**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
        10-KSB/A**


**(Amendment
        No. 1 to Form 10-KSB)**





(Mark
      One)


**[X]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE**


**ACT
      OF 1934**





**For
      the Fiscal Year Ended April 30, 2005**





**[
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**





**For
      the transition period from _________ to __________**





**Commission
      file number: 0-26277**





**WPCS
      INTERNATIONAL INCORPORATED**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            **98-0204758**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)





**One
      East Uwchlan Avenue**


**Suite
      301**


**Exton,
      Pennsylvania 19341**


**** (Address
      of principal executive offices)





**(610)
      903-0400**


(Registrant's
      telephone number, including area code)





(Former
      name, former address and former fiscal year, if changed since last
      report)


**140
      South Village Avenue**


**Suite
      20**


**Exton,
      Pennsylvania 19341**





Securities
      registered pursuant to Section 12(g) of the Act: None





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





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
      THE**


**PRECEDING
      FIVE YEARS:**





Indicate
      by check mark whether the registrant filed all documents and reports required
      to
      be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
      after
      the distribution of securities under a plan confirmed by a court.


Yes
      [ ]
      No [ ]





**APPLICABLE
      ONLY TO CORPORATE ISSUERS:**





State
      the
      number of shares outstanding of each of the registrant's classes of common
      equity, as of the latest practicable date: 3,821,385 shares issued and
      outstanding as of July 7, 2005.





1





**Explanatory
      Note**





WPCS
      International Incorporated (the “Company”) has restated its consolidated
      financial statements for the fiscal year ended April 30, 2005 on Form 10-KSB/A,
      and the interim periods ended January 31, 2005, July 31, 2005 and October 31,
      2005 on Forms 10-QSB/A.





As
      previously disclosed, on November 16, 2004, the Company completed a private
      placement with certain investors for an aggregate of 2,083,887 shares of its
      common stock and 2,083,887 common stock purchase warrants for $10,000,000.
      Under
      the terms of the sale, the investors were granted certain registration rights
      in
      which the Company agreed to timely file a registration statement to register
      the
      common shares and the shares underlying the warrants, obtain effectiveness
      of
      the registration statement by the SEC within ninety (90) days of November 16,
      2004, and maintain the effectiveness of this registration statement for a preset
      time thereafter. In the event the Company fails to timely perform under the
      registration rights agreement, the Company agrees to pay the investors
      liquidated damages in an amount equal to 1.5% of the aggregate amount invested
      by the investors for each 30-day period or pro rata for any portion thereof
      following the date by which the registration statement should have been
      effective. The initial registration statement was filed and declared effective
      by the SEC within the allowed time and the Company has maintained the
      effectiveness of the registration statement to date, and has not been required
      to pay any liquidated damages in connection with the filing or on-going
      effectiveness of the registration statement.





The
      Emerging Issues Task Force ("EITF") is currently reviewing the accounting for
      securities with liquidated damages clauses as stated in EITF 05-04, "The Effect
      of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
      to
      EITF 00-19." There are currently several views as to how to account for this
      type of transaction and the EITF has not yet reached a consensus. In accordance
      with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To,
      and Potentially Settled in the Company's Own Stock," and EITF 05-04, because
      the
      maximum potential liquidated damages for failure to maintain an effective
      registration statement is greater than the difference between the fair value
      of
      registered and unregistered shares, the value of the common stock subject to
      such registration rights should be classified as temporary equity. Additionally,
      in accordance with EITF 00-19 and the terms of the above warrants, the fair
      value of the warrants should be recorded as a liability, with an offsetting
      reduction to shareholders’ equity. The warrant liability is initially measured
      at fair value using the Black-Scholes option pricing model, and is then
      re-valued at each reporting date, with changes in the fair value reported as
      non-cash charges or credits to earnings.





The
      SEC
      recently announced its preferred interpretation of the accounting for
      common stock and warrants with registration rights under EITF 00-19. The SEC
      concluded that for agreements containing registration rights where significant
      liquidated damages could be required to be paid to the holder of the instrument
      in the event the issuer fails to maintain the effectiveness of a registration
      statement for a preset time period, the common stock subject to such liquidated
      damages does not meet the tests required for shareholders’ equity
      classification, and accordingly must be reflected between liabilities and
      shareholders’ equity in the balance sheet until  the conditions are
      eliminated. In analyzing instruments under EITF 00-19, the SEC concluded that
      the likelihood or probability related to the failure to maintain an effective
      registration statement is not a factor.





Historically,
      the Company classified the common stock and warrants with registration rights
      described above as shareholders' equity, as it believed these securities met
      the
      requirements necessary to record them as shareholders’ equity. After further
      review in accordance with the SEC’s recent preferred interpretation of EITF
      00-19 as it relates to these common shares and warrants subject to registration
      rights, the Company has concluded that its financial statements for the year
      ended April 30, 2005, and interim periods ended January 31, 2005, July 31,
      2005,
      and October 31, 2005, will be restated. The restatement includes the
      reclassification of common stock subject to registration rights from
      shareholders’ equity and into temporary equity, and the reclassification of the
      liability for the fair value of the warrants out of shareholders' equity
      and into warrant liability as of the closing date (November 16, 2004).





Based
      on
      the above determination, as of April 30, 2005, the Company reclassified
      $5,732,116 of common stock subject to registration from shareholders’ equity and
      into temporary equity. In addition, the Company measured the initial fair value
      of the warrants on the closing date at $3,408,833 and reclassified the fair
      value of the warrants from shareholders’ equity and into warrant liability. At
      the end of each reporting period, the value of the warrants is re-measured
      based
      on the fair value of the underlying shares, and changes to the warrant liability
      and related “gain or loss in fair value of the warrants” is recorded  as a
      non-cash charge or credit to earnings. The warrant liability will be
      reclassified to shareholders’ equity when the Company is no longer subject to
      performance under the registration rights agreement.





At
      April
      30, 2005, the warrant liability was $1,994,570, due to changes in the fair
      value
      of the warrants. The fair value of the warrants was estimated using the
      Black-Scholes option-pricing model, with the following assumptions for the
      year
      ended April 30, 2005: risk-free interest rate of 3.91% to 3.96%, dividend yield
      of 0%, expected life of 6.54 to 7 years and volatility range of 28.4% to 42.1%
      were used.







2




For
      the
      year ended April 30, 2005, the non-cash gain on fair value of warrants was
      $1,414,263. The gain on fair value of warrants is due principally to the
      decrease in the market value of the common stock of the Company. The non-cash
      gain on fair value of warrants has no effect on the Company’s cash flows or
      liquidity.





This
      Amendment No. 1 on Form 10-KSB/A ( the “Form 10-KSB/A”) to the
      Company’s Annual Report on Form 10-KSB for the fiscal year ended April 30,
      2005, initially filed with the Securities and Exchange Commission ( the “SEC”)
      on July 29, 2005, is being filed to reflect restatements of the Company’s
      Consolidated Balance Sheet as of April 30, 2005, and the related Consolidated
      Statements of Operations, Shareholders’ Equity and Cash Flows for the year
 ended April 30, 2005. For a more detailed description of these
      restatements, see Note 2, “Restatement for Equity Issued with Registration
      Rights”.





For
      the
      convenience of the reader, this Form 10-KSB/A sets forth the original Form
      10-KSB in its entirety. However, this Form 10-KSB/A only amends and restates
      Items 6 and 7, in each case as a result of, and to reflect, the
      restatement. No other information in the original Form 10-KSB is amended hereby.
      In addition, pursuant to the rules of the SEC, the original Form 10-KSB has
      been
      amended to contain currently dated certifications from the Company’s Chief
      Executive Officer and Chief Financial Officer, as required by Sections 302
      and
      906 of the Sarbanes-Oxley Act of 2002.





3





**PART
      I**





**ITEM
      1. - DESCRIPTION OF BUSINESS**





This
      Annual Report on Form 10-KSB/A (including the section regarding Management's
      Discussion and Analysis of Financial Condition and Results of Operations)
      contains forward-looking statements regarding our business, financial condition,
      results of operations and prospects. Words such as "expects," "anticipates,"
      "intends," "plans," "believes," "seeks," "estimates" and similar expressions
      or
      variations of such words are intended to identify forward-looking statements,
      but are not deemed to represent an all-inclusive means of identifying
      forward-looking statements as denoted in this Annual Report on Form 10-KSB/A.
      Additionally, statements concerning future matters are forward-looking
      statements.





Although
      forward-looking statements in this Annual Report on Form 10-KSB/A reflect the
      good faith judgment of our Management, such statements can only be based on
      facts and factors currently known by us. Consequently, forward-looking statements
      are inherently subject to risks and uncertainties and actual results and
      outcomes may differ materially from the results and outcomes discussed in or
      anticipated by the forward-looking statements. Factors that could cause or
      contribute to such differences in results and outcomes include, without
      limitation, those specifically addressed under the heading "Risks Related to
      Our
      Business" below, as well as those discussed elsewhere in this Annual Report
      on
      Form 10-KSB/A. Readers are urged not to place undue reliance on these
      forward-looking statements, which speak only as of the date of this Annual
      Report on Form 10-KSB/A. We file reports with the Securities and Exchange
      Commission ("SEC"). We make available on our website under "Investor
      Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB/A,
      quarterly reports on Form 10-QSB and  10-QSB/A and current reports on
      Form 8-K and amendments to those reports as soon as reasonably practicable
      after
      we electronically file such materials with or furnish them to the SEC. Our
      website address is www.wpcs.com. You can also read and copy any materials we
      file with the SEC at the SEC's Public Reference Room at 450 Fifth Street NW,
      Washington, DC 20549. You can obtain additional information about the operation
      of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
      the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy
      and information statements, and other information regarding issuers that file
      electronically with the SEC, including us.





We
      undertake no obligation to revise or update any forward-looking statements
      in
      order to reflect any event or circumstance that may arise after the date of
      this
      Annual Report on Form 10-KSB/A. Readers are urged to carefully review and
      consider the various disclosures made throughout the entirety of this annual
      Report, which attempt to advise interested parties of the risks and factors
      that
      may affect our business, financial condition, results of operations and
      prospects.





**Description
      of the Business**





**Overview**





WPCS
      International Incorporated is an engineering company that focuses on the
      implementation requirements of wireless technology and specialty communication
      systems. We provide a range of services including site design, product
      integration, security, structured cabling, construction and project management.
      These projects may require the integration of multiple communication components
      and engineering services in order to complete the customer’s requirements for
      the deployment of a wireless or specialty communication system. We have an
      extensive customer base that includes many major corporations, government
      entities and educational institutions in two segments.





On
      May
      17, 2002, pursuant to an agreement and plan of merger, Phoenix Star Ventures
      Inc., a publicly held Delaware corporation, through its wholly owned subsidiary
      WPCS Acquisition Corp., acquired WPCS Holdings Inc., a Delaware corporation
      by
      issuing shares of its common stock to shareholders of WPCS Holdings, Inc. in
      exchange of all the outstanding shares of WPCS Holdings, Inc. Concurrently
      with
      the acquisition, Phoenix Star Ventures Inc. changed its name to WPCS
      International Incorporated.





Historically,
      we have grown by acquisition and have integrated five acquisitions to-date.
      As a
      result of the acquisitions of Invisinet, Inc. on November 13, 2002 and Walker
      Comm, Inc. on December 30, 2002, we experienced significant growth in our
      overall business and commenced operations in two segments, specialty
      communication systems and wireless infrastructure services. With the acquisition
      of Clayborn Contracting Group, Inc. on August 22, 2003 and Quality
      Communications & Alarm Company on November 24, 2004, we experienced
      additional expansion of the specialty communication segment. With the
      acquisition of Heinz on April 2, 2004, we experienced additional expansion
      of
      the wireless infrastructure segment.





4








**Fiscal
      2005 Developments**





Financing





On
      November 16, 2004, we sold an aggregate of 2,083,887 shares of common stock
      and
      2,083,887 common stock purchase warrants to eight investors for $10,000,000.
      The
      common stock and warrants were issued in a private placement transaction
      pursuant to Section 4(2) under the Securities Act of 1933. Pursuant to the
      terms
      of sale, we filed a resale registration statement on December 30, 2004 covering
      the common stock and the common stock issuable upon exercise of the warrants,
      which was declared effective by the Securities and Exchange Commission on
      January 18, 2005.





Each
      warrant is exercisable for a period of five years at a price of $8.40 per share,
      subject to certain adjustments. The exercise price of the warrants is subject
      to
      adjustment for subsequent lower price issuances by us, as well as customary
      adjustment provisions for stock splits, combinations, dividends and the like.
      The warrants are callable by us, upon 30 days notice, should the common stock
      trade at or above $25.20 for 25 out of 30 consecutive trading days. A maximum
      of
      20% of the warrants may be called in any three-month period.





Acquisitions





On
      November 24, 2004, we acquired Quality Communications & Alarm Company, Inc.
      (“Quality”), a New Jersey corporation, for aggregate consideration of
      approximately $7,400,000 in cash, net of acquisition transaction costs. The
      acquisition of Quality gives us additional project engineering expertise for
      specialty communication opportunities, broadens our customer base especially
      in
      the public safety and gaming sector, and expands our geographic presence in
      the
      Northeastern United States. The financing for this transaction was completed
      through the issuance of the common stock described above.





Reverse
      Stock Split





Effective
      January 10, 2005, a majority of our shareholders approved a one-for-twelve
      reverse stock split of the Company’s common stock, decreasing the number of
      issued and outstanding shares of common stock from 20,849,976 shares to
      1,737,498 shares. The par value of the common stock was not affected by the
      reverse stock split and remains at $0.0001 per share. Consequently, the reverse
      stock split has been reflected retroactively in the accompanying annual report
      on Form 10-KSB/A, financial statements and notes for all periods presented
      and
      all applicable references as to the number of common shares and per share
      information, stock options, warrants and market prices have been restated to
      reflect this reverse stock split.





Exchange
      Listing





Effective
      March 28, 2005, we began trading on the Nasdaq SmallCap Stock Market. Our common
      stock is traded under the symbol “WPCS.”





**Our
      Business**





We
      generate our revenue by providing engineering services that focus on wireless
      technology and specialty communication systems. We have two reportable segments,
      specialty communication systems and wireless infrastructure services.





**Specialty
      Communication Systems**





WPCS
      is a
      complete project engineering company with design and build capabilities. We
      have
      certified engineers and project managers that are capable of providing services
      that take advantage of today’s technology while looking forward to tomorrow’s
      emerging technologies. We have designed and implemented unique specialty
      communication systems for public safety, healthcare, homeland security,
      hospitality services and gaming applications that have improved not only
      communication capability, but also the customer’s productivity. WPCS maintains a
      union and non-union workforce that is trained and certified in OSHA safety
      parameters and all regulations pertaining to communications deployment. We
      are
      also equipped to offer the following standard services: wireless distribution
      systems, RCDD design, network integration, video security, fiber optic cabling,
      telecommunication systems, audio/visual systems, construction and
      trenching.





5








**Wireless
      Infrastructure Services**





Wireless
      infrastructure services include the internal and external design and
      installation of a wireless solution to support data, voice or video transmission
      between two or more points without the utilization of landline infrastructure.
      Wireless infrastructure services includes radio frequency engineering, site
      survey and design to determine terrain status and where mounting and alignment
      will occur and spectrum analysis to study the performance of licensed and
      unlicensed frequencies for a specific area. Also, we mount and align equipment
      and integrate the products into one system, and finally test, document and
      support the installation. We also provide network security, training and
      technical support.





**Sales
      and Marketing and Internal Growth**





In
      both
      segments, we primarily service major corporations, government entities and
      educational institutions in the United States. We also perform limited services
      internationally, which account for less than 1% of total sales. We market and
      sell services through a direct sales team of sales and project engineering
      professionals. Sales personnel work collaboratively with senior management,
      project managers and project engineers to develop new sales leads and procure
      new contracts. We generate revenue opportunities through formal bid responses,
      end user referrals, contracting assignments from technology providers and
      subcontracting assignments from general infrastructure providers. We also,
      through our subsidiaries, are listed on the Federal GSA schedule for government
      contracts.





**Customers**




We
      provide specialty communication systems and wireless infrastructure services
      to
      many major corporations, government entities and educational institutions.
      We
      had revenue to one customer totaling $6.2 million, which comprised 15.5% of
      our
      total revenue. At April 30, 2005, we had a backlog of unfilled orders believed
      to be firm of approximately $14.6 million, representing the uncompleted portion
      of services to be performed under job-specific contracts or purchase orders.
      We
      expect these projects to be completed and the backlog fully converted to revenue
      within the next eight months.





**Competition**





The
      markets in the specialty communication systems and wireless infrastructure
      services segments are relatively competitive and fragmented and are represented
      typically by numerous service providers, ranging from small independent firms
      servicing local markets to larger firms servicing regional and national markets.
      We also face competition from existing or prospective clients which employ
      in-house personnel to perform some of the same types of services we provide.
      Historically, there have been relatively few significant barriers to entry
      into
      the markets in which we operate, and, as a result, any organization that has
      adequate financial resources and access to technical expertise may become one
      of
      our competitors. Overall, we believe that there are no dominant competitors
      in
      either of the segments that we provide products and services.





We
      believe that the principal competitive factors in our markets include the
      ability to deliver results within budget (time and cost), reputation,
      accountability, staffing flexibility, project management expertise, industry
      experience and competitive pricing. In addition, expertise in new and evolving
      technologies has become increasingly important. We believe that the ability
      to
      integrate these technologies from multiple vendors gives us a competitive
      advantage. Our ability to compete also depends on a number of additional factors
      which are outside of our control, including:


•
            competitive
                pricing for similar services;•
            the
                ability and willingness of our competitors to finance customers’ projects
                on favorable terms;•
            the
                ability of our customers to perform the services themselves;
                and•
            the
                responsiveness of our competitors to customer
                needs.





We
      believe that our principal competitive advantage is the ability to integrate
      multiple component products and services across the vast majority of wireless
      infrastructure services and specialty communication systems. We have a trained
      and certified staff, our local presence combined with the ability to provide
      national coverage, and a strong customer base. We use proven methodologies
      to
      rapidly design, install, integrate and manage communications deployments.





6







**Acquisition
      Strategy**





In
      the
      future, our primary goal is to focus on organic growth opportunities. We will
      also consider strategic acquisitions of companies familiar with specialty
      communication systems and wireless infrastructure services. The goal for each
      acquisition will be to expand the product and services offerings, strengthen
      our
      project services capabilities, expand our customer base and add accretive
      revenue and earnings. In this regard, we completed the acquisition of Quality
      in
      November 2004.





**Employees**





As
      of
      April 30, 2005, we employed 200 full time employees, of whom 135 are project
      engineers, 25 are project managers, 35 are in administration and 5 are
      executives. A majority of the project engineers are represented by the
      International Brotherhood of Electrical Workers. We also have non-union
      employees. We believe our relations with all of our employees are good. The
      Company has approximately 110 union employees. A contract with these union
      employees expires November 30, 2008.





**Risk
      Related to Business**





You
      should carefully consider the following risk factors and all other information
      contained herein as well as the information included in this Annual Report
      in
      evaluating our business and prospects. The risks and uncertainties described
      below are not the only ones we face. Additional risks and uncertainties, other
      than those we describe below, that are not presently known to us or that we
      currently believe are immaterial, may also impair our business operations.
      If
      any of the following risks occur, our business and financial results could
      be
      harmed. You should refer to the other information contained in this Annual
      Report, including our consolidated financial statements and the related
      notes.





**We
      have a history of operating losses and may never become
      profitable.**





Although
      we achieved net income of approximately $1,329,000 for the year ended April
      30,
      2005, there can be no assurance that we will achieve or sustain profitability
      or
      positive cash flow from operating activities in the future. If we cannot achieve
      operating profitability or positive cash flow from operating activities, we
      may
      not be able to meet our working capital requirements. If we are unable to meet
      our working capital requirements, we are likely to reduce or cease all or part
      of our operations.





