Statement of Operations Information:

 

		Consolidated (in thousands, except per share data)
		Six Months Ended April 30,						Year Ended October 31,
		2008			2007			2007			2006
Revenues		$	7,302		$	7,755		$	16,205		$	14,184
Gross profit		$	2,720		$	3,160		$	6,824		$	6,068
Income before income taxes		$	1,143		$	1,489		$	3,337		$	3,495
Net income 1		$	628		$	847		$	1,901		$	2,335
Basic earnings per common share		$	0.03		$	0.04		$	0.10		$	0.22
Diluted earnings per common share		$	0.03		$	0.04		$	0.09		$	0.13

 

---

(1)

Prior to the reverse acquisition Pharma-PR 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. As a result, Pharma-PR did not pay any income tax through January 25, 2006. Since January 25, 2006, Pharma-PR has been subject to income tax in Puerto Rico at statutory rates ranging from 39% to 41.5%. If Pharma-PR had not been treated as an N Corporation during a portion of the fiscal year ended October 31, 2006, net income for the year ended in October 31, 2006 would have been approximately $1,977,000, or $0.19 per share (basic) and $0.11 per share (diluted).

 

3

---

   

Consolidated Balance Sheet Information (in thousands):

 

		April 30, 2008			October 31, 2007
Working capital		$	1,314		$	3,863
Total assets			7,415			9,563
Total liabilities			4,558			7,396
Retained earnings			2,674			2,046
Stockholders’ equity			2,857			2,167

RISK FACTORS

 

An investment in our securities involves a high degree of risk. In determining whether to purchase our securities, you should carefully consider all of the material risks described below, together with the other information contained in this prospectus before making a decision to purchase our securities. You should only purchase our securities if you can afford to suffer the loss of your entire investment.

Risks That Relate to our Business

 

Because our business is concentrated in the pharmaceutical industry in Puerto Rico, any changes in that industry could impair our ability to generate business.

Since most of our business is performed in Puerto Rico for pharmaceutical, biotechnology, medical device and chemical manufacturing companies, our ability to generate revenue and profit would be impaired by factors in Puerto Rico for example changes in taxes, regulatory, political or economic conditions which discourage these businesses from operating in Puerto Rico and changes in U.S. government regulations which affect the need for services such as those provided by Pharma-PR.

Since our business is dependent to the development and enhancement of patented pharmaceutical products or processes by our clients, the failure of our clients to obtain and maintain patents could impair our business.

Companies in the pharmaceutical industry are highly dependent on their ability to obtain and maintain patents for their products or processes. We are aware of some pharmaceutical companies with operations in Puerto Rico whose patents rights may expire in the near future. The inability to obtain new patents and the expiration of active patents may reduce the need for our services and thereby impair our ability to operate profitably.

Because our business is dependent upon a small number of clients, the loss of a major client could impair our ability to operate profitably.

Our business has been dependent upon a small number of clients. During the six months ended in April 30, 2008 and 2007, and the years ended October 31, 2007 and 2006, a very small number of clients accounted for a disproportionately large percentage of our revenue. For the six-month periods ended in April 30, 2008 and 2007, four customers accounted for approximately 65% of our revenue, in both periods. For the year ended October 31, 2007, five customers accounted for approximately 66.7% of revenue. For the year ended October 31, 2006, four customers accounted for approximately 73.0% of revenue. The loss of, or significant reduction in, the scope of work performed for any major customer could impair our ability to operate profitably. We cannot assure we will not sustain significant decreases in revenue from our major customers or that we will be able to replace any decline in revenue.

 

4

---

 

We may be unable to pass on increased labor costs to our clients.

The principal components of our cost of revenues 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. To remain competitive, we may not be able to pass these cost increases to our clients, and, to the extent that we are not able to pass these increases to our clients, our gross margin will be reduced.

Our cash requirements include payments due from reverse merger transaction.

Pursuant to the merger agreement, we are still required to make a final payment of $2.75 million per our reverse merger agreement due on January 25, 2009. This payment is not contingent upon our earnings, earnings before interest, taxes, depreciation and amortization or any other financial criteria. We may not have resources, other than from our operations, from which to make the payment and, even if we do have the available cash, our growth may be impaired if we use our cash for that purpose.

Because the pharmaceutical industry is subject to government regulations, changes in government regulations relating to this industry may affect the need for our services.

Because government regulations affect all aspects of the pharmaceutical, biotechnology, medical device and chemical manufacturing industries, including regulations relating to the testing and manufacturing of pharmaceutical products and the disposal of materials which are or may be considered toxic, any change in government regulations could have a profound effect upon not only these companies but companies, such as ours, that provide services to these industries. If we are not able to adapt and provide necessary services to meet the requirements of these companies in response to changes in government regulations, our ability to generate business may be impaired.

The willingness of companies in the pharmaceutical and related industries to conduct business in Puerto Rico could significantly impair our business by reducing the need for our services.

Since our business is conducted mainly in Puerto Rico, our ability to generate revenues and income is dependent upon the willingness of our clients and potential clients to maintain or increase their operations in Puerto Rico. Our clients may consider factors such as tax benefits, Puerto Rico’s economy, cost of doing business and other economic factors.

Changes in tax benefits may affect the willingness of companies to continue or expand their operations in Puerto Rico.

Until 1996, the Internal Revenue Code provided certain tax benefits to pharmaceutical companies operating in Puerto Rico by enabling their Puerto Rico operations to operate free from federal income taxes. Partly as a result of the tax benefits, numerous pharmaceutical companies established facilities in Puerto Rico. In 1996, this tax benefit was eliminated, although companies that had facilities in Puerto Rico could continue to receive these benefits for ten years, at which time the benefits were set to expire. In order to promote business activities in Puerto Rico, the Puerto Rico government enacted in May 2008 a tax incentive law (“Act 73”). Among others, Act 73 provides tax exemption from various taxes, including income tax, and investment credits for activities similar to those of our customers and our Company. The change in the tax laws may affect favorably or unfavorably the willingness of pharmaceutical companies to continue or to expand their Puerto Rico operations. To the extent that pharmaceutical companies choose to develop and manufacture products outside of Puerto Rico, our ability to generate new business may be impaired.

 

Puerto Rico’s economy, including its 2006 governmental financial crisis, may affect the willingness of businesses to commence or expand operations in Puerto Rico.

As a result of Puerto Rico’s 2006 governmental financial crisis, which resulted in the temporary closing of government offices, businesses may be reluctant to commence or expand their operations in Puerto Rico. Further, since Puerto Rico’s economy is petroleum-based, the high price of oil, combined with Puerto Rico’s high level of debt, may make Puerto Rico a less attractive place to expand existing operations or commence new business activities. To the extent that companies in the pharmaceutical and related industries decide not to commence new operations or not to expand their existing operations in Puerto Rico, the market for our services may decline.

 

5

---

 

Other factors, including economic factors, may affect the decision of businesses to continue or expand their operations in Puerto Rico.

Companies in the pharmaceutical and related industries for which we perform service are subject to economic pressures which affect their global operations and which may influence the decision to reduce or increase the scope of their operations in Puerto Rico. These companies consider a wide range of factors in making such a decision, and may be influences by a need to consolidate operations, to reduce expenses, to increase their business in geographical regions where there are large customer bases, to tax, regulatory and political considerations and many other factors. We can not assure you that our customers and potential customers will not make extensive reductions or terminate their operations in Puerto Rico entirely, which could significantly impair our ability to generate revenue.

