**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**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, 2006**





**[
      ] 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)





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par
      value





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 [ ]





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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      Form 10-KSB.





Yes
      [ ]
      No [X] Delinquent filers are disclosed herein.





Total
      revenues for Fiscal Year Ended April 30, 2006 were $52,144,575.





The
      aggregate market value of the Common Stock held by non-affiliates (as affiliates
      are defined in Rule 12b-2 of the Exchange Act) of the registrant, computed
      by
      reference to the average of the high and low sale price on July 24, 2006, was
      $25,788,330.





As
      of
      July 24, 2006, there were 5,494,853 shares of issuer’s common stock outstanding.








**PART
      I**





**ITEM
      1. - DESCRIPTION OF BUSINESS**





This
      Annual Report on Form 10-KSB (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.
      Additionally, statements concerning future matters are forward-looking
      statements.





Although
      forward-looking statements in this Annual Report on Form 10-KSB 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.
      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. 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, quarterly reports on Form 10-QSB,
      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 100 F Street, NE, 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. 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.





**Overview**





We
      design
      and deploy wireless networks. We provide design-build engineering services
      for
      specialty communication systems, which are dedicated wireless networks for
      specified applications, and for wireless infrastructure, which encompasses
      commercial cellular systems for wireless carriers. Our range of services
      includes site design, spectrum analysis, engineering, trenching, electrical
      work, structured cabling, product integration, testing and project management.
      Because we are technology and vendor independent, we can integrate multiple
      products and services across a variety of communication requirements. This
      ability gives our customers the flexibility to create and implement the most
      appropriate solution for their communication needs, and the cost advantage
      that
      comes from dealing with competing vendors. Our customers include corporations,
      government entities and educational institutions. Within this customer base,
      we
      also serve vertical sectors such as public safety, gaming, healthcare, and
      wireless carriers.




The
      increasing demand for wireless services has become a driving force behind the
      recent growth in the global communications industry. Wireless technology has
      advanced substantially to the point where wireless networks have proven to
      be an
      effective alternative to land line networks, a key factor in wireless’ broad
      acceptance. The advantages of wireless over land line communication are apparent
      in the aspects of mobility, capacity, cost, and deployment. We believe the
      use
      of dedicated wireless networks for specified applications has improved
      productivity for individuals and organizations alike. We provide comprehensive
      and cost effective engineering services to address the demand for these wireless
      networks.




With
      seven offices across the United States, we provide our services to our customers
      nationwide. Our rapid revenue growth since we commenced operations in November
      2001 is attributable to a combination of acquisitions and organic growth. For
      the fiscal year ended April 30, 2006, we generated revenues of $52.1 million,
      an
      increase of 29.9% from the fiscal year ended April 30, 2005. Our backlog at
      April 30, 2006 was approximately $15.9 million.





**Industry
      Background**





Worldwide
      use of wireless communications has grown rapidly as cellular and other emerging
      wireless technologies have become more widely available and affordable for
      businesses and consumers. The Cellular Telecommunications & Internet
      Association, or CTIA, in a summary prepared in April 2006, reported that there
      were approximately 207.9 million wireless subscribers in the United States,
      an
      increase of 7% over the prior year. The rapid growth in wireless communications
      is driven by the dramatic increase in wireless device usage, as well as strong
      demand for wireless data services and enterprise applications. According to
      the
      CTIA summary, wireless service revenue from data applications increased 86%
      from
      the prior year, to reach $8.6 billion in 2005.





2


The
      growing number of wireless subscribers and the increase in usage by those
      subscribers have fueled the growth of the wireless services industry. According
      to the CTIA, U.S. wireless carriers spent $25.3 billion on capital investment
      in
      2005. We believe enterprise wireless network investment will increase
      substantially as the industry continues to expand.





*Advantages
      of Wireless Technology*





Various
      improvements in wireless technologies have resulted in an environment where
      wireless solutions provide a number of key advantages over traditional land
      line
      solutions, including:




•
            *Mobility.*Mobile
                communications and computing are among the driving forces behind
                the
                demand for wireless connectivity. The increased functionality and
                declining cost of mobile wireless devices has fueled further growth.
                Mobile connectivity has led to greater productivity as organizations
                transmit data and gather information from remote staff and locations
                where
                land line connectivity is unavailable. Such mobile connectivity has
                created significant cost savings in data collection, increased
                responsiveness, enabled greater access to enterprise resources, and
                improved controls.




•
            *Capacity.*Current
                technology allows wireless transmission with capacity, quality and
                reliability superior to land line and comparable to fiber. For example,
                current radio technology is capable of two-way data transfer at rates
                up
                to 1 gigabits per second, allowing wireless networks to transmit
                content
                as quickly as over fiber.




•
            *Cost.*Wireless
                networks cost less than comparable land line networks both to deploy
                and
                to operate. Wireless deployment is less expensive because the installation
                of a land line network is more labor-intensive, requires more time
                and may
                involve substantial right-of-way expenditures. We expect the main
                cost
                component of wireless networks, equipment, to continue to decline
                as
                technology advances and production volumes increase. Operating costs
                of
                wireless networks are also lower because land lines require extensive
                troubleshooting to execute repairs. In addition, wireless networks
                bypass
                local service providers, eliminating recurring monthly
                charges.




•
            *Deployment.*Because
                enterprise wireless networks do not require negotiating rights of
                way,
                substantial infrastructure engineering, time-consuming third party
                coordination efforts or additional FCC licensing, they can be deployed
                quickly and less expensively. Rapid deployment allows organizations
                to
                install networks more closely in line with immediate needs rather
                than
                having to commit to time-consuming engineering projects in anticipation
                of
                future growth.






*Industry
      Trends*




The
      demand for wireless data services can be tied to the following key
      trends:




•
            increased
                security of wireless data
                transmission;




•
            introduction
                of new technologies such as Wi-Fi, WiMAX and
                RFID;




•
            increasing
                accessibility and affordability of Web-enabled devices;
                and




•
            increased
                capacity of wireless networks, making them a legitimate substitute
                for
                land line communications.




The
      advantages gained through wireless communication solutions have expanded the
      scope of possible applications, creating demand for specialty communication
      systems.




Demand
      for wireless data services is accelerating the adoption of new technologies
      to
      enable wireless networks to deliver enhanced features and capabilities. Such
      technologies include Internet protocol, or IP, communications, including Voice
      over IP; fixed broadband wireless that permits the use of high capacity wireless
      connections between locations that are within a line of sight across relatively
      short distances; and mobile wireless technologies and new high capacity
      applications, commonly referred to as “3G” broadband wireless networks.
      According to the Telecommunications Industry Association’s *2005
      Telecommunications Market Review and Forecast* ,
      Wi-Fi
      and WiMAX infrastructure revenues were expected to reach $5.2 billion and $115
      million, respectively, in 2005. The proliferation of network technologies,
      enabled by the standardization around IP is increasing the challenge to
      integrate these technologies, protocols and services. All these new technologies
      have increased the complexity of wireless systems, and created demand for the
      services of companies with specialized skills to address that
      complexity.




**Business
      Strategy**




Our
      goal
      is to become a recognized leader in the design and deployment of wireless
      networks for specialty communication systems and wireless infrastructure. We
      have designed and deployed many systems incorporating innovative uses of
      wireless technology in various vertical markets. Our strategy focuses on both
      organic growth and the pursuit of acquisitions that add to our engineering
      capacity and geographic coverage. Specifically, we will endeavor
      to:




3




•
            *Market
                additional services to our customers.*Each
                acquisition we make expands our customer base. We seek to expand
                these new
                customer relationships by making them aware of the diverse products
                and
                services we offer. We believe that providing these customers the
                full
                range of our services will lead to new projects or revenue opportunities
                and increased profitability.




•
            *Maintain
                and expand our focus in vertical markets.*We
                have deployed successful, innovative wireless solutions for multiple
                customers in a number of vertical markets, such as public safety
                and the
                gaming industry. We will continue to seek additional customers in
                these
                targeted vertical markets who can benefit from our expertise, and
                look for
                new ways in which we can design wireless solutions to enhance productivity
                within these markets. We also look for new vertical markets where
                we can
                make a difference with compelling wireless solutions, and will continue
                to
                expand our vertical market coverage to include these new markets
                as
                appropriate.




•
            *Strengthen
                our relationships with technology providers.*We
                will continue to strengthen the relationships we have with technology
                providers such as Avaya and Motorola. These companies rely on us
                to deploy
                their technology products within their customer base. We have worked
                with
                these providers in testing new equipment they develop, and our personnel
                maintain certifications on our technology providers’ products. We also
                look for innovative products which can be of benefit to our customers,
                and
                endeavor to establish similar relationships with new technology providers
                as part of our commitment to offering the most complete solutions
                to our
                customers.




•
            *Seek
                strategic acquisitions.*Since
                April 30, 2006, we have acquired two companies, New England Communication
                Systems, Inc. (NECS), and Southeastern Communication Service, Inc.
                (SECS).
                We will continue to look for additional acquisitions of compatible
                businesses that can be assimilated into our organization, expand
                our
                geographic coverage and add accretive earnings to our business. Our
                preferred acquisition candidates will have experience with specialty
                communication systems, engineering capacity in a design-build format,
                an
                expansive customer base, and a favorable financial
                profile.




**Services**





We
      operate in two segments, specialty communication systems and wireless
      infrastructure services. Specialty communication systems are wireless networks
      designed to improve productivity for a specified application by communicating
      data, voice or video information in situations where land line networks are
      non-existent, more difficult to deploy or too expensive. Wireless infrastructure
      services include the engineering, installation, integration and maintenance
      of
      wireless carrier equipment. For the fiscal year ended April 30, 2006, specialty
      communication systems represented approximately 82% of our total revenue, and
      wireless infrastructure services represented approximately 18% of our total
      revenue. For the fiscal year ended April 30, 2005, specialty communication
      systems represented approximately 78% of our total revenue, and wireless
      infrastructure services represented approximately 22% of our total
      revenue.




*Specialty
      Communication Systems*




The
      types
      of specialty communication systems that we implement are used for mobile
      computing and general wireless connectivity purposes. In mobile computing,
      the
      most popular use is the transfer of data, voice or video from a server to a
      mobile device, which can be achieved through the following
      applications:




•
            asset
                tracking, which is a wireless network that monitors the location
                of mobile
                assets such as vehicles or stationary assets such as
                equipment;




•
            telematics,
                which are instructions sent through a wireless network that controls
                a
                device such as a slot machine or traffic signal;
                and




•
            telemetry,
                which is the acquisition of data from a measuring device such as
                the
                devices used at a water treatment plant to maintain the integrity
                of
                drinking water.




