
                $
                -Income
                    tax withheld by clients but used as a credit in the
                  income
                    tax return of a stockholder (noncash distribution)
                
                $
                -
                
                $
                84,561Income
                    tax withheld by clients to be used as a credit in the
                  credit
                    in the Company's income tax
                    return
                
                $
                8,361
                
                $
                -Debt
                    incurred in the acquisition of certain assets from
                  another
                    company
                
                $
                -
                
                $
                200,000Debt
                    payable to officer originated in the acquisition of
                  Plaza,
                    net of $1,025,000 imputed interest
                
                $
                -
                
                $
                7,225,000
 
 See
          notes
          to financial statements.
 
  5
  
 **PHARMA-BIO
        SERV, INC.**
 **Consolidated
        Statement of Changes in Stockholders’ Equity (Unaudited)**
 **For
        the Three-Month Period Ended January 31, 2007**
 
  **Common
                    Stock**
                
                **Preferred
                    Stock**
                
                **AdditionalPaid-in**
                
                **Retained****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Earnings**
                
                **Total**BALANCE
                    AT OCTOBER 31, 2006
                
                
                18,315,001
                
                $
                1,831
                
                
                -
                
                $
                -
                
                $
                -
                
                $
                145,227
                
                $
                147,058CASHLESS
                    CONVERSION OF WARRANTS TO SHARES
                  OF
                    COMMON STOCK
                
                
                1,300,538
                
                
                130
                
                
                -
                
                
                -
                
                
                -
                
                
                (130
                )
                
                -STOCK-BASED
                    COMPENSATION
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                39,022
                
                
                
                
                
                39,022NET
                    INCOME
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                329,416
                
                
                329,416BALANCE
                    AT JANUARY 31, 2007
                
                
                19,615,539
                
                $
                1,961
                
                
                -
                
                $
                -
                
                $
                39,022
                
                $
                474,513
                
                $
                515,496
 See
        notes
        to financial statements.
 
  6
 
  **PHARMA-BIO
        SERV, INC.**
 **Notes
        to Consolidated Financial Statements (Unaudited)**
 **Three
        Month Periods Ended January 31, 2007 and 2006**
  **NOTE
        A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES**
  **B** **ASIS
        OF** **P** **RESENTATION**
 
 Pharma-Bio
        Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14,
        2004, under the name Lawrence Consulting Group, Inc. ("Lawrence"). Pharma-Bio
        is
        the parent company of Plaza Consulting Group, Inc. (“Plaza”), a Puerto Rico
        corporation, which operates in Puerto Rico and the United States under the
        name
        of Pharma Serv and is engaged in providing technical compliance consulting
        services primarily to the pharmaceutical, chemical, medical device and
        biotechnology industries. Pharma-Bio and Plaza are collectively referred
        to as
        the “Company”.
 
 On
        January 25, 2006, Pharma-Bio acquired Plaza in a transaction which is accounted
        for as a reverse acquisition. Although Pharma-Bio, then known as Lawrence,
        is
        the corporation that made the acquisition, for accounting purposes, Plaza
        is
        treated as the acquiring company. As a result, the financial statements reflect
        the financial position, results of operations and cash flows of Plaza prior
        to
        January 25, 2006 and the combined operations of Pharma-Bio and Plaza from
        and
        after January 25, 2006.
 
 All
        intercompany transactions and balances have been eliminated in
        consolidation.
 
 The
        unaudited interim financial statements for the three-month periods ended
        on
        January 31, 2007 and 2006 presented herein have been prepared in accordance
        with
        accounting principles generally accepted in the United States for interim
        financial statements and with the instructions to Form 10-QSB and Regulation
        S-B
        pertaining to interim financial statements and reflect all adjustments,
        consisting of normal recurring adjustments and accruals which, in the opinion
        of
        management, are considered necessary for a fair presentation of the Company’s
        financial position, results of operations and cash flows. Results of operations
        for interim periods are not necessarily indicative of the results that may
        be
        expected for the full year.
  **R** **EVERSE** **A** **CQUISITION**
  On
        January 25, 2006, pursuant to a plan and agreement of merger (the "Plaza
        Agreement") dated as of October 31, 2005, among Pharma-Bio, Plaza Acquisition
        Corp., a wholly-owned subsidiary of Pharma-Bio ("Acquisition Company"), Plaza
        and Elizabeth Plaza, the sole stockholder of Plaza, Pharma-Bio acquired Plaza.
        The acquisition was effected by the merger of Acquisition Company into Plaza.
        Pursuant to the Plaza Agreement, Ms. Plaza, as the sole stockholder of Plaza,
        received at the closing $10,000,000 plus 1,150,000 shares of Pharma-Bio's
        common
        stock. In addition, the Plaza Agreement provides for the Company to make
        three
        annual payments to Ms. Plaza, each in the amount of $2,750,000, payable on
        January 25, 2007, 2008 and 2009. See Note G with respect to payments made
        and
        obligations due to affiliate.
  At
        the
        closing, all of the present officers and directors of Pharma-Bio resigned
        from
        their respective positions, except that Mr. Dov Perlysky, who was president
        and
        a director of Pharma-Bio, resigned as an officer, but continued as a director.
        At the closing, Pharma-Bio elected four directors, including Ms. Plaza. The
        other three are independent directors.
 
 Pharma-Bio
        raised the funds necessary to make the $10,000,000 payment due to Ms. Plaza
        through the private placement of units consisting of shares of a series A
        preferred stock and warrants to purchase 7,999,400 common stock. The series
        A
        preferred stock was automatically converted into 15,998,800 shares of common
        stock upon an increase in Pharma-Bio's authorized common stock. See Note
        C.
   7
  The
        acquisition of Plaza and the private placement resulted in a change of control
        of Pharma-Bio. As a result of the reverse acquisition accounting treatment,
        Plaza is deemed to be the acquiring company for accounting purposes. The
        transaction was accounted for as a reverse acquisition because former owners
        of
        Plaza, together with the purchasers in the private placement who purchased
        the
        series A preferred stock and warrants in connection with the acquisition
        of
        Plaza, gained control of Pharma-Bio. Effective on the acquisition date,
        Pharma-Bio's balance sheet includes the assets and liabilities of Plaza and
        its
        equity accounts have been recapitalized to reflect the equity of Pharma-Bio.
 
 **S** **UMMARY
        OF** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES**
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from these
        estimates.
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying value of the Company's financial instruments (excluding obligations
        under capital leases and amounts due to affiliate): cash, accounts receivable,
        accounts payable and accrued liabilities, are considered reasonable estimates
        of
        fair value due to the short-term nature. Management believes, based on current
        rates, that the fair value of its obligations under capital leases and amounts
        due to affiliate approximate the carrying amount.
 
 **Revenue
        Recognition**
 
 Revenue
        is primarily derived from: (1) time and materials contracts (representing
        approximately 90% of total revenues), which is recognized by applying the
        proportional performance model, whereby revenue is recognized as performance
        occurs, and (2) short-term fixed-fee contracts or "not to exceed" contracts
        (approximately 10% of total revenues), which revenue is recognized similarly,
        except that certain milestones also have to be reached before revenue is
        recognized. In the case of fixed-fee contracts, which mostly are short-term
        contracts, revenue is recognized based on the percentage that the services
        rendered bears to the estimated services to be performed over the contract.
        If
        the Company determines that a fixed-fee or “not to exceed” contract will result
        in a loss, the Company recognizes the estimated loss in the period in which
        such
        determination is made.
 
 **Cash
        and Cash Equivalents**
  For
        purposes of the statements of cash flows, cash and cash equivalents include
        liquid investments with original maturities of three months or
        less.
 
 **Accounts
        Receivable**
 
 Accounts
        receivable are recorded at their estimated realizable value. Accounts are
        deemed
        past due when payment has not been received within the stated time period.
        The
        Company's policy is to review individual past due amounts periodically and
        write
        off amounts for which all collection efforts are deemed to have been exhausted.
        Due to the nature of the Company’s customers, bad debts are accounted for using
        the direct write-off method whereby an expense is recognized only when a
        specific account is determined to be uncollectible. The effect of using this
        method approximates that of the allowance method.
  8
  **Income
        Taxes**
 
 The
        Company follows the provisions of Statement of Financial Accounting Standards
        Board No. 109, "Accounting for Income Taxes," which requires an asset and
        liability approach method of accounting for income taxes. This method measures
        deferred income taxes by applying enacted statutory rates in effect at the
        balance sheet date to the differences between the tax basis of assets and
        liabilities and their reported amounts on the financial statements. The
        resulting deferred tax assets or liabilities are adjusted to reflect changes
        in
        tax laws as they occur. A valuation allowance is provided when it is more
        likely
        than not that a deferred tax asset will not be realized.
  Plaza,
        from its inception until January 24, 2006, was covered under the provisions
        of
        Subchapter N of Subtitle A of the Puerto Rico Internal Revenue Code (the
        "Puerto
        Rico Code"), which is similar to Subchapter S of the Internal Revenue Code
        in
        that its taxable income is taxed to the stockholders and therefore there
        is no
        income tax liability for that period. As a result of the completion of the
        reverse acquisition, Plaza and Pharma-Bio are no longer eligible for treatment
        as a Subchapter N corporation. See Note F.
 