**We
      may be unable to obtain the additional capital required to grow our business.
      We
      may have to curtail our business if we cannot find adequate
      funding.**





Our
      ability to grow depends significantly on our ability to expand our operations
      through internal growth and by acquiring other companies or assets that require
      significant capital resources. We may need to seek additional capital from
      public or private equity or debt sources to fund our growth and operating plans
      and respond to other contingencies such as:





·
            shortfalls
                in anticipated revenues or increases in
                expenses;


·
            the
                development of new services; or


·
            the
                expansion of our operations, including the recruitment of additional
                personnel.





We
      cannot
      be certain that we will be able to raise additional capital in the future on
      terms acceptable to us or at all. If alternative sources of financing are
      insufficient or unavailable, we may be required to modify our growth and
      operating plans in accordance with the extent of available
      financing.





**Our
      success is dependent on growth in the deployment of wireless networks, and
      to
      the extent that such growth slows down, our business may be harmed.**





The
      wireless industry has historically experienced a dramatic rate of growth both
      in
      the United States and internationally. Recently, however, many end users have
      been re-evaluating their network deployment plans in response to downturns
      in
      the capital markets, changing perceptions regarding industry growth, the
      adoption of new wireless technologies, increased price competition and a general
      economic slowdown in the United States and internationally. It is difficult
      to
      predict whether these changes will result in a downturn in the wireless
      industry. If the rate of growth should slow down and end users continue to
      reduce their capital investments in wireless infrastructure or fail to expand
      their networks, our operating results may decline which could cause a decline
      in
      our profits.





7








The
      uncertainty associated with rapidly changing wireless technologies may also
      continue to negatively impact the rate of deployment of wireless networks and
      the demand for our services. End users face significant challenges in assessing
      their bandwidth demands and in acceptance of rapidly changing enhanced wireless
      capabilities. If end users continue to perceive that the rate of acceptance
      of
      next generation wireless products will grow more slowly than previously
      expected, they may, as a result, continue to slow their deployment of next
      generation wireless technologies. Any significant slowdown will reduce the
      demand for our services and would result in negative net growth, net losses,
      and
      potentially a reduction in our business operations.





**The
      increase of services offered by equipment vendors could cause a reduction in
      demand for our services.**





Recently,
      the wireless equipment vendors have increased the services they offer for their
      technology. This activity and the potential continuing trend towards offering
      services may lead to a greater ability among equipment vendors to provide a
      comprehensive range of wireless services, and may simplify integration and
      installation, which could lead to a reduction in demand for our services.
      Moreover, by offering certain services to end users, equipment vendors could
      reduce the number of our current or potential customers and increase the
      bargaining power of our remaining customers, which may result in a decline
      in
      our net revenue and profits.





**Our
      quarterly results fluctuate and may cause our stock price to decline.**





Our
      quarterly operating results have fluctuated in the past and will likely
      fluctuate in the future. As a result, we believe that period to period
      comparisons of our results of operations are not a good indication of our future
      performance. A number of factors, many of which are outside of our control,
      are
      likely to cause these fluctuations.





The
      factors outside of our control include:




§
            Wireless
                market conditions and economic conditions generally;§
            Timing
                and volume of customers’ specialty communication
                projects;§
            The
                timing and size of wireless deployments by end users;§
            Fluctuations
                in demand for our services;§
            Changes
                in our mix of customers’ projects and business
                activities;§
            The
                length of sales cycles;§
            Adverse
                weather conditions, particularly during the winter season, could
                effect
                our ability to render specialty communication services in certain
                regions
                of the United States;§
            The
                ability of certain customers to sustain capital resources to pay
                their
                trade accounts receivable balances;§
            Reductions
                in the prices of services offered by our competitors;
                and§
            Costs
                of integrating technologies or businesses that we
                add.




The
      factors substantially within our control include:




§
            Changes
                in the actual and estimated costs and time to complete fixed-price,
                time-certain projects that may result in revenue adjustments for
                contracts
                where revenue is recognized under the percentage of completion
                method;§
            The
                timing of expansion into new markets, both domestically and
                internationally;§
            Costs
                incurred to support internal growth and acquisitions;§
            Fluctuations
                in operating results caused by acquisitions; and§
            The
                timing and payments associated with possible
                acquisitions.





Because
      our operating results may vary significantly from quarter to quarter, our
      operating results may not meet the expectations of securities analysts and
      investors, and our common stock could decline significantly which may expose
      us
      to risks of securities litigation, impair our ability to attract and retain
      qualified individuals using equity incentives and make it more difficult to
      complete acquisitions using equity as consideration.





**Failure
      to keep pace with the latest technological changes could result in decreased
      revenues.**





The
      market for our services is characterized by rapid change and technological
      improvements. Failure to respond in a timely and cost-effective way to these
      technological developments could result in serious harm to our business and
      operating results. We have derived, and we expect to continue to derive, a
      substantial portion of our revenues from creating wireless networks that are
      based upon today’s leading technologies and that are capable of adapting to
      future technologies. As a result, our success will depend, in part, on our
      ability to develop and market service offerings that respond in a timely manner
      to the technological advances of our customers, evolving industry standards
      and
      changing client preferences.






8


**Failure
      to properly manage projects may result in costs or claims.**





Our
      engagements often involve large scale, highly complex projects involving
      wireless networks and specialty communication systems utilizing leading
      technology. The quality of our performance on such projects depends in large
      part upon our ability to manage the relationship with our customers, and to
      effectively manage the project and deploy appropriate resources, including
      third-party contractors, and our own personnel, in a timely manner. Any defects
      or errors or failure to meet clients’ expectations could result in claims for
      substantial damages against us. Our contracts generally limit our liability
      for
      damages that arise from negligent acts, error, mistakes or omissions in
      rendering services to our clients. However, we cannot be sure that these
      contractual provisions will protect us from liability for damages in the event
      we are sued.  In addition, in certain instances, we guarantee customers
      that we will complete a project by a scheduled date or that the network will
      achieve certain performance standards. As a result, we often have to make
      judgments concerning time and labor costs. If the project or network experiences
      a performance problem, we may not be able to recover the additional costs we
      will incur, which could exceed revenues realized from a project. Finally, if
      we
      miscalculate the resources or time we need to complete a project with capped
      or
      fixed fees, our operating results could seriously decline.





**Potential
      future acquisitions could be difficult to integrate, disrupt our business,
      dilute stockholder value and adversely affect our operating results.**





Since
      November 13, 2002, we have acquired five companies and we intend to further
      expand our operations through targeted, strategic acquisitions over time. This
      may require significant management time and financial resources because we
      may
      need to integrate widely dispersed operations with distinct corporate cultures.
      Our failure to manage future acquisitions successfully could seriously harm
      our
      operating results. Also, acquisition costs could cause our quarterly operating
      results to vary significantly. Furthermore, our stockholders would be diluted
      if
      we financed the acquisitions by incurring convertible debt or issuing
      securities. Although we currently only have operations within the United States,
      if we were to acquire an international operation; we will face additional risks,
      including:




•
            difficulties
                in staffing, managing and integrating international operations due
                to
                language, cultural or other differences;•
            different
                or conflicting regulatory or legal requirements;•
            foreign
                currency fluctuations; and•
            diversion
                of significant time and attention of our
                management.





**ITEM
      2 - DESCRIPTION OF PROPERTIES**





Our
      principal executive offices are located in approximately 2,550 square feet
      of
      office space in Exton, Pennsylvania. The lease for such space expires in
      February 2008. The aggregate annual base rental for this space is
      $48,769.





We
      operate our business under operating leases in the following locations:




Location
            
            Lease
                Expiration Date
            
            Minimum
                Annual RentalFairfield,
                California (a)
            
            February
                28, 2011
            
            $94,125Rocklin,
                California
            
            January
                31, 2006
            
            $37,710San
                Leandro, California
            
            July
                31, 2006
            
            $13,756Auburn,
                California (b)
            
            Month-to-month
            
            $64,440St.
                Louis, Missouri
            
            August
                31, 2008
            
            $56,142Lakewood,
                New Jersey
            
            August
                31, 2007
            
            $90,370




(a)
      The
      lease for our Fairfield, California location is with a trust, of which a certain
      officer is the trustee.





(b)
      The
      lease for our Auburn, California location is month to month; therefore the
      minimum annual rental price assumes we rent the property for the entire
      year.





We
      believe that our existing facilities are suitable and adequate to meet our
      current business requirements.





9








**ITEM
      3 - LEGAL PROCEEDINGS**





From
      time
      to time, we may become involved in various lawsuits and legal proceedings which
      arise in the ordinary course of business. However, litigation is subject to
      inherent uncertainties, and an adverse result in these or other matters may
      arise from time to time that may harm our business. We are currently not aware
      of any such legal proceedings or claims that we believe will have, individually
      or in the aggregate, a material adverse affect on our business, financial
      condition or operating results.





**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





None.





10





**PART
      II**





**ITEM
      5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





**Market
      Information**





Our
      common stock is listed on the Nasdaq SmallCap Stock Market under the symbol
      "WPCS". The following table sets forth the range of the high and low bid
      quotations for our common stock for the periods indicated, reflective of the
      one-for-twelve reverse stock split for all periods presented. Such market
      quotations reflect inter-dealer prices, without mark-up, mark-down or commission
      and may not necessarily represent actual transactions.





High
            
            Low**2005**First
              Quarter
            
            $
            14.88
            
            $
            7.80Second
                Quarter
            
            
            11.28
            
            
            5.76Third
                Quarter
            
            
            8.28
            
            
            4.32Fourth
                Quarter
            
            
            7.80
            
            
            4.50





High
            
            Low**2004**First
                Quarter
            
            $
            22.56
            
            $
            4.68Second
                Quarter
            
            
            20.76
            
            
            12.24Third
                Quarter
            
            
            20.40
            
            
            10.92Fourth
                Quarter
            
            
            17.28
            
            
            10.80





As
      of
      July 7, 2005, there were approximately 85 holders of record of our common stock
      and the closing bid quotation of our common stock was $5.63 per
      share.





**Dividend
      Policy**





We
      have
      never paid any cash dividends on our capital stock and do not anticipate paying
      any cash dividends on our common stock in the foreseeable future. We intend
      to
      retain future earnings to fund ongoing operations and future capital
      requirements of our business. Any future determination to pay cash dividends
      will be at the discretion of the Board and will be dependent upon our financial
      condition, results of operations, capital requirements and such other factors
      as
      the Board deems relevant.








**ITEM
      6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





**Overview**





WPCS
      International Incorporated is an engineering company that focuses on the
      implementation requirements of wireless technology and specialty communication systems. We provide a range of services including ,
      site
      design, product integration, security, structured cabling, construction and
      project management. **** As
      a
      result of the acquisitions of Invisinet, Inc. on November 13, 2002 and Walker
      Comm, Inc. on December 30, 2002, we experienced significant growth in our
      overall business and commenced operations in two segments, specialty
      communication systems and wireless infrastructure services. With the
      acquisitions of Clayborn Contracting Group, Inc. and Heinz Corporation in fiscal
      2004 and Quality Communications & Alarm Company in fiscal 2005, we
      experienced additional growth in each of these segments.





**Significant
      Transactions and Events**





On
      August
      22, 2003, we acquired all of the outstanding shares of Clayborn in exchange
      for
      an aggregate of 68,871 newly issued shares of our common stock with a fair
      value
      of approximately $868,000 and $900,000 cash consideration. An additional
      $1,100,000 is due by September 30, 2007, payable in quarterly distributions,
      by
      payment to the Clayborn shareholders of 50% of the quarterly post-tax profits,
      as defined, of Clayborn and a final payment of any remaining balance on that
      date.





11








On
      April
      2, 2004, we acquired all of the outstanding common stock of Heinz for
      $1,000,000, as follows: (1) $700,000 of our common stock, based on the closing
      price of its common stock on March 30, 2004 of $11.76 per share, for an
      aggregate of 59,524 newly issued shares of our common stock and (2) $300,000
      total cash consideration, of which $100,000 was paid at closing and a $200,000
      non-interest bearing promissory note. Of the $200,000, $75,000 was paid in
      April
      2005, $75,000 is payable on the second anniversary of the closing date and
      $50,000 is payable on the third anniversary of the closing date.





On
      November 16, 2004, we sold an aggregate of 2,083,887 shares of our common stock
      and 2,083,887 common stock purchase warrants to eight investors for $10,000,000.
      The common stock and the warrants were issued in a private placement transaction
      pursuant to Section 4(2) under the Securities Act of 1933.





On
      November 24, 2004, we acquired all of the outstanding common stock of Quality
      for aggregate consideration of approximately $7,400,000 in cash, net of
      acquisition transaction costs. The acquisition of Quality gives us additional
      project engineering expertise for specialty communication opportunities,
      broadens our customer base especially in the public safety and gaming sector,
      and expands our geographic presence in the Northeastern United
      States.





Effective
      January 10, 2005, a majority of our shareholders approved a one-for-twelve
      reverse stock split of our common stock, decreasing the number of issued and
      outstanding shares of common stock from 20,849,976 shares to 1,737,498 shares.
      The par value of the common stock was not affected by the reverse stock split
      and remains at $0.0001 per share. Consequently, the reverse stock split has
      been
      reflected retroactively in the accompanying financial statements and notes
      for
      all periods presented and all applicable references as to the number of common
      shares and per share information, stock options, warrants and market prices
      have
      been restated to reflect this reverse stock split.





On
      March
      28, 2005, we began trading on the Nasdaq SmallCap Stock Market. Our Common
      Stock
      is traded under the symbol “WPCS.”





**Results
      of Operations**





Management
      currently considers the following events, trends and uncertainties to be
      important to understand its results of operations and financial
      condition:





·
            For
                the years ended April 30, 2005 and 2004, revenue was approximately
                $40,100,000 and $22,100,000, respectively. The increase in revenue
                was
                attributable to organic growth expansion of our customer base and
                new
                contract awards of approximately $7,600,000 and strategic acquisitions
                of
                approximately $10,400,000.





·
            We
                operate in two segments, specialty communication systems and wireless
                infrastructure services. With the acquisition of Clayborn in the
                second
                quarter of fiscal 2004 and Quality in the third quarter of fiscal
                2005, we
                experienced additional expansion of the specialty communication segment.
                With the acquisition of Heinz in the fourth quarter of fiscal 2004,
                we
                experienced additional expansion of the wireless infrastructure
                segment.





·
            For
                the years ended April 30, 2005 and 2004, the specialty communication
                segment represents approximately 79% of total revenue, and wireless
                infrastructure services represent approximately 21% of total revenue.




·
            Our
                primary goal is to focus on organic growth opportunities. We will
                also
                consider strategic acquisitions of companies familiar with wireless
                infrastructure and specialty communication systems. The goal for
                any
                future acquisition will be to expand the product and service offerings,
                to
                strengthen our project services capabilities, expand our customer
                base and
                add accretive revenue and earnings.





·
            As
                of April 30, 2005, our backlog is approximately $14,600,000. Our
                backlog
                is comprised of the uncompleted portion of services to be performed
                under
                job-specific contracts or purchase orders. We expect this backlog
                to be
                fully recognized as revenue within the next eight
                months.





·
            Our
                selling, general and administrative expenses decreased as a percentage
                of
                revenue for the year ended April 30, 2005, as compared to the prior
                year.





12








·
            In
                connection with sales of our common stock and warrants to certain
                investors during the third fiscal quarter ended January 31, 2005,
                we
                granted certain registration rights that provide for liquidated damages
                in
                the event of failure to timely perform under the agreements. The
                SEC
                recently announced its preferred interpretation of the accounting
                for
                common stock and warrants with registration rights under EITF 00-19.
                The
                SEC concluded that for agreements containing registration rights
                where
                significant liquidated damages could be required to be paid to the
                holder
                of the instrument in the event the issuer fails to maintain the
                effectiveness of a registration statement for a preset time period,
                the
                common stock subject to such liquidated damages does not meet the
                tests
                required for shareholders' equity classification, and accordingly
                must be been reflected as temporary equity in the  consolidated
                balance sheet until the conditions are eliminated. In analyzing
                instruments under EITF 00-19, the SEC concluded that the likelihood
                or
                probability related to the failure to maintain an effective registration
                statement is not a factor.





Historically,
      we classified the common stock and warrants with registration rights described
      above as shareholders’ equity, as we believed these securities met the
      requirements necessary to record them as shareholders’ equity. After further
      review in accordance with the SEC’s recent preferred interpretation of EITF
      00-19 as it relates to these common shares and warrants subject to registration
      rights, we have  concluded that our financial statements for the year
      ended April 30, 2005, and interim periods ended January 31, 2005, July 31,
      2005,
      and October 31, 2005, will be restated. The restatement includes the
      reclassification of common stock subject to registration rights from
      shareholders’ equity and into temporary equity, and the reclassification of the
      liability for the fair value of the warrants from shareholders’ equity and into
      warrant liability as of the closing date (November 16, 2004).





Based
      on
      the above determination, as of April 30, 2005, we reclassified $5,732,116 of
      common stock subject to registration from shareholders’ equity and into
      temporary equity. In addition, we measured the initial fair value of the
      warrants on the closing date at $3,408,833 and reclassified the fair value
      of
      the warrants from shareholders’ equity and into warrant liability. At the end of
      each reporting period, the value of the warrants is re-measured based on the
      fair value of the underlying shares, and changes to the warrant liability and
      related “gain or loss in fair value of the warrants” is recorded  as a
      non-cash charge or credit to earnings. The warrant liability will be
      reclassified to shareholders’ equity when we are  no longer subject to
      performance under the registration rights agreement.





At
      April
      30, 2005, the warrant liability was $1,994,570, due to changes in the fair
      value
      of the warrants. The fair value of the warrants was estimated using the
      Black-Scholes option-pricing model, with the following assumptions for the
      year
      ended April 30, 2005: risk-free interest rate of 3.91% to 3.96%, dividend yield
      of 0%, expected life of 6.54 to 7 years and volatility range of 28.4% to 42.1%
      were used.





For
      the
      year ended April 30, 2005, the non-cash gain on fair value of warrants was
      $1,414,263. The gain on fair value of warrants is due principally to the
      decrease in the market value of our  common stock . The non-cash gain
      on fair value of warrants has no effect on our cash flows or liquidity.





13








**Fiscal
      Year ended April 30, 2005 Compared to Fiscal Year Ended April 30,
      2004**





Consolidated
      results for the years ended April 30, 2005 and 2004 were as follows. Certain
      reclassifications have been made to prior year financial statements to conform
      to the current presentation.





**Year
                Ended****April
                30,****2005**
            
            **2004**REVENUE
            
            $
            40,148,233
            
            $
            22,076,246COSTS
                AND EXPENSES:Cost
                of revenue
            
            
            32,445,470
            
            
            17,286,099Selling,
                general and administrative expenses
            
            
            7,028,850
            
            
            4,441,776Depreciation
                and amortization
            
            
            682,397
            
            
            382,510Total
                costs and expenses
            
            
            40,156,717
            
            
            22,110,385OPERATING
                LOSS
            
            
            (8,484
            )
            
            (34,139
            )OTHER
                EXPENSE:Interest
                expense
            
            
            24,702
            
            
            14,048Gain
                on fair value of warrants
            
            
            (1,414,263
            )
            
            -INCOME
                (LOSS) BEFORE INCOME TAX PROVISION
            
            
            1,381,077
            
            
            (48,187
            )Income
                tax provision
            
            
            52,096
            
            
            76,000NET
                INCOME (LOSS)
            
            $
            1,328,981
            
            
            ($124,187
            )





***Revenue***





We
      generate our revenue by providing project engineering and deployment services
      for wireless infrastructure services and specialty communication systems. We
      provide a range of engineering services including site design, construction,
      product integration, structured cabling, network security, project management
      and technical support.