In
      general wireless connectivity, we design and deploy wireless networks which
      allow entities to reduce their dependence on high cost leased land lines or
      provide them with a redundant back-up wireless network to their land line
      network.




Wireless
      communication is primarily achieved through radio frequency, or RF, signals.
      There are various RF communication methods used for connectivity, including
      Wi-Fi and WiMAX technology for local area and wide area networking, fixed
      wireless networks for point-to-point connectivity, and cellular communication
      for general voice and data transmission. We have the engineering expertise
      to
      utilize any facet of wireless technology or a combination of various wireless
      technologies to engineer a cost effective network for a customer’s wireless
      communication requirement. In addition, the design and deployment of a specialty
      communication system is a comprehensive effort that requires experience in
      RF
      engineering so that the wireless network is free from interference with other
      signals and amplified sufficiently to carry data, voice or video with speed
      and
      accuracy. Our extensive engineering expertise with RF communications makes
      us
      well suited to address these challenges for our customers.




4


We
      are
      technology and vendor independent. As wireless networks evolve, customers are
      increasingly showing a tendency to select independent service providers,
      allowing our independence to become an important differentiator. As open
      standards and IP-based architecture continue to supplant vendor proprietary
      protocols and products in the marketplace, we believe our independent position
      will allow us to capture an increasing share of the specialty communication
      systems market. We believe that the strength of our experience in the design
      and
      deployment of these specialty communication systems gives us a competitive
      advantage and has supported our rapid growth, both organically and through
      acquisitions.




*Wireless
      Infrastructure Services*




We
      provide wireless infrastructure services to major wireless carriers. Wireless
      carriers are focused on building and expanding their networks, increasing
      capacity, upgrading their networks with new technologies and maintaining their
      existing infrastructure. Our engineers install, test and commission base station
      equipment at the carrier cell site, including installations of new equipment,
      technology upgrades, equipment modifications and reconfigurations. These
      services may also include tower construction. The range of infrastructure
      services includes the following:




•
            Installation,
                testing and commissioning of base station equipment, which is the
                installation of radio frequency equipment inside the shelter at a
                cell
                site, and testing to ensure that the equipment is operating prior
                to cell
                site activation;




•
            Equipment
                modification and reconfiguration, which involves replacing old equipment
                with new equipment, re-routing cables, and re-locating equipment
                at the
                cell site;




•
            Network
                modifications, which refers to work done on existing cell sites to
                increase capacity or change the direction of sectors or
                antennas;




•
            Sectorization,
                which is the installation of antennas to existing cell towers to
                increase
                the capacity of the cell site; and




•
            Maintenance,
                which includes antenna maintenance to replace damaged antennas, installing
                tower lighting control panels or sensors, or repairing damaged
                shelters.




*Project
      Characteristics*




Our
      contracts are service-based projects providing installation and engineering
      services, which include providing labor, materials and equipment for a complete
      installation. The projects are generally staffed with a project manager who
      manages multiple projects and a field supervisor who is responsible for an
      individual project. Depending on contract scope, project staff size could range
      from two to four engineers to as high as 25 to 30 engineers. A project may
      also
      include subcontracted services along with our direct labor.




The
      project manager coordinates the daily activities of direct labor and
      subcontractors and works closely with our field supervisors. Project managers
      are responsible for job costing, change order tracking, billing, and customer
      relations. Executive management monitors the performance of all projects
      regularly through work-in-progress reporting or percentage-of-completion, and
      reviews this information with each project manager.




Our
      projects are executed on a contract basis. These contracts can be awarded
      through a competitive bidding process, an informal bidding process, or a simple
      quote request. Upon award of a contract, there can often be a delay of several
      months before work begins. The active work time on our projects can range in
      duration from a few days up to as long as two years. Once services under the
      contract commence, our average project length is approximately two
      months.




**Customers**




We
      serve
      a variety of customers in different market segments. In our specialty
      communication systems segment, we believe our design and deployment of
      innovative wireless networks specific to the needs of customers in certain
      vertical markets has brought us recognition in these markets.




In
      public
      safety, we have designed and deployed illuminated crosswalks activated by a
      wireless signal, wireless traffic monitoring systems and wireless changeable
      highway message signs for Amber Alert notification. In addition, we have
      designed and deployed inclusive emergency management systems that coordinate
      emergency services including 911 dispatching and records management. Our public
      safety customers have included CALTRANS, Amtrak, the New Jersey State Police
      and
      the State of New York.




In
      the
      gaming industry, we have developed expertise in the design and deployment of
      wireless networks to monitor slot machine activity for casino operators. The
      slot machines, which represent the highest percentage of revenue for any casino,
      are networked and constantly monitored from a central location. The network
      is
      designed to alert the casino operators if there is a malfunction, and provide
      the ability to repair any technical issues immediately and remotely,
      representing an economic benefit in both cost savings and elimination of lost
      revenue. In addition, we have established wireless two-way radio, paging and
      dispatch networks within casinos for improved communication. Our gaming
      customers have included Bally’s, Caesar’s Entertainment, Mohegan Sun Hotel &
Casino and The Seminole Indian Nation.




5


In
      the
      healthcare industry, we have deployed systems such as the
      following:




•
            a
                wireless network for the asset tracking of ambulances in order to
                improve
                medical dispatch services for
                patients;




•
            the
                deployment of laptop computers in ambulances for the transmission
                of
                patient information to the hospital while in transit;
                and




•
            a
                wireless network that allows medical staff to access consolidated
                patient
                medical records throughout the hospital via mobile wireless devices,
                improving the accuracy of patient
                care.




Our
      healthcare customers have included Amcare Ambulance, Wake Forest University
      Baptist Hospital, Somerset Hospital and Southeast Regional Medical
      Center.




We
      also
      provide design and deployment of wireless networks for general wireless
      connectivity. We have provided these services to customers within our vertical
      markets, as well as corporations such as United Parcel Service and real estate
      developers such as Silverstein Properties in the construction of the new 7
      World
      Trade Center in New York City. Improved communication can be established between
      buildings by establishing Wi-Fi networks and fixed wireless networks that
      eliminate costly leased land lines. We also designed and deployed a wireless
      network for Alltel Stadium, the home of the Jacksonville Jaguars and site of
      the
      2005 Super Bowl, which is used for point-of-sale inventory management for
      different vendors throughout the stadium.




In
      our
      wireless infrastructure segment, our customers are major wireless service
      providers. We have provided services for Sprint Nextel, Cingular, T-Mobile,
      U.S.
      Cellular and Verizon. We are performing engineering services for a major
      wireless carrier related to a project mandated by the FCC. The project involves
      a multi-phase FCC-mandated re-banding initiative to include mitigation of public
      safety radio interference at the 800MHz frequency by moving service to the
      900
      MHz frequency. The scope of our project requires the removal and replacement
      of
      certain equipment located at the cell site shelters to accommodate the frequency
      changes. In addition, we are upgrading and integrating non-wide band equipment
      within existing transmitter sites to allow for future frequency
      migration.




For
      the
      fiscal year ended April 30, 2006, we had revenue from two customers totaling
      $10.8 million and $7.6 million, which comprised 20.8% and 14.5% of our total
      revenue, respectively. For the fiscal year ended April 30, 2005, we had revenue
      from one customer totaling $6.2 million, which comprised 15.5% of our total
      revenue.




**Sales
      and Marketing**




We
      have
      dedicated sales and marketing resources that develop opportunities within our
      existing customer base, and identify new customers through our vertical market
      focus and our relationships with technology providers. In addition, our project
      managers devote a portion of their time to sales and marketing. When an
      opportunity is identified, we assess the opportunity to determine our level
      of
      interest in participation. After qualifying an opportunity, our sales and
      marketing resources work with the internal project management teams to prepare
      a
      cost estimate and contract proposal for a particular project. We keep track
      of
      bids submitted and bids that are awarded. Once a bid is awarded to us, it is
      assigned to a project management team and included in our backlog. We focus
      almost all of our sales and marketing effort in the United States due to the
      robust market conditions.




**Backlog**




As
      of
      April 30, 2006, we had a backlog of unfilled orders of approximately $15.9
      million compared to approximately $14.6 million at April 30, 2005. We anticipate
      our backlog at April 30, 2006 to be recognized as revenue within eight months
      from that date. We define backlog as the value of work-in-hand to be provided
      for customers as of a specific date where the following conditions are met
      (with
      the exception of engineering change orders): (i) the price of the work to be
      done is fixed; (ii) the scope of the work to be done is fixed, both in
      definition and amount; and (iii) there is a written contract, purchase order,
      agreement or other documentary evidence which represents a firm commitment
      by
      the customer to pay us for the work to be performed. These backlog amounts
      are
      based on contract values and purchase orders and may not result in actual
      receipt of revenue in the originally anticipated period or at all. We have
      experienced variances in the realization of our backlog because of project
      delays or cancellations resulting from external market factors and economic
      factors beyond our control and we may experience such delays or cancellations
      in
      the future. Backlog does not include new firm commitments which may be awarded
      to us by our customers from time to time in future periods. These new project
      awards could be started and completed in this same future period. Accordingly,
      our backlog does not necessarily represent the total revenue that could be
      earned by us in future periods.




**Competition**




We
      face
      competition from numerous service providers, ranging from small independent
      regional firms to larger firms servicing national markets. We also face
      competition from existing or prospective customers that employ in-house
      personnel to perform some of the same types of services that 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 a
      competitor. At the present time, we believe that there are no dominant
      competitors in the specialty communication systems segment. Some of the
      competition we face comes from companies that provide similar services, but
      are
      not vendor independent, such as Terabeam, Inc. and ARC Wireless Solutions,
      Inc.,
      and from companies that offer general wireless connectivity services on a
      subscription model basis, such as Earthlink, Inc. and T-Mobile USA, Inc. The
      vendor-independent competitors in this market are relatively fragmented, and
      there is no recognized competitor who offers services similar to ours on a
      national scale. There are a number of engineering firms that could compete
      with
      us in the future, who have substantially greater resources. The competition
      we
      face in the wireless infrastructure services segment comes primarily from
      Wireless Facilities, Inc. and LCC International, Inc. There are also numerous
      regional competitors whom we encounter in our wireless infrastructure services
      business.