 Although
        Ms. Plaza is responsible for the taxes on the Plaza's taxable income for
        the
        period from December 1, 2005 to January 24, 2006, pursuant to the Plaza
        Agreement, the Company agreed to reimburse Ms. Plaza for the income taxes
        applicable to said taxable income. The reimbursement amounts to $125,227
        and was
        paid on June 15, 2006.
 
 **Property
        and equipment**
 
 Owned
        property and equipment, and leasehold improvements are stated at cost. Equipment
        and vehicles under capital leases are stated at the lower of fair market
        value
        or net present value of the minimum lease payments at the inception of the
        leases..
  Depreciation
        of owned assets, and amortization of assets under capital leases and leasehold
        improvements, are provided using the straight-line basis over the shorter
        of the
        estimated useful lives of the assets or the lease term. Major renewals and
        betterments that extend the life of the assets are capitalized, while
        expenditures for repairs and maintenance are expensed when
        incurred.
  The
        Company evaluates for impairment its long-lived assets to be held and used,
        and
        long-lived assets to be disposed of, whenever events or changes in circumstances
        indicate that the carrying amount of an asset may not be
        recoverable.
 
 **Intangible
        assets**
 
 Definite-lived
        intangible assets, such as customer lists and covenants not to compete, are
        amortized on a straight-line basis over their estimated useful lives. The
        Company continually evaluates the reasonableness of the useful lives of these
        assets.
 
 **Stock-based
        compensation**
 
 Effective
        November 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), and Staff Accounting Bulletin No. 107
        (“SAB 107”) using the modified prospective method, which results in the
        provisions of SFAS 123R being applied to the consolidated financial statements
        on a prospective basis. Under the modified prospective recognition method,
        restatement of consolidated income from prior periods is not required, and
        accordingly, the Company has not provided such restatements. Under the modified
        prospective provisions of SFAS 123R, compensation expense is recorded for
        the
        unvested portion of previously granted awards that were outstanding on
        November 1, 2006 and all subsequent awards. SFAS 123R requires that all
        stock-based compensation expense be recognized in the financial statements
        based
        on the fair value of the awards. Stock-based compensation cost is measured
        at
        the grant date based on the fair value of the award and is recognized as
        expense
        over the requisite service period, which generally represents the vesting
        period, and includes an estimate of awards that will be forfeited. The Company
        calculates the fair value of stock options using the Black-Scholes
        option-pricing model at grant date. SFAS 123R also amends SFAS No. 95,
“Statement of Cash Flows”, to require that excess tax benefits related to
        stock-based compensation be reflected as cash flows from financing activities
        rather than cash flows from operating activities. The Company does not recognize
        such cash flow from financing activities since there has been no tax benefit
        related to the stock-based compensation.
  9
  As
        required under the new standards, stock option compensation expense is based
        on
        the number of options expected to vest. Forfeitures estimated when recognizing
        compensation expense are adjusted when actual forfeitures differ from the
        estimate.
  **Income
        Per Share of Common Stock**
 
 Basic
        income per share of common share is calculated by dividing net income by
        the
        weighted average number of shares of common stock outstanding. Diluted income
        per share includes the dilution of common stock equivalents. Pursuant to
        reverse
        acquisition accounting treatment, the weighted average number of shares
        outstanding in the computation of basic income per share was derived by
        weighting (i) for the period prior to the reverse acquisition transaction,
        the
        1,150,000 shares received by the former stockholder of Plaza and the shares
        600,000 shares received by San Juan Holdings, Inc., and (ii) for the period
        after the transaction, the number of shares outstanding represented the
        outstanding shares of Pharma-Bio that are outstanding. Diluted income per
        share
        includes the dilution of common equivalents. Accordingly, the series A preferred
        stock was deemed outstanding from the date of issuance until April 25, 2006,
        when the Company’s restated certificate of incorporation was filed with the
        Secretary of State of Delaware and the shares of series A preferred stock
        were
        automatically converted into common stock. The warrants were deemed to be
        outstanding from the date of issuance to the end of the reporting period,
        except
        for stock warrants issued to the investment banker for Plaza as a result
        of the
        reverse acquisition, which were deemed to be outstanding through all periods
        prior to the reverse acquisition.
 
 The
        weighted average shares of common stock outstanding (basic and diluted) were
        calculated using the treasury stock method for the respective
        periods.
 
 **NOTE
        B - RECENT ACCOUNTING PRONOUNCEMENTS**
  1.
        In
        February 2007, the Financial Accounting Standards Board (FASB) issued Statement
        No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities -
        Including an Amendment of FASB Statement No. 115”.This
        Statement permits entities to choose to measure many financial instruments
        and
        certain other items at fair value. The objective is to improve financial
        reporting by providing entities with the opportunity to mitigate volatility
        in
        reported earnings caused by measuring related assets and liabilities differently
        without having to apply complex hedge accounting provisions. This Statement
        is
        expected to expand the use of fair value measurement, which is consistent
        with
        the FASB’s long-term measurement objectives for accounting for financial
        instruments.
  This
        Statement is effective as of the beginning of an entity’s first fiscal year that
        begins after November 15, 2007. Early adoption is permitted as of the beginning
        of a fiscal year that begins on or before November 15, 2007, provided the
        entity
        also elects to apply the provisions of FASB Statement No. 157, “Fair Value
        Measurements”.
  Management
        does not expect that the application of this standard will have any effect
        on
        the Company's financial statements.
  10
  2.
        In
        September 2006, the FASB published Statement No. 157 “Fair Value Measurement”.
        This Statement defines fair value, establishes a framework for measuring
        fair
        value in generally accepted accounting principles (GAAP), and expands
        disclosures about fair value measurements. This Statement applies under other
        accounting pronouncements that require or permit fair value measurements,
        the
        FASB having previously concluded in those accounting pronouncements that
        fair
        value is the relevant measurement attribute. Accordingly, this Statement
        does
        not require any new fair value measurements. However, for some entities,
        the
        application of this Statement will change current practice. The changes to
        current practice resulting from the application of this Statement relate
        to the
        definition of fair value, the methods used to measure fair value, and the
        expanded disclosures about fair value measurements.
  This
        Statement is effective for financial statements issued for fiscal years
        beginning after November 15, 2007, and interim periods within those fiscal
        years. Earlier application is encouraged, provided that the reporting entity
        has
        not yet issued financial statements for that fiscal year, including financial
        statements for an interim period within that fiscal year. The provisions
        of this
        Statement should be applied prospectively as of the beginning of the fiscal
        year
        in which this Statement is initially applied, except for certain exceptions
        stated in the Statement.
  The
        implementation of this Statement will have no significant effect on the
        Company’s financial statements.
  3.
        In
        June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in
        Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
        Interpretation clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109, “Accounting for Income Taxes” *.* FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. This Interpretation also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure, and transition. This Interpretation is effective for
        fiscal
        years beginning after December 15, 2006. Earlier application of the provisions
        of this Interpretation is encouraged if the enterprise has not yet issued
        financial statements, including interim financial statements, in the period
        this
        Interpretation is adopted. Management does not expect that the application
        of
        this standard will have any effect on the Company's results of operations
        or its
        financial condition.
  4.
        Other
        recently issued FASB Statements or Interpretations, SEC Staff Accounting
        Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been
        implemented or are not applicable to the Company.
  **NOTE
        C - CAPITAL TRANSACTIONS**
 
 On
        January 24, 2006, Pharma-Bio effected a two-for-one share distribution with
        respect to its common stock pursuant to which Pharma-Bio issued one share
        of
        common stock for each share outstanding on the record date, January 24, 2006.
        All share and per share information in these financial statements give
        retroactive effect to this share distribution.
 