Revenue
      for the year ended April 30, 2005 was approximately $40,148,000, as compared
      to
      $22,076,000 for the prior year. The increase in revenue was attributable to
      organic growth expansion of our customer base and new contract awards of
      approximately $7,600,000 from Walker and Clayborn, and approximately $10,400,000
      from the acquisitions of Heinz and Quality.





Total
      revenue from the specialty communication segment for the years ended April
      30,
      2005 and 2004 was approximately $31,497,000 or 78.5% and $17,508,000 or 79.3%
      of
      total revenue, respectively. Wireless infrastructure segment revenue for the
      years ended April 30, 2005 and 2004 was approximately $8,651,000 or 21.5% and
      $4,568,000 or 20.7% of total revenue, respectively.





***Cost
      of Revenue***





Cost
      of
      revenue consists of direct costs on contracts, including materials, direct
      labor, third party subcontractor services, Walker union benefits and other
      overhead costs. Our cost of revenue was approximately $32,445,000 or 80.8%
      of
      revenue for the year ended April 30, 2005, compared to $17,286,000 or 78.3%
      for
      the prior year. The dollar increase in our total cost of revenue is due to
      the
      corresponding increase in revenue during the year ended April 30, 2005 as a
      result of organic growth in revenue from Walker and Clayborn and the
      acquisitions of Clayborn, Heinz and Quality,. In addition, the increase in
      total
      cost of revenue is due to an increase in costs incurred on certain Walker
      contracts that were recognized during the year of approximately $1,200,000.
      In
      direct response to these additional costs, we have made certain personnel
      changes and initiated additional project management training. The increase
      in
      cost of revenue as a percentage of revenue is due primarily to an increase
      in
      costs incurred on certain Walker contracts, offset by the revenue mix
      attributable to the acquisitions of Heinz and Quality.





14


The
      specialty communication segment cost of revenue and cost of revenue as a
      percentage of revenue for the years ended April 30, 2005 and 2004 was
      approximately $25,919,000 and 82.3% and $13,831,000 and 79.0%, respectively.
      As
      discussed above, the dollar increase in our total cost of revenue is due to
      the
      corresponding increase in revenue during the year ended April 30, 2005 as a
      result of organic growth in revenue from Walker and Clayborn, and the
      acquisitions of Clayborn and Quality. In addition, the increase in total cost
      of
      revenue is due to an increase in costs incurred on certain Walker contracts
      that
      were recognized during the year of approximately $1,200,000. The increase in
      cost of revenue as a percentage of revenue is due to an increase in the costs
      incurred on certain Walker contracts recognized during the period, partially
      offset by lower cost of revenue on revenues attributable to the Quality
      acquisition.





Wireless
      infrastructure segment cost of revenue and cost of revenue as a percentage
      of
      revenue for the years ended April 30, 2005 and 2004 was approximately $6,526,000
      and 75.4% and $3,455,000 and 75.6%, respectively. The dollar increase in our
      total cost of revenue is due to the corresponding increase in revenue during
      the
      year ended April 30, 2005 as a result of the acquisition of Heinz. The decrease
      in cost of revenue as a percentage of revenue is due to the revenue mix
      attributable to the acquisition of Heinz.





***Selling,
      general and administrative expenses***





For
      the
      year ended April 30, 2005, total selling, general and administrative expenses
      were $7,029,000, or 17.5% of total revenue compared to $4,442,000 or 20.1%
      of
      revenue for the prior year. The percentage decrease is due to the management
      of
      our cost structure as we leverage incremental revenue dollars in fiscal 2005.
      Included in selling, general and administrative expenses for the year ended
      April 30, 2005 are $3,656,000 for salaries, commissions, and payroll taxes.
      The
      increase in salaries and payroll taxes compared to the prior year is due to
      the
      increase in headcount as a result of the acquisitions of Clayborn, Heinz and
      Quality. Professional fees were $537,000, which include accounting, legal and
      investor relation fees. Insurance costs were $1,164,000 and rent for office
      facilities was $358,000. Automobile and other travel expenses were $422,000
      and
      telecommunication expenses were $196,000. Other selling, general and
      administrative expenses totaled $696,000. For the year ended April 30, 2005,
      total selling, general and administrative expenses for the specialty
      communication and wireless infrastructure segments were $4,658,000 and
      $1,180,000, respectively.





For
      the
      year ended April 30, 2004, selling, general and administrative expenses were
      $4,442,000 or 20.1% of revenue. Included in the selling, general and
      administrative expenses was $2,100,000 for salaries, commissions and payroll
      taxes, $566,000 in professional fees and insurance costs of $730,000. Rent
      for
      our office facilities amounted to $250,000. Automobile and other travel expenses
      were $259,000 and telecommunication expenses were $133,000. Other selling,
      general and administrative expenses totaled $404,000. For the year ended April
      30, 2004, total selling, general and administrative expenses for the specialty
      communication and wireless infrastructure segments were $2,805,000 and $712,000,
      respectively.





***Depreciation
      and amortization***





For
      the
      years ended April 30, 2005 and 2004, depreciation was approximately $372,000
      and
      $228,000, respectively. The increase in depreciation is due to the acquisition
      of fixed assets from acquiring Clayborn, Heinz, and Quality. The amortization
      of
      customer lists and backlog for the year ended April 30, 2005 was $310,000 as
      compared to $154,000 for the same period of the prior year. The increase in
      amortization is due to the acquisition of customer lists from Clayborn, Heinz
      and Quality, and backlog from Heinz. All customer lists are amortized over
      a
      period of five to six years from the date of their acquisition. Backlog is
      amortized over a period of one year from the date of acquisition.





**Gain
      on Fair Value of Warrants**





Gain
      on
      fair value of warrants for the year ended April 30, 2005 was approximately
      $1,414,000. The gain is due principally to the decrease in the market value
      of our common stock. The gain represents the unrealized non-cash change in
      the
      fair value of certain warrants, using the Black-Scholes option pricing model.
      The non-cash gain on fair value of warrants has no impact on our cash flows
      or
      liquidity.





***Net
      income (loss)***





Net
      income was approximately $1,329,000 for the year ended April 30, 2005. Net
      income included federal and state income tax provisions of approximately
      $52,000. The variation in effective tax rates between periods is primarily
      due
      to the Clayborn and Heinz acquisitions and certain book-to-tax permanent
      differences.





We
      incurred a net loss of approximately $124,000 for the year ended April 30,
      2004.








15


***Liquidity
      and capital resources***





At
      April
      30, 2005, we had working capital of approximately $5,145,000, which consisted
      of
      current assets of approximately $13,339,000 and current liabilities of
      $8,194,000.




Operating
      activities used $2,682,000 in cash during the year ended April 30, 2005. This
      was mainly comprised of $1,329,000 of net income less $813,000 in net non-cash
      charges, a $1,899,000 increase in accounts receivable, a $1,214,000 decrease
      in
      costs and estimated earnings in excess of billings on uncompleted contracts,
      a
      $537,000 increase in inventory, $337,000 decrease in accounts payable and
      accrued expenses, $1,147,000 decrease in billings in excess of costs and
      estimated earnings on uncompleted contracts payable, $329,000 decrease in income
      taxes payable and a $163,000 net increase in other assets.





Our
      investing activities utilized $7,025,000 in cash during the year ended April
      30,
      2005, which consisted of $216,000 paid for property and equipment, $6,709,000
      for the acquisition of Quality, net of cash acquired of $164,000, $82,000 for
      the acquisition of Heinz and $18,000 of acquisition earn-out payments and other
      acquisition transaction costs.





Our
      financing activities provided cash of $8,711,000 during the year ended April
      30,
      2005. Financing activities included net proceeds from the issuance of common
      stock of $9,114,000, repayments on lines of credit of $304,000, and repayments
      of equipment loans and capital lease obligations of approximately $99,000.





Our
      capital requirements depend on numerous factors, including the market for our
      services, the resources we devote to developing, marketing, selling and
      supporting our business, the timing and extent of establishing additional
      markets and other factors. On June 3, 2005, we entered into a credit agreement
      with a new commercial bank. The credit agreement (the "Credit Agreement"),
      provides for a revolving line of credit in an amount not to exceed $5,000,000,
      together with a letter of credit facility not to exceed $500,000. We also
      entered into security agreements, pursuant to which each subsidiary granted
      a
      security interest to the bank in all of their assets.





Pursuant
      to the terms of the Credit Agreement, we are permitted to borrow up to
      $3,000,000 under the revolving credit line, based upon eligible receivables.
      Once we have provided financial statements which evidence that we have earnings
      before interest, taxes, depreciation and amortization of (i) $750,000 for the
      quarter ended July 31, 2005, (ii) $750,000 for the quarter ended October 31,
      2005, and (iii) $2,500,000 for the year ended April 30, 2006, the revolving
      commitment amount will be increased to $5,000,000. The Credit Agreement contains
      customary covenants, including but not limited to (i) restrictions on the
      permitted ratio of total unsubordinated liabilities to tangible net worth plus
      subordinated indebtedness, (ii) the Company's total tangible net worth, (iii)
      working capital, (iv) minimum earnings before interest, taxes, depreciation
      and
      amortization, and (v) dividend restrictions. The loan commitment shall expire
      on
      August 31, 2008. We may prepay the loan at any time. Loans
      under the Credit Agreement bear interest at a rate equal to either the bank’s
      reference rate plus one half (0.5%) percent, or LIBOR plus two and
      three-quarters (2.75%) percent, as we may request. We paid a facility fee to
      the
      bank of $50,000 on the closing date.





We
      used
      the initial funds provided by the loan, in the gross amount of $3,000,000,
      to
      repay existing bank debt at Walker of approximately $672,000, for the payment
      of
      approximately $742,000 to the former shareholders of our Quality subsidiary
      for
      monies due to them pursuant to the terms of the purchase of their company,
      and
      for working capital. A $500,000 letter of credit was re-issued in favor of
      Walker’s surety bonding company as collateral for performance and payment bond
      requirements.





On
      November 16, 2004, we sold an aggregate of 2,083,887 shares of our common stock
      and 2,083,887 common stock purchase warrants to eight investors for $10,000,000.
      The common stock and the warrants were issued in a private placement transaction
      pursuant to Section 4(2) under the Securities Act of 1933. Pursuant to the
      terms
      of sale, we filed a resale registration statement on December 30, 2004 covering
      the common stock and the common stock issuable upon exercise of the warrants,
      which was declared effective by the SEC on January 18, 2005.





Each
      warrant is exercisable for a period of five years at a price of $8.40 per share,
      subject to certain adjustments. The exercise price of the warrants is subject
      to
      adjustment for subsequent lower price issuances, as well as customary adjustment
      provisions for stock splits, combinations, dividends and the like. The warrants
      are callable, upon 30 days notice, should the common stock trade at or above
      $25.20 per share for 25 out of 30 consecutive trading days. A maximum of 20%
      of
      the warrants may be called in any three-month period.





In
      connection with sale of the common stock and warrants, we effectuated a
      one-for-twelve reverse split of our outstanding common stock on January 10,
      2005. We also completed listing of our common stock on the Nasdaq SmallCap
      Stock
      Market.





16


On
      November 24, 2004, we acquired Quality for the aggregate consideration of
      approximately $7,400,000 in cash, net of acquisition transaction costs. A formal
      purchase price allocation has been completed and the amounts assignable to
      tangible assets, other intangible assets and goodwill have been determined.
      The
      acquisition of Quality gives us additional project engineering expertise for
      specialty communication opportunities, broadens our customer base especially
      in
      the public safety sector and gaming industry, and expands our geographic
      presence in the Northeastern United States. The financing for this transaction
      was completed through the issuance of the common stock as described above.




At
      April
      30, 2005, we had cash and cash equivalents of $989,000, working capital of
      approximately $5,145,000 and revolving lines of credit available of $318,000.
      With the additional capital resources raised from the issuance of the common
      stock, funds available from the recently obtained Credit Agreement and
      internally available funds, we believe that we have sufficient capital to meet
      our needs through April 30, 2006. Our future operating results may be affected
      by a number of factors including our success in bidding on future contracts
      and
      our continued ability to manage controllable costs effectively. To the extent
      we
      grow by future acquisitions that involve consideration other than stock, our
      cash requirements may increase.





***Critical
      Accounting Policies***





Financial
      Reporting Release No. 60, published by the SEC, recommends that all companies
      include a discussion of critical accounting policies used in the preparation
      of
      their financial statements. While all these significant accounting policies
      impact our financial condition and results of operations, we view certain of
      these policies as critical. Policies determined to be critical are those
      policies that have the most significant impact on our consolidated financial
      statements and require management to use a greater degree of judgment and
      estimates. Actual results may differ from those estimates.





We
      believe that given current facts and circumstances, it is unlikely that applying
      any other reasonable judgments or estimate methodologies would cause a material
      effect on our consolidated results of operations, financial position or
      liquidity for the periods presented in this report.





The
      accounting policies identified as critical are as follows:





***Equity
      Issued with Registration Rights***




In
      connection with sales of our common stock and warrants to certain investors
      during the third fiscal quarter ended January 31, 2005, the Company granted
      certain registration rights that provide for liquidated damages in the event
      of
      failure to timely perform under the agreements. Although the common stock
      purchase agreement does not provide for net-cash settlement, the existence
      of
      liquidated damages provides for a defacto net-cash settlement option. Therefore,
      common stock subject to such liquidated damages does not meet the tests required
      for shareholders’ equity classification, and accordingly has been reflected
      between liabilities and equity in the accompanying consolidated balance sheet
      until such time as the conditions are eliminated.




***Warrant
      Liability*** **




In
      connection with the sale of certain equity instruments during the third fiscal
      quarter ended January 31, 2005, as described above, the Company issued
      freestanding warrants. Although the terms of the warrants do not provide for
      net-cash settlement, in certain circumstances, physical or net-share settlement
      is deemed to not be within the Company’s control and, accordingly, the Company
      is required to account for these freestanding warrants as a derivative financial
      instrument liability, rather than as shareholders’ equity.





The
      warrant liability is initially measured and recorded at its fair value, and
      is
      then re-valued at each reporting date, with changes in the fair value reported
      as non-cash charges or credits to earnings. For warrant-based derivative
      financial instruments, the Black-Scholes option pricing model is used to value
      the warrant liability.




The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed at the end of
      each reporting period. Derivative instrument liabilities are classified in
      the
      balance sheet as current or non-current based on whether or not net-cash
      settlement of the derivative instrument could be required within 12 months
      of
      the balance sheet date.




The
      Company does not use derivative instruments to hedge exposures to cash flow,
      market, or foreign currency risks.





17





***Use
      of Estimates***





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and revenue and expenses during the reporting
      period. The most significant estimates relate to the estimation of percentage
      of
      completion on uncompleted contracts, valuation of inventory, allowance for
      doubtful accounts and estimated life of customer lists. Actual results could
      differ from those estimates.





***Accounts
      receivable***





Accounts
      receivable are due within contractual payment terms and are stated at amounts
      due from customers net of an allowance for doubtful accounts. Credit is extended
      based on evaluation of a customer's financial condition. Accounts outstanding
      longer than the contractual payment terms are considered past due. The Company
      determines its allowance by considering a number of factors, including the
      length of time trade accounts receivable are past due, the Company's previous
      loss history, the customer's current ability to pay its obligation to the
      Company, and the condition of the general economy and the industry as a whole.
      The Company writes off accounts receivable when they become uncollectible,
      and
      payment subsequently received on such receivables are credited to the allowance
      for doubtful accounts.





***Goodwill
      and other Long-lived Assets***





We
      assess
      the impairment of long-lived assets whenever events or changes in circumstances
      indicate that their carrying value may not be recoverable from the estimated
      future cash flows expected to result from their use and eventual disposition.
      Our long-lived assets subject to this evaluation include property and equipment
      and amortizable intangible assets. We assess the impairment of goodwill annually
      in our fourth fiscal quarter and whenever events or changes in circumstances
      indicate that it is more likely than not that an impairment loss has been
      incurred. Intangible assets other than goodwill are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying value
      may
      not be fully recoverable. We are required to make judgments and assumptions
      in
      identifying those events or changes in circumstances that may trigger
      impairment. Some of the factors we consider include a significant decrease
      in
      the market value of an asset, significant changes in the extent or manner for
      which the asset is being used or in its physical condition, a significant
      change, delay or departure in our business strategy related to the asset,
      significant negative changes in the business climate, industry or economic
      condition, or current period operating losses, or negative cash flow combined
      with a history of similar losses or a forecast that indicates continuing losses
      associated with the use of an asset.





We
      performed our annual review for goodwill impairment in the fourth quarter of
      fiscal 2005 and 2004 and tested for goodwill impairment in each reporting unit
      that contains goodwill. Our tests found that no impairment existed. Our
      impairment review is based on comparing the fair value to the carrying value
      of
      the reporting units with goodwill. The fair value of a reporting unit is
      measured at the business unit level using a discounted cash flow approach that
      incorporates our estimates of future revenues and costs for those business
      units. Reporting units with goodwill include Invisinet and Heinz within our
      wireless infrastructure segment and Walker, Clayborn and Quality within our
      specialty communications segment. Our estimates are consistent with the plans
      and estimates that we are using to manage the underlying businesses. If we
      fail
      to deliver products and services for these business units, or market conditions
      for these businesses fail to improve, our revenue and cost forecasts may not
      be
      achieved and we may incur charges for goodwill impairment, which could be
      significant and could have a material adverse effect on our net equity and
      results of operations.





***Deferred
      Income Taxes***





We
      determine deferred tax liabilities and assets at the end of each period based
      on
      the future tax consequences that can be attributed to net operating loss and
      credit carryovers and differences between the financial statement carrying
      amounts of existing assets and liabilities and their respective tax bases,
      using
      the tax rate expected to be in effect when the taxes are actually paid or
      recovered. The recognition of deferred tax assets is reduced by a valuation
      allowance if it is more likely than not that the tax benefits will not be
      realized. The ultimate realization of deferred tax assets depends upon the
      generation of future taxable income during the periods in which those temporary
      differences become deductible.





We
      consider past performance, expected future taxable income and prudent and
      feasible tax planning strategies in assessing the amount of the valuation
      allowance. Our forecast of expected future taxable income is based over such
      future periods that we believe can be reasonably estimated. Changes in market
      conditions that differ materially from our current expectations and changes
      in
      future tax laws in the U.S. may cause us to change our judgments of future
      taxable income. These changes, if any, may require us to adjust our existing
      tax
      valuation allowance higher or lower than the amount we have
      recorded.








18








***Revenue
      recognition***





We
      generate our revenue by providing project engineering and deployment services
      for wireless infrastructure services and specialty communication systems. We
      provide a range of engineering services including site design, construction,
      product integration, structured cabling, network security, project management
      and technical support.





We
      record
      revenue and profit on these contracts on a percentage-of-completion basis on
      the
      cost-to-cost method. Contracts in process are valued at cost plus accrued
      profits less earned revenues and progress payments on uncompleted contracts.
      Contracts are generally considered substantially complete when engineering
      is
      completed and/or site construction is completed. We include in operations
      pass-through revenue and costs on cost-plus contracts, which are
      customer-reimbursable materials, equipment and subcontractor costs, when we
      determine that we are responsible for the engineering specification, procurement
      and management of such cost components on behalf of the customer.





We
      have
      numerous contracts that are in various stages of completion. Such contracts
      require estimates to determine the appropriate cost and revenue recognition.
      Cost estimates are reviewed monthly on a contract-by-contract basis, and are
      revised periodically throughout the life of the contract such that adjustments
      to profit resulting from revisions are made cumulative to the date of the
      revision. Significant management judgments and estimates, including the
      estimated cost to complete projects, which determines the project’s percent
      complete, must be made and used in connection with the revenue recognized in
      the
      accounting period. Current estimates may be revised as additional information
      becomes available. If estimates of costs to complete long-term contracts
      indicate a loss, provision is made currently for the total loss
      anticipated.