6




The
      principal competitive advantage in these markets is the ability to deliver
      results on time and within budget. Other factors of importance include
      reputation, accountability, staffing capability, 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 design, deploy and maintain all facets of wireless technology for
      various vertical sectors gives us a competitive advantage. We maintain a trained
      and certified staff of engineers that have developed proven methodologies for
      the design and deployment of wireless networks, and can provide these services
      on a national basis. In addition, we offer both a union and non-union workforce
      that allows us to bid on either labor requirement, creating yet another
      competitive advantage.




However,
      our ability to compete effectively also depends on a number of additional
      factors which are beyond our control. These factors include competitive pricing
      for similar services, the ability and willingness of the competition to finance
      projects on favorable terms, the ability of customers to perform the services
      internally and the responsiveness of our competitors to customer
      needs.




**Employees**





As
      of
      April 30, 2006, we employed 204 full time employees, of whom 145 are project
      engineers, 16 are project managers, 37 are in administration and 6 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. We
      have
      approximately 93 union employees. A contract with these union employees expires
      November 30, 2008.





**Risk
      Related to Business**




**Our
      success is dependent on growth in the deployment of wireless networks, and
      to
      the extent that such growth slows down, our revenues may decrease and our
      ability to continue operating profitably may be harmed.**




Customers
      are constantly re-evaluating their network deployment plans in response to
      trends in the capital markets, changing perceptions regarding industry growth,
      the adoption of new wireless technologies, increasing pricing competition and
      general economic conditions in the United States and internationally. If the
      rate of network deployment growth slows and customers reduce their capital
      investments in wireless technology or fail to expand their networks, our
      revenues and profits, if any, could be reduced.




**We
      have a limited history of profitability which may not
      continue.**




While
      we
      had net income of approximately $1.3 million for the fiscal year ended April
      30,
      2005, we incurred a net loss of approximately $1.6 million for the fiscal year
      ended April 30, 2006. There can be no assurance that we will sustain
      profitability or generate 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
      may
      need to reduce or cease all or part of our operations.




**If
      we fail to accurately estimate costs associated with our fixed-price contracts
      using percentage-of-completion, our actual results may vary from our
      assumptions, which may reduce our profitability or impair our financial
      performance.**




A
      substantial portion of our revenue is derived from fixed price contracts. Under
      these contracts, we set the price of our services on an aggregate basis and
      assume the risk that the costs associated with our performance may be greater
      than we anticipated. We recognize revenue and profit on these contracts as
      the
      work on these projects progresses on a percentage-of-completion basis. Under
      the
      percentage-of-completion method, contracts in process are valued at cost plus
      accrued profits less earned revenues and progress payments on uncompleted
      contracts.




The
      percentage-of-completion method therefore relies on estimates of total expected
      contract costs. These costs may be affected by a variety of factors, such as
      lower than anticipated productivity, conditions at work sites differing
      materially from what was anticipated at the time we bid on the contract and
      higher costs of materials and labor. Contract revenue and total cost estimates
      are reviewed and revised monthly as the work progresses, such that adjustments
      to profit resulting from revisions are made cumulative to the date of the
      revision. Adjustments are reflected in contract revenue for the fiscal period
      affected by these revised estimates. If estimates of costs to complete long-term
      contracts indicate a loss, we immediately recognize the full amount of the
      estimated loss. Such adjustments and accrued losses could result in reduced
      profitability and liquidity.




7




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




Our
      wireless network engagements may involve large scale, highly complex projects.
      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 customers’ expectations could result in claims for substantial damages
      against us. Our contracts generally limit our liability for damages that arise
      from negligent acts, errors, mistakes or omissions in rendering services to
      our
      customers. 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.
      If the project or network experiences a performance problem, we may not be
      able
      to recover the additional costs we would incur, which could exceed revenues
      realized from a project.




**The
      industry in which we operate has relatively low barriers to entry and increased
      competition could result in margin erosion, which would make profitability
      even
      more difficult to sustain.**




Other
      than the technical skills required in our business, the barriers to entry in
      our
      business are relatively low. We do not have any intellectual property rights
      to
      protect our business methods and business start-up costs do not pose a
      significant barrier to entry. The success of our business is dependent on our
      employees, customer relations and the successful performance of our services.
      If
      we face increased competition as a result of new entrants in our markets, we
      could experience reduced operating margins and loss of market share and brand
      recognition.




**Our
      business depends upon our ability to keep pace with the latest technological
      changes, and our failure to do so could make us less competitive in our
      industry.**




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 may 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 deploying 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 preferences.




**Our
      failure to attract and retain engineering personnel or maintain appropriate
      staffing levels could adversely affect our business.**




Our
      success depends upon our attracting and retaining skilled engineering personnel.
      Competition for such skilled personnel in our industry is high and at times
      can
      be extremely intense, especially for engineers and project managers, and we
      cannot be certain that we will be able to hire sufficiently qualified personnel
      in adequate numbers to meet the demand for our services. We also believe that
      our success depends to a significant extent on the ability of our key personnel
      to operate effectively, both individually and as a group. Additionally, we
      cannot be certain that we will be able to hire the requisite number of
      experienced and skilled personnel when necessary in order to service a major
      contract, particularly if the market for related personnel is competitive.
      Conversely, if we maintain or increase our staffing levels in anticipation
      of
      one or more projects and the projects are delayed, reduced or terminated, we
      may
      underutilize the additional personnel, which could reduce our operating margins,
      reduce our earnings and possibly harm our results of operations. If we are
      unable to obtain major contracts or effectively complete such contracts due
      to
      staffing deficiencies, our revenues may decline and we may experience a drop
      in
      net income.




**If
      we are unable to identify and complete future acquisitions, we may be unable
      to
      continue our growth.**




Since
      November 1, 2002, we have acquired seven companies and we intend to further
      expand our operations through targeted strategic acquisitions. However, we
      may
      not be able to identify suitable acquisition opportunities. Even if we identify
      favorable acquisition targets, there is no guarantee that we can acquire them
      on
      reasonable terms or at all. If we are unable to complete attractive
      acquisitions, the growth that we have experienced over the last three fiscal
      years may decline.




**Future
      acquired companies could be difficult to assimilate, disrupt our business,
      diminish stockholder value and adversely affect our operating
      results.**




Completing
      acquisitions may require significant management time and financial resources
      because we may need to assimilate widely dispersed operations with distinct
      corporate cultures. Our failure to manage future acquisitions successfully
      could
      seriously harm our operating results. Also, acquisitions could cause our
      quarterly operating results to vary significantly. Furthermore, our stockholders
      would be diluted if we financed the acquisitions by issuing equity securities.
      In addition, acquisitions expose us to risks such as undisclosed liabilities,
      increased indebtedness associated with an acquisition and the potential for
      cash
      flow shortages that may occur if anticipated financial performance is not
      realized or is delayed from such acquired companies.




8




**We
      derive a significant portion of our revenues from a limited number of customers,
      the loss of which would significantly reduce our revenues.**




We
      have
      derived, and believe that we will continue to derive, a significant portion
      of
      our revenues from a limited number of customers. To the extent that any
      significant customer uses less of our services or terminates its relationship
      with us, our revenues could decline significantly. As a result, the loss of
      any
      significant customer could seriously harm our business. For the fiscal year
      ended April 30, 2006, we had two separate customers which accounted for 20.8%
      and 14.5% of our revenues. For the fiscal year ended April 30, 2005, we had
      one
      customer which accounted for 15.5% of our revenues. Other than under existing
      contractual obligations, none of our customers is obligated to purchase
      additional services from us. As a result, the volume of work that we perform
      for
      a specific customer is likely to vary from period to period, and a significant
      customer in one period may not use our services in a subsequent
      period.




**Amounts
      included in our backlog may not result in actual revenue or translate into
      profits.**




As
      of
      April 30, 2006, we had a backlog of unfilled orders of approximately $15.9
      million. This backlog amount is based on contract values and purchase orders
      and
      may not result in actual receipt of revenue in the originally anticipated period
      or at all. In addition, contracts included in our backlog may not be profitable.
      We have experienced variances in the realization of our backlog because of
      project delays or cancellations resulting from external market factors and
      economic factors beyond our control and we may experience delays or
      cancellations in the future. If our backlog fails to materialize, we could
      experience a reduction in revenue, profitability and liquidity.




**Our
      business could be affected by adverse weather conditions, resulting in variable
      quarterly results.**




Adverse
      weather conditions, particularly during the winter season, could affect our
      ability to perform outdoor services in certain regions of the United States.
      As
      a result, we might experience reduced revenue in the third and fourth quarters
      of our fiscal year. Natural catastrophes such as the recent hurricanes in the
      United States could also have a negative impact on the economy overall and
      on
      our ability to perform outdoor services in affected regions or utilize equipment
      and crews stationed in those regions, which in turn could significantly impact
      the results of any one or more of our reporting periods.




**If
      we are unable to retain the services of Messrs. Hidalgo, Schubiger, Heinz or
      Walker, our operations could be disrupted.**




Our
      success depends to a significant extent upon the continued services of Mr.
      Andrew Hidalgo, our Chief Executive Officer and Messrs. Richard Schubiger,
      James
      Heinz and Donald Walker, our Executive Vice Presidents. Mr. Hidalgo has overseen
      our company since inception and provides leadership for our growth and
      operations strategy. Messrs. Schubiger, Heinz and Walker run the day-to-day
      operations of Quality, Heinz and Walker Comm, respectively. Loss of the services
      of Messrs. Hidalgo, Schubiger, Heinz or Walker could disrupt our operations
      and
      harm our growth, revenues, and prospective business. We do not maintain key-man
      insurance on the lives of Messrs. Hidalgo, Schubiger, Heinz or
      Walker.




**Employee
      strikes and other labor-related disruptions may adversely affect our
      operations.**




Our
      business is labor intensive, with certain projects requiring large numbers
      of
      engineers. Over 45% of our workforce is unionized. Strikes or labor disputes
      with our unionized employees may adversely affect our ability to conduct our
      business. If we are unable to reach agreement with any of our unionized work
      groups on future negotiations regarding the terms of their collective bargaining
      agreements, or if additional segments of our workforce become unionized, we
      may
      be subject to work interruptions or stoppages. Any of these events could be
      disruptive to our operations and could result in negative publicity, loss of
      contracts and a decrease in revenues.