If we are unable to protect our clients’ intellectual property, our ability to generate business will be impaired.

Our services either require us to develop intellectual property for clients or provide our personnel with access to our clients’ intellectual property. Because of the highly competitive nature of the pharmaceutical, biotechnology, medical device and chemical manufacturing industries and the sensitivity of our clients’ intellectual property rights, our ability to generate business would be impaired if we fail to protect those rights. Although all of our employees and contractors are required to sign non-disclosure agreements, any disclosure of a client’s intellectual property by an employee or contractor may subject us to litigation and may impair our ability to generate business either from the affected client or other potential clients. In addition, we are required to enter into confidentiality agreements and our failure to protect the confidential information of our clients may impair our business relationship.

We may be subject to liability if our services or solutions for our clients infringe upon the intellectual property rights of others.

It is possible that in performing services for our clients, we may inadvertently infringe upon the intellectual property rights of others. In such event, the owner of the intellectual property may commence litigation seeking damages and an injunction against both us and our client, and the client may bring a claim against us. Any infringement litigation would be costly, regardless of whether we ultimately prevail. Even if we prevail, we will incur significant expenses and our reputation would be hurt, which would affect our ability to generate business and the terms on which we would be engaged, if at all.

 

We may be held liable for the actions of our employees or contractors when on assignment.

We may be exposed to liability for actions taken by our employees or contractors while on assignment, such as damages caused by their errors, misuse of client proprietary information or theft of client property. Due to the nature of our assignments, we cannot assure you that we will not be exposed to liability as a result of our employees or contractors being on assignment.

To the extent that we perform services pursuant to fixed-price or incentive-based contracts, our cost of services may exceed our revenue on the contract.

Some of our revenue is derived from fixed price contracts. Our costs of services may exceed revenue of these contracts if we do not accurately estimate the time and complexity of an engagement. Further, we are seeking contracts by which our compensation is based on specified performance objectives, such as the realization of cost savings, quality improvements or other performance objectives. Our failure to achieve these objectives would reduce our revenue and could impair our ability to operate profitably.

 

6

---

 

Our profit margin is largely a function of the rates we are able to charge and collect for our services and the utilization rate of our professionals. Accordingly, if we are not able to maintain our pricing for our services or an appropriate utilization rate for our professionals without corresponding cost reductions, our profit margin and profitability will suffer. The rates we are able to charge for our services are affected by a number of factors, including:

·

Our clients’ perception of our ability to add value through our services;

·

Our ability to complete projects on time;

·

Pricing policies of competitors;

·

Our ability to accurately estimate, attain and sustain engagement revenues, margins and cash flows over increasingly longer contract periods; and

·

General economic and political conditions.

Our utilization rates are also affected by a number of factors, including:

·

Seasonal trends, primarily as a result of our hiring cycle;

·

Our ability to move employees and contractors from completed projects to new engagements; and

·

Our ability to manage attrition of our employees and contractors.

Because most of our contracts may be terminated on little or no advance notice, our failure to generate new business could impair our ability to operate profitably.

Subject to cancellation fees, most of our contracts can be terminated by our clients with short notice. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, and the client may terminate, cancel or delay any engagement or the project for which we are engaged, at any time and on short notice. As a result, we need to develop new business on an ongoing basis. Since our operations are heavily concentrated on companies operating in Puerto Rico and, to a lesser extent, Puerto Rico businesses that operate elsewhere, the termination, cancellation, expiration or delay of contracts could have a significant impact on our ability to operate profitably.

 

Because of the competitive nature of the pharmaceutical, biotechnology, medical device and chemical manufacturing consulting market, we may not be able to compete effectively if we cannot efficiently respond to changes in the structure of the market and developments in technology.

Because of recent consolidations in the pharmaceutical, biotechnology, medical device and chemical manufacturing consulting business, we are faced with an increasing number of larger companies that offer a wider range of services and have better access to capital than we have. We believe that larger and better-capitalized competitors have enhanced abilities to compete for both clients and skilled professionals. In addition, one or more of our competitors may develop and implement methodologies that result in superior productivity and price reductions without adversely affecting their profit margins. We cannot assure you that we will be able to compete effectively in an increasingly competitive market.

 

7

---

 

Because we are dependent upon our management, our ability to develop our business may be impaired if we are not able to engage skilled personnel.

Our success to date has depended in large part on the skills and efforts of Elizabeth Plaza, our president, chief executive officer and founder. The loss of the services of Ms. Plaza could have a material adverse effect on the development and success of our business. We entered into a new employment agreement with Ms. Plaza, to continue under her current position and responsibilities through January 1, 2010, and as a consultant thereafter.  Although we have a contract with Ms. Plaza, this agreement does not guarantee that she will continue to be employed by us. Our future success will depend in part upon our ability to attract and retain additional qualified management and technical personnel. Competition for such personnel is intense and we compete for qualified personnel with numerous other employers, including consulting firms, some of which have greater resources than we have, as well as pharmaceutical companies, most of which have significantly greater financial and other resources than we do. We may experience increased costs in order to retain and attract skilled employees. Our failure to attract additional personnel or to retain the services of key personnel and independent contractors could have a material adverse effect on our ability to operate profitably.

We may not be able to continue to grow unless we consummate acquisitions or enter markets outside of Puerto Rico.

An important part of our growth strategy is (i) to acquire other businesses which can increase the range of services and products that we can offer and (ii) to establish offices in locales where we do not presently operate, either by acquisition or by internal growth. If we fail to make any acquisitions or otherwise expand our business, our future growth may be limited. We have recently entered into the Irish market through a newly formed 80%-owned subsidiary. The success of the operation is dependent, among others, on such factors as regulatory, tax, political or economic conditions, our abilities to penetrate the market, hire qualified personnel in a timely manner, obtain and maintain reasonable labor costs, generate service revenue volume and profitable margins.

If we identify a proposed acquisition, we may require substantial cash to fund the cost of the acquisition.

Any acquisitions we make may be made with cash or our securities or a combination of cash and securities. To the extent that we require cash, we may have to borrow the funds or sell equity securities. We have no commitments from any financing source and we may not be able to raise any cash necessary to complete an acquisition. If we seek to expand our business internally, we will incur significant start-up expenses without any assurance of our ability to penetrate the market.

The issuance of securities, whether in connection with an acquisition or otherwise, may result in significant dilution to our stockholders.

If we are required to issue securities either as payment of all or a portion of the purchase price of an acquisition or in order to obtain financing for the acquisition or for other corporate purposes could result in dilution to our stockholders. The amount of such dilution will be dependent upon the terms on which we issue securities. The issuance of securities at a price which is less than the exercise price of warrants or the conversion price of securities could result in additional dilution if we are required to reduce the exercise price or conversion price of the then outstanding options or warrants or other convertible securities.

 

8

---

 

If we make any acquisitions, they may disrupt or have a negative impact on our business.

If we make acquisitions or establish operations in locales outside of Puerto Rico, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect an expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

·

the difficulty of integrating acquired products, services or operations;

·

the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;

·

the potential loss of contracts from clients of acquired companies.