 On
        January 25, 2006, contemporaneously with the consummation of the acquisition,
        Pharma-Bio sold, in a private placement, 47 units, each unit consisting of
        25,000 shares of series A preferred stock, warrants to purchase 85,100 shares
        of
        common stock at $1.10 per share and warrants to purchase 85,100 shares of
        common
        stock at $1.65 per share. In the private placement, Pharma-Bio issued an
        aggregate of 1,175,000 shares of series A preferred stock (which are convertible
        into an aggregate of 15,998,800 shares of common stock), warrants to purchase
        3,999,700 shares of common stock at $1.10 per share, and warrants to purchase
        3,999,700 shares of common stock at $1.65 per share, to 42 accredited investors.
        Pharma-Bio paid brokerage commissions of 10% of the gross purchase price
        and an
        aggregate non-accountable expense allowance of 3% of the gross purchase price
        with respect to the units sold. In certain cases, the broker waived the
        commission and non-accountable expense allowance, and the investor paid the
        purchase price less the commission and non-accountable expense allowance.
        The
        purchase price for the 47 units sold was $11,750,000. Broker-dealers waived
        commission and non-accountable expense allowance with respect to $628,750,
        Pharma-Bio paid commissions and non-accountable expense allowances totaling
        $898,750, and Pharma-Bio issued warrants to purchase an aggregate of 1,439,892
        shares of common stock. The warrants have an exercise price of $.7344 per
        share
        and a term of three years.
  11
  Each
        share of series A preferred stock automatically converted into 13.616 shares
        of
        common stock, or an aggregate of 15,998,800 shares of common stock, upon
        the
        filing, on April 25, 2006, of a restated certificate of incorporation which
        increased the authorized capital stock to 10,000,000 shares of preferred
        stock
        and 50,000,000 shares of common stock.
 
 The
        subscription agreement pursuant to which the series A preferred stock and
        warrants were issued required Pharma-Bio to file a registration statement
        within
        60 days after the effective date of the merger between Plaza and Plaza
        Acquisition Corp. The effective date of the merger was January 25, 2006,
        therefore, the 60-day term expired on March 26, 2006. Since Pharma-Bio failed
        to
        file the registration statement by that date, Pharma-Bio was required to
        issue
        .0003 shares of common stock for each share of common stock issued upon
        conversion of the series A preferred stock for each day of delay. Pharma-Bio
        was
        three days late, therefore, 14,401 shares of common stock were issued to
        the
        former holders of the series A preferred stock.
 
 The
        warrants issued in the private placement expire five years from the closing
        date
        and are callable by Pharma-Bio if the closing price of the common stock is
        at
        least twice the exercise price of the warrants for twenty (20) consecutive
        trading days.
 
 In
        January 2004, Pharma-Bio issued warrants to purchase 800,000 shares of common
        stock at $0.12 per share (1,600,000 shares at $0.06 per share, subsequent
        to the
        stock distribution effected on January 24, 2006). The warrants may also be
        converted to shares of common stock on a cashless basis under certain
        conditions, but on a reduced number of shares. The warrants expire on January
        16, 2014. In January 2007, warrants to purchase a total of 1,350,400 shares
        of
        common stock were converted to 1,300,539 shares of common stock pursuant
        to the
        cashless exercise provisions. As of January 31, 2007, warrants to purchase
        249,600 shares remain outstanding.
 
 **NOTE
        D - PROPERTY & EQUIPMENT**
 
 The
        balance of property and equipment as of January 31, 2007 consists
        of:
 
 **Useful
                  life**
                **(years)**
              
              **Amount**Vehicles
              
              
              5
              
              $
              221,434Computers
              
              
              3
              
              
              179,028Equipment
              
              
              3-5
              
              
              124,748Furniture
                  and fixtures
              
              
              10
              
              
              68,509Total
              
              
              
              
              
              593,718Less:
                  Accumulated depreciation and amortization
              
              
              
              
              
              (245,635
              )Property
                  and equipment, net
              
              
              
              
              $
              348,083
 
 **NOTE
        E - OTHER ASSETS**
 
 At
        January 31, 2007, non-current other assets include the following:
   12
  Intangible
                  assets:Covenant not to compete
              
              $
              76,667Customer-related intangibles
              
              
              95,833Other
                  assets
              
              
              13,267$
              185,767
  Covenant
        not to compete represents the portion of the payment made in connection with
        the
        purchase of the Plaza stock that was allocated to a non-competition covenant.
        Under this agreement, the sole stockholder of Plaza agreed not to compete
        with
        the Company for a period of five years. This amount is amortized on the
        straight-line method over the five-year term of the non-competition
        covenant.
 
 Customer-related
        intangible assets consist mainly of a customer list which Plaza acquired
        along
        with certain other assets from a business which performs in the United States
        consulting services similar to those performed by the Company in Puerto Rico.
        The value of the customer list is being amortized on the straight-line method
        over its estimated useful life of three years.
 
 All
        of
        the intangible assets were originated in January 2006, therefore, there was
        no
        amortization of intangible assets in prior periods. The amortization expense
        for
        the three-month period ended on January 31, 2007 amounted to
        $17,500.
  **NOTE
        F - INCOME TAXES**
 
 The
        Company's taxable income is subject to the Puerto Rico income tax at the
        20% to
        39% rates provided by the 1994 Puerto Rico Internal Revenue Code, as amended.
        However, on August 1, 2005, Puerto Rico Act No. 41 was approved, which imposes
        an additional 2.5% special tax to all corporations and partnerships having
        a net
        taxable income over $20,000. The Act was effective for taxable years commencing
        after December 31, 2004 and ending on or before December 31, 2006; however,
        on
        November 10, 2006, Puerto Rico Act No. 244 was approved to impose the additional
        2.5% special tax to taxable years commencing after December 31, 2004 and
        before
        January 1, 2007. Therefore, the Company's maximum effective tax rate will
        be
        41.5% for its fiscal years ending on October 31, 2006 and October 31, 2007.
        The
        maximum effective tax rate for all other years will be 39%.
 
 For
        federal income tax purposes, the Company only reports operations conducted
        in
        the United States. The resulting federal income taxes, if any, are credited
        against the Puerto Rico income taxes, with certain limitations. Through January
        31, 2007, operations in the United States are not significant.
 
 The
        income tax expense is computed at statutory rates applied to income calculated
        in accordance with the accounting practices described herein and as shown
        in the
        financial statements. Deferred income tax assets and liabilities are computed
        for differences between the financial statements and tax bases of assets
        and
        liabilities that will result in taxable or deductible amounts in the future,
        based on enacted tax laws and rates applicable to the periods in which the
        differences are expected to affect taxable income.
 
 The
        reasons for the difference between the income tax expense applicable to income
        before income taxes and the amount computed by applying the statutory tax
        rate
        in Puerto Rico, were as follows:
  13
  **Three
                  months ended**
                **January
                  31,****2007**
              
              **2006**Theoretical
                  income tax expenseby
                  application of statutory rates tothe
                  book pre-tax
              
              $
              242,929
              
              $
              379,910Effect
                  of income subject to
                taxation
                  under Subchapter N
                (taxable
                  income taxed to stockholders)
              
              
              
              
              
              (358,037
              )Other
                  permanent differences
              
              
              13,026Income
                  tax expense
              
              $
              255,955
              
              $
              21,873
 
 Because
        Plaza was treated as an N Corporation under the Puerto Rico Internal Revenue
        Code through January 24, 2006, its income was taxed to its stockholder through
        said date, and Plaza did not pay income tax. Had income tax been paid at
        the
        statutory rate, the Company’s net income would have been $535,535, or $0.30 per
        share (basic) and $0.10 per share (diluted), for the quarter ended January
        31,
        2006.
 
 **NOTE
        G - RELATED PARTY TRANSACTIONS; DUE TO AFFILIATE**
 
 On
        January 25, 2006, pursuant to the Plaza Agreement, Elizabeth Plaza, as the
        sole
        stockholder of Plaza and affiliate of Plaza, received at the closing $10,000,000
        plus 1,150,000 shares of Pharma-Bio's common stock. In addition, the Company
        agreed to pay Ms. Plaza three payments of $2,750,000, including imputed interest
        determined in accordance with Section 1274 of the Internal Revenue Code,
        on
        January 25, 2007, 2008, and 2009. However, in January 2007, Elizabeth Plaza
        agreed to accept the first installment of $2,750,000 in two payments, one
        of
        $2,500,000 in January 2007 and the second of $250,000 in February 2007. The
        January 31, 2007 outstanding payments are due as follows:
 