***Recently
      issued accounting pronouncements***





In
      December 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based
      Payment”, which amends FASB Statement No. 123 and will be effective for public
      companies that are small business insurers at the beginning of the next fiscal
      year that begins after December 15, 2005. The new standard will require us
      to
      expense the fair value of employee stock options and other share-based payments
      over the vesting period. The FASB believes the use of a binomial lattice model
      for option valuation is capable of more fully reflecting certain characteristics
      of employee share options compared to the Black-Scholes options pricing model.
       The new standard may be adopted in one of three ways - the modified
      prospective transition method, a variation of the modified prospective
      transition method or the modified retrospective transition method. We are
      currently evaluating how we will adopt the standard and evaluating the effect
      that the adoption of SFAS 123(R) will have on our financial position and results
      of operations.





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an
      amendment of ARB No. 43, Chapter 4 *.* ” ** This
      statement amends the guidance in ARB No. 43, Chapter 4, Inventory
      Pricing, to clarify the accounting for abnormal amounts of idle facility
      expense, freight, handling costs and wasted material (spoilage).
      Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
“...under some circumstances, items such as idle facility expense, excessive
      spoilage, double freight, and rehandling costs may be so abnormal as to require
      treatment as current period charges...” SFAS No. 151 requires that those items
      be recognized as current-period charges regardless of whether they meet the
      criterion of “so abnormal.” In addition, this statement requires that allocation
      of fixed production overheads to the costs of conversion be based on the normal
      capacity of the production facilities. The provisions of SFAS 151 shall be
      applied prospectively and are effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005, with earlier application
      permitted for inventory costs incurred during fiscal years beginning after
      the
      date this Statement was issued. The adoption of SFAS No. 151 is not
      expected to have a material impact on our financial position or results of
      operations.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
      Assets, an amendment of APB Opinion No. 29”. The guidance in APB Opinion
      No. 29, “Accounting for Nonmonetary Transactions”, is based on the
      principle that exchanges of nonmonetary assets should be measured based on
      the
      fair value of assets exchanged. The guidance in that Opinion, however, included
      certain exceptions to that principle. This Statement amends Opinion 29 to
      eliminate the exception for nonmonetary exchanges of similar productive assets
      that do not have commercial substance. A nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. SFAS No. 153 is effective for
      nonmonetary exchanges occurring in fiscal periods beginning after June 15,
      2005. The adoption of SFAS No. 153 is not expected to have a material
      impact on our financial position or results of operations.





19








***Forward
      Looking Statements***





This
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations includes a number of forward-looking statements that reflect
      Management's current views with respect to future events and financial
      performance. Those statements include statements regarding the intent, belief
      or
      current expectations of the Company and members of its management team as well
      as the assumptions on which such statements are based. Prospective investors
      are
      cautioned that any such forward-looking statements are not guarantees of future
      performance and involve risk and uncertainties, and that actual results may
      differ materially from those contemplated by such forward-looking statements.





Readers
      are urged to carefully review and consider the various disclosures made by
      the
      Company in this report and in the Company's other reports filed with the
      Securities and Exchange Commission. Important factors currently known to
      Management could cause actual results to differ materially from those in
      forward-looking statements. The Company undertakes no obligation to update
      or
      revise forward-looking statements to reflect changed assumptions, the occurrence
      of unanticipated events or changes in the future operating results over time.
      The Company believes that its assumptions are based upon reasonable data derived
      from and known about its business and operations and the business and operations
      of the Company. No assurances are made that actual results of operations or
      the
      results of the Company's future activities will not differ materially from
      its
      assumptions.











20





**ITEM
      7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**











**INDEX
      TO FINANCIAL STATEMENTS**





PageReport
                of Independent Registered Public Accounting
                Firm
            
            F-2Consolidated
                Balance Sheets as of April 30, 2005 and
                2004
            
            F-3
                - F-4Consolidated
                Statements of Operations for the years
                ended April
                30, 2005 and 2004
            
            F-5Consolidated
                Statement of Shareholders' Equity for
                the years ended April 30, 2005 and 2004
            
            F-6
                - F-7Consolidated
                Statements of Cash Flows for the years endedApril
                30, 2005 and 2004
            
            F-8
                  - F-9Notes
                to Consolidated Financial
                Statements
            
            F-10
                - F-23








F-1







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**








The
        Board
        of Directors and Shareholders
 WPCS
      International Incorporated





We
      have
      audited the accompanying consolidated balance sheets of WPCS International
      Incorporated and Subsidiaries as of April 30, 2005 and 2004, and the related
      consolidated statements of operations, shareholders' equity and cash flows
      for
      the years then ended. These consolidated financial statements are the
      responsibility of the Company's management. 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 Overnight 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. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes 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 consolidated financial position of WPCS
      International Incorporated and Subsidiaries as of April 30, 2005 and 2004,
      and
      their consolidated results of operations and cash flows for the years then
      ended, in conformity with accounting principles generally accepted in the United
      States of America.




As
      discussed in Note 2 to the consolidated financial statements, the Company has
      restated its consolidated financial statements as of April 30, 2005 and for
      the year then ended.







/s/
                J.H COHN LLP
              J.H. COHN LLPRoseland,
              New JerseyJuly
              15, 2005







F-2


WPCS
      INTERNATIONAL INCORPORATED AND
      SUBSIDIARIES





**CONSOLIDATED
      BALANCE SHEETS**








**APRIL
                  30,**
              
              **APRIL
                  30,****ASSETS**
              
              **2005**
              
              **2004**CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              989,252
              
              $
              1,984,636Accounts
                  receivable, net of allowance of $75,786 and $61,779 at April 30,
                  2005 and
                  2004, respectively
              
              
              9,907,316
              
              
              5,909,879Costs
                  and estimated earnings in excess of billings on uncompleted
                  contracts
              
              
              908,955
              
              
              2,123,031Inventory
              
              
              885,624
              
              
              104,799Prepaid
                  expenses and other current assets
              
              
              536,331
              
              
              264,076Deferred
                  income taxes
              
              
              112,000
              
              
              60,000Total
                  current assets
              
              
              13,339,478
              
              
              10,446,421PROPERTY
                  AND EQUIPMENT, net
              
              
              1,560,271
              
              
              1,005,760CUSTOMER
                  LISTS
              
              
              1,158,388
              
              
              603,333GOODWILL
              
              
              13,961,642
              
              
              8,681,870OTHER
                  ASSETS
              
              
              156,932
              
              
              144,713Total
                  assets
              
              $
              30,176,711
              
              $
              20,882,097
















*The
      accompanying notes are an integral part of these consolidated financial
      statements.*




F-3


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS (continued)**





**APRIL
                  30,**
              
              **APRIL
                  30,****LIABILITIES
                  AND SHAREHOLDERS' EQUITY**
              
              
              **2005**
              
              
              **2004**(
                  Note 2)
              
              
              (Note
                  1)CURRENT
                  LIABILITIES:Borrowings
                  under lines of credit
              
              $
              382,281
              
              $
              551,000Current
                  maturities of capital lease obligation
              
              
              2,073
              
              
              2,534Current
                  maturities of loans payable
              
              
              187,420
              
              
              94,056Accounts
                  payable and accrued expenses
              
              
              5,338,813
              
              
              4,732,200Billings
                  in excess of costs and estimated earnings on uncompleted
                  contracts
              
              
              1,204,491
              
              
              2,162,452Due
                  to shareholders
              
              
              915,290
              
              
              88,157Income
                  taxes payable
              
              
              24,790
              
              
              223,753Deferred
                  income taxes
              
              
              139,000
              
              
              196,100Total
                  current liabilities
              
              
              8,194,158
              
              
              8,050,252Capital
                  lease obligation, net of current portion
              
              
              -
              
              
              2,073Loans
                  payable, net of current portion
              
              
              261,455
              
              
              170,362Due
                  to shareholders, net of current portion
              
              
              927,005
              
              
              1,026,755Deferred
                  income taxes
              
              
              439,000
              
              
              344,900Warrant
                  liability
              
              
              1,994,570
              
              
              -Total
                  liabilities
              
              
              11,816,188
              
              
              9,594,342COMMITMENTS
                  AND CONTINGENCIESCOMMON
                  STOCK WITH REGISTRATION RIGHTS:Common
                  stock subject to continuing registration, $0.0001 par
                  value,2,083,887
                  shares issued and outstanding at April 30, 2005
              
              
              5,732,116
              
              
              -SHAREHOLDERS'
                  EQUITY:Preferred
                  Stock - $0.0001 par value, 5,000,000 shares authorized, none
                  issued
              
              
              -
              
              
              -Common
                  Stock - $0.0001 par value, 75,000,000 shares authorized, 1,737,498
                  shares
                  issued and outstanding at April 30, 2005 and 2004,
                  respectively
              
              
              174
              
              
              174Additional
                  paid-in capital
              
              
              11,966,499
              
              
              11,993,387Unearned
                  consulting services
              
              
              -
              
              
              (38,559
              )Retained
                  earnings (accumulated deficit)
              
              
              661,734
              
              
              (667,247
              )Total
                  shareholders' equity
              
              
              12,628,407
              
              
              11,287,755Total
                  liabilities and shareholders' equity
              
              $
              30,176,711
              
              $
              20,882,097








*The
      accompanying notes are an integral part of these consolidated financial
      statements.*




F-4


WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





Year
                  EndedApril
                  30,2005
              
              2004(
                  Note 2)
              
              (
                  Note 1)REVENUE
              
              $
              40,148,233
              
              $
              22,076,246COSTS
                  AND EXPENSES:Cost
                  of revenue
              
              
              32,445,470
              
              
              17,286,099Selling,
                  general and administrative expenses
              
              
              7,028,850
              
              
              4,441,776Depreciation
                  and amortization
              
              
              682,397
              
              
              382,510Total
                  costs and expenses
              
              
              40,156,717
              
              
              22,110,385OPERATING
                  LOSS
              
              
              (8,484
              )
              
              (34,139
              )OTHER
                  EXPENSE:Interest
                  expense
              
              
              24,702
              
              
              14,048Gain
                  on fair value of warrants
              
              
              (1,414,263
              )
              
              -INCOME
                  (LOSS) BEFORE INCOME TAX PROVISION
              
              
              1,381,077
              
              
              (48,187
              )Income
                  tax provision
              
              
              52,096
              
              
              76,000NET
                  INCOME (LOSS)
              
              $
              1,328,981
              
              
              ($124,187
              )Basic
                  net income (loss) per common share
              
              $
              0.50
              
              
              ($0.08
              )Diluted
                  net income (loss) per common share
              
              $
              0.49
              
              
              ($0.08
              )Basic
                  weighted average number of common shares outstanding
              
              
              2,679,529
              
              
              1,521,697Diluted
                  weighted average number of common shares outstanding
              
              
              2,729,866
              
              
              1,521,697










*The
      accompanying notes are an integral part of these consolidated financial
      statements.*








F-5
 **WPCS
          INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’
EQUITY**




**Preferred
                      Stock**
                  
                  
                  **Common
                      Stock**
                  
                  
                  **Additional
                      Paid -
                      In**
                  
                  
                  **Unearned**
                    **Consulting**
                  
                  
                  **Retained**
                    **Earnings**
                    **(Accumulated**
                  
                  
                  **Total**
                    **Shareholders'****Shares**
                  
                  
                  **Amount**
                  
                  
                  **Shares**
                  
                  
                  **Amount**
                  
                  
                  **Capital**
                  
                  
                  **Services**
                  
                  
                  **Deficit)**
                  
                  
                  **Equity**BALANCE,
                      MAY 1, 2003 (Note 1)
                  
                  
                  1,000
                  
                  $
                  -
                  
                  
                  1,089,903
                  
                  $
                  109
                  
                  $
                  8,003,838
                  
                  $
                  -
                  
                  
                  ($543,060
                  )
                  $
                  7,460,887Conversion
                      of Series C Preferred Stock to common stock
                  
                  
                  (1,000
                  )
                  
                  -
                  
                  
                  148,833
                  
                  
                  15
                  
                  
                  (15
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -Net
                      proceeds from issuance of common stock through private
                      placement
                  
                  
                  -
                  
                  
                  -
                  
                  
                  370,367
                  
                  
                  37
                  
                  
                  2,174,231
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,174,268Issuance
                      of common stock, acquisition of Clayborn Contracting Group,
                      Inc.
                  
                  
                  -
                  
                  
                  -
                  
                  
                  68,871
                  
                  
                  7
                  
                  
                  867,761
                  
                  
                  -
                  
                  
                  -
                  
                  
                  867,768Issuance
                      of common stock, acquisition of Heinz Corporation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  59,524
                  
                  
                  6
                  
                  
                  699,994
                  
                  
                  -
                  
                  
                  -
                  
                  
                  700,000Fair
                      value of stock options granted to nonemployees
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  196,166
                  
                  
                  -
                  
                  
                  -
                  
                  
                  196,166Issuance
                      of stock options for consulting services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  51,412
                  
                  
                  (51,412
                  )
                  
                  -
                  
                  
                  -Amortization
                      of unearned consulting services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  12,853
                  
                  
                  -
                  
                  
                  12,853Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (124,187
                  )
                  
                  (124,187
                  )BALANCE,
                      APRIL 30, 2004 (Note 1)
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  1,737,498
                  
                  $
                  174
                  
                  $
                  11,993,387
                  
                  
                  ($38,559
                  )
                  
                  ($667,247
                  )
                  $
                  11,287,755











*The
      accompanying notes are an integral part of these consolidated financial
      statements.*






F-6


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**
   **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY -
        CONTINUED****


**Preferred
                        Stock**
                    
                    
                    **Common
                        Stock**
                    
                    
                    **Additional
                        Paid -
                        In**
                    
                    
                    **Unearned**
                      **Consulting**
                    
                    
                    **Retained**
                      **Earnings**
                      **(Accumulated**
                    
                    
                    **Total**
                      **Shareholders'****Shares**
                    
                    
                    **Amount**
                    
                    
                    **Shares**
                    
                    
                    **Amount**
                    
                    
                    **Capital**
                    
                    
                    **Services**
                    
                    
                    **Deficit)**
                    
                    
                    **Equity**Common
                        Stock issuance costs
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (26,888
                    )
                    
                    -
                    
                    
                    -
                    
                    
                    (26,888
                    )Amortization
                        of unearned consulting services
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    38,559
                    
                    
                    -
                    
                    
                    38,559Net
                        income
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,328,981
                    
                    
                    1,328,981BALANCE,
                        APRIL 30, 2005
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    1,737,498
                    
                    $
                    174
                    
                    $
                    11,966,499
                    
                    $
                    -
                    
                    $
                    661,734
                    
                    $
                    12,628,407














*The
      accompanying notes are an integral part of these consolidated financial
      statements.*








F-7
 **WPCS
          INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                  Ended****April
                  30,****2005**
              
              **2004**(
                  Note 2)OPERATING
                  ACTIVITIES :Net
                  income (loss)
              
              $
              1,328,981
              
              
              ($124,187
              )Adjustments
                  to reconcile net income (loss) to net cash (used in) provided by
                  operating
                  activities:Depreciation
                  and amortization
              
              
              682,397
              
              
              382,510Fair
                  value of warrant liability
              
              
              (1,414,263
              )
              
              -Provision
                  for doubtful accounts
              
              
              14,007
              
              
              91,137Amortization
                  of unearned consulting services
              
              
              38,559
              
              
              -Fair
                  value of stock options granted
              
              
              -
              
              
              209,019Deferred
                  income taxes
              
              
              (134,000
              )
              
              (218,800
              )Changes
                  in operating assets and liabilities, net of effects of
                  acquisitions:Accounts
                  receivable
              
              
              (1,898,625
              )
              
              (2,422,541
              )Costs
                  and estimated earnings in excess of billings on uncompleted
                  contracts
              
              
              1,214,076
              
              
              (1,379,816
              )Inventory
              
              
              (536,772
              )
              
              11,976Prepaid
                  expenses
              
              
              (14,306
              )
              
              (51,319
              )Other
                  assets
              
              
              (148,596
              )
              
              (24,032
              )Accounts
                  payable and accrued expenses
              
              
              (337,355
              )
              
              2,354,024Billings
                  in excess of costs and estimated earnings on uncompleted
                  contracts
              
              
              (1,146,930
              )
              
              1,908,541Income
                  taxes payable
              
              
              (328,751
              )
              
              200,053NET
                  CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
              
              
              (2,681,578
              )
              
              936,565INVESTING
                  ACTIVITIES:Acquisition
                  of property and equipment
              
              
              (215,844
              )
              
              (86,011
              )Acquisition
                  of Clayborn, net of cash received
              
              
              -
              
              
              (722,177
              )Acquisition
                  of Quality, net of cash received
              
              
              (6,708,904
              )
              
              -Acquisition
                  of Heinz, net of cash received
              
              
              (82,283
              )
              
              (109,194
              )Acquisition
                  earn-out and other transaction costs
              
              
              (17,553
              )
              
              (497,677
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (7,024,584
              )
              
              (1,415,059
              )FINANCING
                  ACTIVITIES:Repayment
                  of advances from officers
              
              
              -
              
              
              (100,000
              )Net
                  proceeds from issuance of common stock with registration
                  rights
              
              
              9,140,949
              
              
              2,174,268Common
                  stock issuance costs
              
              
              (26,888
              )
              
              -(Repayments)
                  borrowings under lines of credit
              
              
              (303,848
              )
              
              461,000Repayments
                  of loans payable
              
              
              (96,901
              )
              
              (237,390
              )Payments
                  of capital lease obligations
              
              
              (2,534
              )
              
              (2,295
              )NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              8,710,778
              
              
              2,295,583NET
                  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (995,384
              )
              
              1,817,089CASH
                  AND CASH EQUIVALENTS, BEGINNING OF YEAR
              
              
              1,984,636
              
              
              167,547CASH
                  AND CASH EQUIVALENTS, END OF YEAR
              
              $
              989,252
              
              $
              1,984,636











*The
      accompanying notes are an integral part of these consolidated financial
      statements.*









F-8




**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**







**CONSOLIDATING
      STATEMENTS OF CASH FLOWS - CONTINUED**





**Year
                  Ended****April
                  30,****2005**
              
              **2004**(Note
                  1)SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid during the period for:Interest
              
              $
              32,196
              
              $
              15,770Income
                  taxes
              
              $
              434,289
              
              $
              105,193SCHEDULE
                  OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Issuance
                  of common stock in connection with acquisition of Clayborn and
                  Heinz
              
              $
              -
              
              $
              1,567,768Conversion
                  of Series C preferred stock to common stock
              
              $
              -
              
              $
              15Unpaid
                  earn-out consideration related to acquisitions
              
              $
              -
              
              $
              1,114,912Unpaid
                  purchase price adjustments related to acquisition
              
              $
              742,295
              
              $
              -Issuance
                  of note for net noncash assets received in acquisition
              
              $
              -
              
              $
              182,648Reversal
                  of accruals established in purchase accounting
              
              $
              40,022
              
              $
              -Issuance
                  of notes for property and equipment
              
              $
              192,210
              
              $
              32,339











*The
      accompanying notes are an integral part of these consolidated financial
      statements.*






F-9


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**




**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying consolidated financial statements include the accounts of WPCS
      International Incorporated ("WPCS") and its wholly owned subsidiaries, WPCS
      Incorporated , Invisinet Inc. ("Invisinet"), Walker Comm Inc. ("Walker"),
      Clayborn Contracting Group, Inc. (“Clayborn”) from August 22, 2003 (date of
      acquisition), Heinz Corporation (“Heinz”) from April 2, 2004 (date of
      acquisition), and Quality Communications & Alarm Company (“Quality”) from
      November 24, 2004 (date of acquisition), collectively the "Company". Certain
      reclassifications have been made to prior period financial statements to conform
      to the current presentation.





The
      Company is an engineering company that focuses on the implementation
      requirements of wireless technology and specialty communication systems. The
      Company provides a range of services including site
      design, product integration, security, structured cabling, construction, project
      management and technical support.