**We
      may incur goodwill impairment charges in our reporting entities which could
      harm
      our profitability.**




In
      accordance with Statement of Financial Accounting Standards, or SFAS, No. 142,
      “Goodwill and Other Intangible Assets,” we periodically review the carrying
      values of our goodwill to determine whether such carrying values exceed the
      fair
      market value. All seven of our acquired companies, Clayborn, Heinz/Invisinet,
      Quality, Walker Comm, NECS and SECS, each of which is a reporting unit, are
      subject to annual review for goodwill impairment. If impairment testing
      indicates that the carrying value of a reporting unit exceeds its fair value,
      the goodwill of the reporting unit is deemed impaired. Accordingly, an
      impairment charge would be recognized for that reporting unit in the period
      identified, which could reduce our profitability.




**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 beyond our control, are
      likely to cause these fluctuations. Some of these factors include:




9




•
            the
                timing and size of network deployments and technology upgrades by
                our
                customers;




•
            fluctuations
                in demand for outsourced network
                services;




•
            the
                ability of certain customers to sustain capital resources to pay
                their
                trade accounts receivable balances and required changes to our allowance
                for doubtful accounts based on periodic assessments of the collectibility
                of our accounts receivable
                balances;




•
            reductions
                in the prices of services offered by our
                competitors;




•
            our
                success in bidding on and winning new business;
                and




•
            our
                sales, marketing and administrative cost
                structure.




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.




**Our
      stock price may be volatile, which may result in lawsuits against us and our
      officers and directors.**




The
      stock
      market in general, and the stock prices of technology and telecommunications
      companies in particular, have experienced volatility that has often been
      unrelated to or disproportionate to the operating performance of those
      companies. The market price of our common stock has fluctuated in the past
      and
      is likely to fluctuate in the future. Between April 30, 2005 and April 30,
      2006,
      our common stock has traded as low as $4.32 and as high as $12.78 per share,
      based upon information provided by NASDAQ Capital Market. Factors which could
      have a significant impact on the market price of our common stock include,
      but
      are not limited to, the following:




•
            quarterly
                variations in operating results;




•
            announcements
                of new services by us or our
                competitors;




•
            the
                gain or loss of significant
                customers;




•
            changes
                in analysts’ earnings estimates;




•
            rumors
                or dissemination of false
                information;




•
            pricing
                pressures;




•
            short
                selling of our common stock;




•
            impact
                of litigation;




•
            general
                conditions in the market;




•
            changing
                the exchange or quotation system on which we list our common stock
                for
                trading;




•
            political
                and/or military events associated with current worldwide conflicts;
                and




•
            events
                affecting other companies that investors deem comparable to
                us.




Companies
      that have experienced volatility in the market price of their stock have
      frequently been the object of securities class action litigation. Class action
      and derivative lawsuits could result in substantial costs to us and a diversion
      of our management’s attention and resources, which could materially harm our
      financial condition and results of operations.




**Future
      changes in financial accounting standards may adversely affect our reported
      results of operations.**




A
      change
      in accounting standards could have a significant effect on our reported results
      and may even affect our reporting of transactions completed before the change
      is
      effective. For example, in December 2004, the Financial Accounting Standards
      Board issued SFAS No. 123(R), “Share-Based Payment,” a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation,” which requires companies to expense
      all employee stock options and other share-based payments over the service
      period. Implementation of this standard as required during the first fiscal
      quarter of our fiscal year 2007 may impair our ability to use equity
      compensation to attract and retain skilled personnel. It is likely that we
      will
      have to recognize additional compensation expense in the periods after adoption
      of this standard.




New
      pronouncements and varying interpretations of pronouncements have occurred
      and
      may occur in the future. Changes to existing rules or the questioning of current
      practices may adversely affect our reported financial results or the way we
      conduct our business.




10




**Compliance
      with changing regulation of corporate governance and public disclosure may
      result in additional expenses.**




Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002, newly enacted SEC
      regulations and NASDAQ Stock Market rules, have created additional burdens
      for
      companies such as ours. We are committed to maintaining high standards of
      corporate governance and public disclosure. As a result, we intend to invest
      appropriate resources to comply with evolving standards. This investment will
      result in increased general and administrative costs and a diversion of
      management time and attention from revenue-generating activities to compliance
      activities.




**We
      can issue shares of preferred stock without shareholder approval, which could
      adversely affect the rights of common stockholders.**




Our
      certificate of incorporation permits us to establish the rights, privileges,
      preferences and restrictions, including voting rights, of future series of
      our
      preferred stock and to issue such stock without approval from our stockholders.
      The rights of holders of our common stock may suffer as a result of the rights
      granted to holders of preferred stock that we may issue in the future. In
      addition, we could issue preferred stock to prevent a change in control of
      our
      company, depriving common stockholders of an opportunity to sell their stock
      at
      a price in excess of the prevailing market price.





**There
      may be an adverse effect on the market price of our shares as a result of shares
      being available for sale in the future.**





As
      of
      July 1, 2006, holders of our outstanding options and warrants have the right
      to
      acquire 2,776,511 shares of common stock issuable upon the exercise of stock
      options and warrants, at exercise prices ranging from $4.80 to $19.92 per share,
      with a weighted average exercise price of $8.18. The sale or availability for
      sale in the market of the shares underlying these options and warrants could
      depress our stock price. We have registered substantially all of the underlying
      shares described above for resale. Holders of registered underlying shares
      may
      resell the shares immediately upon issuance upon exercise of an option or
      warrant.





If
      our
      stockholders sell substantial amounts of our shares of common stock, including
      shares issued upon the exercise of outstanding options and warrants, the market
      price of our common stock may decline. These sales also might make it more
      difficult for us to sell equity or equity-related securities in the future
      at a
      time and price that we deem appropriate.





**ITEM
      2 - DESCRIPTION OF PROPERTIES**




**Properties**




Our
      principal executive offices are located in approximately 2,550 square feet
      of
      office space in Exton, Pennsylvania. We operate our business under office leases
      in the following locations:




MinimumLease
              
              AnnualLocation
              
              Expiration
                  Date
              
              RentAuburn,
                  California (1)
              
              
              month-to-month
              
              
              $64,440Exton,
                  Pennsylvania
              
              
              February
                  1, 2008
              
              
              $50,044Fairfield,
                  California (2)
              
              
              February
                  28, 2011
              
              
              $96,950Lakewood,
                  New Jersey
              
              
              August
                  31, 2007
              
              
              $118,370Rocklin,
                  California
              
              
              January
                  31, 2008
              
              
              $27,300San
                  Leandro, California
              
              
              July
                  31, 2007
              
              
              $13,824St.
                  Louis, Missouri
              
              
              August
                  31, 2008
              
              
              $56,142Exton,
                  Pennsylvania
              
              
              July
                  31, 2007
              
              
              $10,260




(1)  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.




(2)  We
      lease
      our Fairfield, California location from a trust, of which Gary Walker, one
      of
      our Directors, is the trustee.




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





**ITEM
      3 - LEGAL PROCEEDINGS**





We
      are
      currently not a party to any material legal proceedings or claims.





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





None.


11


**PART
      II**





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







**PRICE
      RANGE OF COMMON STOCK**




Our
      common stock is currently traded on the NASDAQ Capital Market under the symbol
      “WPCS.” Between January 10, 2005 and March 24, 2005, our stock traded on the OTC
      Bulletin Board under the symbol “WPCI.” Prior to January 10, 2005, our stock
      traded on the OTC Bulletin Board under the symbol “WPCS.”




For
      the
      period from May 1, 2005 to date, the following table sets forth the high and
      low
      sale prices of our common stock as reported by the NASDAQ Capital
      Market.




**Period**
            
            **High**
            
            **Low****Fiscal
                Year Ended April 30, 2005:**First
                Quarter
            
            $
            14.88
            
            $
            7.80Second
                Quarter
            
            
            11.28
            
            
            5.76Third
                Quarter
            
            
            8.28
            
            
            4.32Fourth
                Quarter
            
            
            7.80
            
            
            4.50**Fiscal
                Year Ending April 30, 2006:**First
                Quarter
            
            $
            9.18
            
            $
            4.32Second
                Quarter
            
            
            9.03
            
            
            5.58Third
                Quarter
            
            
            12.78
            
            
            6.12Fourth
                Quarter
            
            
            12.45
            
            
            7.20





On
      July
      24, 2006, the closing sale price of our common stock, as reported by the NASDAQ
      Capital Market, was $7.15 per share. On July 24, 2006, there were 69 holders
      of
      record of our common stock.





**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. Under our
      credit agreement dated June 3, 2005, we are prohibited from declaring or paying
      dividends, except stock dividends, or making any other distribution. 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.






12





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





*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. You can identify these statements by forward-looking words such
      as
“may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or
      similar words. Those statements include statements regarding the intent, belief
      or current expectations of us 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
      us in
      this report and in our 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. We
      undertake 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. We believe that its assumptions
      are
      based upon reasonable data derived from and known about our business and
      operations and the business and operations of the Company. No assurances are
      made that actual results of operations or the results of our future activities
      will not differ materially from its assumptions. Factors that could cause
      differences include, but are not limited to, expected market demand for the
      Company’s services, fluctuations in pricing for materials, and
      competition.*





**Business
      Overview**





We
      respond to the growing demand in wireless communications by providing
      engineering services for the design and deployment of wireless networks. We
      operate in two segments that we define as specialty communication systems and
      wireless infrastructure services.





We
      generate our revenue by providing a range of services including the design,
      deployment and maintenance of:




·
            two-way
                radio communication systems, which are used primarily for emergency
                dispatching;·
            Wi-Fi
                networks, which are wireless local area networks that operate on
                a set of
                product compatibility standards;


·
            WiMAX
                networks, which are networks that can operate at higher speeds and
                over
                greater distances than Wi-Fi;·
            mesh
                networks, which are redundant systems to route information between
                points;


·
            millimeter
                wave networks, which are high capacity networks for high speed wireless
                access;·
            fixed
                wireless networks, which are used in point-to-point outdoor
                communications;


·
            Radio
                Frequency Identification, or RFID, networks, which allow customers
                to
                identify and track assets;·
            free-space
                optics, which is a wireless communication technology that uses light
                to
                transmit voice, data and video; and


·
            commercial
                cellular systems, which are used primarily for mobile
                communications.




Specialty
      communication systems are wireless networks for a specified customer
      application. In this segment, we can utilize any facet of wireless technology
      or
      a combination of various wireless technologies to engineer a cost effective
      network for a customer’s wireless communication requirement. Customers include
      corporations, government entities and educational institutions. For the fiscal
      year ended April 30, 2006, specialty communication systems represented
      approximately 82% of our total revenue.