 **Year
                  ending on January 31,**
              
              
              **Amount**2008
              
              $
              3,000,0002009
              
              
              2,750,000Total
                  payments
              
              
              5,750,000Less:
                  imputed interest
              
              
              (518,428
              )Present
                  value of total payments
              
              
              5,231,572Less:
                  current portion
              
              
              (2,818,744
              )Long-term
                  portion
              
              $
              2,412,828
 
  As
        a
        condition to closing, Plaza was required to have a net tangible book value
        of
        not less than $5,500,000, of which at least $2,000,000 was in cash, as of
        November 30, 2005. Subject to the requirement that Plaza have at least
        $2,000,000 in cash as of November 30, 2005, the purchase price was to be
        adjusted upward or downward depending on the net tangible book value, determined
        as provided in the Plaza agreement. This provision resulted in an additional
        payment to Ms. Plaza in the amount of $88,161, which was paid during the
        third
        quarter of 2006.
  The
        Plaza
        Agreement also provides that Plaza, rather than Ms. Plaza, is responsible
        for
        the income tax from December 1, 2005 through the closing date, which was
        January
        25, 2006. Because of the status of Plaza as an N Corporation under the Puerto
        Rico Internal Revenue Code, Plaza's net income from December 1, 2005 to January
        24, 2006 was taxed to Ms. Plaza. The income tax payable by Ms. Plaza for
        Plaza's
        taxable income for that period amounts to $125,227. Plaza reimbursed Ms.
        Plaza
        the $125,227 during the third quarter of 2006. The $88,161 payment described
        in
        the preceding paragraph and the $125,227 payment described in this paragraph
        are
        treated as additional payments on account of the purchase price of Plaza
        stock
        from Mrs. Plaza.
  14
  Pursuant
        to the Puerto Rico Internal Revenue Code, the Company's clients are required
        to
        withhold a percentage of its fees (usually 3%, but sometimes 7%) as withheld
        income tax and remit such amount to the Puerto Rico Department of the Treasury.
        Such payment is treated as a payment on account to the Company's income tax
        obligations. Prior to January 25, 2006, Plaza was an N Corporation, and the
        Company's taxable income was taxed to Ms. Plaza, as sole stockholder.
        Accordingly, such withheld taxes were treated as a distribution to Ms. Plaza,
        as
        the Company's sole stockholder, since Ms. Plaza was the person entitled to
        take
        the credit for the income tax withheld by the Company's clients in her personal
        income tax return. The amounts withheld prior to January 25, 2006 are recognized
        in the financial statements as non-cash distributions.
  San
        Juan
        Holdings represented Plaza and Elizabeth Plaza in connection with the reverse
        acquisition. For such services, Pharma-Bio issued 600,000 shares of common
        stock
        and warrants to purchase 2,500,000 shares of common stock, with an exercise
        price of $.06 per share, to San Juan Holdings. In Pharma-Bio's private placement
        of series A preferred stock and warrants, San Juan Holdings purchased three
        units. The purchase price for the three units was $750,000. The broker, which
        is
        an affiliate of San Juan Holdings, waived the commission and non-accountable
        expense allowance with respect to such sales, and as a result, San Juan Holdings
        purchased the three units for a net payment of $652,500. The Company also
        paid
        an affiliate of San Juan Holdings a broker's commission and non-accountable
        expense allowance of $195,000 for sales made to other purchasers in the private
        placement, and Pharma-Bio issued to the affiliate three-year warrants to
        purchase an aggregate of 275,724 shares of common stock at an exercise price
        of
        $.7344 per share.
 
 **NOTE
        H - COMMITMENTS**
  **C** **ONTRACTS**
 
 On
        January 25, 2006, the Company entered into employment agreements with Elizabeth
        Plaza and Nelida Plaza. The agreement with Elizabeth Plaza initially provided
        that Ms. Plaza will serve as president and chief executive officer of the
        Company for a period of 18 months, for which she will receive a salary at
        the
        annual rate of $250,000. For 18 months thereafter, Ms. Plaza will serve as
        a
        consultant for which she will receive compensation at the annual rate of
        $75,000. During the term of her employment, the Company will also provide
        Ms.
        Plaza with an automobile allowance at the annual rate of $24,828, discretionary
        bonuses and stock options or other equity-based incentives as shall be
        determined by the compensation committee's board of directors, except that
        her
        bonus shall not be less than 4% nor more than 50% of her salary. If the Company
        terminates Ms. Plaza's employment other than for cause or as a result of
        her
        death or disability, the Company is required to pay Ms. Plaza the balance
        of her
        compensation for her employment terms and her consulting term and other
        benefits, including a pro rata portion of the bonus that would have been
        paid to
        her, and her obligations under her non-competition provision terminate. In
        January 2007, Elizabeth Plaza’s employment agreement was amended to extend her
        employment term through December 31, 2007, and the consulting term will
        immediately commence following the employment term and end on January 31,
        2009.
 
 The
        Company's agreement with Nélida Plaza provides that Ms. Plaza will serve as vice
        president for a term of three years for which she will receive annual
        compensation at the annual rate of $150,000. She is also entitled to such
        bonus
        compensation as is determined by the compensation committee, not to exceed
        50%
        of her salary. The Company also agreed to make the lease payments on the
        automobile she currently leases. Such payments are at the annual rate of
        approximately $11,600. If the Company terminates Ms. Plaza's employment other
        than for cause or as a result of her death or disability, the Company is
        required to pay Ms. Plaza the balance of her compensation for her employment
        terms and her consulting term and other benefits, including a pro rata portion
        of the bonus that would have been paid to her, and her obligations under
        her
        non-competition provision, terminate.
 
 On
        January 26, 2006, the Company entered into a one-year consulting agreement
        with
        Dov Perlysky, pursuant to which the Company agreed to pay Mr. Perlysky a
        5%
        commission on business generated by Mr. Perlysky's efforts. This agreement
        replaced his prior employment agreement. This agreement terminated on January
        26, 2007. No commission was paid to Mr. Perlysky pursuant to this
        agreement.
   15
 
 On
        April
        3, 2006, the Company entered into an employment agreement with its Chief
        Financial Officer (“CFO”) pursuant to which the Company will pay him an annual
        salary of $80,000. The agreement has a one-year term, which may be extended
        for
        up to two years. The Company granted the CFO stock options to purchase 90,000
        shares of common stock at $0.7344 per share, which was the fair market value
        on
        the date of grant.
 
 **Lease
        commitments**
 
 **Capitalized
        lease obligations** -As of
        January 31, 2007, the Company owned vehicles acquired under non-cancelable
        capital leases with a cost of $221,434 (accumulated depreciation of $77,932).
        Depreciation expense for these assets amounted to $11,072 and $11,589 in
        the
        three-month periods ended January 31, 2007 and 2006, respectively. The following
        is a schedule, by year, of future minimum lease payments under the capitalized
        leases together with the present value of the net minimum lease payments
        at
        January 31, 2007:
 
 2008
              
              $
              48,2402009
              
              
              48,2402010
              
              
              66,8572011
              
              
              24,562Total
                  minimum lease payments
              
              
              187,899Less:
                  Amount of imputed interest
              
              
              (16,804
              )Present
                  value of minimum lease payments
              
              
              171,095Current
                  portion of obligation under capital leases
              
              
              (39,651
              )Long-term
                  portion
              
              $
              131,444
   **Operating
        facilities** - The
        Company conducts its administrative operations in office facilities which
        are
        leased under three different rental agreements with the following
        terms:
 Description
                
                Monthly
                    Rent
                
                Commitment
                    TermHeadquarter
                    offices and laboratory testing facilities
                
                $
                18,750
                
                Ending
                    in January 2012, with one
                  five
                    year renewal optionHousing
                    for employees
                
                $
                1,850
                
                On
                    a month to month basisLimerick
                    office space
                
                $
                1,000
                
                Ending
                    in July 2007
 The
        first
        lease listed in the table is with an affiliate of the chief executive officer.
        In February 2007, the Company and the affiliate rescinded a former lease
        agreement and entered into a new agreement. The monthly payments under the
        new
        lease agreement, which amount to $18,750, will increase by 5% annually. The
        new
        agreement also requires the payment of utilities, property taxes, insurance
        and
        a portion of expenses incurred by the affiliate in connection with the
        maintenance of common areas. The Company paid a monthly rental of $3,200
        under
        the lease agreement of its former main resources facilities.
  In
        June
        2006, the Company entered into a new lease agreement for new office facilities
        in Limerick, Pennsylvania, at a monthly rental of $1,000. The lease term
        of the
        new lease agreement expires on July 31, 2007, but the agreement may be
        terminated earlier by giving a prior 90 days written notice. The new lease
        agreement may be renewed for an additional term of three years at monthly
        rental
        of $1,050 during the first year, $1,100 during the second year, and $1,150
        during the third year of the lease renewal term.
 