Effective
      January 10, 2005, a majority of the Company’s shareholders approved a
      one-for-twelve reverse stock split of the Company’s common stock, decreasing the
      number of issued and outstanding shares of common stock from 20,849,976 shares
      to 1,737,498 shares. The par value of the common stock was not affected by
      the
      reverse stock split and remains at $0.0001 per share. Consequently, the reverse
      stock split has been reflected retroactively in the accompanying financial
      statements and notes for all periods presented and all applicable references
      as
      to the number of common shares and per share information, stock options,
      warrants and market prices have been restated to reflect this reverse stock
      split. In addition, shareholders’ equity has been restated for all periods
      presented for the aggregate par value of the number of common shares that were
      reclassified to additional paid-in capital as a result of the reverse stock
      split.




On
      August
      22, 2003, the Company acquired all of the outstanding shares of Clayborn in
      exchange for an aggregate of 68,871 newly issued shares of the Company’s common
      stock with a fair value of approximately $868,000 and $900,000 cash
      consideration. An additional $1,100,000 is due by September 30, 2007, payable
      in
      quarterly distributions, by payment to the Clayborn shareholders of 50% of
      the
      quarterly post-tax profits, as defined, of Clayborn and a final payment of
      any
      remaining balance on that date.





On
      April
      2, 2004, the Company acquired all of the outstanding common stock of Heinz
      for
      $1,000,000, as follows: (1) $700,000 of the Company’s common stock, based on the
      closing price of its common stock on March 30, 2004 of $11.76 per share, for
      an
      aggregate of 59,524 newly issued shares of the Company’s common stock and (2)
      $300,000 total cash consideration, of which $100,000 was paid at closing and
      a
      $200,000 non-interest bearing promissory note. Of the $200,000, $75,000 was
      paid
      in April 2005 and $75,000 is payable on the second anniversary of the closing
      date and $50,000 is payable on the third anniversary of the closing
      date.





On
      November 24, 2004, we acquired all of the issued and outstanding common stock
      of
      Quality. The aggregate consideration paid by the Company to the Quality selling
      shareholders, net of acquisition transaction costs was $7,442,295, of which
      $6,700,000 was paid at closing. Additional purchase price adjustments of
      $742,295 were paid in June 2005 to settle working capital adjustments and income
      tax reimbursements related to the Company electing to make an Internal Revenue
      Code 338 (h) (10) election. For income tax purposes, this election results
      in a
      stepped up basis of assets and liabilities and will result in future income
      tax
      deductions.





**NOTE
      2 - RESTATEMENT FOR EQUITY ISSUED WITH REGISTRATION RIGHTS**





On
      November 16, 2004, the Company completed a private placement with certain
      investors for an aggregate of 2,083,887 shares of its common stock and 2,083,887
      common stock purchase warrants for $10,000,000. Under the terms of the sale,
      the
      investors were granted certain registration rights in which the Company agreed
      to timely file a registration statement to register the common shares and the
      shares underlying the warrants, obtain effectiveness of the registration
      statement by the SEC within ninety (90) days of November 16, 2004, and maintain
      the effectiveness of this registration statement for a preset time thereafter.
      In the event the Company fails to timely perform under the registration rights
      agreement, the Company agrees to pay the investors liquidated damages in an
      amount equal to 1.5% of the aggregate amount invested by the investors for
      each
      30-day period or pro rata for any portion thereof following the date by which
      the registration statement should have been effective. The initial registration
      statement was filed and declared effective by the SEC within the allowed time
      and the Company has maintained the effectiveness of the registration statement
      to date, and has not been required to pay any liquidated damages in connection
      with the filing or on-going effectiveness of the registration
      statement.





The
      Emerging Issues Task Force ("EITF") is currently reviewing the accounting for
      securities with liquidated damages clauses as stated in EITF 05-04, "The Effect
      of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
      to
      EITF 00-19." There are currently several views as to how to account for this
      type of transaction and the EITF has not yet reached a consensus. In accordance
      with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To,
      and Potentially Settled in the Company's Own Stock," and EITF 05-04, because
      the
      maximum potential liquidated damages for failure to maintain an effective
      registration statement is greater than the difference between the fair value
      of
      registered and unregistered shares, the value of the common stock subject to
      such registration rights should be classified as temporary equity. Additionally,
      in accordance with EITF 00-19 and the terms of the above warrants, the fair
      value of the warrants should be recorded as a liability, with an offsetting
      reduction to shareholders’ equity. The warrant liability is initially measured
      at fair value using the Black-Scholes option pricing model, and is then
      re-valued at each reporting date, with changes in the fair value reported as
      non-cash charges or credits to earnings.







F-10


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**




The
      SEC
      recently announced its preferred  interpretation of the accounting for
      common stock and warrants with registration rights under EITF 00-19. The SEC
      concluded that for agreements containing registration rights where significant
      liquidated damages could be required to be paid to the holder of the instrument
      in the event the issuer fails to maintain the effectiveness of a registration
      statement for a preset time period, the common stock subject to such liquidated
      damages does not meet the tests required for shareholders’ equity
      classification, and accordingly must be reflected between liabilities and
      shareholders’ equity in the balance sheet until  the conditions are
      eliminated. In analyzing instruments under EITF 00-19, the SEC concluded that
      the likelihood or probability related to the failure to maintain an effective
      registration statement is not a factor.





Historically,
      the Company classified the common stock and warrants with registration rights
      described above as shareholders’ equity, as it believed these securities met the
      requirements necessary to record them as shareholders’ equity. After further
      review in accordance with the SEC’s recent preferred interpretation of EITF
      00-19 as it relates to these common shares and warrants subject to registration
      rights, the Company has concluded that its financial statements for the year
      ended April 30, 2005, and interim periods ended January 31, 2005, July 31,
      2005,
      and October 31, 2005, will be restated. The restatement includes the
      reclassification of common stock subject to registration rights from
      shareholders’ equity and into temporary equity, and the reclassification of the
      liability for the fair value of the warrants from shareholders’ equity and into
      warrant liability as of the closing date (November 16, 2004).





Based
      on
      the above determination, as of April 30, 2005, the Company reclassified
      $5,732,116 of common stock subject to registration from shareholders’ equity and
      into temporary equity. In addition, the Company measured the initial fair value
      of the warrants on the closing date at $3,408,833 and reclassified the fair
      value of the warrants from shareholders’ equity and into warrant liability. At
      the end of each reporting period, the value of the warrants is re-measured
      based
      on the fair value of the underlying shares, and changes to the warrant liability
      and related “gain or loss in fair value of the warrants” is recorded  as a
      non-cash charge or credit to earnings. The warrant liability will be
      reclassified to shareholders’ equity when the Company is no longer subject to
      performance under the registration rights agreement.





At
      April
      30, 2005, the warrant liability was $1,994,570, due to changes in the fair
      value
      of the warrants. The fair value of the warrants was estimated using the
      Black-Scholes option-pricing model, with the following assumptions for the
      year
      ended April 30, 2005: risk-free interest rate of 3.91% to 3.96%, dividend yield
      of 0%, expected life of 6.54 to 7 years and volatility range of 28.4% to 42.1%
      were used.





For
      the
      year ended April 30, 2005, the non-cash gain on fair value of warrants was
      $1,414,263. The gain on fair value of warrants is due principally to the
      decrease in the market value of the common stock of the Company. The non-cash
      gain on fair value of warrants has no effect on the Company’s cash flows or
      liquidity.




**NOTE
      3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





A
      summary
      of significant accounting policies consistently applied in the preparation
      of
      the accompanying consolidated financial statements follows:





***Principles
      of Consolidation***





All
      significant intercompany transactions and balances have been eliminated in
      these
      consolidated financial statements.





***Cash
      and Cash Equivalents***





Cash
      and
      cash equivalents include all cash and highly-liquid investments with an original
      maturity at time of purchase of three months or less.





***Concentrations
      of Credit Risk***





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of cash and accounts receivable. The Company reduces
      credit risk by placing its temporary cash and investments with major financial
      institutions with high credit ratings. At times, such amounts may exceed
      Federally insured limits. The Company reduces credit risk related to accounts
      receivable by routinely assessing the financial strength of its customers and
      maintaining an appropriate allowance for doubtful accounts based on its history
      of write-offs, current economic conditions and an evaluation of the credit
      risk
      related to specific customers.





F-11


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**






***Accounts
      Receivable***





Accounts
      receivable are due within contractual payment terms and are stated at amounts
      due from customers net of an allowance for doubtful accounts. Credit is extended
      based on evaluation of a customer's financial condition. Accounts outstanding
      longer than the contractual payment terms are considered past due. The Company
      determines its allowance by considering a number of factors, including the
      length of time trade accounts receivable are past due, the Company's previous
      loss history, the customer's current ability to pay its obligation to the
      Company, and the condition of the general economy and the industry as a whole.
      The Company writes off accounts receivable when they become uncollectible,
      and
      payment subsequently received on such receivables are credited to the allowance
      for doubtful accounts. Included in the accounts receivable is retainage
      receivable of $1,333,413 which is expected to be collected within one
      year.





***Inventory***





As
      a
      result of the acquisition of Quality, inventory consists of materials, parts
      and
      supplies principally valued using the first-in-first-out (FIFO)
      method.





***Property
      and Equipment***





Property
      and equipment are stated at cost. Depreciation and amortization are provided
      for, using straight-line methods, in amounts sufficient to charge the cost
      of
      depreciable assets to operations over their estimated service lives. Repairs
      and
      maintenance costs are charged to operations as incurred.





***Goodwill***





In
      accordance with the guidelines of Statement of Financial Standards (“SFAS”)
      No. 142, “Goodwill and Other Intangible Assets,” goodwill and
      indefinite-lived intangible assets are no longer amortized but are assessed
      for
      impairment on at least an annual basis. SFAS No. 142 also requires that
      intangible assets with definite useful lives be amortized over their respective
      estimated useful lives to their estimated residual values, and reviewed for
      impairment.





SFAS
      No. 142 requires that goodwill be tested for impairment upon adoption and
      at least annually thereafter, utilizing a two-step methodology. The initial
      step
      requires the Company to determine the fair value of the business acquired
      (reporting unit) and compare it to the carrying value, including goodwill,
      of
      such business (reporting unit). If the fair value exceeds the carrying value,
      no
      impairment loss would be recognized. However, if the carrying value of the
      reporting unit exceeds its fair value, the goodwill of the unit may be impaired.
      The amount, if any, of the impairment is then measured in the second
      step.





The
      Company completed the initial step of impairment testing which indicated that
      no
      goodwill impairment existed as of April 30, 2005 and 2004. The Company
      determined the fair value of the businesses acquired for purposes of this test
      primarily by using a discounted cash flow valuation technique. Significant
      estimates used in the valuation include estimates of future cash flows, both
      future short-term and long-term growth rates, and estimated cost of capital
      for
      purposes of arriving at a discount factor. The fair value of the Company’s
      reporting units derived using discounted cash flow models exceeded the carrying
      values of the reporting units. Accordingly, step two was unnecessary and no
      impairment was recognized in the consolidated statement of operations for the
      years ended April 30, 2005 and 2004. On an ongoing basis, the Company expects
      to
      perform its annual impairment test during the fourth quarter absent any interim
      impairment indicators.








F-12





WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES


Goodwill
      through the years ended April 30, 2005 and 2004 consisted of the
      following:





Beginning
                balance, May 1, 2003
            
            $
            5,388,882Clayborn
                acquisition
            
            
            1,772,806Heinz
                acquisition
            
            
            1,065,799Walker
                earn-out provision
            
            
            441,793Transaction
                costs
            
            
            12,590Beginning
                balance, May 1, 2004
            
            $
            8,681,870Reversal
                of accruals established in purchase accounting
            
            
            (40,022
            )Heinz
                acquisition cost adjustments
            
            
            (183,480
            )Quality
                acquisition
            
            
            5,496,064Transaction
                costs
            
            
            7,210Ending
                balance, April 30, 2005
            
            $
            13,961,642





***Revenue
      Recognition***





The
      Company generates its revenue by providing engineering and deployment services
      for wireless infrastructure services and specialty communication systems The
      Company provides a range of engineering services including, site design,
      construction, product integration, structured cabling, network security, project
      management and technical support.





The
      Company records revenue and profit on these contracts on a
      percentage-of-completion basis using the cost-to-cost method. Contracts in
      process are valued at cost plus accrued profits less earned revenues and
      progress payments on uncompleted contracts. Contracts are generally considered
      substantially complete when engineering is completed and/or site construction
      is
      completed. The Company includes in operations pass-through revenue and costs
      on
      cost-plus contracts, which are customer-reimbursable materials, equipment and
      subcontractor costs, when the Company determines that it is responsible for
      the
      engineering specification, procurement and management of such cost components
      on
      behalf of the customer.





The
      Company has numerous contracts that are in various stages of completion. Such
      contracts require estimates to determine the appropriate cost and revenue
      recognition. Cost estimates are reviewed monthly on a contract-by-contract
      basis, and are revised periodically throughout the life of the contract such
      that adjustments to profit resulting from revisions are made cumulative to
      the
      date of the revision. Significant management judgments and estimates, including
      the estimated cost to complete projects, which determines the project’s percent
      complete, must be made and used in connection with the revenue recognized in
      the
      accounting period. Current estimates may be revised as additional information
      becomes available. If estimates of costs to complete long-term contracts
      indicate a loss, provision is made currently for the total loss anticipated.





***Other
      Concentrations***





For
      the
      year ended April 30, 2005, the Company had revenue from one customer totaling
      approximately $6,220,000, which comprised 15.5% of total revenue. Management
      believes there is no significant business vulnerability regarding the
      concentration of revenue due to the Company’s strong relationship with this
      customer and the customer’s financial strength.




The
      Company has approximately 110 union employees. A contract with these union
      employees expires November 30, 2008.





***Income
      Taxes***





Income
      taxes are accounted for in accordance with SFAS No. 109, "Accounting of Income
      Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized
      for the future tax consequences attributable to differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax basis. Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years in
      which those temporary differences are expected to be recovered or settled.
      Under
      SFAS No. 109, the effect on deferred tax assets and liabilities of a change
      in
      tax rates is recognized in income in the period that includes the enactment
      date. The recognition of deferred tax assets is reduced by a valuation allowance
      if it is more likely than not that the tax benefits will not be realized. The
      ultimate realization of deferred tax assets depends upon the generation of
      future taxable income during the periods in which those temporary differences
      become deductible.








F-13




WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES


***Earnings
      (Loss) Per Share***





Earnings
      (loss) per common share is computed pursuant to SFAS No. 128, "Earnings Per
      Share" (“EPS”). Basic income (loss) per share is computed as net income (loss)
      divided by the weighted average number of common shares outstanding for the
      period. Diluted EPS reflects the potential dilution that could occur from common
      stock issuable through stock options, restrictive stock awards, warrants and
      other convertible securities. At April 30, 2005, 188,340 stock options and
      2,572,171 warrants were not included in the computation of fully diluted
      earnings per share, because the stock option and warrant exercise prices
      exceeded the market price of the common stock and, therefore, the effects would
      be antidilutive. The assumed conversion of the remaining 266,556 stock options
      resulted in a 50,337 share increase in weighted average shares for fully diluted
      earnings per share. At April 30, 2004, the Company had 299,322 stock options
      and
      425,784 warrants outstanding which are potentially dilutive securities, however,
      basic and fully diluted EPS is the same since the effect of the assumed exercise
      of stock options and warrants would be antidilutive.





***Stock-Based
      Compensation Plans***





SFAS
      123(R) (revised December 2004), *Share-Based
      Payment* ,
      an
      amendment of SFAS 123, *Accounting
      for Stock-Based Compensation,* established
      accounting and disclosure requirements using a fair-value-based method of
      accounting for stock-based employee compensation plans. As a result of the
      amendments to SFAS 123, the Company will be required to expense the fair value
      of employee stock options beginning with its fiscal year ending April 30, 2007.
      The new standard will require the Company to expense the fair value of employee
      stock options and other share-based payments over the vesting period. The FASB
      believes the use of a binomial lattice model for option valuation is capable
      of
      more fully reflecting certain characteristics of employee share options compared
      to the Black-Scholes options pricing model.  The new standard may be
      adopted in one of three ways - the modified prospective transition method,
      a
      variation of the modified prospective transition method or the modified
      retrospective transition method. We are currently evaluating how we will adopt
      the standard and evaluating the effect that the adoption of SFAS 123(R) will
      have on our financial position or results of operations.





As
      currently permitted by SFAS 123, the Company has elected to continue to account
      for its stock-based compensation plans in accordance with the
      intrinsic-value-based method of accounting prescribed by Accounting Principles
      Board Opinion No. 25 (“APB 25”), *Accounting
      for Stock Issued to Employees* .
      Under
      APB 25, compensation expense is recorded on the date of grant only if the
      current market price of the underlying stock exceeds the exercise price. The
      exercise price of all options granted to employees has been equal to or greater
      than the fair market value at the date of grant and, accordingly, the Company
      has not recognized compensation expense associated with its stock option plan.
      By making that election, the Company is required under SFAS 123 to provide
      pro
      forma disclosures of net loss and net loss per common share as if the fair
      value
      based method of accounting had been applied. The following table illustrates
      the
      effect on net loss and net loss per common share for fiscal 2005 and 2004 as
      if
      the Company had applied the fair value recognition provisions of SFAS 123 to
      stock-based compensation.





The
      Company applies the intrinsic value method in accounting for its stock based
      compensation plan. Had the Company measured compensation under the fair value
      method for stock options granted and amortized the cost over the related vesting
      period, the Company’s net loss and net loss per share attributable to common
      shareholders would have been as follows:





**2005**
            
            **2004**Net
                income (loss), as reported
            
            $
            1,328,981
            
            
            ($124,187
            )Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of tax
            
            
            (452,820
            )
            
            (300,838
            )Net
                income (loss), Pro forma
            
            $
            876,161
            
            
            ($425,025
            )Basic
                net income (loss) per shareAs
                reported
            
            $
            0.50
            
            
            ($0.08
            )Pro
                forma
            
            $
            0.33
            
            
            ($0.28
            )Diluted
                net income (loss) per shareAs
                reported
            
            $
            0.49
            
            
            ($0.08
            )Pro
                forma
            
            $
            0.32
            
            
            ($0.28
            )







F-14




WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES





The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes Option pricing model with the following assumptions. For the
      year
      ended April 30, 2005, risk-free interest rate of 3.51% to 4.22%, dividend yield
      of 0%, expected life of 5 years and volatility range 28.4% to 44.9% were used.
      For the year ended April 30, 2004, risk-free interest rate of 2.80% to 3.61%,
      dividend yield of 0%, expected life of 5 years and volatility range 71.0% to
      73.2% were used.





***Use
      of Estimates***





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and revenues and expenses during the reporting
      period. The most significant estimates relate to the calculation of percentage
      of completion on uncompleted contracts, allowance for doubtful accounts,
      valuation of inventory and life of customer lists. Actual results could differ from
      those estimates.





***Recently
      Issued Accounting Pronouncements***





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an
      amendment of ARB No. 43, Chapter 4 *.* ” ** This
      statement amends the guidance in ARB No. 43, Chapter 4, Inventory
      Pricing, to clarify the accounting for abnormal amounts of idle facility
      expense, freight, handling costs and wasted material (spoilage).
      Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
“...under some circumstances, items such as idle facility expense, excessive
      spoilage, double freight, and rehandling costs may be so abnormal as to require
      treatment as current period charges...” SFAS No. 151 requires that those items
      be recognized as current-period charges regardless of whether they meet the
      criterion of “so abnormal.” In addition, this statement requires that allocation
      of fixed production overheads to the costs of conversion be based on the normal
      capacity of the production facilities. The provisions of SFAS 151 shall be
      applied prospectively and are effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005, with earlier application
      permitted for inventory costs incurred during fiscal years beginning after
      the
      date this Statement was issued. The adoption of SFAS No. 151 is not
      expected to have a material impact on our financial position or results of
      operations.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
      Assets, an amendment of APB Opinion No. 29”. The guidance in APB Opinion
      No. 29, “Accounting for Nonmonetary Transactions”, is based on the
      principle that exchanges of nonmonetary assets should be measured based on
      the
      fair value of assets exchanged. The guidance in that Opinion, however, included
      certain exceptions to that principle. This Statement amends Opinion 29 to
      eliminate the exception for nonmonetary exchanges of similar productive assets
      that do not have commercial substance. A nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. SFAS No. 153 is effective for
      nonmonetary exchanges occurring in fiscal periods beginning after June 15,
      2005. The adoption of SFAS No. 153 is not expected to have a material
      impact on our financial position or results of operations.