·

the difficulty of maintaining profitability due to increased labor and expenses from acquired company.

·

difficulties in complying with regulations in other countries that relate to both the pharmaceutical or other industries to which we provide services as well as our own operations;

 

·

difficulties in maintaining uniform standards, controls, procedures and policies;

·

the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;

·

the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;

·

the effect of any government regulations which relate to the business acquired;

·

potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether of not successful, resulting from actions of the acquired company prior to our acquisition;

·

difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; and

·

potential expenses under the labor, environmental and other laws of other countries.

Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. Further, the commencement of business in other countries may be subject to significant risks in areas which we are not able to prepare for in advance.

 

9

---

 

Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our stock price.

Our quarterly revenues, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter, making them difficult to predict. This may lead to volatility in our share price. The factors that are likely to cause these variations are:

·

Seasonality, including number of workdays and holiday and summer vacations;

·

The business decisions of clients regarding the use of our services;

·

Periodic differences between clients’ estimated and actual levels of business activity associated with ongoing engagements, including the delay, reduction in scope and cancellation of projects;

·

The stage of completion of existing projects and/or their termination;

·

Our ability to move employees quickly from completed projects to new engagements and our ability to replace completed contracts with new contracts with the same clients or other clients;

·

The introduction of new services by us or our competitors;

 

·

Changes in pricing policies by us or our competitors;

·

Our ability to manage costs, including personnel compensation, support-services and severance costs;

·

Acquisition and integration costs related to possible acquisitions of other businesses;

·

Changes in estimates, accruals and payments of variable compensation to our employees or contractors; and

·

Global economic and political conditions and related risks, including acts of terrorism.

Because of our cash requirements, we may be unable to pay dividends.

Except for payments to Elizabeth Plaza during the period when she was our sole stockholder, including $8.0 million paid in the year ended October 31, 2007, we have not paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future under the merger agreement. We intend to retain any earnings to finance the growth of our business and to pay the deferred payment of $2.75 million owed to Elizabeth Plaza and we may never pay cash dividends.

Risks Concerning our Securities

Because there is a limited market in our common stock, stockholders may have difficulty in selling our common stock and our common stock may be subject to significant price swings.

There is a very limited market for our common stock. Since trading commenced in December 2006, there has been little activity in our common stock and on some days there is no trading in our common stock. Because of the limited market for our common stock, the purchase or sale of a relatively small number of shares may have an exaggerated effect on the market price for our common stock. We cannot assure stockholders that they will be able to sell common stock or, that if they are able to sell their shares, that they will be able to sell the shares in any significant quantity at the quoted price.

 

10

---

 

The exercise of outstanding options and warrants may have a dilutive effect on the price of our common stock.

To the extent that outstanding stock options and warrants are exercised, dilution to our stockholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of the outstanding options and warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise terms provided by the outstanding options and warrants.

Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.

The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the Commission and others, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than necessary, we have not yet adopted all of these measures. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations. Furthermore, commencing with our current fiscal year, which ends October 31, 2008, we will be required to have a more formal and documented internal control structure in place. We may incur significant expenses during the year to enable us to take steps that are necessary in order to establish such requirements.

 

11

---

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Pharma-Bio Serv, Inc.

Dorado, Puerto Rico

 

We have audited the accompanying consolidated balance sheet of Pharma-Bio Serv, Inc. as of October 31, 2007, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended October 31, 2007. Pharma-Bio Serv, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pharma-Bio Serv, Inc as of October 31, 2007, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended October 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

 

S/HORWATH VÉLEZ & CO, PSC

San Juan, Puerto Rico

 

January 28, 2008

Puerto Rico Society of Certified Public Accountants

Stamp number 2298338 was

Affixed to the original of this report+

 

F-2

---

PHARMA-BIO SERV, INC.

Consolidated Balance Sheet

October 31, 2007

 

ASSETS:
Current assets
Cash and cash equivalents		$	4,792,366
Accounts receivable			3,559,279
Other			276,506
Total current assets			8,628,151
Property and equipment			799,851
Other assets, mainly intangible assets			134,686
Total Assets		$	9,562,688
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities
Current portion-obligations under capital leases		$	41,987
Accounts payable and accrued expenses			1,592,389
Due to affiliate - current			2,706,892
Income taxes payable			423,703
Total current liabilities			4,764,971
Due to affiliate			2,530,873
Other long-term liabilities			99,661
Total liabilities			7,395,505
Stockholders' 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			1,961
Additional paid-in capital			115,404
Retained earnings			2,046,264
Accumulated other comprehensive income			3,554
Total stockholders' equity			2,167,183
Total Liabilities and Stockholders' Equity		$	9,562,688

 

See notes to consolidated financial statements.

 

F-3

---

 

PHARMA-BIO SERV, INC. 

Consolidated Statements of Income

For the Years Ended October 31, 2007 and 2006

		Years ended October 31,
		2007			2006
REVENUES		$	16,204,851		$	14,184,445
COST OF REVENUES			9,380,916			8,116,207
GROSS PROFIT			6,823,935			6,068,238
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			3,176,140			2,225,714
INCOME FROM OPERATIONS			3,647,795			3,842,524
OTHER INCOME (EXPENSES):
Interest expense			(392,171	)		(392,742	)
Interest income			107,505			49,050
Loss on disposition of property and equipment			(25,660	)		(3,664	)
			(310,326	)		(347,356	)
INCOME BEFORE INCOME TAX			3,337,469			3,495,168
INCOME TAX			1,436,302			1,159,828
NET INCOME		$	1,901,167		$	2,335,340
BASIC EARNINGS PER COMMON SHARE		$	0.10		$	0.22
DILUTED EARNINGS PER COMMON SHARE		$	0.09		$	0.13
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC			19,391,063			10,508,938
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED			22,166,182			17,880,265

 

See notes to consolidated financial statements.

 

F-4

---

 

PHARMA-BIO SERV, INC.

Consolidated Statements of Cash Flows

For the Years Ended October 31, 2007 and 2006

		Years ended October 31,
		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the year		$	1,901,167		$	2,335,340
Loss on disposition of property and equipment			25,660			3,664
Stock-based compensation			115,404			-
Depreciation and amortization			208,225			194,977
Imputed interest expense			382,804			379,961
Decrease (increase) in accounts receivable			2,245,364			(870,275	)
Decrease (increase) in other assets			188,298			(468,084	)
Increase (decrease) in liabilities			561,794			(17,725	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			5,628,716			1,557,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(322,512	)		(104,922	)
Cash acquired as part of the Pharma-PR acquisition			-			28,943
NET CASH USED IN INVESTING ACTIVITIES			(322,512	)		(75,979	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of preferred stock			-			10,000,000
Payment for purchase of Pharma-PR stock			-			(9,900,000	)
Payment for non-compete covenant			-			(100,000	)
Payments on capital lease obligations			(38,873	)		(35,459	)
Payments to affiliate			(2,750,000	)		(213,388	)
Distributions to stockholder			-			(749,554	)
NET CASH USED IN FINANCING ACTIVITIES			(2,788,873	)		(998,401	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			2,517,331			483,478
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			2,275,035			1,791,557
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	4,792,366		$	2,275,035

See notes to consolidated financial statements.