 Rent
        expense during the three-month periods ended January 31, 2007 and 2006 amounted
        to $18,150 and $26,300, respectively.
   16
  **NOTE
        I - STOCK OPTIONS AND STOCK-BASED COMPENSATION**
 
 In
        October 2005, the Company's board of directors adopted, and on April 25,
        2006,
        the Company’s stockholders approved, the 2005 Long-Term Incentive Plan, covering
        2,500,000 shares of common stock. The 2005 plan provides for the grant of
        incentive and non-qualified options, stock grants, stock appreciation rights
        and
        other equity-based incentives to employees, including officers, and consultants.
        The 2005 plan is to be administered by a committee of independent directors.
        In
        the absence of a committee, the plan is administered by the board of directors.
        Independent directors are not eligible for discretionary options. However,
        each
        newly elected independent director receives at the time of his or her election,
        a five-year option to purchase 25,000 shares of common stock at the market
        price
        on the date of his or her election. In addition, the plan provides for the
        annual grant of an option to purchase 5,000 shares of common stock on the
        first
        trading day of January of each year, commencing January 2007. The options
        to
        directors have a term of five years and become exercisable cumulatively as
        to
        50% of the shares subject to the option six months from the date of grant
        and,
        as to the remaining 50%, 18 months from the date of grant. Pursuant to this
        provision, on January 25, 2006, options to purchase 25,000 shares at $0.7344
        per
        share, being the fair market value on the date of grant, were automatically
        granted to each of the three independent directors. Options intended to be
        incentive stock options must be granted at an exercise price per share which
        is
        not less than the fair market value of the common stock on the date of grant
        and
        may have a term which is not longer than ten years. If the option holder
        holds
        at least 10% of our common stock, the exercise price must be at least 110%
        of
        the fair market value on the date of grant and the term of the option cannot
        exceed five years.
  Pursuant
        to the Plaza Agreement, all outstanding options issued by Plaza were terminated,
        and the Company granted incentive stock options to purchase an aggregate
        of
        1,400,000 shares of common stock at an exercise price of $0.7344 per share
        to
        the holders of such terminated Plaza options pursuant to the Company's 2005
        Long-Term Incentive Plan. Of the total options to purchase 1,400,000 shares
        of
        common stock, options to purchase 776,186 shares of common stock were granted
        to
        18 employees whose options to purchase Plaza common stock were cancelled.
        The
        options to purchase the remaining 623,814 shares of common stock were granted
        to
        both the 18 former holders of Plaza options and 23 additional Plaza employees.
        The Company subsequently granted options to purchase other 600,627 shares
        to
        employees and independent directors. The new options have a weighted average
        exercise price of approximately $0.74, a term of five years and are exercisable
        in installments. As of January 31, 2007, there were approximately outstanding
        options to purchase 1,413,909 shares of common stock, , since some options
        expired because of employment terminations.
  The
        following table presents the stock-based compensation included in the Company’s
        consolidated statement of income and the effect on earnings per share:
 Three
                      months endedJanuary
                    31, 2007Stock-based
                    compensation expense:Cost of services
                
                $
                31,906Selling, general and administrative
                
                
                7,116Stock-based
                    compensation before tax
                
                
                39,022Income
                    tax benefit
                
                
                --Net
                    stock-based compensation expense
                
                $
                39,022Effect
                    on earnings per share:Basic
                    earnings per share
                
                $
                (0.002
                )Diluted
                    earnings per share
                
                $
                (0.002
                )
 
 Prior
        to
        the adoption of SFAS 123R and SAB 107, the Company followed APB 25, and
        compensation cost related to employee stock options was generally not recognized
        because options were granted with exercise prices equal to or greater than
        the
        fair market value at the date of grant. Had compensation cost for the stock
        option plans been determined based on the fair value at the grant date for
        awards in the three-month ended January 31, 2006, consistent with the provisions
        of SFAS No. 123R, the effect on Company’s net income and earnings per share
        would not have been significant.
  17
 
 The
        fair
        value of each stock option granted prior to November 1, 2006 was estimated
        at
        $0.60 by the Company’s investment bankers based on its valuation given that the
        Company’s stock had not yet traded and given that the value of the options
        cannot exceed the market price of the common stock ($0.7344) in the most
        recent
        issuance of securities by the Company, which was its January 2006 private
        placement.
 
 The
        fair
        value of each stock option granted on or after November 1, 2006 was estimated
        on
        the date of grant using the Black-Scholes option pricing model using the
        following weighted average assumptions (expected volatility is based upon
        the
        historical volatility of the Company’s stock price):
 
 Expected
                  dividend yield
              
              
              0.0
              %Expected
                  stock price volatility
              
              
              10
              %Risk
                  free interest rate
              
              
              4.7
              %Expected
                  life of options
              
              
              2.65
                  yearsWeighted
                  average fair value per share of options granted during the quarter
                ended
                  January 31, 2007
              
              
              $0.1169
 
 As
        of
        November 1, 2006 there were outstanding options to acquire 1,348,090 shares
        of
        common stock. During the three month period ended January 31, 2007, the Company
        granted options to purchase 5,000 shares of common stock to each of its three
        independent directors and an option to purchase 50,000 shares to its new
        general
        manager. No options were exercised or expired during the three month period
        ended January 31, 2007. Therefore, as of January 31, 2007, there were
        outstanding options to purchase 1,413, 909 shares. The weighted average of
        the
        remaining contractual life of the outstanding stock options is 4 years and
        the
        weighted average exercise price is $0.7467.
 
 Pursuant
        to the Plaza Agreement, Pharma-Bio agreed that it would issue 100 shares
        of
        common stock to each of Plaza's eligible employees. Such shares will not
        be
        issued until Pharma-Bio is eligible to use a Form S-8 registration statement
        in
        connection with the issuance of such shares. Approximately 16,500 shares
        of
        common stock may be issued pursuant to this program.
 
 **NOTE
        J - CONCENTRATION OF RISKS**
 
 The
        Company's cash balances are maintained in a bank checking account and a money
        market account.
  Management
        deems all its accounts receivables to be fully collectible, and, as such,
        does
        not maintain any allowances for uncollectible receivables.
  The
        Company's revenues, and the related receivables, are concentrated in the
        pharmaceutical industry in Puerto Rico. A small number of customers have
        accounted for a significant percentage of its revenue. In spite of the fact
        that
        just a few customers represent a significant source of revenue, our functions
        are not a continuous process, accordingly, the client base for which our
        services are typically rendered, on a project-by-project basis, changes
        regularly. The following table sets forth information as to revenues and
        percentage of revenues for the three months periods ended on January 31,
        2006
        and 2005 (dollars in thousands) for the Company's principal clients, all
        of
        which are pharmaceutical companies:
  Three
                      Month Periods Ended January 31,2007
                
                2006GlaxoSmithKline
                
                $
                1,260
                
                
                34.8
                %
                $
                630
                
                
                17.4
                %Schering-Plough
                
                
                225
                
                
                6.2
                %
                
                1,309
                
                
                36.2
                %Johnson
                      & Johnson
                
                
                747
                
                
                20.6
                %
                
                267
                
                
                7.8
                %Lilly
                      del Caribe
                
                
                301
                
                
                8.3
                %
                
                384
                
                
                10.6
                %Total
                
                $
                2,533
                
                
                69.9
                %
                $
                2,590
                
                
                72.0
                %
  18
   Schering-Plough,
        Lilly del Caribe, GlaxoSmithKline and Johnson & Johnson had outstanding
        balances at January 31, 2007 representing 11%, 13%, 27% and 13%, respectively,
        of the total receivables.
  The
        Company assesses the financial strength of its customers and, as a consequence,
        believes that its trade accounts receivable credit risk exposure is limited.
        However, the loss or significant decline in business from any of its major
        customers could have a material effect upon its revenue and income.
  In
        June
        2006, Schering-Plough announced the closing of one of its two facilities
        in
        Puerto Rico and the reduction of staff in the second. The accompanying
        statements of operations include revenues from the closed facility as follows:
  Three
                  Month Periods Ended January 31,
              
              Revenues2007
              
              $
              185,8232006
              
              $
              397,530
  The
        receivables at January 31, 2007 from the closed facility amounted to
        approximately $256,000, but the credit risk exposure on these receivables
        is not
        significant. The Company does not anticipate any problem in connection with
        the
        collection of said outstanding balance.
 
 **NOTE
        K - RETIREMENT PLAN**
 
 The
        Company has a qualified profit sharing in accordance with the provision of
        Section l165(a)(3)(A) of the Puerto Rico Code, for employees who meet certain
        age and service period requirements. The Company makes contributions to this
        plan as required by the provisions of the plan document. Contributions for
        the
        three months ended January 31, 2007 and 2006 were $13,601 and $10,265,
        respectively.
 
 
 19
 **Item
        2. Management's Discussion and Analysis of Financial Condition and Results
        of
        Operations**
 
 The
        following discussion of our results of operations and financial condition
        should
        be read in conjunction with the financial statements and the related notes.
        The
        following discussion includes forward-looking statements. For a discussion
        of
        important factors that could cause actual results to differ from results
        discussed in the forward-looking statements, see "Forward Looking
        Statements."
 
 As
        a
        result of the reverse acquisition that closed on January 25, 2006, Plaza
        is
        treated as the accounting acquirer and the results of operations for periods
        prior to January 25, 2006 reflect only the operations of Plaza.
 