Wireless
      infrastructure services include the design, deployment and maintenance of
      commercial cellular systems. The primary customers in this category include
      major wireless service providers such as Sprint Nextel and Cingular. For the
      fiscal year ended April 30, 2006, wireless infrastructure services represented
      approximately 18% of our total revenue.





Management
      currently considers the following events, trends and uncertainties to be
      important in understanding our results of operations and financial condition:





·
            For
                the fiscal year ended April 30, 2006, the specialty communication
                systems
                segment represented approximately 82% of total revenue, and the wireless
                infrastructure services segment represented approximately 18% of
                total
                revenue, as compared to approximately 79% and 21%, respectively,
                for the
                fiscal year ended April 30, 2005. This shift in revenue composition
                towards the specialty communication systems segment was primarily a
                result of our acquisition of Quality in the third fiscal quarter
                of 2005.






13





·
            As
                we continue to search for acquisitions, our primary goal is to identify
                companies which are performing well financially and are compatible
                with
                the services that we perform in the specialty communication systems
                segment. This trend could lead to a further shift in our revenue
                composition towards the specialty communication systems segment.
                We
                believe that the strength of our experience in the design and
                deployment of specialty communication systems gives us a competitive
                advantage.





·
            We
                also seek to achieve organic growth in our existing business by maximizing
                the value of our existing customer base, maintaining and expanding
                our
                focus in vertical markets and developing our relationships with technology
                providers.





·
            We
                believe that the emergence of new and improved technologies such
                as WiMAX
                will create additional opportunities for us to design and deploy
                solutions
                through the use of the latest technologies and assisting existing
                customers in enhancing the efficiency of their existing wireless
                networks
                using new technologies.





·
            We
                believe that the wireless carriers will continue to make expenditures
                to
                build and upgrade their networks, increase existing capacity, upgrade
                their networks with new technologies and maintain their existing
                infrastructure. In response to this trend, we will continue to provide
                network deployment services that address wireless carrier
                needs.·
            In
                connection with the sale of our common stock and warrants to certain
                investors during the third quarter ended January 31, 2005, we granted
                certain registration rights that provided for liquidated damages
                in the
                event of failure to timely perform under the agreements. During the
                third
                quarter of fiscal 2006, we became aware that the SEC had recently
                announced its preferred interpretation of the accounting for common
                stock
                and warrants with registration rights under Emerging Issues Task
                Force
                (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed
                To, and Potentially Settled in the Company’s Own Stock,” and EITF 05-04,
                “The Effect of a Liquidated Damages Clause on a Freestanding Financial
                Instrument Subject to EITF 00-19.” Although the EITF was still reviewing
                the guidance in EITF 05-04, the SEC concluded that under EITF 00-19,
                the
                common stock and warrants subject to 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 does not meet the
                tests
                required for shareholders’ equity classification and accordingly, must be
                reflected as temporary equity in the balance sheet until the conditions
                are eliminated. Additionally, the fair value of warrants should be
                recorded as a liability, with an offsetting reduction to shareholders’
                equity, adjusted to market value at the end of each period. 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.After
                further review during the third quarter of 2006, in accordance with
                the
                SEC’s interpretation of EITF 00-19 as it relates to these common shares
                and warrants subject to registration rights, we restated our financial
                statements for the year ended April 30, 2005, and interim periods
                ended
                January 31, 2005, July 31, 2005, and October 31, 2005. As of April
                30,
                2005, the restatement included the reclassification of the $5,732,116
                value of common stock subject to registration rights from shareholders’
                equity and into temporary equity, and the reclassification of the
                fair
                value of the common stock warrants from shareholders’ equity and into
                warrant liability of $1,994,570 using the Black-Scholes option pricing
                model to value the warrants. The warrant liability was initially
                recorded
                during the fiscal year 2005 at a fair value of $3,408,833 and, as
                a result
                of a decrease in the fair value of the warrant liability principally
                due
                to the decrease in the market value of our common stock as of April
                30,
                2005, we recorded a non-cash gain of $1,414,263 for that year.During
                fiscal 2006, certain of the shares of common stock were sold by the
                investors and we were therefore no longer subject to performance
                for these
                shares under the registration rights agreement. On April 11, 2006,
                we
                entered into a waiver agreement with the institutional investors
                in our
                November 2004 private placement. Pursuant to the waiver, the parties
                agreed to modify the registration rights agreement associated with
                the
                common stock and warrants issued in November 2004 affected by EITF
                00-19.
                This modification eliminated the provision for penalties that could
                have
                resulted from not maintaining the effectiveness of the registration
                statement related to these common shares and shares underlying the
                warrants. As a result of these events, at April 30, 2006, we have
                reclassified $5,732,116 from temporary equity back to shareholders’
                equity.During
                the first three quarters of our fiscal year 2006, the warrant liability
                increased principally due to the increase in the market value of
                our
                common stock resulting in a non-cash loss of $11,406,414 for the
                nine
                months ended January 31, 2006. This loss was partially offset by
                a gain of
                $7,327,920 due to a decrease in the fair value of the warrant liability
                in
                the fourth quarter of fiscal 2006, resulting in a net non-cash loss
                on
                fair value of warrants of $4,078,494 for the fiscal year ended April
                30,
                2006. Finally, due to the elimination of the liquidated damages provisions
                of the registration rights agreement discussed above, the remaining
                warrant liability balance of $3,223,760 was reclassified to shareholders’
                equity, and there will not be any similar non-cash charges in subsequent
                fiscal years. The non-cash loss on fair value of warrants had no
                effect on
                our cash flows or liquidity.













14


**Results
      of Operations for the Fiscal Year ended April 30, 2006 Compared to Fiscal Year
      Ended April 30, 2005**





Consolidated
      results for the year ended April 30, 2006 and 2005 are as follows. Certain
      reclassifications have been made to prior year financial statements to conform
      to the current presentation.




**Year
                  Ended****April
                  30,****2006**
              
              **2005**REVENUE
              
              $
              52,144,575
              
              
              100.0%
              
              $
              40,148,233
              
              
              100.0%COSTS
                  AND EXPENSES:Cost
                  of revenue
              
              
              38,010,945
              
              
              72.9%
              
              
              32,445,470
              
              
              80.8%Selling,
                  general and administrative expenses
              
              
              9,191,392
              
              
              17.6%
              
              
              7,032,504
              
              
              17.5%Depreciation
                  and amortization
              
              
              837,789
              
              
              1.6%
              
              
              682,397
              
              
              1.7%Total
                  costs and expenses
              
              
              48,040,126
              
              
              92.1%
              
              
              40,160,371
              
              
              100.0%OPERATING
                  INCOME (LOSS)
              
              
              4,104,449
              
              
              7.9%
              
              
              (12,138
              )
              
              0.0%OTHER
                  EXPENSE (INCOME):Interest
                  expense
              
              
              256,022
              
              
              0.5%
              
              
              31,865
              
              
              0.1%Interest
                  income
              
              
              (121,720
              )
              
              (0.2%
              )
              
              (10,817
              )
              
              0.0%Loss
                  (gain) on change in fair value of warrants
              
              
              4,078,494
              
              
              7.8
              
              
              (1,414,263
              )
              
              (3.5%
              )INCOME
                  (LOSS) BEFORE INCOME TAX PROVISION
              
              
              (108,347
              )
              
              (0.2%
              )
              
              1,381,077
              
              
              3.4%Income
                  tax provision
              
              
              1,515,773
              
              
              2.9%
              
              
              52,096
              
              
              0.1%NET
                  INCOME (LOSS)
              
              
              ($1,624,120
              )
              
              (3.1%
              )
              $
              1,328,981
              
              
              3.3%








***Revenue***





Revenue
      for the year ended April 30, 2006 was approximately $52,145,000, as compared
      to
      $40,148,000 for the year ended April 30, 2005. The increase in revenue for
      the
      year was primarily attributable to the acquisition of Quality on November 24,
      2004 and from organic growth. For the year ended April 30, 2006, we had two
      separate customers which comprised 20.8% and 14.5% of total revenue. For the
      year ended April 30, 2005, we had one customer which comprised 15.5% of total
      revenue.





Total
      revenue from the specialty communication segment for the years ended April
      30,
      2006 and 2005 was approximately $42,845,000 or 82.2% and $31,497,000 or 78.5%
      of
      total revenue, respectively. Wireless infrastructure segment revenue for the
      years ended April 30, 2006 and 2005 was approximately $9,300,000 or 17.8% and
      $8,651,000 or 21.5% of total revenue, respectively.





***Cost
      of Revenue***





Cost
      of
      revenue consists of direct costs on contracts, materials, direct labor, third
      party subcontractor services, union benefits and other overhead costs. Our
      cost
      of revenue was approximately $38,011,000 or 72.9% of revenue for the year ended
      April 30, 2006, compared to $32,445,000 or 80.8% 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, 2006 as a result of the acquisition
      of
      Quality and from organic growth. The decrease in cost of revenue as a percentage
      of revenue is due primarily to the revenue mix attributable to revenue from
      Walker, Clayborn and Heinz and the acquisition Quality.





15




The
      specialty communication segment cost of revenue and cost of revenue as a
      percentage of revenue for the years ended April 30, 2006 and 2005 was
      approximately $31,194,000 and 72.8% and $25,919,000 and 82.3%, 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, 2006 as a
      result of the acquisition of Quality. The decrease in cost of revenue as a
      percentage of revenue is due to the revenue mix attributable to revenue from
      Walker and Clayborn and the Quality acquisition.




Wireless
      infrastructure segment cost of revenue and cost of revenue as a percentage
      of
      revenue for the years ended April 30, 2006 and 2005 was approximately $6,817,000
      and 73.3% and $6,526,000 and 75.4%, respectively. The dollar increase in our
      total cost of revenue is due to the corresponding increase in revenue during
      the
      year ended April 30, 2006 as a result of organic growth in revenue from Heinz.
      The decrease in cost of revenue as a percentage of revenue is due to the revenue
      mix attributable to Heinz.