 

F-5

---

 

PHARMA-BIO SERV, INC.

Consolidated Statements of Cash Flows - (Continued)

For the Years Ended October 31, 2007 and 2006

		Years ended October 31,
		2007			2006
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for:
Income tax		$	1,134,301		$	1,038,126
Interest		$	513,076		$	12,781
SUPPLEMENTARY SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to common stock		$	-		$	1,483
Conversion of cashless exercise warrants to shares of common stock		$	130		$	-
Application of down payment to acquisition price of property and equipment		$	-		$	37,655
Income tax withheld by clients but used as a credit in the income tax return of a stockholder (non-cash distribution)		$	-		$	84,561
Disposed partially depreciated property and equipment with accumulated depreciation of $68,962		$	94,962		$	-
Accounts payable incurred for project in process		$	246,502		$	-
Debt incurred in the acquisition of certain assets from another company		$	-		$	200,000
Debt payable to affiliate originated in the acquisition of Pharma-PR, net of $1,025,000 imputed interest		$	-		$	7,225,000

See notes to consolidated financial statements.

 

F-6

---

 

PHARMA-BIO SERV, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED OCTOBER 31, 2007 AND 2006

 

		Common Stock						Preferred Stock						Additional Paid-in			Retained			Accumulated Other Comprehensive
		Shares			Amount			Shares			Amount			Capital			Earnings			Income			Total
BALANCE AT OCTOBER 31, 2005 (PHARMA-PR -ONLY)			50,000		$	1,000			-		$	-		$	-		$	5,979,569		$	-		$	5,980,569
RECLASSIFICATION OF $0.02 COMMON STOCK			(50,000	)		(1,000	)		-			-			1,000			-			-			-
ISSUANCE OF $0.0001 COMMON STOCK IN CONNECTION WITH RECLASSIFICATION OF EQUITY			275,900			28			-			-			20,947			-			-			20,975
TWO-FOR-ONE SHARE DISTRIBUTION			275,900			28			-						(28	)		-			-			-
ISSUANCE OF $0.0001 COMMON STOCK			1,750,000			174			-			-			844,385			-			-			844,559
ISSUANCE OF $0.0001 PREFERRED STOCK			-			-			1,175,000			118			10,171,383			-			-			10,171,501
ISSUANCE OF STOCK WARRANTS TO PURCHASE 2,500,000  SHARES OF COMMON STOCK AT $0.06			-			-			-			-			1,686,000			(1,686,000	)		-			-
ISSUANCE OF STOCK WARRANTS TO PURCHASE 1,600,000 SHARES OF COMMON STOCK AT $0.06			-			-			-			-			800			(800	)		-			-
CAPITAL PAYMENT			-			-			-			-			(12,724,487	)		(5,647,284	)		-			(18,371,771	)
CONVERSION OF PREFERRED STOCK TO COMMON STOCK			15,998,800			1,600			(1,175,000	)		(118	)		-			(1,482	)		-			-
ADDITIONAL SHARES FROM CONVERSION OF PREFERRED STOCK TO COMMON STOCK			14,401			1			-			-			-			(1	)		-			-
NET INCOME			-			-			-			-			-			2,335,340			-			2,335,340
DISTRIBUTIONS			-			-			-			-			-			(834,115	)		-			(834,115	)
BALANCE AT OCTOBER 31, 2006 (CONSOLIDATED)			18,315,001			1,831			-			-			-			145,227			-			147,058
CASHLESS CONVERSION OF WARRANTS TO SHARES OF COMMON STOCK			1,300,538			130			-			-			-			(130	)		-			-
STOCK-BASED COMPENSATION			-			-			-			-			115,404			-			-			115,404
COMPREHENSIVE INCOME:
NET INCOME			-			-			-			-			-			1,901,167			-			1,901,167
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT			-			-			-			-			-			-			3,554			3,554
OTHER COMPREHENSIVE INCOME																								3,554
COMPREHENSIVE INCOME																								1,904,721
BALANCE AT OCTOBER 31, 2007 (CONSOLIDATED)			19,615,539		$	1,961			-		$	-		$	115,404		$	2,046,264		$	3,554		$	2,167,183

 

See notes to consolidated financial statements. 

 

F-7

---

 

PHARMA-BIO SERV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED OCTOBER 31, 2007 AND 2006

 

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

 

Pharma-Bio Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14, 2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc. (“Pharma-PR”), which was formerly Plaza Consulting Group, Inc., a Puerto Rico corporation, and Pharma-Bio Serv Validation & Compliance Limited (“Pharma-IR”) an Irish corporation. Pharma-Bio, Pharma-PR and Pharma-IR are collectively referred to as the “Company.” The Company operates in Puerto Rico, the United States and soon in Ireland 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.

 

On January 25, 2006, Pharma-Bio acquired Pharma-PR in a transaction which is accounted for as a reverse acquisition. Although Pharma-Bio is the company that made the acquisition, for accounting purposes, Pharma-PR is treated as the acquiring company. As a result, the financial statements reflect the results of operations and cash flows of Pharma-PR prior to January 25, 2006 and the combined operations of Pharma-Bio and Pharma-PR from and after January 25, 2006.

 

Pharma-IR is a majority owned subsidiary, which was organized in Ireland in September 2007. As of October 31, 2007, this subsidiary was in development stage and incurred organization expenses of approximately $39,800. During 2008, it is management’s intention to change the current corporate structure of this majority own subsidiary but this is not expected to have a significant effect on the Company’s future operations or its financial position.

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

REVERSE ACQUISITION

 

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"), Pharma-PR and Elizabeth Plaza, the sole stockholder of Pharma-PR, Pharma-Bio acquired Pharma-PR. The acquisition was effected by the merger of Acquisition Company into Pharma-PR. Pursuant to the Plaza Agreement, Ms. Plaza, as the sole stockholder of Pharma-PR, 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 us 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 H with respect to payments made and obligations due to related parties.

 

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.

 

The acquisition of Pharma-PR and the private placement resulted in a change of control of Pharma-Bio. As a result of the reverse acquisition accounting treatment, Pharma-PR is deemed to be the acquiring company for accounting purposes. The transaction was accounted for as a reverse acquisition because former owners of Pharma-PR, together with the purchasers in the private placement who purchased the series A preferred stock and warrants in connection with the acquisition of Pharma-PR, gained control of Pharma-Bio. Effective on the acquisition date, Pharma-Bio's balance sheet includes the assets and liabilities of Pharma-PR and its equity accounts have been recapitalized to reflect the equity of Pharma-Bio.

 

F-8

---

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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 and cash equivalents, 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 approximates 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. 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 consolidated 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.

 

F-9

---

 

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.

Pharma-PR, 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, Pharma-PR and Pharma-Bio are no longer eligible for treatment as a Subchapter N corporation. See Note G.

 

Although Ms. Plaza was responsible for the taxes on the Pharma-PR'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 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 consolidated financial statements based on the fair value of the awards. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at grant date. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits related to stock-based compensation be reflected as cash flows from financing activities rather than cash flows from operating activities. The Company does not recognize such cash flow from financing activities since there has been no tax benefit related to the stock-based compensation.