 **Overview**
 
 We
        are a
        validation and compliance consulting service firm in Puerto Rico. The validation
        and compliance consulting service market in Puerto Rico consists of local
        validation and compliance consulting firms, United States dedicated validation
        and compliance consulting firms and large publicly traded and private domestic
        and foreign engineering and consulting firms. We provide a broad range of
        compliance and validation consulting services. We market our services to
        pharmaceutical, chemical, biotechnology and medical devices and allied products
        companies in Puerto Rico, the United States and Europe through their Puerto
        Rico
        operations. Our staff includes more than 140 experienced engineering and
        life
        science professionals, and includes former quality assurance managers or
        directors, and experienced and well-trained professionals with bachelors,
        masters and doctorate degrees in health sciences and engineering.
 
 Our
        revenue is derived from time and materials contracts (representing approximately
        90% of total revenues), where the clients are charged for the time, materials
        and expenses incurred on a particular project, and to a lesser extent
        (approximately 10% of total revenues), from fixed-fee contracts or from "not
        to
        exceed" contracts, which generally are short-term contracts, in which the
        value
        of the contract to us cannot exceed a stated amount. For time and materials
        contracts, our revenue is principally a function of the number of its compliance
        and validation professional employees and the number of hours billed per
        professional. To the extent that our revenue is based on fixed-fee or "not
        to
        exceed" contracts, our ability to operate profitably is dependent upon our
        ability to estimate accurately the costs that we will incur on a project
        and to
        management and monitoring progress. If we underestimate our costs on any
        contract, we would sustain a loss on the contract.
 
 We
        believe the most significant factors to achieving future business growth
        are the
        ability to (a) continue to provide quality value-added validation and compliance
        services to our clients in the Puerto Rico marketplace; (b) recruit and retain
        highly educated and experienced validation and compliance professionals;
        (c)
        further expand its products and services to address the expanding compliance
        needs of the clients; and (d) expand our market presence into the United
        States,
        Latin America and Europe in order to respond to the international validation
        and
        compliance demands of our clients.
 
 Our
        business has been dependent upon a small number of clients. For the three-month
        period ended January 31, 2007, two customers accounted for approximately
        55.4%
        of revenues. For the three-month period ended January 31, 2006, one of these
        two
        customers, together with another customer accounted for approximately 53.6%
        of
        revenues. In spite of the fact that just a few customers represent a significant
        source of revenue, our functions are not a continuous process, accordingly,
        the
        client base for which our services are typically rendered, on a
        project-by-project basis, changes regularly.  However, the loss of or
        significant reduction in the scope of work performed for any major customer
        could impair our ability to operate profitably. In particular, we had a contract
        with one of our largest customers which expired on December 31, 2005. Although
        this contract was divided in a number of smaller contracts and extended with
        termination dates varying through December 2006, the level of business has
        significantly declined from the prior year. In June 2006, this customer
        announced the closing of one of its two facilities located in Puerto Rico
        and a
        reduction of staff in the second facility. The revenues from this major customer
        were as follows:
  20
  Three
                  month periods ended on January 31,
              
              Operating
                  facility
              
              Closed
                  facility
              
              Total2007
              
              $
              185,823
              
              $
              38,739
              
              $
              224,5622006
              
              
              397,530
              
              
              911,091
              
              
              1,308,621
 
 Although
        our business is affected by seasonal factors such as vacation and holiday
        work
        policies, we do not believe that our business is seasonal. However, because
        our
        business is based on performing services under contracts which relate to
        specific projects, there may be a lag between the completion of one project
        and
        the commencement of the following project. This lag may cause a decline in
        revenues and a related decline in gross margin.
 
 On
        January 9, 2006, we acquired, for $300,000, from the individual who served
        as
        our executive vice president and chief operating officer from February 1,
        2006
        to March 31, 2006, certain assets of Integrated Validation Service, a United
        States-based business that performs consulting services for the pharmaceutical
        and biotech industries. These assets include a client list and the validation
        compliance service business that was operated by that individual. We also
        hired
        nine former employees of the business. This acquisition was made pursuant
        to our
        strategy to expand our operations beyond Puerto Rico with a view to lessening
        our dependence upon a small number of Puerto Rico pharmaceutical companies.
        Revenues from these operations for the quarter ended January 31, 2007 were
        approximately $126,000. We cannot give assurance that any significant revenues
        will be derived from these operations.
 
 The
        principal components of our costs of revenue are employee compensation
        (salaries, wages, taxes and benefits) and expenses relating to the performance
        of the services. We face increasing labor costs which we seek to pass on
        to our
        customers through increases in our rates. However, there is often a delay
        between the increase in our costs and the increases in our billing rates,
        which
        may result in a reduced gross margin during that period. Although we have
        been
        successful in the past in being able to increase our billing rates to reflect
        our increased labor costs, we cannot give any assurance that we will continue
        to
        be able to do so.
 
 On
        January 25, 2006, Pharma-Bio acquired Plaza in a transaction which was accounted
        for as a reverse acquisition, with Plaza being deemed the accounting acquirer.
        Pursuant to the acquisition agreement, we paid Elizabeth Plaza, the sole
        stockholder of Plaza, $10,000,000 plus 1,150,000 shares of Pharma-Bio's common
        stock. In addition, Ms. Plaza is to receive three installments, each in the
        amount of $2,750,000, payable on January 25, 2007, 2008 and 2009. In January
        2007, Elizabeth Plaza agreed to accept the first installment of $2,750,000
        in
        two payments, one in the amount of $2,500,000 in January 2007 and the second
        in
        the amount of $250,000 in February 2007. The $250,000 payment due in February
        2007 and the second installment due in February 2007, net of imputed interest,
        is a current liability at January 31, 2007, and is a significant factor in
        the
        reduction in the Company's working capital, as discussed under "Liquidity
        and
        Capital Resources."
 
 **Critical
        Accounting Policies and Estimates**
 
 The
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with generally accepted accounting principles (“GAAP”) in the United
        States. We believe the following are the critical accounting policies that
        impact the financial statements, some of which are based on management’s best
        estimates available at the time of preparation. Actual experience may differ
        from these estimates.
  Cash
        and
        cash equivalents - For purposes of the statements of cash flows, cash and
        cash
        equivalents include liquid investments with original maturities of three
        months
        or less.
  Revenue
        Recognition - We recognize revenues from time and material contracts by applying
        the proportional performance model, whereby revenue is recognized as performance
        occurs. In the case of fixed-fee or “not to exceed” contracts, which are
        generally short-term contracts, revenue is recognized similarly, except that
        certain milestones also have to be reached before revenue is recognized.
        With
        respect to fixed-fee contracts, revenue is recognized based on the percentage
        that services rendered bears to the estimated services to be performed over
        the
        contract. If we determine that a fixed-fee or “not to exceed” contract will
        result in a loss, we recognize the estimated loss in the period in which
        such
        determination is made.
  21
 
 Bad
        Debts
        - Bad debts are accounted for using the direct write-off method whereby an
        expense is recognized only when a specific account is determined to be
        uncollectible. The effect of using this method approximates that of the
        allowance method.
 
 Property
        and Equipment - Owned property and equipment, and leasehold improvements
        are
        stated at cost. Equipment and vehicles under capital leases are stated at
        the
        lower of fair market value or net present value of the minimum lease payments
        at
        the inception of the leases.
  Depreciation
        of owned assets, and amortization of assets under capital leases and leasehold
        improvements, are provided using the straight-line basis over the shorter
        of the
        estimated useful lives of the assets or the lease term. Major renewals and
        betterments that extend the life of the assets are capitalized, while
        expenditures for repairs and maintenance are expensed when
        incurred.
  We
        evaluate for impairment our long-lived assets to be held and used, and
        long-lived assets to be disposed of, whenever events or changes in circumstances
        indicate that the carrying amount of an asset may not be
        recoverable.
 