***Selling,
      General and Administrative Expenses***





For
      the
      year ended April 30, 2006, total selling, general and administrative expenses
      were $9,191,000, or 17.6% of total revenue compared to $7,033,000 or 17.5%
      of
      revenue for the prior year. Included in selling, general and administrative
      expenses for the year ended April 30, 2006 are $5,062,000 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 acquisition of Quality. Professional fees were $514,000, which include
      accounting, legal and investor relation fees. Insurance costs were $1,411,000
      and rent for office facilities was $396,000. Automobile and other travel
      expenses were $713,000 and telecommunication expenses were $231,000. Other
      selling, general and administrative expenses totaled $864,000. For the year
      ended April 30, 2006, total selling, general and administrative expenses for
      the
      specialty communication and wireless infrastructure segments were $6,725,000
      and
      $1,139,000, respectively.





For
      the
      year ended April 30, 2005, selling, general and administrative expenses were
      $7,033,000 or 17.5% of revenue. Included in the selling, general and
      administrative expenses was $3,656,000 for salaries, commissions and payroll
      taxes, $537,000 in professional fees and insurance costs of $1,164,000. Rent
      for
      our office facilities amounted to $358,000. Automobile and other travel expenses
      were $422,000 and telecommunication expenses were $196,000. Other selling,
      general and administrative expenses totaled $700,000. 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.





***Depreciation
      and Amortization***





For
      the
      years ended April 30, 2006 and 2005, depreciation was approximately $544,000
      and
      $372,000, respectively. The increase in depreciation is due to the purchase
      of
      property and equipment and the acquisition of fixed assets from acquiring
      Quality. The amortization of customer lists for the year ended April 30, 2006
      was $294,000 as compared to $310,000 for the same period of the prior year.
      The
      decrease in amortization is due to the amortization of backlog for Heinz in
      the
      prior year, partially offset by an increase in amortization from the acquisition
      of Quality customer lists. 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.




***Interest
        Expense and Interest Income***
 
 For
        the years
        ended April 30, 2006 and 2005, interest expense was approximately $256,000
        and
        $32,000, respectively. The increase in interest expense is due principally
        from
        borrowings on the revolving line of credit and the amortization of debt issuance
        costs under the credit agreement entered into on June 3, 2005.
 
 For
        the years
        ended April 30, 2006 and 2005, interest income was approximately $122,000
        and
        $11,000, respectively. The increase in interest earned is due principally
        to the
        increase in our cash and cash equivalent balance in fiscal 2006 from the
        proceeds received from the exercise of warrants and issuance of common stock.




***Loss
      (Gain) on Fair Value of Warrants***




Loss
      on
      fair value of warrants for the year ended April 30, 2006 was approximately
      $4,078,000. The loss in fiscal 2006 was due principally to the increase in
      the
      market value of our common stock in fiscal 2006. The loss represents the
      unrealized non-cash change in the fair value of certain warrants for the year,
      using the Black-Scholes option pricing model. For the year ended April 30,
      2005,
      the gain on fair value of warrants was approximately ($1,414,000), due
      principally to the decrease in the market value of our common stock. The
      non-cash loss or gain on fair value of warrants has no impact on our cash flows
      or liquidity.





***Net
      Income (Loss)***





As
      a
      result of the above, the net loss was approximately $1,624,000 for the year
      ended April 30, 2006. Net loss is net of federal and state income tax expense
      of
      approximately $1,516,000. The variation in effective tax rates between periods
      is primarily due to the Quality acquisition and the loss on fair value of
      warrants described above.





We
      recognized net income of approximately $1,329,000 for the year ended April
      30,
      2005. Income tax of approximately $52,000 was expensed for federal and state
      income taxes.


16


***Liquidity
      and Capital Resources***





At
      April
      30, 2006, we had working capital of approximately $20,176,000, which consisted
      of current assets of approximately $27,433,000 and current liabilities of
      $7,257,000.




Operating
      activities provided approximately $509,000 in cash for the year ended April
      30,
      2006. The sources of cash from operating activities total approximately
      $4,004,000, comprised of $1,624,000 net loss, $4,950,000 in net non-cash
      charges, a $287,000 net decrease in other assets, a $9,000 increase in billings
      in excess of costs and estimated earnings on uncompleted contracts payable
      and a
      $382,000 increase in income taxes payable. The uses of cash from operating
      activities total approximately $3,495,000, comprised of a $2,266,000 increase
      in
      accounts receivable, a $533,000 increase in costs and estimated earnings in
      excess of billings on uncompleted contracts, a $319,000 increase in inventory,
      and a $377,000 decrease in accounts payable and accrued expenses.





Our
      investing activities utilized approximately $239,000 in cash during the year
      ended April 30, 2006, which consisted of $235,000 paid for property and
      equipment, and $4,000 paid for acquisition transaction costs.





Our
      financing activities provided cash of approximately $11,021,000 during the
      year
      ended April 30, 2006. Financing activities include the net proceeds from the
      exercise of warrants of $4,435,000 less related issuance costs of $268,000,
      proceeds from the issuance of common stock of $6,138,000 less issuance costs
      of
      $610,000, proceeds from the exercise of stock options of $59,000, borrowings
      under lines of credit of $2,618,000 less debt issuance costs of $159,000,
      repayments of equipment loans and capital lease obligations of approximately
      $230,000, and $962,000 to repay shareholder loans.




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 commercial bank. 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.




Under
      the
      terms of our credit agreement, as amended, we were permitted to borrow up to
      $3,000,000 under the revolving credit line, based upon eligible receivables
      as
      of April 30, 2006. Once we have provided financial statements which evidence
      that we had earnings before interest, taxes, depreciation and amortization
      and
      the effects of the change in the fair value of the warrant liability discussed
      above 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) our total tangible
      net
      worth, (iii) working capital, (iv) minimum earnings before interest, taxes,
      depreciation and amortization, and the change in the warrant liability, and
      (v)
      dividend restrictions. As of April 30, 2006, we were in compliance with the
      credit agreement covenants. The loan commitment expires on August 31, 2008.
      We
      may prepay the loan at any time.




The
      loan
      under the credit agreement bears 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 (8.000% as of April 30, 2006).
      We paid a facility fee to the bank of $50,000 on the closing date.  In
      addition to the loan, 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.




We
      used
      the initial funds provided by the loan, in the gross amount of $3,000,000,
      to
      repay the balance of Walker’s existing bank line of credit of approximately
      $672,000, for the payment of approximately $758,000 to the former stockholders
      of our Quality subsidiary for monies due to them under the terms of the purchase
      of their company, and for working capital.





At
      April
      30, 2006, we had cash and cash equivalents of approximately $12,280,000, and
      working capital of approximately $20,176,000. With the funds available from
      the
      recently obtained revolving credit line and internally available funds, we
      believe that we have sufficient capital to meet our needs through April 30,
      2007. 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.




Effective
      June 1, 2006, we acquired New England Communications Systems, Inc., a
      Connecticut corporation (NECS), for approximately $3,200,000 in cash, subject
      to
      adjustment, and approximately $1,437,000 paid directly to a lender to pay-off
      outstanding debt owed by NECS. NECS was acquired pursuant to a Stock Purchase
      Agreement among WPCS International Incorporated, NECS, and the shareholders
      of
      NECS. In addition, for each $2.00 of earnings before interest and taxes for
      the
      calendar year ending December 31, 2006, the NECS shareholders shall be paid
      aggregate additional consideration of $1.00, up to a maximum of $468,000. At
      our
      option, any amount of consideration due to be paid may be paid in cash or shares
      of our common stock (valued at the last sale price of the common stock on the
      date two days prior to the date the payment is due). In connection with the
      acquisition, NECS entered into employment agreements with two of the
      shareholders, each for a period of two years and a consulting agreement with
      one
      of the shareholders for a period of seven years. Based on the historical net
      assets acquired from NECS, we preliminarily expect to recognize goodwill of
      approximately $3,200,000. Upon completion of a formal purchase price allocation
      there may be a decrease in the amount assigned to goodwill and a corresponding
      increase in tangible or intangible assets.




17


The
      acquisition of NECS provides us with additional project engineering expertise
      for specialty communication systems, broadens our customer base especially
      in
      the public safety and gaming markets, including the Massachusetts State Police,
      University of Connecticut and Foxwoods Resort Casino, and expands our geographic
      presence in New England.





Effective
      July 19, 2006, we acquired Southeastern Communication Service, Inc. (SECS)
      of
      Sarasota, Florida for $1,800,000 in cash and 200,288 shares of our common stock
      having a value of $1,400,000. SECS was acquired pursuant to a Stock Purchase
      Agreement among WPCS International Incorporated, SECS, and the shareholders
      of
      SECS. In addition, we are required to file a registration statement with the
      SEC
      no later than thirty (30) days after the closing of the acquisition to register
      the shares of common stock issued to the former SECS shareholders, and we will
      use our best efforts to cause the registration statement to be declared
      effective by the SEC within one hundred twenty (120) days after the initial
      filing with the SEC. In connection with the acquisition, SECS entered into
      employment agreements and a consulting agreement with certain officers or former
      officers of SECS. Based on the historical net assets acquired from SECS, we
      preliminarily expect to recognize goodwill of approximately $2,300,000. Upon
      completion of a formal purchase price allocation there may be a decrease in
      the
      amount assigned to goodwill and a corresponding increase in tangible or
      intangible assets.




The
      acquisition of SECS provides us with additional project engineering expertise
      for wireless infrastructure services, broadens our customer base of corporate,
      government and educational clients, including the National Oceanic and
      Atmospheric Administration (NOAA), Verizon, BellSouth, Comcast, Time Warner,
      University of Florida and Puerto Rico Telephone, and expands our geographic
      presence in the Southeastern United States.




***Backlog***




As
      of
      April 30, 2006, we had a backlog of unfilled orders of approximately $15.9
      million compared to approximately $14.6 million at April 30, 2005. We anticipate
      our backlog at April 30, 2006 to be recognized as revenue within eight months
      from that date. We define backlog as the value of work-in-hand to be provided
      for customers as of a specific date where the following conditions are met
      (with
      the exception of engineering change orders): (i) the price of the work to be
      done is fixed; (ii) the scope of the work to be done is fixed, both in
      definition and amount; and (iii) there is a written contract, purchase order,
      agreement or other documentary evidence which represents a firm commitment
      by
      the customer to pay us for the work to be performed. These backlog amounts
      are
      based on contract values and purchase orders and may not result in actual
      receipt of revenue in the originally anticipated period or at all. We have
      experienced variances in the realization of our backlog because of project
      delays or cancellations resulting from external market factors and economic
      factors beyond our control and we may experience such delays or cancellations
      in
      the future. Backlog does not include new firm commitments which may be awarded
      to us by our customers from time to time in future periods. These new project
      awards could be started and completed in this same future period. Accordingly,
      our backlog does not necessarily represent the total revenue that could be
      earned by us in future periods.