 

F-10

---

 

Income Per Share of Common Stock

 

Basic income per share of common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted income per share includes the dilution of common stock equivalents. Pursuant to reverse acquisition accounting treatment, for the year ended October 31, 2006, 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 number of shares outstanding represented the 1,150,000 shares received by the former stockholder of Pharma-PR 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 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 Pharma-PR 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.

Foreign Operations

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

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

Reclassifications

Certain reclassifications have been made to the October 31, 2006 consolidated financial statements to conform to the October 31, 2007 consolidated financial statements presentation. Such reclassifications do not have an effect on net earnings as previously reported.

 

F-11

---

 

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS

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

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

2. In February 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”.

 

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

3. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157 “Fair Value Measurement”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. 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.

 

4. 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.

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

 

F-12

---

 

NOTE C - CAPITAL TRANSACTIONS

On January 24, 2006, Pharma-Bio effected a two-for-one share distribution with respect to its common stock pursuant to which Pharma-Bio issued one share of common stock for each share outstanding on the record date, January 24, 2006. All share and per share information in these financial statements give retroactive effect to this share distribution.

 

On January 25, 2006, contemporaneously with the consummation of the acquisition, Pharma-Bio sold, in a private placement, 47 units, each unit consisting of 25,000 shares of series A preferred stock, warrants to purchase 85,100 shares of common stock at $1.10 per share and warrants to purchase 85,100 shares of common stock at $1.65 per share. In the private placement, Pharma-Bio issued an aggregate of 1,175,000 shares of series A preferred stock (which were convertible into an aggregate of 15,998,800 shares of common stock), warrants to purchase 3,999,700 shares of common stock at $1.10 per share, and warrants to purchase 3,999,700 shares of common stock at $1.65 per share, to 42 accredited investors. Pharma-Bio paid brokerage commissions of 10% of the gross purchase price and an aggregate non-accountable expense allowance of 3% of the gross purchase price with respect to the units sold. In certain cases, the broker waived the commission and non-accountable expense allowance, and the investor paid the purchase price less the commission and non-accountable expense allowance. The purchase price for the 47 units sold was $11,750,000. Broker-dealers waived commission and non-accountable expense allowance with respect to $628,750, Pharma-Bio paid commissions and non-accountable expense allowances totaling $898,750, and Pharma-Bio issued warrants to purchase an aggregate of 1,439,892 shares of common stock. The warrants have an exercise price of $0.7344 per share and a term of three years. As of October 31, 2007, the warrants disclosed herein were still outstanding.

 

Each share of series A preferred stock was 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 Pharma-PR 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 consecutive trading days.

 

In January 2004, Pharma-Bio issued warrants to purchase 1,600,000 shares at $0.06 per share. The warrants may also be converted into shares of common stock on a cashless basis under certain conditions, but on a reduced number of shares. The warrants expire on January 16, 2014. In January 2007, warrants to purchase a total of 1,350,400 shares of common stock were converted to 1,300,538 shares of common stock pursuant to the cashless exercise provisions. As of October 31, 2007, warrants to purchase 249,600 shares remain outstanding.

 

F-13

---

 

NOTE D - PROPERTY AND EQUIPMENT

 

The balance of property and equipment at October 31, 2007 consists of:

 

		Useful life (years)			Amount
Vehicles under capital leases			5		$	221,434
Leasehold improvements			5			19,279
Computers			3			185,491
Equipment			3-5			119,672
Furniture and fixtures			10			68,509
Projects in progress			-			508,399
Total						1,122,784
Less: Accumulated depreciation and amortization						(322,933	)
Property and equipment, net					$	799,851

 

NOTE E - OTHER ASSETS

 

At October 31, 2007, non-current other assets include the following:

Intangible assets:
Covenant not to compete, net of accumulated amortization of $38,333		$	61,667
Customer-related intangibles, net of accumulated amortization of $91,667			58,333
Other assets			14,686
		$	134,686

 

Covenant not to compete represents the portion of the payment made in connection with the purchase of the Pharma-PR stock that was allocated to a non-competition covenant. Under this agreement, the sole stockholder of Pharma-PR 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 Pharma-PR acquired along with 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.

 

The amortization expense for the years ended on October 31, 2007 and 2006 amounted to $70,000 and $60,000, respectively.

NOTE F - LINE-OF-CREDIT

The Company has available an unsecured line-of-credit with a financial institution, which provides for borrowings up to $250,000. This line of credit is used as working capital whenever the Company’s bank account cannot meet its daily cash requirements. Interest on advances obtained from this line-of-credit will be paid at 2% over the bank’s prevailing prime rate. During the year ended October 31, 2007 the line-of-credit was not used.

 

F-14

---

 

NOTE G - INCOME TAXES

 

As substantially all operations are being carried by the Puerto Rico subsidiary, the Company's taxable income is subject to the Puerto Rico income to a maximum of a 39% rate 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 was 41.5% for its fiscal years ending on October 31, 2007 and October 31, 2006, and thereafter will be 39%.

 

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

As of October 31, 2007 the Company has not recognized deferred income taxes on $2,099,583 of undistributed earnings of its Puerto Rican subsidiary, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed in the form of dividends, the Company would be subject to a $209,958 tollgate tax.

The income tax expense is computed at statutory rates applied to income calculated in accordance with the accounting practices described herein and as shown in the consolidated financial statements. Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

 

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

 

		Years ended October 31,
		2007			2006
Theoretical income tax expense by application of statutory rates to the book pre-tax income		$	1,401,569		$	1,450,495
Permanent Differences:
Effect of income subject to taxation under Subchapter N (taxable income taxed to stockholders)						(358,037	)
Other permanent differences			34,733			67,370
Income tax expense		$	1,436,302		$	1,159,828

 

Because Pharma-PR was treated as an N Corporation under the Puerto Rico Internal Revenue Code through January 24, 2006, its income was taxed to its stockholder during that period, and Pharma-PR did not pay income tax. Had income tax been paid at the statutory rate, Pharma-PR’s net income would have been $1,977,303, or $0.19 per share (basic) and $0.11 per share (diluted), for the year ended October 31, 2006.

 

F-15

---

 

NOTE H - RELATED PARTY TRANSACTIONS; DUE TO AFFILIATE

On January 25, 2006, pursuant to the Plaza Agreement, Elizabeth Plaza, as the sole stockholder of Pharma-PR and affiliate of Pharma-PR, 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. 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 October 31, 2007 outstanding payments are due as follows:

Twelve months ending October 31,

2008		$	2,750,000
2009			2,750,000
Total payments			5,500,000
Less: imputed interest			(262,235	)
Present value of minimum payments			5,237,765
Current portion			(2,706,892	)
Long-term portion		$	2,530,873

 

As a condition to closing, Pharma-PR 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 Pharma-PR, 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, Pharma-PR's net income from December 1, 2005 to January 24, 2006 was taxed to Ms. Plaza. The income tax payable by Ms. Plaza for Pharma-PR's taxable income for that period amounted to $125,227. Pharma-PR 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 Pharma-PR stock from Mrs. Plaza.

 

Pursuant to the Puerto Rico Internal Revenue Code, the Company's clients are required to withhold a percentage of its fees (usually 3%, but sometimes 7%) as withheld income tax and remit such amount to the Puerto Rico Department of the Treasury. Such payment is treated as a payment on account to the Company's income tax obligations. Prior to January 25, 2006, Pharma-PR 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 consolidated financial statements as non-cash distributions.