 Income
        Taxes -- We elected from our inception until January 25, 2006, to be covered
        under the provisions of Subchapter N of Subtitle A of the Puerto Rico Internal
        Revenue Code (the “Puerto Rico Code”), which is similar to Subchapter S of the
        Internal Revenue Code in that we paid no income taxes since the taxable income
        was taxed to our stockholder. Under the provisions of the Puerto Rico Code,
        we
        paid the Puerto Rico Secretary of Treasury, on behalf of its stockholder,
        an
        amount equal to 33% of our taxable income. These payments, and any income
        tax
        withheld, are included in the amount of distributions to stockholder in our
        financial statements.
  Commencing
        with the acquisition of Plaza on January 25, 2006, we are taxed based on
        our
        taxable income under the applicable provisions of the Puerto Rico Code and
        the
        Internal Revenue Code. The financial statements for the year ended October
        31,
        2006 reflect a provision for income taxes based on the applicable provisions
        of
        the Puerto Rico Code, since the income was earned in Puerto Rico, and, pursuant
        to the Puerto Rico Code, we did not pay income tax for periods prior to January
        25, 2006.
  Concentration
        of credit risk -- Financial instruments which potentially subject us to
        concentrations of credit risk consist principally of cash deposits and trade
        accounts receivable. We maintain our cash deposits in two high quality financial
        institutions. While we attempt to limit any financial exposure, our deposit
        balances frequently exceed federally insured limits; however, no losses have
        been experienced on these accounts.
  Our
        revenues are concentrated in the pharmaceutical industry in Puerto Rico.
        Approximately $2.5 million, or 70.0%, of the revenues in the three month
        period
        ended January 31, 2007 were generated by four customers. The same customers
        had
        an outstanding balance at January 31, 2007 representing 64.5% of the total
        receivables. Approximately $2.6 million, or 71.6% of revenue, for the three
        month period ended January 31, 2006, was generated by these four customers.
        These four customers had outstanding balances at January 31, 2006 representing
        69% of the total receivables. We assess the financial strength of our clients
        and, as a consequence, believe that our trade accounts receivable credit
        risk
        exposure is limited.
  Retirement
        Plan -- We adopted a qualified profit sharing plan in January 2002 (amended
        on
        November 30, 2003) in accordance with the applicable provisions of the Puerto
        Rico Code, for employees who meet certain age and service period requirements.
        We make contributions to this plan as required by the provisions of the plan
        document, amounting to $13,601 and $10,265 for the three month periods ended
        January 31, 2007 and 2006, respectively.
  22
  Stock
        Option Plan --During the year ended October 31, 2004, we granted stock options
        with an exercise price equal to the book value of the common stock as of
        October
        31, 2003, which we deemed to be the fair value of our common stock. The options
        expired ten years from the date of grant and generally vested over a three-year
        period. In connection with our acquisition of Plaza, these options were
        cancelled and we granted the option holders options to purchase an aggregate
        of
        776,186 shares of common stock in respect of the cancelled options and we
        issued
        options to purchase an additional 623,814 shares of common stock to employees
        of
        Plaza, including those whose options were cancelled. We have subsequently
        granted options to purchase other 510,627 shares to employees and options
        to
        purchase 90,000 shares to independent directors. However, as of January 31,
        2007, there were outstanding options to purchase 1,413,909 shares of common
        stock. Most of our outstanding options have an exercise price of $0.7344,
        a term
        of five years and are exercisable in installments.
 
 Stock-based
        compensation -- Effective November 1, 2006, we adopted the provisions of
        SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), and Staff Accounting
        Bulletin No. 107 (“SAB 107”) using the modified prospective method, which
        results in the provisions of SFAS 123R being applied to the consolidated
        financial statements on a prospective basis. Under the modified prospective
        recognition method, restatement of consolidated income from prior periods
        is not
        required, and accordingly, we have not provided such restatements. Under
        the
        modified prospective provisions of SFAS 123R, compensation expense is recorded
        for the unvested portion of previously granted awards that were outstanding
        on
        November 1, 2006 and all subsequent awards. SFAS 123R requires that all
        stock-based compensation expense be recognized in the financial statements
        based
        on the fair value of the awards. Stock-based compensation cost is measured
        at
        the grant date based on the fair value of the award and is recognized as
        expense
        over the requisite service period, which generally represents the vesting
        period, and includes an estimate of awards that will be forfeited. We calculate
        the fair value of stock options using the Black-Scholes option-pricing model
        at
        grant date. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,”
to require that excess tax benefits related to stock-based compensation be
        reflected as cash flows from financing activities rather than cash flows
        from
        operating activities. We do not recognize such cash flow from financing
        activities since there has been no tax benefit related to the stock-based
        compensation.
 
 As
        required under the new standards, stock option compensation expense is based
        on
        the vesting period of the options. Forfeitures estimated when recognizing
        compensation expense are adjusted when actual forfeitures differ from the
        estimate.
 
 Fair
        value of financial instruments - The carrying value of our financial instruments
        (excluding obligations under capital leases): cash, accounts receivable,
        accounts payable and accrued liabilities, are considered reasonable estimates
        of
        fair value due to the short period to maturity. We believe, based on current
        rates, that the fair value of its obligations under capital leases approximates
        the carrying amount.
  Use
        of
        estimates - The preparation of financial statements in conformity with
        accounting principles generally accepted in the United States of America,
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities at the date of the financial statements, and the reported amounts
        of
        revenue and expenses during the reporting period. Actual results could differ
        from those estimates.
 
 **New
        Accounting Pronouncements**
  In
        February 2007, the Financial Accounting Standards Board (FASB) issued Statement
        No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities -
        Including an Amendment of FASB Statement No. 115”. This Statement permits
        entities to choose to measure many financial instruments and certain other
        items
        at fair value. The objective is to improve financial reporting by providing
        entities with the opportunity to mitigate volatility in reported earnings
        caused
        by measuring related assets and liabilities differently without having to
        apply
        complex hedge accounting provisions. This Statement is expected to expand
        the
        use of fair value measurement, which is consistent with the FASB’s long-term
        measurement objectives for accounting for financial instruments. This Statement
        is effective as of the beginning of an entity’s first fiscal year that begins
        after November 15, 2007. Early adoption is permitted as of the beginning
        of a
        fiscal year that begins on or before November 15, 2007, provided the entity
        also
        elects to apply the provisions of FASB Statement No. 157, “ Fair
        Value Measurements”. We do not expect that the application of this standard will
        have any effect on our financial statements.
  23
  In
        September 2006, the FASB published Statement No. 157 “Fair Value Measurement”.
        This Statement defines fair value, establishes a framework for measuring
        fair
        value in generally accepted accounting principles (GAAP), and expands
        disclosures about fair value measurements. This Statement applies under other
        accounting pronouncements that require or permit fair value measurements,
        the
        FASB having previously concluded in those accounting pronouncements that
        fair
        value is the relevant measurement attribute. Accordingly, this Statement
        does
        not require any new fair value measurements. However, for some entities,
        the
        application of this Statement will change current practice. The changes to
        current practice resulting from the application of this Statement relate
        to the
        definition of fair value, the methods used to measure fair value, and the
        expanded disclosures about fair value measurements. This Statement is effective
        for financial statements issued for fiscal years beginning after November
        15,
        2007, and interim periods within those fiscal years. Earlier application
        is
        encouraged, provided that the reporting entity has not yet issued financial
        statements for that fiscal year, including financial statements for an interim
        period within that fiscal year. The provisions of this Statement should be
        applied prospectively as of the beginning of the fiscal year in which this
        Statement is initially applied, except for certain exceptions stated in the
        Statement. The implementation of this Statement will have no significant
        effect
        on our financial statements.
  In
        June
        2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in
        Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
        Interpretation clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109, “Accounting for Income Taxes” *.* FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. This Interpretation also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure, and transition. This Interpretation is effective for
        fiscal
        years beginning after December 15, 2006. Earlier application of the provisions
        of this Interpretation is encouraged if the enterprise has not yet issued
        financial statements, including interim financial statements, in the period
        this
        Interpretation is adopted. We do not expect that the application of this
        standard will have any effect on our results of operations or financial
        condition.
  Other
        recently issued FASB Statements or Interpretations, SEC Staff Accounting
        Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been
        implemented or are not applicable to the Company.
 
 **Results
        of Operations**
 
 The
        following table sets forth our statements of operations for the three months
        ended January 31, 2007 and 2006, in dollars (dollars in thousands) and as
        a
        percentage of revenue:
  Three
                  months ended January 31,2007
              
              2006Revenue
              
              $
              3,618
              
              
              100.0
              %
              $
              3,404
              
              
              100.0
              %Cost
                  of revenue
              
              
              2,167
              
              
              59.9
              %
              
              2,033
              
              
              59.7
              %Gross
                  profit
              
              
              1,451
              
              
              40.1
              %
              
              1,371
              
              
              40.3
              %Selling,
                  general and administrative expenses
              
              
              737
              
              
              20.3
              %
              
              455
              
              
              13.4
              %Interest
                  expense
              
              
              129
              
              
              3.6
              %Income
                  before income taxes
              
              
              585
              
              
              16.2
              %
              
              916
              
              
              26.9
              %Income
                  tax expense1
              
              
              256
              
              
              7.1
              %
              
              22
              
              
              0.6Net
                  income1
              
              $
              329
              
              
              9.1
              %
              $
              894
              
              
              26.3
              %
  24
  (1)
            Plaza
                was treated as an N Corporation under the Puerto Rico Internal Revenue
                Code, which is similar to an S Corporation under the United States
                Internal Revenue Code, prior to the reverse acquisition. As a result,
                Plaza did not pay any income tax through January 25, 2006. Since
                January
                25, 2006, the Company has been subject to income tax in Puerto Rico.
                If
                Plaza had not been treated as an N Corporation during the three-month
                period ended January 31, 2006, the Company income before income taxes
                would have been taxed at a 41.5% rate, the income tax expense and
                the net
                income would have amount to approximately $380,000 (11.2%) and $536,000
                (15.7%), respectively. 
 Quarter
        Ended January 31, 2007 Compared to Quarter Ended January 31, 2006
 
 Revenues .
        Revenues for the first quarter 2007 were $3.6 million, an increase of
        approximately $0.2 million, or 6.3%, compared to first quarter 2006 revenues.
        We
        increased our revenue notwithstanding a decline in revenue of approximately
        $1.1
        million in the quarter ended January 31, 2007 from the comparable quarter
        of the
        prior year from the one of our largest customers in the quarter ended January
        31, 2006, following completion of contracts with this customer. This customer
        significantly reduced the scope of its operations by closing one of its two
        facilities in Puerto Rico and reducing personnel at the second. This decrease
        in
        revenue from this customer was offset by an increase of $1.1 million from
        two
        other customers that generated revenues of $0.9 million in the quarter ended
        January 31, 2006.
 