***Off-Balance
      Sheet Arrangements***





We
      have
      no off-balance sheet arrangements.





***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:





***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, estimated life of customer lists and estimates of the fair
      value of reporting units and discounted cash flows used in determining whether
      goodwill has been impaired. Actual results could differ from those
      estimates.





18


***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
      as of April 30 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.





Our
      annual review for goodwill impairment for the fiscal years 2006 and 2005 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.





***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, spectrum
      analysis, engineering, trenching, electrical work, structured cabling, product
      integration, testing and project management.





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 the
      contract determines that we are responsible for the engineering specification,
      procurement and management of such cost components on behalf of the customer.





19


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***





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, we will be required to expense the fair value of
      employee stock options beginning with our fiscal year ending April 30, 2007.
      The
      revised standard will require us to expense the fair value of employee stock
      options and other share-based payments over the service period. 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, although
      it
      is likely that we will have to recognize additional compensation expense in
      periods after adoption.





On
      April
      20, 2006, our Board of Directors approved the accelerated vesting, from August
      1, 2006 to April 30, 2006, of 114,021 stock options previously awarded to
      certain officers under the 2006 Incentive Stock Plan. All other terms and
      conditions applicable to such stock options, including the exercise price,
      remain unchanged. The exercise price of the options was $6.14 and the closing
      price of our common stock on April 19, 2006, the last trading day before the
      approval of acceleration, was $7.96. The Board took the action with the belief
      that it is in the best interest of stockholders. The purpose of the accelerated
      vesting was to enable us to avoid recognizing future compensation expense
      associated with these options of $86,196, upon adoption of SFAS 123(R) discussed
      above. For the purpose of applying Accounting Principles Board Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* and
      related Interpretations No. 44, *Accounting
      for Certain Transactions Involving Stock Compensation* ,
      the
      acceleration event was treated as the acceleration of the vesting of employee
      options that otherwise would have vested as scheduled and, accordingly, was
      not
      a modification requiring the remeasurement of the intrinsic value of the
      options. The stock options were held by officers with considerable service
      and,
      accordingly, we assumed a zero forfeiture rate and, therefore, no compensation
      expense was recognized for these options.





No
      other
      recently issued accounting pronouncement issued or effective after the end
      of
      the fiscal year is expected to have a material impact on our consolidated
      financial statements.


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, 2006 and 2005
            
            F-3
                - F-4Consolidated
                Statements of Operations for the years endedApril
                30, 2006 and 2005
            
            F-5Consolidated
                Statements of Shareholders' Equity for the years ended April 30,
                2006 and
                2005
            
            F-6
                - F-7Consolidated
                Statements of Cash Flows for the years endedApril
                30, 2006 and 2005
            
            F-8
                - F-9Notes
                to Consolidated Financial Statements
            
            F-10
                - F-22














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, 2006 and 2005, 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, 2006 and 2005,
      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.














/s/
      J.H.
      COHN LLP





Roseland,
      New Jersey


June
      28,
      2006, except for the second paragraph


of
      Note
      15, which is as of July 19, 2006








F-2


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**











**April
                30,**
            
            **April
                30,****ASSETS**
            
            **2006**
            
            **2005**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            12,279,646
            
            $
            989,252Accounts
                receivable, net of allowance of $104,786 and $75,786 at April 30,
                2006 and
                2005, respectively
            
            
            12,141,789
            
            
            9,907,316Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            1,441,977
            
            
            908,955Inventory
            
            
            1,204,540
            
            
            885,624Prepaid
                expenses and other current assets
            
            
            286,625
            
            
            536,331Deferred
                income taxes
            
            
            78,000
            
            
            62,000Total
                current assets
            
            
            27,432,577
            
            
            13,289,478PROPERTY
                AND EQUIPMENT, net
            
            
            1,352,216
            
            
            1,560,271CUSTOMER
                LISTS, net
            
            
            864,388
            
            
            1,158,388GOODWILL
            
            
            14,239,918
            
            
            13,961,642DEBT
                ISSUANCE COSTS, net
            
            
            111,091
            
            
            -DEFERRED
                INCOME TAXES
            
            
            51,000
            
            
            50,000OTHER
                ASSETS
            
            
            71,128
            
            
            156,932Total
                assets
            
            $
            44,122,318
            
            $
            30,176,711







*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**
            
            **2006**
            
            **2005**(Note
                2)CURRENT
                LIABILITIES:Borrowings
                under line of credit
            
            $
            -
            
            $
            382,281Current
                portion of capital lease obligation
            
            
            -
            
            
            2,073Current
                portion of loans payable
            
            
            231,065
            
            
            187,420Accounts
                payable and accrued expenses
            
            
            4,989,861
            
            
            5,338,813Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            1,213,364
            
            
            1,204,491Due
                to shareholders
            
            
            381,377
            
            
            915,290Income
                taxes payable
            
            
            420,066
            
            
            24,790Deferred
                income taxes
            
            
            21,000
            
            
            139,000Total
                current liabilities
            
            
            7,256,733
            
            
            8,194,158Borrowings
                under line of credit
            
            
            3,000,000
            
            
            -Loans
                payable, net of current portion
            
            
            256,692
            
            
            261,455Due
                to shareholders, net of current portion
            
            
            514,623
            
            
            927,005Deferred
                income taxes
            
            
            531,000
            
            
            439,000Warrant
                liability
            
            
            -
            
            
            1,994,570Total
                liabilities
            
            
            11,559,048
            
            
            11,816,188COMMITMENTS
                AND CONTINGENCIESCOMMON
                STOCK WITH REGISTRATION RIGHTS:Common
                stock subject to continuing registration, $0.0001 par value, 2,083,887
                sharesissued
                and outstanding at April 30, 2005
            
            
            -
            
            
            5,732,116SHAREHOLDERS'
                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, 5,264,284
                and
                1,737,498 shares issued and outstanding at April 30, 2006 and 2005,
                respectively
            
            
            526
            
            
            174Additional
                paid-in capital
            
            
            33,525,130
            
            
            11,966,499Retained
                earnings (accumulated deficit)
            
            
            (962,386
            )
            
            661,734Total
                shareholders' equity
            
            
            32,563,270
            
            
            12,628,407Total
                liabilities and shareholders' equity
            
            $
            44,122,318
            
            $
            30,176,711







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






F-4




**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**Year
                Ended****April
                30,****2006**
            
            **2005**(Notes
                1 and 2)REVENUE
            
            $
            52,144,575
            
            $
            40,148,233COSTS
                AND EXPENSES:Cost
                of revenue
            
            
            38,010,945
            
            
            32,445,470Selling,
                general and administrative expenses
            
            
            9,191,392
            
            
            7,032,504Depreciation
                and amortization
            
            
            837,789
            
            
            682,397Total
                costs and expenses
            
            
            48,040,126
            
            
            40,160,371OPERATING
                INCOME (LOSS)
            
            
            4,104,449
            
            
            (12,138
            )OTHER
                EXPENSE (INCOME):Interest
                expense
            
            
            256,022
            
            
            31,865Interest
                income
            
            
            (121,720
            )
            
            (10,817
            )Loss
                (gain) on change in fair value of warrants
            
            
            4,078,494
            
            
            (1,414,263
            )INCOME
                (LOSS) BEFORE INCOME TAX PROVISION
            
            
            (108,347
            )
            
            1,381,077Income
                tax provision
            
            
            1,515,773
            
            
            52,096NET
                INCOME (LOSS)
            
            
            ($1,624,120
            )
            $
            1,328,981Basic
                net income (loss) per common share
            
            
            ($0.40
            )
            $
            0.50Diluted
                net income (loss) per common share
            
            
            ($0.40
            )
            $
            0.49Basic
                weighted average number of common shares outstanding
            
            
            4,057,940
            
            
            2,679,529Diluted
                weighted average number of common shares outstanding
            
            
            4,057,940
            
            
            2,729,866








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





F-5


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**






**Retained****Additional**
            
            
            **Unearned**
            
            
            **Earnings**
            
            
            **Total****Preferred
                Stock**
            
            
            **Common
                Stock**
            
            
            **Paid-In**
            
            
            **Consulting**
            
            
            **(Accumulated**
            
            
            **Shareholders'****Shares**
            
            
            **Amount**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Services**
            
            
            **Deficit)**
            
            
            **Equity**BALANCE,
                MAY 1, 2004
            
            
            -
            
            $
            -
            
            
            1,737,498
            
            $
            174
            
            $
            11,993,387
            
            $
            (38,559
            )
            
            ($667,247
            )
            $
            11,287,755Common
                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-6


WPCS
      INTERNATIONAL INCORPORATED AND
      SUBSIDIARIES




**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY - CONTINUED** **









**Retained****Additional**
            
            
            **Earnings**
            
            
            **Total****Preferred
                Stock**
            
            
            **Common
                Stock**
            
            
            **Paid-In**
            
            
            **(Accumulated**
            
            
            **Shareholders'****Shares**
            
            
            **Amount**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Deficit)**
            
            
            **Equity**Reclassification
              of proceeds from sales of common stockwith
                registration rights to additional paid-in capital
            
            
            -
            
            
            -
            
            
            2,083,887
            
            $
            208
            
            $
            5,731,908
            
            
            -
            
            $
            5,732,116Net
                proceeds from exercise of warrants
            
            
            -
            
            
            -
            
            
            554,717
            
            
            55
            
            
            4,167,092
            
            
            -
            
            
            4,167,147Reclassification
                of fair value of warrant liability to additionalpaid-in
                capital from exercise of warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,849,302
            
            
            -
            
            
            2,849,302Reclassification
                of fair value of warrant liability to additionalpaid-in
                capital from the termination of liquidateddamages
                provision under registration rights agreement
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,223,760
            
            
            -
            
            
            3,223,760Net
                proceeds from issuance of common stock
            
            
            -
            
            
            -
            
            
            876,931
            
            
            88
            
            
            5,528,078
            
            
            -
            
            
            5,528,166Net
                proceeds from exercise of stock options
            
            
            -
            
            
            -
            
            
            11,251
            
            
            1
            
            
            58,491
            
            
            -
            
            
            58,492Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,624,120
            )
            