 

San Juan Holdings represented Pharma-PR 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 $0.06 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. Pharma-Bio 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 $0.7344 per share. As of October 31, 2007, warrants to purchase the 2,500,000 shares remained outstanding.

 

F-16

---

 

NOTE I - COMMITMENTS

 

1. Contracts

 

On January 25, 2006, the Company entered into employment agreements with Elizabeth Plaza and Nelida Plaza. The agreement with Elizabeth Plaza, as extended to December 31, 2008 provides that Ms. Plaza will serve as president and chief executive officer of the Company, for which she will receive a salary at the annual rate of $250,000. 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. Upon termination of the agreement Ms. Plaza will serve as a consultant under terms to be negotiated.

 

The Company's agreement with Nelida 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. 

2. Lease commitments

 

Capitalized lease obligations - As of October 31, 2007, the Company leases vehicles under non-cancelable capital leases with a cost of $221,434 (accumulated depreciation of $111,147). Amortization expense for these assets amounted to $44,286 and $44,805 in the years ended October 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 October 31, 2007:

Twelve months ending October 31,		Amount
2008		$	48,240
2009			71,240
2010			32,239
Total future minimum lease payments			151,719
Less: Amount of imputed interest			( 10,071	)
Present value of future minimum lease payments			141,648
Current portion of obligation under capital leases			(41,987	)
Long-term portion		$	99,661

 

F-17

---

 

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

 

Description		Monthly Rent			Commitment Term
Headquarter offices and laboratory testing facilities		$	18,750		Ending in January 2012, with one five year renewal option
Cork office facilities		$	750		Month-to-month
Limerick office space		$	1,050		Ending in July 2010

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 for the new headquarters and laboratory testing facilities. 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 for its former office facilities.

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

Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of October 31, 2007 are:

 

		Amount
2008		$	246,188
2009			258,459
2010			267,715
2011			270,233
2012			68,372
Total minimum lease payments		$	1,110,967

The Company leases certain apartments as dwellings for employees. The leases are under short-term lease agreements and usually are cancelable upon 30-day notification. Rent expense during the years ended October 31, 2007 and 2006 was $251,231 and $98,936, respectively.

NOTE J - 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.

 

F-18

---

Pursuant to the Plaza Agreement, all outstanding options issued by Pharma-PR 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 Pharma-PR 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 Pharma-PR 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 Pharma-PR options and 23 additional Pharma-PR employees. The Company subsequently granted options to purchase other 473,724 shares to employees and independent directors. The new options have an exercise price of $0.7344, a term of five years and are exercisable in installments. As of October 31, 2006, there were approximately 1,348,090 outstanding options, since some options expired because of certain employment terminations.

 

As of November 1, 2006 there were outstanding options to acquire 1,348,090 shares of common stock, of which options, with a weighted-average exercise price of $0.7344, to acquire 228,320 shares terminated unexercised. In January 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. In February 2007, the Company also granted an option to purchase 35,000 shares to an independent contractor, of which an option to purchase 14,585 shares subsequently became vested and the option to purchase the remaining 20,414 shares was forfeited. No options were exercised or expired during the year ended October 31, 2007. As of October 31, 2007, there were outstanding options to purchase 1,199,355 shares. The weighted average of the remaining contractual life of the outstanding stock options is 3 years and the weighted average exercise price is $0.7496.

As of October 31, 2007 there were 75,000 vested stock options with a weighted average value and exercise price of $0.60 and $0.7344, respectively. The remaining contractual term for these vested stock options is 3 years.

The following table presents the stock-based compensation included in the Company’s consolidated statement of income and the effect on earnings per share for the year ended October 31, 2007:

Stock-based compensation expense:
Cost of services		$	60,990
Selling, general and administrative			54,414
Stock-based compensation before tax			115,404
Income tax benefit			—
Net stock-based compensation expense		$	115,404
Effect on earnings per share:
Basic earnings per share		$	(0.006	)
Diluted earnings per share		$	(0.005	)

 

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 for the year ended October 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.

The fair value of each stock option granted prior to November 1, 2006 was estimated at $0.60. For purposes of valuing the options, since there was no public market for the common stock, the underlying common stock was valued at $0.7344, which is the price paid by the private placement investors in January 2006, which was the most recent sale of securities by the Company.

 

F-19

---

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 years
Weighted average fair value per share of options granted during the year ended October 31, 2007		$	0.1506

Pursuant to the Plaza Agreement, Pharma-Bio agreed that it would issue 100 shares of common stock to each of Pharma-PR'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.

 

On December 20, 2007, subsequent to our fiscal year end herein reported, in accordance with the 2005 Long-Term Incentive Plan, the Company awarded 240,000 stock options to certain employees and executives. See Note M.

NOTE K - CONCENTRATION OF RISKS

 

Cash and cash equivalents

The Company maintains our cash deposits in a FDIC insured bank and in a money market obligations trust registered under the US Investment Company Act of 1940, as amended. The deposit balances frequently exceed federally insured limits; however, no losses have been experienced on these accounts.

 

Accounts receivable and revenues

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 and United States of America. Although 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 Company provides a substantial portion of its services to various customers, which account 10% or more of our revenues. During one or both years ended October 31, 2007 and 2006, revenues over 10% for services provided to these customers represent 67% and 73% of total revenues, respectively. Individually, these customers represent total revenues of 23%, 22%, 10%, 7% and 5% in 2007; and 30%, 12%, 0%, 21% and 10% in 2006, respectively. At October 31, 2007 amounts due from these customers represent 29% of total accounts receivable balance.

Subsequent to October 31, 2007 one of the major customers, which represented 23% of the Company’s 2007 revenues, announced its plans to close its Puerto Rico operations during 2008. As of October 31, 2007, the outstanding balance of this customer represented 5% of total accounts receivable. Management considers the amount to be fully collectible. Although past performance is no indication of future performance, in the past, in the ordinary course of business, the Company has been successful substituting customer losses by adding new customers or projects to its base.

 

F-20

---

 

NOTE L - RETIREMENT PLAN

 

Pharma-PR has a qualified profit sharing plan 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 years ended October 31, 2007 and 2006 were $69,595 and $40,439, respectively.

   

NOTE M - SUBSEQUENT EVENT

On December 20, 2007, in accordance with the Company’s 2005 Long-Term Incentive Plan, the Compensation Committee granted a total of 240,000 stock option awards to employees and executives.

 

F-21

---

PHARMA-BIO SERV, INC.

Condensed Consolidated Balance Sheet (Unaudited)

April 30, 2008 

ASSETS:
Current assets
Cash and cash equivalents		$	2,359,668
Accounts receivable			3,234,395
Other			173,564
Total current assets			5,767,627
Property and equipment			1,550,670
Other assets, mainly intangible assets			96,586
Total assets		$	7,414,883
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities
Current portion-obligations under capital leases		$	49,377
Accounts payable and accrued expenses			1,220,811
Due to affiliate			2,616,930
Income taxes payable			566,580
Total current liabilities			4,453,698
Long-term liabilities			103,984
Total liabilities			4,557,682
Stockholders' 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			1,961
Additional paid-in capital			190,422
Retained earnings			2,674,171
Accumulated other comprehensive loss			(9,353	)
Total stockholders' equity			2,857,201
Total liabilities and stockholders' equity		$	7,414,883

 

See notes to condensed consolidated financial statements.