 Cost
        of Revenues; Gross Margin .
        Our
        gross margin basically remained stable during the first quarter of 2007 as
        compared to the gross margin for the first quarter of 2006.
 
 Selling,
        General and Administrative Expenses .
        Selling, general and administrative expenses were approximately $737,000
        during
        the first quarter 2007, an increase of $282,000, or 62.0%, from the selling,
        general and administrative expenses of $455,000 in the comparable quarter
        of the
        prior year. Such increase resulted from expenses related to executive salaries
        not previously incurred and to expenses of an office we opened in Pennsylvania
        in early January 2006.
 
 Interest
        Expense .
        Since
        January 25, 2006, we have been recognizing approximately $125,000 quarterly
        corresponding to imputed interest expense incurred in connection with the
        long-term obligations to Ms. Plaza which originated as a result of the reverse
        acquisition. The first payment to Ms. Plaza was made in January 2007. The
        interest expense will decrease as payments are made.
 
 Income
        Tax Expense .
        The
        increase in the income tax expense results from a change in our tax status.
        We
        became a regular corporation taxpayer effective January 25, 2006. Prior to
        that
        date, we did not pay taxes pursuant to the provisions of Subchapter N of
        Subtitle A of the Puerto Rico Internal Revenue Code (the "Puerto Rico Code"),
        which is similar to Subchapter S of the United States Internal Revenue Code
        in
        that our taxable income is taxed to the stockholders.
  Net
        Income .
        As a
        result of the increase in selling, general and administrative expenses, the
        recognition of imputed interest and the change in our tax status, our net
        income
        for the quarter ended on January 31, 2007 decreased to approximately $329,000,
        or $0.02 per share (basic) and $0.01 per share (diluted), a decline of
        approximately $565,000, or 63.2%, from $894,000 net income, or $0.50 per
        share
        (basic) and $0.16 per share (diluted), for the quarter ended on January 31,
        2006.
 
 The
        basic
        and diluted income per share are also affected by the securities issued in
        connection with the private placement that was completed contemporaneously
        with
        the reverse acquisition. At that time, the Company issued shares of series
        A
        preferred stock which were convertible into 15,998,800 shares of common stock.
        The series A preferred stock was automatically converted into the 15,998,800
        shares on April 25, 2006, when the Company increased its authorized capital
        stock. As a result, the shares of common stock that were issued upon conversion
        of the series A preferred stock are included in determining diluted earnings
        per
        share from January 25, 2006 until April 24, 2006 and in determining basic
        earnings per share thereafter.
  25
  **Liquidity
        and Capital Resources**
 
 Liquidity
        is a measure of our ability to meet potential cash requirements, including
        planned capital expenditures. At January 31, 2006, we had working capital
        of
        approximately $2.5 million, a decrease of $0.7 million from the working capital
        at January 31, 2006 of $3.2 million. Although we generated approximately
        $2.7
        million from operations in the quarter ended January 31, 2007, this increase
        was
        offset by a payment of $2.5 million made in connection with obligation payable
        to Elizabeth Plaza for the acquisition of Plaza. At January 31, 2006, we
        have a
        $2.7 million short term and a $2.6 million long term obligations, both net
        of
        imputed interest, to Ms. Plaza for a payment of $250,000 due in 2007, and
        two
        payments of $2.75 million each due in January 2008 and 2009, respectively.
 
 In
        January 2006, we raised gross proceeds of $11.75 million from the sale of
        series
        A preferred stock and warrants, and used $10 million to pay Ms. Plaza the
        cash
        portion of the purchase price of the Plaza stock and most of the balance
        to pay
        offering expenses and closing expenses.
 
 Our
        primary cash needs consist of payments of compensation to professional
        employees, overhead expenses and payments due to Ms. Plaza pursuant to the
        terms
        of the acquisition of Plaza. In addition, since January 25, 2006, we have
        been
        subject to income tax in Puerto Rico. Our taxable income in Puerto Rico is
        taxed
        at rates ranging from 39% to 41.5% of taxable income. We have a line of credit
        of $250,000, which bears interest at 2.00% over the prime rate and that was
        unused at January 31, 2007.
 
 Management
        believes that based on current levels of operations and anticipated growth,
        cash
        flows from operations, high quality customer receivables will be sufficient
        to
        fund anticipated expenses and satisfy other possible long-term contractual
        commitments, including our obligations to pay Ms. Plaza pursuant to the
        agreement relating to the acquisition of Plaza, for the next twelve
        months.
 
 While
        uncertainties relating to competition, the industries and geographical regions
        served by the Company and other regulatory matters exist within the consulting
        services industry, management is not aware of any trends or events likely
        to
        have a material adverse effect on liquidity or its financial
        statements.
 
 **Forward
        Looking Statements**
 
 This
        Report on Form 10-QSB contains certain forward-looking statements that are
        based
        on current expectations. In light of the important factors that can materially
        affect results, including those set forth in this paragraph and below, the
        inclusion of forward-looking information herein should not be regarded as
        a
        representation by the Company or any other person that the objectives or
        plans
        of the Company will be achieved. The Company may be unable to expand its
        customer base and to replace customers upon the completion of contracts,
        and may
        encounter competitive, technological, financial and business challenges making
        it more difficult than expected to continue to develop and market its services;
        the market may not accept the Company's existing and future services; the
        Company may be unable to retain existing key management personnel; and there
        may
        be other material adverse changes in the Company's operations or business.
        Assumptions relating to budgeting, marketing, and other management decisions
        are
        subjective in many respects and thus susceptible to interpretations and periodic
        revisions based on actual experience and business developments, the impact
        of
        which may cause the Company to alter its marketing, or other budgets, which
        may
        in turn affect the Company's financial position and results of operations.
        The
        reader is therefore cautioned not to place undue reliance on forward-looking
        statements contained herein, which speak solely as of the date of this Form
        10-QSB, and the forward looking statements are qualified in their entirety
        by
        reference to the material contained in "Risk Factors" and "Management's
        Discussion and Analysis of Financial Condition and Results of Operations"
        contained in our Form 10-KSB for the year ended October 31, 2006 and in our
        other filings with the SEC and the "Management's Discussion and Analysis
        of
        Financial Condition and Results of Operations" contained in this Form 10-QSB.
        We
        assume no responsibility to update any forward-looking statements as a result
        of
        new information, future events, or otherwise.
  26
 
 **Item
        3. Controls and Procedures**
 
 As
        of the
        end of the period covered by this report, our chief executive officer and
        chief
        financial officer evaluated the effectiveness of our disclosure controls
        and
        procedures. Based on their evaluation, the chief executive officer and chief
        financial officer concluded that our disclosure controls and procedures are
        effective in alerting them to material information that is required to be
        included in the reports that we file or submit under the Securities Exchange
        Act
        of 1934 and that information required to be disclosed in the reports that
        we
        file or submit under the Securities Exchange Act of 1934 is accumulated and
        communicated to our management, including our chief executive officer and
        chief
        financial officer, to allow timely decisions regarding required
        disclosure.
 
 During
        the quarterly period covered by this report, there were no changes in the
        Company's internal controls over financial reporting that materially affected,
        or are reasonably likely to materially affect, the Company's internal controls
        over financial reporting.
 
 **PART
        II. OTHER INFORMATION**
 
 **Item
        6. Exhibits**
 
 (a)    
        Exhibits:
 
 31.1
              Certification
                  of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
 
 31.2
              Certification
                  of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
 
 32.1
              Certification
                  of the chief executive officer and chief financial officer pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of
                  2002
  27
  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
   **PHARMA-BIO
                  SERV, INC**./s/ Elizabeth
                PlazaElizabeth
                PlazaChief
                  Executive Officer
  /s/ Manuel
                O.
                MoreraManuel
                O. MoreraChief
                    Financial OfficerDated: March 16, 2007
  28