**NOTE
      4 - ACQUISITIONS**





In
      accordance with SFAS No. 141, “Business Combinations,” acquisitions of
      businesses are accounted for under the purchase accounting method of accounting.
      Under the purchase method of accounting, assets acquired and liabilities assumed
      are recorded at their estimated fair values. Goodwill is recorded to the extent
      the purchase price consideration, including certain acquisition and closing
      costs, exceeds the fair value of the net identifiable assets acquired at the
      date of the acquisition.





***Clayborn***





On
      August
      22, 2003, the Company completed a merger with Clayborn, a California
      corporation. The acquisition of Clayborn gives the Company expertise in
      engineering and deployment services for specialty communication systems and
      additional wireless opportunities to pursue.





The
      aggregate consideration paid by the Company for Clayborn was approximately
      $2,932,000. The Company acquired all of the issued and outstanding shares of
      Clayborn in exchange for $900,000 cash consideration and $64,000 of transaction
      costs, and 68,871 newly issued shares of the Company’s common stock with a fair
      value of approximately $868,000 based on the average value of the Company’s
      common stock as of a few days before and after the merger terms were agreed
      to
      and announced. An additional $1,100,000 is due by September 30, 2007, payable
      in
      quarterly distributions, by payment to the Clayborn shareholders of 50% of
      the
      quarterly post tax profits, as defined, of Clayborn and a final payment of
      any
      remaining balance on that date.








F-15




**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





The
      purchase price allocation has been determined as follows:





Assets
                purchased:Cash
            
            $
            134,218Accounts
                receivable
            
            
            575,804Costs
                in excess of billings
            
            
            231,562Income
                tax refunds receivable
            
            
            104,765Inventory
            
            
            39,000Fixed
                assets
            
            
            444,126Backlog
            
            
            13,500Customer
                list
            
            
            245,000Other
                assets
            
            
            97,669Goodwill
            
            
            1,775,4473,661,091Liabilities
                assumed:Accounts
                payable
            
            
            (294,992
            )Accrued
                expenses
            
            
            (136,119
            )Notes
                payable
            
            
            (184,611
            )Deferred
                tax liability
            
            
            (113,800
            )(729,522
            )Purchase
                price
            
            $
            2,931,569





***Heinz***





On
      April
      2, 2004, the Company acquired all of the issued and outstanding common stock
      of
      Heinz for $1,000,000, as follows: (1) $700,000 of the Company’s common stock,
      based on the closing price of our common stock on March 30, 2004 of $11.76
      per
      share, for an aggregate of 59,524 newly issued shares of the Company's common
      stock and (2) $300,000 total cash consideration, of which $100,000 was paid
      at
      closing and a $200,000 non-interest bearing promissory note. Of the $200,000,
      $75,000 was paid in April 2005, $75,000 is payable on the second anniversary
      of
      the closing date and $50,000 is payable on the third anniversary of the closing
      date. The purchase price includes the present value of the note totaling
      $182,648, discounted at 5%. The initial current and long-term discounted present
      value at April 2, 2004 of this note was $71,429 and $111,219, respectively.





Heinz
      is
      a St. Louis, Missouri based provider of in-building wireless infrastructure
      services for both cellular and WiFi applications, including consulting,
      integration and installation services for wireless infrastructure. In addition,
      Heinz has performed fixed wireless services, structured cabling, and cellular
      base station equipment installation and testing. The acquisition of Heinz gives
      the Company additional project engineering expertise for wireless infrastructure
      services, broadens its customer base, and expands its geographical presence
      in
      the Midwest.





A
      valuation of certain assets was completed, including property and equipment,
      backlog, list of major customers, and the Company internally determined the
      fair
      value of its other assets and liabilities. In determining the fair value of
      acquired assets, standard valuation techniques were used including the market
      and cost approaches. The initial purchase price allocation in 2004 has been
      adjusted as a result of final valuation in 2005, with fixed assets increasing
      in
      value by $24,000, customer lists being valued at $220,000 and backlog being
      valued at $65,000, resulting in a decrease in goodwill by these combined
      amounts. Accordingly, a deferred tax liability of $119,000 was recorded since
      the amortization of customer lists and backlog is not available as a tax
      deduction to the Company. The aggregate changes resulted in goodwill being
      decreased to approximately $847,000 as of the acquisition date.





The
      final
      purchase price allocation, as adjusted, has been determined as follows:





Assets
                purchased:Cash
            
            $
            8,052Accounts
                receivable
            
            
            593,667Costs
                in excess of billings
            
            
            103,459Fixed
                assets
            
            
            47,440Customer
                lists
            
            
            220,000Backlog
            
            
            65,000Other
                assets
            
            
            71,128Goodwill
            
            
            846,8661,955,612Liabilities
                assumed:Accounts
                payable
            
            
            (494,503
            )Accrued
                expenses
            
            
            (130,694
            )Line
                of credit
            
            
            (90,000
            )Notes
                payable
            
            
            (80,942
            )Billings
                in excess of cost
            
            
            (29,223
            )Deferred
                tax liability
            
            
            (119,000
            )(944,362
            )Purchase
                price
            
            $
            1,011,250










F-16




**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**






***Quality***





On
      November 24, 2004, the Company acquired all of the issued and outstanding common
      stock of Quality. The aggregate consideration paid by the Company to the Quality
      selling shareholders, net of acquisition transaction costs of $172,578, was
      $7,442,295, of which $6,700,000 was paid at closing. Additional purchase price
      adjustments of $742,295 were paid in June 2005 to settle working capital
      adjustments and income tax reimbursements related to the Company electing to
      make an Internal Revenue Code 338 (h) (10) election. For income tax purposes,
      this election results in a stepped up basis of assets and liabilities and will
      result in future income tax deductions.





Quality
      is a Lakewood, New Jersey based provider of specialty communication services.
      The acquisition of Quality gives the Company additional project engineering
      expertise for specialty communication opportunities, broadens its customer
      base
      especially in the public safety sector and gaming industry, and expands its
      geographic presence in the Northeastern United States. The financing for this
      transaction was completed through the issuance of common stock as described
      in
      Note 11.





A
      valuation of certain assets was completed, including property and equipment,
      list of major customers, and the Company internally determined the fair value
      of
      its other assets and liabilities. In determining the fair value of acquired
      assets, standard valuation techniques were used including the market and income
      approaches.





The
      final
      purchase price allocation has been determined as follows:





Assets
                purchased:Cash
            
            $
            163,674Accounts
                receivable
            
            
            2,124,587Inventory
            
            
            244,053Fixed
                assets
            
            
            495,145Prepaid
                expenses
            
            
            70,447Customer
                lists
            
            
            580,000Other
                assets
            
            
            6,000Goodwill
            
            
            5,496,0649,179,970Liabilities
                assumed:Accounts
                payable
            
            
            (912,736
            )Accrued
                expenses
            
            
            (271,991
            )Income
                taxes payable
            
            
            (84,663
            )Line
                of credit borrowings
            
            
            (135,129
            )Notes
                payable
            
            
            (160,578
            )(1,565,097
            )Purchase
                price
            
            $
            7,614,873








F-17
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





The
      following unaudited pro forma financial information presents the combined
      results of operations of the Company and Quality as if the acquisition had
      occurred on May 1, 2004, and the Company, Clayborn, Heinz and Quality, as if
      the
      acquisitions had occurred on May 1, 2003, after giving effect to certain
      adjustments, including the issuance of the Company’s common stock to Clayborn
      and Heinz as part of the purchase price and the issuance of common stock
      described in Note 11 to finance the acquisition of Quality. The pro forma
      financial information does not necessarily reflect the results of operations
      that would have occurred had the Company, Clayborn, Heinz, and Quality been
      a
      single entity during these periods.





**2005**
            
            **2004**Revenue
            
            $
            46,810,720
            
            $
            35,830,021Net
                income
            
            $
            1,474,004
            
            $
            167,227Weighted
                average number of shares used in calculation:Basic
                net income per share
            
            
            3,821,385
            
            
            3,821,385Diluted
                net income per share
            
            
            3,871,722
            
            
            4,069,476Pro
                forma net income per common shareBasic
            
            $
            0.39
            
            $
            0.04Diluted
            
            $
            0.38
            
            $
            0.04





For
      all
      acquisitions, customer lists are amortized over a period of five to six years
      and backlog is amortized over a period of one year from the date of acquisition.
      The Company recorded amortization expense related to customer lists and backlog
      of $310,000 and $154,000 for the years ended April 30, 2005 and 2004,
      respectively. With the exception of goodwill related to the Quality acquisition,
      any future goodwill impairments are not deductible for income tax
      purposes.





**NOTE
      5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS**





Costs
      and
      estimated earnings on uncompleted contracts consist of the following at April
      30:





**2005**
            
            **2004**Costs
                incurred on uncompleted contracts
            
            $
            25,474,753
            
            $
            17,574,035Estimated
                contract profit
            
            
            4,983,102
            
            
            4,699,28030,457,855
            
            
            22,273,315Less:
                billings to date
            
            
            30,753,391
            
            
            22,312,736Net
                billings in excess
            
            
            ($295,536
            )
            
            ($39,421
            )Costs
                and estimated earnings in excess of billings
            
            $
            908,955
            
            $
            2,123,031Billings
                in excess of costs and estimated earningson
                uncompleted contracts
            
            
            (1,204,491
            )
            
            (2,162,452
            )Net
                billings in excess
            
            
            ($295,536
            )
            
            ($39,421
            )








F-18
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**NOTE
      6 - PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following at April 30:





**Estimated
                useful life (years)**
            
            **2005**
            
            **2004**Furniture
                and fixtures
            
            
            5
                -
                7
            
            $
            135,383
            
            $
            163,778Computers
                and software
            
            
            3
            
            
            373,325
            
            
            247,062Office
                equipment
            
            
            5-7
            
            
            46,480
            
            
            30,437Vehicles
            
            
            5
                -
                7
            
            
            1,141,011
            
            
            624,304Machinery
                and equipment
            
            
            5
            
            
            310,681
            
            
            281,757Leasehold
                improvements
            
            
            3
                -
                10
            
            
            218,938
            
            
            192,3492,225,818
            
            
            1,539,687Less
                accumulated depreciation and amortization
            
            
            
            
            
            665,547
            
            
            533,927$
            1,560,271
            
            $
            1,005,760





Depreciation
      and amortization expense for property and equipment for the years ended April
      30, 2005 and 2004 was approximately $372,000 and $228,000,
      respectively.





**NOTE
      7 - LINE OF CREDIT**





Walker
      maintained a revolving line of credit facility with a commercial bank, with
      a
      borrowing limit up to 70% of eligible Walker accounts receivable. As of April
      30, 2005, the borrowing base was $700,000 and the outstanding balance was
      approximately $382,000. Effective August 30, 2004, the amount available to
      Walker was decreased from $1,200,000 to $700,000 to support a $500,000 letter
      of
      credit issued in favor of Walker’s surety bonding company. In August 2004,
      Walker was awarded a contract of approximately $5,000,000, which required
      performance and payment bonds. In order to provide the bonds, the surety bonding
      company required a letter of credit for 10% of the total contract award. The
      line of credit was collateralized by all of Walker’s accounts receivable,
      inventory and equipment and bears interest at the Wall Street Journal Prime
      Index Rate plus 1.5% (7.25% as of April 30, 2005). In addition, the Company
      and
      certain executive officers of the Company personally guaranteed this line of
      credit facility. On June 3, 2005, this line of credit was paid off in connection
      with the credit agreement described below.





On
      June
      3, 2005, the Company entered into a credit agreement with a new commercial
      bank.
      The credit agreement (the "Credit Agreement"), provides for a revolving line
      of
      credit in an amount not to exceed $5,000,000, together with a letter of credit
      facility not to exceed $500,000. The Company also entered into security
      agreements with the bank, pursuant to which each subsidiary granted a security
      interest to the bank in all of their assets.





Under
      the
      terms of the Credit Agreement, the Company is permitted to borrow up to
      $3,000,000 under the revolving credit line, based upon eligible receivables.
      Once the Company has provided financial statements to the bank which evidence
      that the Company has earnings before interest, taxes, depreciation and
      amortization of (i) $750,000 for the quarter ended July 31, 2005, (ii) $750,000
      for the quarter ended October 31, 2005, and (iii) $2,500,000 for the year ended
      April 30, 2006, the revolving commitment amount will be increased to $5,000,000.
      The Credit Agreement contains customary covenants, including but not limited
      to
      (i) restrictions on the permitted ratio of total unsubordinated liabilities
      to
      tangible net worth plus subordinated indebtedness, (ii) the Company's total
      tangible net worth, (iii) working capital, (iv) minimum earnings before
      interest, taxes, depreciation and amortization, and (v) dividend restrictions.
      The loan commitment expires on August 31, 2008. The Company may prepay the
      loan
      at any time.




Loans
      under the Credit Agreement bear interest at a rate equal to either the bank’s
      reference rate plus one half (0.5%) percent, or LIBOR plus two and
      three-quarters (2.75%) percent, as the Company may request. The Company paid
      a
      facility fee to the bank of $50,000 on the closing date.





The
      Company used the initial funds provided by the loan, in the gross amount of
      $3,000,000, to repay existing bank debt at Walker of approximately $672,000,
      for
      the payment of approximately $742,000 to the former shareholders of our Quality
      subsidiary for monies due to them pursuant to the terms of the purchase of
      their
      company, and for working capital. A $500,000 letter of credit was also re-issued
      in favor of Walker’s surety bonding company for performance and payment bond
      collateral requirements described above.








F-19


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**






**NOTE
      8 - RELATED PARTY TRANSACTIONS**





In
      connection with the acquisition of Walker, the Company assumed a ten-year lease
      with a trust, of which, a certain officer of the Company is the trustee, for
      a
      building and land located in Fairfield, California, which is occupied by its
      Walker subsidiary. For the years ended April 30, 2005 and 2004 the rent paid
      for
      this lease was $88,000 and $56,000, respectively.




In
      connection with the acquisition of Clayborn, an additional $1,100,000 is due
      by
      September 30, 2007, payable in quarterly distributions to the Clayborn
      shareholders, by payment of 50% of the quarterly post tax profits, as defined,
      of Clayborn and the payment of the remainder on that date.





In
      connection with the acquisition of Heinz, a $200,000 non-interest bearing
      promissory note was issued. Of the $200,000, $75,000 was paid in April 2005,
      $75,000 is payable on the second anniversary of the closing date and $50,000
      is
      payable on the third anniversary of the closing date.





In
      connection with the acquisition of Quality, approximately $742,000 of additional
      purchase price consideration was paid to the selling shareholders in June 2005
      for working capital adjustments and income tax reimbursements.





**NOTE
      9 - RETIREMENT PLANS**





The
      Company and its subsidiaries participate in employee savings plans under Section
      401(k) of the Internal Revenue Code pursuant to which eligible employees may
      elect to defer a portion of their annual salary by contributing to the plan.
      There were $8,800 and $4,000 in contributions made for the years ended April
      30,
      2005 and 2004, respectively.





The
      Company also contributes to multi-employer pension plans which provide benefits
      to union employees covered by a collective bargaining agreement. Cost of revenue
      includes approximately $2,178,000 and $1,210,000 for such costs for the years
      ended April 30, 2005 and 2004, respectively.





**NOTE
      10 - INCOME TAXES**





The
      provision or income taxes for the years ended at April 30, 2005 and 2004 is
      summarized as follows:





**2005**
            
            **2004**CurrentFederal
            
            $
            99,000
            
            $
            177,000State
            
            
            87,096
            
            
            117,800DeferredFederal
            
            
            (76,000
            )
            
            (49,000
            )State
            
            
            (58,000
            )
            
            (169,800
            )Totals
            
            $
            52,096
            
            $
            76,000





The
      actual provisions for income taxes reflected in the consolidated statements
      of
      operations for the years ended April 30, 2005 and 2004 differ from the amounts
      computed at the federal statutory tax rates. The principal differences between
      the statutory income tax expense and the effective provision for income taxes
      are summarized as follows:





**2005**
            
            **2004**Expected
                tax provision (benefit) at statutory rate (34%)
            
            $
            470,000
            
            
            ($16,000
            )State
                and local taxes, net of federal tax benefit
            
            
            19,000
            
            
            76,000Increase
                in valuation allowance
            
            
            12,000
            
            
            16,000Gain
              on fair value of warrants
            
            
            (482,000
            )
            
            -Other
            
            
            33,096
            
            
            -$
            52,096
            
            $
            76,000








F-20
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





The
      tax
      effects of temporary differences which give rise to deferred tax assets and
      liabilities is summarized as follows:





**2005**
            
            **2004**Deferred
                tax assets:Net
                operating loss carryforward
            
            $
            113,000
            
            $
            60,000Allowance
                for doubtful accounts
            
            
            29,000
            
            
            26,000Reserve
                for loss on work-in-progress
            
            
            13,000
            
            
            -Customer
                lists
            
            
            10,000
            
            
            -Federal
                benefit of deferred state tax liabilities
            
            
            20,000
            
            
            34,000Valuation
                allowance
            
            
            (73,000
            )
            
            (60,000
            )Net
                deferred tax assets - current
            
            
            112,000
            
            
            60,000Deferred
                tax liabilities:Sec
                481(a) adjustment for cash to accrual basis accounting-
                current
            
            
            (104,000
            )
            
            (106,000
            )-
                long term
            
            
            -
            
            
            (106,000
            )Non-deductible
                amortization of purchase priceInventory
                - current
            
            
            (15,000
            )
            
            (29,000
            )Fixed
                assets - long term
            
            
            (117,000
            )
            
            (132,000
            )Goodwill
                - long term
            
            
            (65,000
            )
            
            -Federal
                benefit of deferred state tax liabilities - current
            
            
            (20,000
            )
            
            -Customer
                lists - long term
            
            
            (257,000
            )
            
            (168,000
            )Total
            
            
            (578,000
            )
            
            (541,000
            )Net
                deferred tax liabilities
            
            
            ($466,000
            )
            
            ($481,000
            )





At
      April
      30, 2005, the Company has net operating loss carryforwards for State tax
      purposes approximating $1,170,000 expiring through 2025. Due to the uncertainty
      of recognizing a tax benefit on these losses in certain states, the Company
      has
      provided a valuation allowance of $73,000 against the total deferred tax asset
      of $113,000 related to these losses.





**NOTE
      11 - STOCK OPTION PLAN**





The
      Company established a nonqualified stock option plan pursuant to which options
      to acquire a maximum of 416,667 shares of the Company's common stock were
      reserved for grant (the "2002 Plan"). Under the terms of the 2002 Plan, the
      options, which expire five years after grant, are exercisable at prices equal
      to
      the fair market value of the stock at the date of the grant and become
      exercisable in accordance with terms established at the time of the grant.
      At
      April 30, 2005, there were 5,771 shares available for grant under the 2002
      Plan.
      From time to time, the Company issues stock options to employees outside the
      plan. In 2005, the Company issued 44,000 stock options to employees outside
      the
      plan.





The
      following table summarizes the activity of the employee stock option plan for
      the year ended April 30, 2005.