 

F-22

---

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Income (Unaudited)

For the Six-Month Periods Ended April 30,, 2008 and 2007

		Six months ended April 30,
		2008			2007
REVENUES		$	7,302,096		$	7,755,138
COST OF REVENUES			4,581,876			4,595,451
GROSS PROFIT			2,720,220			3,159,687
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			1,501,924			1,474,550
INCOME FROM OPERATIONS			1,218,296			1,685,137
OTHER INCOME (EXPENSES):
Interest expense			(133,318	)		(213,802	)
Interest income			57,872			43,754
Loss on disposition of property and equipment			-			(25,661	)
			(75,446	)		(195,709	)
INCOME BEFORE INCOME TAXES			1,142,850			1,489,428
INCOME TAXES			514,943			641,700
NET INCOME		$	627,907		$	847,728
BASIC EARNINGS PER COMMON SHARE		$	0.03		$	0.04
DILUTED EARNINGS PER COMMON SHARE		$	0.03		$	0.04
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC			19,615,539			19,162,866
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – DILUTED			22,114,006			21,897,862

 

See notes to condensed consolidated financial statements.

 

F-23

---

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six-Month Periods Ended April 30, 2008 and 2007

		Six months ended April 30,
		2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	627,907		$	847,728
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposition of property and equipment			-			25,661
Stock-based compensation			75,018			65,374
Depreciation and amortization			103,699			107,657
Imputed interest expense			129,166			208,729
Decrease in accounts receivable			326,314			1,784,616
Decrease in other assets			96,784			249,536
(Decrease) increase in liabilities			(395,346	)		532,323
NET CASH PROVIDED BY OPERATING ACTIVITIES			963,541			3,821,624
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment			(624,257	)		(18,080	)
NET CASH USED IN INVESTING ACTIVITIES			(624,257	)		(18,080	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on obligations under capital lease			(21,982	)		(19,048	)
Payments to affiliate			(2,750,000	)		(2,750,000	)
NET CASH USED IN FINANCING ACTIVITIES			(2,771,982	)		(2,769,048	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(2,432,698	)		1,034,496
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			4,792,366			2,275,035
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	2,359,668		$	3,309,531
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes		$	372,067		$	150,000
Interest		$	349,285		$	508,781
SUPPLEMENTARY SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accounts payable incurred in projects in process		$	161,518		$	-
Income tax withheld by clients to be used as a credit in the Company’s income tax return		$	-		$	53,573
Obligation under capital lease incurred for the acquisition of a vehicle		$	33,695		$	-
Conversion of cashless exercise warrants to shares of common stock		$	-		$	130

See notes to condensed consolidated financial statements.

F-24

---

PHARMA-BIO SERV, INC.

Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)

For the Six-Month Period Ended April 30, 2008

														Additional						Accumulated Other
		Common Stock						Preferred Stock						Paid-in			Retained			Comprehensive
		Shares			Amount			Shares			Amount			Capital			Earnings			Income (Loss)			Total
BALANCE AT OCTOBER 31, 2007			19,615,539		$	1,961			-		$	-		$	115,404		$	2,046,264		$	3,554		$	2,167,183
STOCK-BASED COMPENSATION			-			-			-			-			75,018			-			-			75,018
COMPREHENSIVE INCOME:
NET INCOME			-			-			-			-			-			627,907			-			627,907
OTHER COMPREHENSIVE LOSS:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT			-			-			-			-			-			-			(12,907	)		(12,907	)
OTHER COMPREHENSIVE LOSS																								(12,907	)
COMPREHENSIVE INCOME																								615,000
BALANCE AT APRIL 30, 2008			19,615,539		$	1,961			-		$	-		$	190,422		$	2,674,171		$	(9,353	)	$	2,857,201

See notes to condensed consolidated financial statements.

F-25

---

PHARMA-BIO SERV, INC.

Notes To Condensed Consolidated Financial Statements (Unaudited)

For the Six-Month Periods Ended April 30, 2008 and 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements for the six-month periods ended on April 30, 2008 and 2007 presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America 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.

Consolidation

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

Use of Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

F-26

---

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. If the Company determines that a fixed-fee or “not to exceed” contract will result in a loss, the Company recognizes the estimated loss in the period in which such determination is made.

 

Cash Equivalents

 

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

Accounts Receivable

 

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

Income Taxes

 

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

Property and equipment

 

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

 

Depreciation and amortization of owned assets are provided for, when placed in service, in amount sufficient to relate the cost of depreciable assets to operations over their estimated service lives, using straight-line basis. Assets under capital leases and leasehold improvements are amortized, over the shorter of the estimated useful lives of the assets or 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. Based on management estimates, no impairment of the operating properties was present.

Intangible assets

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

 

F-27

---

 

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 consolidated financial statements based on the fair value of the awards. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at grant date. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits related to stock-based compensation be reflected as cash flows from financing activities rather than cash flows from operating activities. The Company does not recognize such cash flow from financing activities since there has been no tax benefit related to the stock-based compensation.

Income Per Share of Common Stock

 

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

 

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

Foreign Operations

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

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

Reclassifications

Certain reclassifications have been made to the April 30, 2007 interim condensed consolidated financial statements to conform them to the April 30, 2008 interim condensed consolidated financial statements presentation. Such reclassifications do not have a material effect on net income as previously reported.

F-28

---

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

3. In February 2007, the FASB issued Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”.

 

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

4. In September 2006, the FASB issued Statement No. 157 “Fair Value Measurement”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. 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 had no significant effect on the Company’s consolidated financial statements.

 

F-29

---

5. 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 derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The application of this standard had no significant effect on the Company's results of operations or its financial condition.

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

 

NOTE C - PROPERTY AND EQUIPMENT

 

The balance of property and equipment at April 30, 2008 consists of the following:

		Useful life (years)			Amount
Vehicles under capital leases			5		$	255,129
Leasehold improvements			5			19,279
Computers			3			212,862
Equipment			3-5			124,402
Furniture and fixtures			10			68,509
Projects in progress			-			1,262,121
Total						1,942,302
Less: Accumulated depreciation and amortization						(391,632	)
Property and equipment, net					$	1,550,670

 

NOTE D - OTHER ASSETS

 

At April 30, 2008, non-current other assets include the following:

 

Intangible assets:
Covenant not to compete, net of accumulated amortization of $48,333		$	51,667
Customer-related intangibles, net of accumulated amortization of $116,667			33,333
Other assets			11,586
		$	96,586

Covenant not to compete represents the portion of the payment made in connection with the purchase of the Pharma-PR stock that was allocated to a non-competition covenant. Under this agreement, the then sole stockholder of Pharma-PR 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 Pharma-PR acquired along with 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.

Intangible assets amortization expense for each of the six-month periods ended April 30, 2008 and 2007 amounted to $35,000.

 

F-30

---

NOTE E - LINE-OF-CREDIT

The Company has available an unsecured line-of-credit with a financial institution, which provides for borrowings up to $250,000. This line of credit may be used as working capital whenever the Company’s bank account cannot meet its daily cash requirements. Interest on advances obtained from this line-of-credit will be paid at 2% over the bank’s prevailing prime rate. During the six-months period ended April 30, 2008 the line-of-credit was not used.