Number
                of Shares
            
            Weighted-average
                Exercise PriceOutstanding,
                May 1, 2003
            
            
            6,418
            
            $
            17.41Granted
            
            
            334,864
            
            $
            12.31Cancelled
            
            
            (41,960
            )
            $
            12.97Outstanding,
                May 1, 2004
            
            
            299,322
            
            $
            12.49Granted
            
            
            266,890
            
            $
            6.15Cancelled
            
            
            (111,316
            )
            $
            6.58Outstanding,
                April 30, 2005
            
            
            454,896
            
            $
            8.77








F-21
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





The
      following is a summary of activity with respect to stock options granted under
      the 2002 Plan at April 30, 2005:





Options
                outstanding
            
            Options
                exercisableExercise
                prices
            
            Shares
                under option
            
            Weighted-average
                remaining life in years
            
            Shares
            
            Exercise
                price4.80
                - 5.35
            
            80,764
            
            4.75
            
            52,336
            
            4.80
                - 5-356.10
                - 9.00
            
            257,131
            
            4.08
            
            241,174
            
            6.10
                - 9.0010.92
                - 14.40
            
            77,248
            
            3.38
            
            61,263
            
            10.92
                - 14.4015.00
                - 18.60
            
            29,335
            
            1.62
            
            29,335
            
            15.00
                - 18.6019.92
                - 27.96
            
            10,418
            
            3.10
            
            10,418
            
            19.92
                - 27.96Total
            
            454,896
            
            
            
            394,526





The
      weighted-average fair value of options on the grant date was $6.15 and $12.31,
      respectively, for options granted during the years ended April 30, 2005 and
      2004.





**NOTE
      12 - SHAREHOLDERS' EQUITY**





On
      November 16, 2004, the Company sold an aggregate of 2,083,887 shares of common
      stock and 2,083,887 common stock purchase warrants to eight investors for
      $10,000,000. The common stock and the warrants were issued in a private
      placement transaction pursuant to Section 4(2) under the Securities Act of
      1933.
      Pursuant to the terms of sale, the Company filed a resale registration statement
      on December 30, 2004 covering the common stock and the common stock issuable
      upon exercise of the warrants, which was declared effective by the SEC on
      January 18, 2005.





Each
      warrant is exercisable for a period of five years at a price of $8.40 per share,
      subject to certain adjustments. The exercise price of the warrants is subject
      to
      adjustment for subsequent lower price issuances by the Company, as well as
      customary adjustment provisions for stock splits, combinations, dividends and
      the like. The warrants are callable by the Company, upon 30 days notice, should
      the common stock trade at or above $25.20 per share for 25 out of 30 consecutive
      trading days. A maximum of 20% of the warrants may be called in any three-month
      period.





The
      Company paid the placement agent of the offering a cash fee of $650,000 or
      6.5%
      of the proceeds of the offering. In addition, the placement agent received
      warrants to purchase 62,500 shares of common stock, exercisable for a period
      of
      five years at an exercise price of $4.80 per share. The Company also paid a
      finders’ fee of $100,000 to another third party in connection with the offering
      and incurred other related costs of $112,095. Accordingly, the Company received
      net proceeds of $9,137,905 from the offering.




In
      connection with the sale of the common stock and warrants, the Company
      effectuated a one-for-twelve reverse stock split of its outstanding common
      stock
      on January 10, 2005.





The
      following table summarizes the activity of the stock purchase warrants for
      the
      year ended April 30, 2005.





Number
                of Shares
            
            Weighted
                Average Exercise PriceOutstanding,
                May 1, 2003
            
            
            0Granted
            
            
            425,784
            
            $
            10.57Outstanding,
                May 1, 2004
            
            
            425,784
            
            $
            10.57Granted
            
            
            2,146,387
            
            $
            8.40Outstanding,
                April 30, 2005
            
            
            2,572,171
            
            $
            8.76








F-22
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**NOTE
      13 - SEGMENT REPORTING**





The
      Company's reportable segments are determined and reviewed by management based
      upon the nature of the services, the external customers and customer industries
      and the sales and distribution methods used to market the products. The Company
      has two reportable segments: wireless infrastructure services and specialty
      communication systems. Management evaluates performance based upon (loss) income
      before income taxes. Corporate includes corporate salaries and external
      professional fees, such as accounting, legal and investor relations costs which
      are not allocated to the other subsidiaries. Corporate assets include cash,
      prepaid expenses and deferred tax assets. Segment results for the years ended
      April 30, 2005 and 2004 are as follows:





**As
                of/Year ended April 30, 2005**
            
            **As
                of/Year ended April 30, 2004**Corporate
            
            WirelessInfrastructure
            
            SpecialtyCommunication
            
            Total
            
            Corporate
            
            WirelessInfrastructure
            
            SpecialtyCommunication
            
            TotalRevenue
            
            $
            -
            
            $
            8,651,555
            
            $
            31,496,678
            
            $
            40,148,233
            
            $
            -
            
            $
            4,568,714
            
            $
            17,507,532
            
            $
            22,076,246Depreciation
                and Amortization
            
            $
            20,423
            
            $
            161,485
            
            $
            500,489
            
            $
            682,397
            
            $
            98
            
            $
            40,054
            
            $
            342,358
            
            $
            382,510Income
                (loss) before income taxes
            
            $
            207,777
            
            $
            783,014
            
            $
            390,286
            
            $
            1,381,077
            
            
            ($924,882
            )
            $
            361,160
            
            $
            515,535
            
            
            ($48,187
            )Goodwill
            
            $
            -
            
            $
            2,479,410
            
            $
            11,482,232
            
            $
            13,961,642
            
            $
            -
            
            $
            2,698,343
            
            $
            5,983,527
            
            $
            8,681,870Total
                assets
            
            $
            1,169,887
            
            $
            4,604,335
            
            $
            24,402,489
            
            $
            30,176,711
            
            $
            803,082
            
            $
            6,387,166
            
            $
            13,691,849
            
            $
            20,882,097








**NOTE
      14 - COMMITMENTS AND CONTINGENCIES**





***Employment
      Agreements***





The
      Company has entered into employment contracts ranging from two to four years
      with its executive officers. The aggregate base salary commitments under these
      contracts at April 30, 2005 are approximately $1,800,000.





***Litigation***





From
      time
      to time, the Company may become involved in various lawsuits and legal
      proceedings which arise in the ordinary course of business. However, litigation
      is subject to inherent uncertainties, and an adverse result in these or other
      matters may arise from time to time that may harm the Company's business. The
      Company is currently not aware of any such legal proceedings or claims that
      we
      believe will have, individually or in the aggregate, a material adverse affect
      on our business, consolidated financial condition or operating
      results.





***Lease
      Commitments***





The
      Company leases its office facilities pursuant to non-cancelable operating leases
      expiring through February 2011. The Company also has non-cancelable vehicle
      leases. The minimum rental commitments under these non-cancelable leases at
      April 30, 2005 are summarized as follows:





Year
                ending April 30,2006
            
            $
            386,0542007
            
            
            328,4902008
            
            
            237,0962009
            
            
            121,5682010
            
            
            105,941Thereafter
            
            
            90,480Total
                minimum lease payments
            
            $
            1,269,629




Rent
      expense for all operating leases was approximately $358,000 and $260,000 in
      2005
      and 2004, respectively.




***Walker
        Comm, Inc. Acquisition***
 
 In
        connection with the acquisition of Walker, the Company assumed a ten-year
        lease
        with a trust, of which, a certain officer of the Company is the trustee,
        for a
        building and land located in Fairfield, California, which is occupied by
        its
        Walker subsidiary.
  ***Clayborn
        Contracting Group, Inc. Acquisition***
 
 In
        connection with the acquisition of Clayborn, an additional $1,100,000 is
        due by
        September 30, 2007, payable in quarterly distributions to the Clayborn
        shareholders, by payment of 50% of the quarterly post tax profits as defined,
        of
        Clayborn and the payment of the remainder on that date.
 
 ***Heinz
        Corporation Acquisition***
 
 In
        connection with the acquisition of Heinz, a $200,000 non-interest bearing
        promissory note was issued. Of the $200,000, $75,000 is payable on the second
        anniversary of the closing date and $50,000 is payable on the third anniversary
        of the closing date.


F-23


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**







**ITEM
      8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE** .





None





**ITEM
      8A - CONTROLS AND PROCEDURES**





Evaluation
      of disclosure controls and procedures. An evaluation as of April 30, 2005 was
      performed under the supervision and with the participation of our management,
      including the chief executive officer and the chief financial officer, of the
      effectiveness of the design and operation of our disclosure procedures. Based
      on
      that evaluation , our principal executive officer and chief financial officer
      have concluded that our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
      (the “Exchange Act")) were sufficiently effective to ensure that the information
      required to be disclosed by us in the reports that we file under the Exchange
      Act is gathered, analyzed and disclosed with adequate timeliness, accuracy
      and
      completeness.




In
      connection with its review of the Company's financial statements for the three
      and nine months ended January 31, 2005 J.H. Cohn LLP, the Company's independent
      registered public accounting firm brought to the attention of the Company's
      management and Audit Committee that the Company had initially understated its
      provision for income taxes by improperly reversing deferred tax liabilities
      arising from an acquisition. The Company subsequently adopted additional
      procedures to address this deficiency, including consulting a third party income
      tax consultant to review the Company’s income tax provision.





Changes
      in internal controls. There have been no significant changes in our internal
      controls, except for the change in procedures referred to in the preceding
      paragraph, or in other factors that could significantly affect these controls
      subsequent to the date of the evaluation referred to above, nor were there
      any
      significant deficiencies or material weaknesses in our internal
      controls.





**ITEM
      8B - OTHER INFORMATION**





None





21
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**ITEM
      9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH SECTION 16(a) OF THE EXCHANGE ACT**





The
      following persons are our executive officers and directors as of the date
      hereof:





NAME
            
            AGE
            
            OFFICES
                HELDAndrew
                Hidalgo
            
            49
            
            Chairman,
                Chief Executive Officer and DirectorJoseph
                Heater
            
            41
            
            Chief
                Financial OfficerDonald
                Walker
            
            42
            
            Executive
                Vice PresidentJames
                Heinz
            
            43
            
            Executive
                Vice PresidentRichard
                Schubiger
            
            39
            
            Executive
                Vice PresidentNorm
                Dumbroff
            
            44
            
            DirectorNeil
                Hebenton
            
            49
            
            DirectorGary
                Walker
            
            50
            
            DirectorWilliam
                Whitehead
            
            49
            
            Director











***Andrew
      Hidalgo, Chairman and Chief Executive Officer***





Mr.
      Hidalgo has been Chairman of the Board and Chief Executive Officer of the
      Company since its inception in May 2002 and served in the same capacity with
      the
      predecessor companies WPCS, Inc. and WPCS Holdings, Inc. since September 2000.
      He is responsible for the Company's operations and direction. Prior to that,
      Mr.
      Hidalgo held various positions in operations, sales and marketing with Applied
      Digital Solutions, the 3M Company, Schlumberger and General Electric. He
      attended Fairfield University in Fairfield, Connecticut where he majored in
      Marketing and Finance.





***Joseph
      Heater, Chief Financial Officer***





Mr.
      Heater has been Chief Financial Officer since July 2003. From November 2001
      to
      June 2003, Mr. Heater was the Controller for Locus Pharmaceuticals, Inc., a
      development stage pharmaceutical company. Prior to that, from April 1999 to
      September 2001, Mr. Heater was Director of Finance and Corporate Controller
      for
      esavio Corporation, an information technology consulting company providing
      application development, network design, integration, and managed services.
      Prior to that, from March 1995 to November 1998, Mr. Heater was Director of
      Financial Planning and Assistant Corporate Controller for Airgas, Inc. Mr.
      Heater holds a B.S. from the University of Nebraska and an M.B.A. from Villanova
      University.





***Donald
      Walker, Executive Vice President***





Mr.
      Walker has been Executive Vice President since December 2002. Mr. Walker was
      the
      founder of Walker Comm, Inc. and its Chief Executive Officer from November
      1996
      until it's acquisition by WPCS in December 2002. He has over twenty-one years
      of
      project management experience and is a Registered Communications Distribution
      Designer (RCDD). In addition, Mr. Walker is a committee member with the National
      Electrical Contractors Association (NECA). Mr. Walker began his project engineer
      career at General Dynamics where he developed his engineering skills while
      managing large projects and coordinating technical
      staff.





***James
      Heinz, Executive Vice President***





Mr.
      Heinz
      has been Executive Vice President since April 2004. Mr. Heinz was the founder
      of
      Heinz Corporation and its President since January 1994 until its acquisition
      by
      WPCS in April 2004. Mr. Heinz has over twenty years of project engineering
      experience in civil and commercial construction projects with over ten years
      specifically dedicated to wireless infrastructure services. Mr. Heinz is the
      Chairman of the Construction Advisory Board for Southern Illinois University
      and
      a general advisory member of the School of Engineering. He holds a B.S. degree
      in construction management from Southern Illinois University.








22
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





***Richard
      Schubiger, Executive Vice President***





Mr.
      Schubiger has been Executive Vice President since November 2004. Mr. Schubiger
      was a co-founder of Quality Communications and its President since December
      1995
      until its acquisition by WPCS in November 2004. Mr. Schubiger has over twenty
      years of experience in the wireless communications industry and has been
      involved with all facets including sales, service, design and project
      management. Prior to establishing Quality Communications, Mr. Schubiger worked
      for Motorola, Inc., designing and supporting major wireless systems for
      commercial and government users. Mr. Schubiger had a distinguished career in
      the
      United States Marine Corps where he served as a wireless engineering specialist
      involved with deployments throughout North America, Asia and
      Europe.





***Directors:***





***Norm
      Dumbroff***





Mr.
      Dumbroff became a Director of WPCS in November 2002. He has been the Chief
      Executive Officer of Wav Incorporated since April 1990, a distributor of
      wireless products in North America. Prior to Wav Incorporated, Mr. Dumbroff
      was
      an engineer for Hughes Aircraft. He holds a B.S. degree in Computer Science
      from
      Albright College.





***Neil
      Hebenton***





Mr.
      Hebenton became a director of WPCS in October 2002. Since February 2002, he
      has
      been Senior Director, Business Development, for Perceptive Informatics, Inc.
      (a
      subsidiary of PAREXEL International Corp.), a company offering clinical trial
      data management software applications to pharmaceutical and biotechnology
      companies. From January 1998 to January 2002, he was the Managing Director
      for
      the U.K. based FW Pharma Systems, a multi-million dollar application software
      company serving the pharmaceutical and biotechnology sectors. Prior to that,
      Mr.
      Hebenton has held a variety of operational, scientific and marketing positions
      in Europe with Bull Information Systems (BULP-Paris, Frankfurt, Zurich) and
      Phillips Information Systems. He received his B.S. in Mathematics from the
      University of Edinburgh, Scotland.





***Gary
      Walker***





Mr.
      Walker became a director of WPCS in December 2002. He is currently the president
      of the Walker Comm subsidiary for WPCS International, a position he has held
      since November 1996. Prior to his involvement at Walker Comm, Mr. Walker
      had a distinguished career with the U.S. Navy and also held an elected political
      position in Fairfield, California. He holds a B.A. in Business Management from
      St. Mary's College in Moraga, California.





***William
      Whitehead***





Mr.
      Whitehead became a director of WPCS in October 2002. Since October 1998, he
      has
      been the Chief Financial Officer for Neutronics Incorporated, a multi-million
      dollar process and safety systems manufacturer. Mr. Whitehead has held a variety
      of financial management positions with Deloitte & Touche and was Division
      Controller for Graphic Packaging Corporation from April 1990 to March 1998.
      After attending West Point, Mr. Whitehead received a B.S. in Accounting from
      the
      Wharton School at the University of Pennsylvania and received his M.B.A. from
      the Kellogg Graduate School at Northwestern University.





***Board
      of Directors***





All
      of
      our directors hold office until the next annual meeting of stockholders and
      the
      election and qualification of their successors. Directors serve without
      compensation and without other fixed remuneration. Directors are entitled to
      receive stock options under our 2002 Stock Option as determined by the Board
      of
      Directors. We reimburse our directors for expenses incurred in connection with
      attending Board meetings.





The
      following is a summary of the committees our directors serve. ****





Audit
      Committee




We
      have
      an Audit Committee currently consisting of William Whitehead , Norm
      Dumbroff and Neil Hebenton, with Mr. Whitehead elected as Chairman of the
      Committee. Our board of directors has determined that each of Messrs. Whitehead,
      Dumbroff and Hebenton are "independent" as that term is defined under applicable
      SEC rules and under the current listing standards of the Nasdaq Stock Market.
      Mr. Whitehead is our audit committee financial expert. The Audit
      Committee was expanded in December 2004 and met once after formation and prior
      to the filing of the original Form 10-KSB. The Board of Directors has
      adopted a written charter setting forth the authority and responsibilities
      of
      the Audit Committee.






23


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**




The
      Audit
      Committee's responsibilities include: (i) reviewing the independence,
      qualifications, services, fees, and performance of the independent auditors,
      (ii) appointing, replacing and discharging the independent auditors, (iii)
      pre-approving the professional services provided by the independent auditors,
      (iv) reviewing the scope of the annual audit and reports and recommendations
      submitted by the independent auditors, and (v) reviewing our financial reporting
      and accounting policies, including any significant changes, with management
      and
      the independent auditors. The Audit Committee also prepares the Audit Committee
      report that is required pursuant to the rules of the SEC.




Executive
      Committee





We
      have
      an Executive Committee currently consisting of Norm Dumbroff, Neil Hebenton
      and
      William Whitehead, with Mr. Dumbroff elected as Chairman of the Committee.
      The
      Board of Directors has determined that all of the members are "independent"
      under the current listing standards of the Nasdaq Stock Market. The Executive
      Committee was formed in December 2004 and has not met to date. The Board of
      Directors has adopted a written charter setting forth the authority and
      responsibilities of the Executive Committee.








The
      Executive Committee has responsibility for assisting the Board of Directors
      in,
      among other things, evaluating and making recommendations regarding the
      compensation of the executive officers and directors of the Company; assuring
      that the executive officers are compensated effectively in a manner consistent
      with the stated compensation strategy of the Company; producing an annual report
      on executive compensation in accordance with the rules and regulations
      promulgated by the SEC; periodically evaluating the terms and administration
      of
      the Company's incentive plans and benefit programs and monitoring of compliance
      with the legal prohibition on loans to directors and executive officers of
      the
      Company.





Nominating
      Committee





We
      have a
      Nominating Committee currently consisting of Neil Hebenton, Norm Dumbroff and
      William Whitehead, with Mr. Hebenton elected as Chairman of the Committee.
      The
      Board of Directors has determined that all of the members are "independent"
      under the current listing standards of the Nasdaq Stock Market. The Nominating
      Committee was designated by the Board of Directors in February 2005 and has
      not
      met to date.





The
      Nominating Committee has responsibility for assisting the Board in, among other
      things, effecting Board organization, membership and function including
      identifying qualified Board nominees; effecting the organization, membership
      and
      function of Board committees including composition and recommendation of
      qualified candidates; establishment of and subsequent periodic evaluation of
      successor planning for the chief executive officer and other executive officers;
      development and evaluation of criteria for Board membership such as overall
      qualifications, term limits, age limits and independence; and oversight of
      compliance with the Corporate Governance Guidelines. The Nominating Committee
      shall identify and evaluate the qualifications of all candidates for nomination
      for election as directors.





***Section
      16(a) Beneficial Ownership Reporting Compliance***


Based
      solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished
      to
      us during fiscal year 2005 and 2004, we are not aware of any director, officer
      or beneficial owner of more than ten percent of our Common Stock that failed
      to
      file reports required by Section 16(a) of the Securities Exchange Act of 1934
      on
      a timely basis during fiscal year 2005.





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth in summary form the compensation received during
      the
      fiscal years ended April 30, 2005, 2004, and 2003 by the Company's Chief
      Executive Officer and each of the Company’s four other most highly compensated
      executive officers based on salary and bonus earned during the 2005 fiscal
      year.








24
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**Summary
      Compensation Table**





Annual
                Compensation
            
            Long
                Term CompensationName
                and Principal Position
            Year
            Salary
                ($)
            Bonus
                ($)
            Other
                Annual Compensation ($)
            
            Restricted
                Stock Awards
            Securities
                Underlying Options (5)
            LTIP
                Payouts
            All
                Other Compensation ($)Andrew
                Hidalgo
            2005
            168,000
            -
            -
            
            -
            154,167
            -
            -Chairman,
                Chief Executive Officer
            2004
            154,500
            17,000
            -
            
            -
            -
            -
            -and
                Director
            2003
            141,000
            -
            -
            
            -
            -
            -
            -Donald
                Walker
            2005
            140,000
            10,269
            -
            
            -
            -
            -
            -Executive
                Vice President (1)
            2004
            140,000
            26,962
            -
            
            -
            16,667
            -
            -2003
            41,160
            2,669Gary
                Walker
            2005
            140,000
            10,269
            
            
            -
            2,084
            -
            -President-Walker
                and Director (2)
            2004
            140,000
            26,962
            -
            
            -
            16,667
            -
            -2003
            42,333
            2,669
            
            
            -
            -
            -
            -James
                Heinz
            2005
            140,000
            -
            
            
            
            10,000
            -
            -Executive
                Vice President (3)
            2004
            10,231
            -
            -
            
            -
            -
            -
            -Joseph
                Heater
            2005
            132,000
            -
            -
            
            -
            35,000
            -
            -Chief
                Financial Officer (4)
            2004
            95,500
            8,000
            -
            
            -
            33,334
            -
            -





(1)
            Mr.
                Walker has served as Executive Vice President since December 30,
                2002.


(2)
            Mr.
                Walker has served as President of Walker and as a Director since
                December
                30, 2002.


(3)
            Mr.
                Heinz has served as Executive Vice President since April 2,
                2004.


(4)
            Mr.
                Heater has served as Chief Financial Officer since July 15,
                2003.


(5)
            The
                number of securities under options granted reflects the number of
                WPCS
                shares that may be purchased upon the exercise of options. The Company
                does not have any outstanding stock appreciation
                rights.








25
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**








**Option
      Grants During 2005 Fiscal Year**





The
      following table provides information related to options granted to the named
      executive officers during the 2005 fiscal year. The Company does not have any
      outstanding stock appreciation rights.





Name
            No.
                of Securities Underlying Options Granted (#)
            %
                of Total Options Granted to Employees in Fiscal Year
            Exercise
                Price ( $/Sh)
            Expiration
                DateAndrew
                Hidalgo
            154,167
            57.8%
            6.60
            10/6/2009Gary
                Walker
            2,084
            0.8%
            4.80
            12/20/2009James
                Heinz
            10,000
            3.8%
            5.25
            2/1/2010Joseph
                Heater
            25,000
            9.4%
            6.60
            10/6/2009Joseph
                Heater
            10,000
            3.8%
            5.25
            2/1/2010





**Aggregated
      Option Exercises During 2005 Fiscal Year and Fiscal Year-End Option
      Values**





The
      following table provides information related to employee options exercised
      by
      the named executive officers during the 2005 fiscal year and number and value
      of
      such options held at fiscal year-end.





Shares
                Acquired
            Value
            
            Number
                of Securities Underlying Unexercised Options at Fiscal Year- End
                (#)
            
            Value
                of Unexercised In-the-Money Options at Fiscal Year- End ($)
                (1)Name
            on
                Exercise (#)
            Realized
            
            Exercisable
            Unexercisable
            
            Exercisable
            UnexercisableAndrew
                Hidalgo
            -
            -
            
            154,167
            -
            
            -
            -Gary
                Walker
            -
            -
            
            2,084
            -
            
            -
            -James
                Heinz
            -
            -
            
            10,000
            -
            
            -
            -Joseph
                Heater
            -
            -
            
            25,000
            -
            
            -
            -Joseph
                Heater
            -
            -
            
            10,000
            -
            
            -
            -





(1).
      Value based on the closing price of $4.95 per share on April 29, 2005, less
      the
      option exercise price.





**EMPLOYMENT
      AGREEMENTS**





***Contract
      with Andrew Hidalgo***





On
      February 1, 2005, the Company entered into a three-year employment contract
      with
      the Chairman and Chief Executive Officer of the Company. Upon each one year
      anniversary of the agreement, the agreement will automatically renew for another
      three years from the anniversary date. The base salary under the agreement
      is
      $168,000 per annum, plus benefits.





***Contract
      with Joseph Heater***





On
      June
      1, 2005, the Company entered into a three-year employment contract with the
      Chief Financial Officer. Upon each one year anniversary of the agreement, the
      agreement will automatically renew for another three years from the anniversary
      date The base salary under the agreement is $140,000 per annum, plus
      benefits.








***Contract
      with Donald Walker***





On
      December 30, 2002, the Company entered into a four-year employment contract
      with
      an option to renew for an additional year, with the President of Walker, who
      is
      also an Executive Vice President of the Company. The base salary under the
      agreement is $140,000 per annum, plus benefits.








26


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**






***Contract
      with Gary Walker***





On
      December 30, 2002, the Company entered into a four-year employment contract
      with
      an option to renew for an additional year, with the President of Walker, who
      is
      also a Director of the Company. The base salary under the agreement is $140,000
      per annum, plus benefits.





***Contract
      with James Heinz***





On
      April
      2, 2004, the Company entered into a three-year employment contract with James
      Heinz, the President of Heinz, who is also an Executive Vice President of the
      Company. The base salary under the agreement is $140,000 per annum, plus
      benefits.





***Contract
      with Richard Schubiger***





On
      November 24, 2004, the Company entered into a two-year employment contract
      with
      Richard Schubiger, the President of Quality, who is also an Executive Vice
      President of the Company. The base salary under the agreement is $120,000 per
      annum, plus benefits.





**** ***Code
      of Ethics***





WPCS
      adopted a Code of Ethics for its officers, directors and employees. A copy
      of
      the Code of Ethics is incorporated by reference as an exhibit.








27
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**ITEM
      11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND**


**RELATED
      STOCKHOLDER MATTERS**





The
      following tables sets forth, as of July 15, 2005, the number of and percent
      of
      the Company's common stock beneficially owned by: (1) all directors and
      nominees, naming them, (2) our executive officers, (3) our directors and
      executive officers as a group, without naming them, and (4) persons or groups
      known by us to own beneficially 5% or more of our common stock. The Company
      believes that all persons named in the table have sole voting and investment
      power with respect to all shares of common stock beneficially owned by them.





A
      person
      is deemed to be the beneficial owner of securities that can be acquired by
      him
      within 60 days from July 15, 2005 upon the exercise of options, warrants or
      convertible securities. Each beneficial owner's percentage ownership is
      determined by assuming that options, warrants or convertible securities that
      are
      held by him, but not those held by any other person, and which are exercisable
      within 60 days of July 15, 2005 have been exercised and converted.




NAME
                    AND ADDRESS
                  OF
                    OWNER
                TITLE 
                    OF  CLASS
                NUMBER
                    OF
                  SHARES 
                    BENEFICIALLYOWNED(1)
                PERCENTAGE OFCLASS
                    (2)Andrew  Hidalgo
                Common
                    Stock
                583,384
                    (3)
                14.67%One
                    East Uwchlan AvenueExton,
                    PA 19341Donald
                    Walker
                Common
                    Stock
                37,721
                    (3)
                *One
                    East Uwchlan AvenueExton,
                    PA 19341James
                    Heinz
                Common
                    Stock
                69,524
                    (3)
                1.81%One
                    East Uwchlan AvenueExton,
                    PA 19341Richard
                    Schubiger
                Common Stock
                10,000
                    (3)
                *One
                    East Uwchlan AvenueExton,
                    PA 19341Joseph
                    Heater
                Common
                    Stock
                68,334
                    (3)
                1.76%One
                    East Uwchlan AvenueExton,
                    PA 19341Norm
                    Dumbroff
                Common
                    Stock
                75,002
                    (3)
                1.96%One
                    East Uwchlan AvenueExton,
                    PA 19341Neil
                    Hebenton
                Common
                    Stock
                6,252
                    (3)
                *One
                    East Uwchlan AvenueExton,
                    PA 19341Gary
                    Walker
                Common
                    Stock
                96,315
                    (3)
                2.51%One
                    East Uwchlan AvenueExton,
                    PA 19341Common
                    Stock
                17,419
                    (3)
                *William
                    WhiteheadOne
                    East Uwchlan AvenueExton,
                    PA 19341All
                    Officers and Directors
                Common
                    Stock
                963,951
                    (3)
                23.39%As
                    a Group (9 persons)Barron
                    Partners LP
                Common
                    Stock
                535,340
                    (4)
                12.29%730
                    Fifth Avenue, 9th FloorNew
                    York, NY 10019Special
                    Situations Private
                Common
                    Stock
                1,016,668
                    (4)
                23.41%Equity
                    Fund, L.P.153
                    E. 53rd Street, 55th FloorNew
                    York, NY 10022Special
                    Situations Fund III,
                    L.P.
                Common Stock
                1,423,534
                    (4)
                31.28%153
                    E. 53rd Street, 55th FloorNew
                    York, NY 10022SF Capital
                  Partners
                  Ltd.
                Common
                  Stock
                310,466
                    (4)
                7.70%3600
                    South Lake DriveSt.
                    Francis, WI 53235Carrhae
&
                  Co.
                Common
                  Stock
                208,334
                    (4)
                5.31%150
                    E. Social Hall Avenue4th
                    FloorSalt
                    Lake City, UT 84111




*
      Less
      than 1%.





(1)
      Beneficial Ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or investment
      power with respect to securities. Shares of common stock subject to options
      or
      warrants currently exercisable or convertible, or exercisable or convertible
      within 60 days of July 15, 2005 are deemed outstanding for computing the
      percentage of the person holding such option or warrant but are not deemed
      outstanding for computing the percentage of any other person.





(2)
      Based
      on 3,821,835 shares of common stock issued and outstanding.





(3)
      Includes the following number of shares of common stock which may be acquired
      by
      certain officers and directors through the exercise of stock options which
      were
      exercisable as of July 15, 2005 or become exercisable within 60 days of that
      date: Andrew Hidalgo, 154,167 shares; Donald Walker, 16,667 shares; James Heinz,
      10,000 shares; Richard Schubiger, 10,000 shares; Joseph Heater, 68,334 shares,
      Norm Dumbroff, 4,168 shares; Neil Hebenton, 6,252 shares; Gary Walker, 18,751
      shares; William Whitehead, 10,419 shares; and all officers and directors as
      a
      group, 298,758 shares.





(4)
      Includes the following number of shares of common stock which may be acquired
      through the exercise of common stock purchase warrants which were exercisable
      as
      of July 15, 2005 or become exercisable within 60 days of that date: Barron
      Partners LP, 535,340 shares; Special Situations Fund Private Equity Fund, L.P.,
      520,834 shares; Special Situations Fund III, L.P., 729,167 shares; SF Capital
      Partners Ltd., 208,334 shares; and Carrhae & Co., 104,167
      shares.











28
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**EQUITY
      COMPENSATION PLAN INFORMATION**





The
      following table sets forth information about the shares of the Company's common
      Stock that may be issued upon the exercise of options granted to employees
      under
      the 2002 Stock Option Plan, which were approved by the Board of Directors,
      as
      well as shares that may be issued upon the exercise of options under the 2002
      Stock Option Plan, that were issued to consultants, which were not approved
      by
      the Board of Directors.






Plan
                Category
            
            (a)
              Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            (b)
              Weighted-average
                exercise price of outstanding options, warrants and rights
            
            (c)
              Number
                of securities remaining available for future issuance under equity
                compensation plans excluding securities reflected in column (a)
                (1)Equity
                compensation plans approved by security holders
            
            
            410,896
            
            $
            9.25
            
            
            5,771Equity
                compensation plans not approved by security holders (1),
                (2)
            
            
            44,000
            
            $
            5.25
            
            
            -Total
            
            
            454,896
            
            $
            8.77
            
            
            5,771




(1)
            The
                Company established a nonqualified stock option plan pursuant to
                which
                options to acquire a maximum of 416,667 shares of the Company's common
                stock were reserved for grant. As of April 30, 2005, included above
                are
                392,145 shares issuable upon exercise of options granted to employees
                and
                directors.





(2)
            Includes
                62,669 shares issuable upon exercise of stock options granted to
                outside
                consultants for services rendered to the
                Company.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





At
      the
      time of the following transactions, there were no affiliations between us and
      the other parties. As a result of these transactions, the other parties became
      affiliates. The transactions were ongoing after the close resulting in payoffs
      to the other parties who became affiliates.





In
      connection with the acquisition of Walker, we assumed a lease with a trust,
      of
      which, a certain officer is the trustee, for a building and land located in
      Fairfield, California, which is occupied by our Walker Comm subsidiary. The
      lease calls for monthly rental payments of $4,642, with annual increases,
      calculated using the San Francisco-Oakland-San Jose Consolidated Metropolitan
      Statistical Area Consumer Price Index. For the year ended April 30, 2005,
      $88,300 was paid as rent for this lease.





On
      August
      22, 2003, we acquired all of the outstanding shares of Clayborn in exchange
      for
      an aggregate $900,000 cash consideration and 68,871 newly issued shares of
      our
      common stock. An additional $1,100,000 is due by September 30, 2007, payable
      in
      quarterly distributions, by payment to the Clayborn shareholders of 50% of
      the
      quarterly post tax profits, as defined, of Clayborn and a final payment of
      any
      remaining balance on that date.





On
      April
      2, 2004, we acquired all of the issued and outstanding common stock of Heinz.
      We
      acquired all of the issued and outstanding shares of Heinz for $1,000,000,
      as
      follows: (1) $700,000 of our common stock, based on the closing price of our
      common stock on March 30, 2004 of $11.76 per share, for an aggregate of 59,524
      newly issued shares of the Company's common stock and (2) $300,000 total cash
      consideration, of which $100,000 was paid at closing and a $200,000 non-interest
      bearing promissory note. Of the $200,000, $75,000 was paid in April 2005,
      $75,000 is payable on the second anniversary of the closing date and $50,000
      is
      payable on the third anniversary of the closing date.





On
      November 24, 2004, we acquired all of the issued and outstanding common stock
      of
      Quality. The aggregate consideration paid by the Company to the Quality selling
      shareholders, net of acquisition transaction costs, was $7,442,295, of which
      $6,700,000 was paid at closing. Additional purchase price adjustments of
      $742,295 were paid in June 2005 to settle working capital adjustments and income
      tax reimbursements related to the Company electing to make an Internal Revenue
      Code 338 (h) (10) election. For income tax purposes, this election results
      in a
      stepped up basis of assets and liabilities and will result in future income
      tax
      deductions.





**ITEM
      13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.**





***Exhibits:***





Number
            
            Exhibit3.1
            
            Certificate
                of Incorporation, with amendments (1)3.2
            
            By-Laws
                (1)4.1
            
            Certificate
                of Designation - Series A Preferred Stock (1)4.2
            
            Certificate
                of Designation - Series B Preferred Stock (2)4.3
            
            Certificate
                of Designation - Series C Preferred Stock (3)4.4
            
            2002
                Employee Stock Option Plan (3)4.5
            
            Form
                of 2003 Warrant (3)4.6
            
            Form
                of Common Stock Purchase Warrant (4)10.1
            
            Andrew
                Hidalgo Employment Agreement (5)10.2
            
            Donald
                Walker Employment Agreement (3)10.3
            
            Gary
                Walker Employment Agreement (3)10.4
            
            Joseph
                Heater Employment Agreement (10)10.5
            
            James
                Heinz Employment Agreement (5)10.6
            
            Richard
                Schubiger Employment Agreement (8)10.8
            
            Agreement
                and Plan of Merger by and among WPCS International Incorporated and
                Clayborn Contracting Group made as of the 22ndday of August, 2003 (6)10.9
            
            Agreement
                and Plan of Merger by and among WPCS International Incorporated and
                Heinz
                Corporation made as of the 2ndday of April, 2004 (7)10.10
            
            Stock
                Purchase Agreement among WPCS International Incorporated and Richard
                Schubiger, Matthew Haber and Brian Fortier, dated as of November
                24, 2004
                (8)10.11
            
            Securities
                Purchase Agreement, dated as of November 16, 2004 (4)10.12
            
            Form
                of Registration Rights Agreement, dated as of November 16, 2004
                (4)10.13
            
            Credit
                Agreement with Bank Leumi USA, dated as of June 3, 2005
                (9)10.14
            
            Form
                of Security Agreement with Bank Leumi, dated as of June 3, 2005
                (9)14
            
            Code
                of Ethics (3)31.1
            
            Certification
                of Principal Executive Officer pursuant to
                Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities
                and
                Exchange Act of 1934, as amended31.2
            
            Certification
                of Principal Financial Officer pursuant to
                Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities
                and
                Exchange Act of 1934, as amended32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                (Chief
                Executive Officer)32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                (Chief
                Financial Officer)





1.
      Incorporated by reference from the Company's registration statement on Form
      SB-2
      (Commission File # 333-38802).


2.
      Incorporated by reference to the Company Annual Report on Form 10-KSB for the
      year ended April 30, 2002.


3.
      Incorporated by reference to the Company Annual Report on Form 10-KSB for the
      year ended April 30, 2003.


4.
      Incorporated by reference to the Company’s registration statement on Form S-2
      (Commission File # 333-121757)


5.
      Incorporated by reference from the Company's registration statement on Form
      SB-2
      (Commission File # 333-109522).


6.
      Incorporated by reference to the Company Current Report on Form 8-K, dated
      as of
      August 29, 2003.


7.
      Incorporated by reference to the Company Current Report on Form 8-K, dated
      as of
      April 9, 2004.


8.
      Incorporated by reference to the Company Current Report on Form 8-K, dated
      as of
      November 30, 2004.


9.
      Incorporated by reference to the Company Current Report on Form 8-K, dated
      June
      3, 2005.


10.
      Incorporated by reference to the Company Annual Report on Form 10-KSB for the
      year ended April 30, 2005.





29
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**








**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





Audit
      Fees. The aggregate fees billed by our auditors, for professional services
      rendered for the audit of our annual financial statements for the years ended
      April 30, 2005 and 2004, and for the reviews of the financial statements
      included in our Quarterly Reports on Form 10-QSB during that fiscal year were
      $133,000, and $115,500, respectively.





Audit
      Related Fees. We incurred fees to auditors of $39,473 and $21,511, respectively,
      for audit related fees during the fiscal years ended April 30, 2005 and
      2004.





Tax
      Fees.
      We incurred fees to auditors of $3,900 and $2,115, respectively, for tax
      compliance services during the fiscal years ended April 30, 2005 and
      2004.





The
      Audit
      Committee has considered whether the provision of non-audit services is
      compatible with maintaining the principal accountant's
      independence.








30
 **WPCS
            INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
      of
      1934, the Registrant has duly caused this Report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





WPCS
      INTERNATIONAL INCORPORATED







/s/
                ANDREW HIDALGO
              Andrew HidalgoChief
                Executive Officer(Principal executive
              officer)







/s/
                JOSEPH HEATER
              Joseph HeaterChief
                Financial Officer(Principal accounting
              office)






Date:
        March 31, 2006


Pursuant
          to the requirements of the Securities and Exchange Act of 1934, this report
          has
          been signed below by the following persons on behalf of the registrant
          in the
          capacities as on , March 31, 2006.


/s/
                  ANDREW HIDALGO
                
                Andrew
                  Hidalgo,Chairman
                    of the Board


/s/
                  NORM DUMBROFF
                
                Norm
                  Dumbroff,Director


/s/
                NEIL HEBENTON
              
              Neil
                Hebenton,Director










/s/
                  GARY WALKER
                
                Gary
                  Walker,Director


//s/
                  WILLIAM WHITEHEAD
                William
                  Whitehead,Director








31