NOTE F - INCOME TAXES

 

As substantially all operations are being carried on by the Puerto Rico subsidiary, the Company's taxable income is subject to the Puerto Rico income tax at a maximum tax rate of 39% as provided by the 1994 Puerto Rico Internal Revenue Code, as amended. However, for the year ended October 31, 2007, the Company was subject to an additional 2.5% special tax as imposed to corporations and partnerships by Puerto Rico Act No. 41of August 2005, as amended by Act No. 244 of November 2006.

 

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

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

As of April 30, 2008, the Company has not recognized deferred income taxes on $2,849,444 of undistributed earnings of its Puerto Rican subsidiary, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed in the form of dividends, the Company would be subject to a $284,944 tollgate tax.

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

 

		Six months ended April 30,
		2008			2007
Theoretical income tax expense by application of statutory rates to the book pre-tax income		$	493,278		$	618,113
Permanent differences, net			21,665			23,587
Income tax expense		$	514,943		$	641,700

 

F-31

---

NOTE G - DUE TO AFFILIATE

Pursuant to a plan and agreement of merger dated January 25, 2006, the Company agreed to pay its then sole stockholder of Pharma-PR three installments of $2,750,000 on January 25, 2007, 2008 and 2009, including imputed interest determined in accordance with Section 1274 of the Internal Revenue Code. As of April 30, 2008 two installments were paid.

Outstanding installment as of April 30, 2008:

Installment due January 25, 2009		$	2,750,000
Less: imputed interest			(133,070	)
Present value of minimum payment, due within one year		$	2,616,930

 

NOTE H - LEASE COMMITMENTS

 

Capitalized lease obligations - As of April 30, 2008, the Company leases vehicles under non-cancelable capital leases with a cost of $255,129 (accumulated depreciation of $134,976). Amortization expense for these assets amounted to $23,828 and $22,144 in the six-month periods ended April 30, 2008 and 2007, respectively. The following is a schedule, by year, of future minimum lease payments under the capitalized leases together with the present value of the net minimum lease payments at April 30, 2008:

 

Twelve months ending April 30,		Amount
2009		$	56,294
2010			78,028
2011			17,439
2012			8,054
2013			6,042
Total future minimum lease payments			165,857
Less: Amount of imputed interest			( 12,496	)
Present value of future minimum lease payments			153,361
Current portion of obligation under capital leases			(49,377	)
Long-term portion		$	103,984

Operating facilities - The Company conducts its administrative operations in office facilities which are leased under three different rental agreements.

In February 2007, the Company entered into a lease agreement with an affiliate of the chief executive officer for the new headquarters and laboratory testing facilities in Dorado, Puerto Rico. The lease agreement is for a term of five years with monthly rental payments of $18,750, $19,687, $20,672, $21,705 and $22,791 for each of the years under the lease. The lease agreement ends in January 2012 and provides a five year-renewal option. The 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. Through January 2007, a different smaller facility was leased from the same entity.

 

In August 2007, the Company renewed its lease agreement for office facilities in Limerick, Pennsylvania. The lease agreement was renewed for a term of three years with monthly rental payments of $1,050, $1,100, and $1,150; for each of the years under the lease which ends in July 2010.

 

F-32

---

The Company maintains office facilities in Cork, Ireland. The facilities are under a month-to-month lease with monthly payments of approximately $750.

The Company leases certain apartments as dwellings for employees. The leases are under short-term lease agreements and usually are cancelable upon 30-day notification.

Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of April 30, 2008 are:

 

		Amount
2009		$	252,253
2010			264,813
2011			267,171
2012			205,117
Total minimum lease payments		$	989,354

Rent expense during the six-month periods ended April 30, 2008 and 2007 was $189,249 and $89,063, respectively.

NOTE I - STOCK OPTIONS AND STOCK BASED COMPENSATION

 

In October 2005, the Company's board of directors adopted, and on April 25, 2006, the Company’s stockholders approved, the 2005 Long-Term Incentive Plan, covering 2,500,000 shares of common stock. The 2005 plan provides for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, and consultants. The 2005 plan is to be administered by a committee of independent directors. In the absence of a committee, the plan is administered by the board of directors. 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 the Company’s 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.

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

 

		Six-months ended
		April 30,
		2008			2007
Stock-based compensation expense:
Cost of services		$	30,588		$	42,090
Selling, general and administrative			44,430			23,284
Stock-based compensation before tax			75,018			65,374
Income tax benefit			—			—
Net stock-based compensation expense		$	75,018		$	65,374

 

 During the six-month period ended in April 30 2008, in accordance with the 2005 Long-Term Incentive Plan, the Company awarded stock options to certain employees, executives and directors to purchase an aggregate of 370,000 shares of common stock.

 

F-33

---

NOTE J – WARRANTS

 

At April 30, 2008 the Company had outstanding warrants to purchase 12,188,892 shares of the Company’s common stock at prices ranging from $0.06 to $1.65 per share. The warrants became exercisable at various dates commencing in 2004 and expire at various dates through 2014.

 

NOTE K – EARNINGS PER SHARE

The following data show the amounts used in the calculations of basic and diluted earnings per share for the six-month periods ended in April 30, 2008 and 2007.

 

		Six months ended  April 30,
		2008			2007
Net income available to common equity holders – used to compute basic and diluted earnings per share		$	627,907		$	847,728
Weighted average number of common shares – used to compute basic earnings per share			19,615,539			19,162,866
Effect of warrants to purchase common stock			2,497,167			2,734,996
Effect of options to purchase common stock			1,300			-
Weighted average number of shares – used to compute dilute earnings per share			22,114,006			21,897,862

 

Warrants for 9,439,292 for the purchase of shares of common stock for the six-month periods ended in April 30, 2008 and 2007, were not included in computing diluted earning per share because, their effects were antidilutive. In addition, options for the purchase of common stock in the amount of 1,266,772 and 1,143,090 for the six-month periods ended April 30, 2008 and 2007, respectively, were not included in computing diluted earning per share because their effects were antidilutive.

 

NOTE L - CONCENTRATION OF RISKS

 

Cash and cash equivalents

The Company maintains cash deposits in a FDIC insured bank and in a money market obligations trust, registered under the US Investment Company Act of 1940, as amended. The bank deposit balances frequently exceed federally insured limits. The money market fund is not insured. No losses have been experienced on these accounts.

 

F-34

---

 

Accounts receivable and revenues

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 and the United States of America. Although 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 Company provides a substantial portion of its services to four customers, which account 10% or more of our revenues in the six month periods ended April 30, 2008 or 2007. For the six-month period ended April 30, 2008 revenues from these customers were 28%, 26%, 11% and 0%, or a total of 65%, as compared to the same period last year for 3%, 25%, 6% and 31%, or a total of 65%, respectively. At April 30, 2008 amounts due from these customers represent 51% of total accounts receivable balance.

 

NOTE M - RETIREMENT PLAN

 

Pharma-PR has a qualified profit sharing plan 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 six-month periods ended April 30, 2008 and 2007 were $30,630 and $28,554, respectively.

 

F-35

---