            (1,624,120
            )BALANCE,
                APRIL 30, 2006
            
            
            -
            
            $
            -
            
            
            5,264,284
            
            $
            526
            
            $
            33,525,130
            
            $
            (962,386
            )
            $
            32,563,270





*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,****2006**
            
            **2005**OPERATING
                ACTIVITIES :
            
            
            
            (Note
                2)Net
                income (loss)
            
            $
            (1,624,120
            )
            $
            1,328,981Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Depreciation
                and amortization
            
            
            837,789
            
            
            682,397Change
                in fair value of warrant liability
            
            
            4,078,494
            
            
            (1,414,263
            )Provision
                for doubtful accounts
            
            
            29,000
            
            
            14,007Amortization
                of debt issuance costs
            
            
            47,696
            
            
            -Amortization
                of unearned consulting services
            
            
            -
            
            
            38,559Deferred
                income taxes
            
            
            (43,000
            )
            
            (134,000
            )Changes
                in operating assets and liabilities, net of effects of
                acquisitions:Accounts
                receivable
            
            
            (2,265,623
            )
            
            (1,898,625
            )Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            (533,022
            )
            
            1,214,076Inventory
            
            
            (318,916
            )
            
            (536,772
            )Prepaid
                expenses and other current assets
            
            
            249,706
            
            
            (14,306
            )Other
                assets
            
            
            37,001
            
            
            (148,596
            )Accounts
                payable and accrued expenses
            
            
            (376,943
            )
            
            (337,355
            )Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            8,873
            
            
            (1,146,930
            )Income
                taxes payable
            
            
            381,758
            
            
            (328,751
            )NET
                CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            508,693
            
            
            (2,681,578
            )INVESTING
                ACTIVITIES:Acquisition
                of property and equipment
            
            
            (234,792
            )
            
            (215,844
            )Acquisition
                of Quality, net of cash received
            
            
            -
            
            
            (6,708,904
            )Acquisition
                of Heinz, net of cash received
            
            
            -
            
            
            (82,283
            )Acquisition
                transaction costs
            
            
            (4,304
            )
            
            (17,553
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (239,096
            )
            
            (7,024,584
            )FINANCING
                ACTIVITIES:Net
                proceeds from exercise of warrants
            
            
            4,167,147
            
            
            -Net
                proceeds from issuance of common stock
            
            
            5,528,166
            
            
            -Net
                proceeds from exercise of stock options
            
            
            58,492
            
            
            -Net
                proceeds from issuance of common stock with continuing registration
                rights
            
            
            -
            
            
            9,140,949Common
                stock issuance costs
            
            
            -
            
            
            (26,888
            )Debt
                issuance costs
            
            
            (158,787
            )
            
            -Borrowings
                (repayments) under lines of credit, net
            
            
            2,617,719
            
            
            (303,848
            )Repayments
                of loans payable
            
            
            (227,952
            )
            
            (96,901
            )Repayments
                of amounts due to shareholders
            
            
            (961,915
            )
            
            -Payments
                of capital lease obligations
            
            
            (2,073
            )
            
            (2,534
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            11,020,797
            
            
            8,710,778NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            11,290,394
            
            
            (995,384
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            989,252
            
            
            1,984,636CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            12,279,646
            
            $
            989,252









F-8


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES


**CONSOLIDATING
      STATEMENTS OF CASH FLOWS - CONTINUED**





**Year
                Ended****April
                30,****2006**
            
            **2005**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
              paid during the period for:Interest
            
            $
            189,435
            
            $
            32,196Income
                taxes
            
            $
            1,187,556
            
            $
            434,289SCHEDULE
                OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Unpaid
                purchase price adjustments related to acquisition
            
            $
            -
            
            $
            742,295Reversal
                of accruals established in purchase accounting
            
            $
            2,150
            
            $
            40,022Issuance
                of notes for property and equipment
            
            $
            266,834
            
            $
            192,210Reclassification
                of proceeds from sales of common stock with registration
                rightsto
                additional paid-in capital
            
            $
            5,732,116
            
            $
            -Reclassification
                of fair value of warrant liability to additional paid-in capitalfrom
                the exercise of warrants
            
            $
            2,849,302
            
            $
            -Reclassification
                of fair value of warrant liability to additional paid-in capital
                from
                thetermination
                of liquidated damages provision under registration rights
                agreement
            
            $
            3,223,760
            
            $
            -








*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”), Heinz Corporation (“Heinz”), 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 provides design-build engineering services for specialty communication
      systems, which are dedicated wireless networks for specified applications,
      and
      for wireless infrastructure, which encompasses commercial cellular systems
      for
      wireless carriers .
      The
      Company provides a range of services including site
      design, spectrum analysis, engineering, trenching, electrical work, structured
      cabling, product integration, testing and project management.





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
      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, was $7,457,913,
      of
      which $6,700,000 was paid at closing. Additional purchase price adjustments
      of
      $757,913 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 Securities and Exchange Commission (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
      had failed to timely perform under the registration rights agreement, the
      Company agreed 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
      maintained the effectiveness of the registration statement through the date
      the
      penalty provisions were waived, as described below. The Company was not required
      to pay any liquidated damages in connection with the filing or on-going
      effectiveness of the registration statement. Prior to October 31, 2005, the
      Company had classified the common stock and warrants with registration rights
      described above as shareholders’ equity, as it believed these instruments met
      the requirements necessary to record them as shareholders’ equity.





During
      the third quarter of fiscal 2006, the Company became aware that the SEC had
      recently announced its preferred interpretation of the accounting for common
      stock and warrants with registration rights under Emerging Issues Task Force
      (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed To, and
      Potentially Settled in the Company’s Own Stock,” and EITF 05-04, “The Effect of
      a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
      to
      EITF 00-19.” Although the EITF was still reviewing the guidance in EITF 05-04,
      the SEC concluded that under EITF 00-19, the common stock and warrants subject
      to 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
      does not meet the tests required for shareholders’ equity classification and,
      accordingly, must be reflected as temporary equity in the balance sheet until
      the conditions are eliminated. Additionally, the fair value of warrants should
      be recorded as a liability, with an offsetting reduction to shareholders’
equity, adjusted to market value at the end of each period. 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.





F-10




WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES




After
      further review during the third quarter of 2006, in accordance with the SEC’s
      interpretation of EITF 00-19 as it relates to these common shares and warrants
      subject to registration rights as discussed above, the Company restated its
      financial statements for the year ended April 30, 2005, and interim periods
      ended January 31, 2005, July 31, 2005, and October 31, 2005. As of April 30,
      2005, the restatement included the reclassification of the $5,732,116 value
      of
      common stock subject to registration rights from shareholders’ equity and into
      temporary equity, and the reclassification of the fair value of the common
      stock
      warrants from shareholders’ equity and into warrant liability of $1,994,570
      using the Black-Scholes option pricing model to value the warrants. The warrant
      liability was initially recorded during the fiscal year 2005 at a fair value
      of
      $3,408,833 and, as a result of a decrease in the fair value of the warrant
      liability principally due to the decrease in the market value of the Company’s
      common stock as of April 30, 2005, the Company recorded a non-cash gain of
      $1,414,263 for that year.





During
      fiscal 2006, certain of the shares of common stock were sold by the investors
      and the Company was therefore no longer subject to performance for these shares
      under the registration rights agreement. On April 11, 2006, the Company entered
      into a waiver agreement with the institutional investors in the Company’s
      November 2004 private placement. Pursuant to the waiver, the parties agreed
      to
      modify the registration rights agreement associated with the common stock and
      warrants issued in November 2004 affected by EITF 00-19. This modification
      eliminated the provision for penalties that could have resulted from not
      maintaining the effectiveness of the registration statement related to these
      common shares and shares underlying the warrants. As a result of these events,
      at April 30, 2006, the Company has reclassified $5,732,116 from temporary equity
      back to shareholders’ equity.





During
      the first three quarters of fiscal year 2006, the warrant liability increased
      principally due to the increase in the market value of the Company’s common
      stock resulting in a non-cash loss of $11,406,414 for the nine months ended
      January 31, 2006. This loss was partially offset by a gain of $7,327,920 due
      to
      a decrease in the fair value of the warrant liability in the fourth quarter
      of
      fiscal 2006, resulting in a net non-cash loss on fair value of warrants of
      $4,078,494 for the fiscal year ended April 30, 2006. Finally, due to the
      elimination of the liquidated damages provisions of the registration rights
      agreement discussed above, the remaining warrant liability balance of $3,223,760
      was reclassified to shareholders’ equity, and there will not be any similar
      non-cash charges in subsequent fiscal years. The non-cash loss on fair value
      of
      warrants had 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.





***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
      payments subsequently received on such receivables are credited to the allowance
      for doubtful accounts. Included in the accounts receivable is retainage
      receivable of $895,368 which is expected to be collected within one
      year.




F-11


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES


***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 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 at least annually, 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 is 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, based on the excess, if any, of the reporting
      unit’s carrying value of goodwill over its implied
      value.




The
      Company determines the fair value of the businesses acquired (reporting units)
      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 at April 30, 2006
      and
      2005. Accordingly, step two was unnecessary and no impairment charge was
      recognized in the consolidated statement of operations for the years ended
      April
      30, 2006 and 2005. On an ongoing basis, the Company expects to perform its
      annual impairment test at April 30 absent any interim impairment
      indicators.





Goodwill
      through the years ended April 30, 2006 and 2005 consisted of the
      following:





Beginning
                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
            
            
            7,210Beginning
                balance, May 1, 2005
            
            
            13,961,642Additional
                transaction costs for prior acquisitions
            
            
            2,675Clayborn
                acquisition purchase price adjustment
            
            
            48,803Quality
                acquisition purchase price adjustment
            
            
            226,798Ending
                balance, April 30, 2006
            
            $
            14,239,918





***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 services including site design, spectrum analysis,
      engineering, trenching, electrical work, structured cabling, product
      integration, testing and project management.





F-12




WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES




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 contract determines that the Company 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, 2006, the Company had revenue from two separate customers
      totaling approximately $10,830,000 and $7,579,000, which comprised 20.8% and
      14.5% of total revenue, respectively. For the fiscal year ended April 30, 2005,
      the Company had revenue from one customer totaling approximately $6,200,000,
      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 these customers and their financial
      strength.




The
      Company has approximately 93 union employees. The 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.





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





Earnings
      (loss) per common share is computed pursuant to SFAS No. 128, "Earnings Per
      Share" (“EPS”). Basic income (loss) per common 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, 2006, 786,432 stock options
      and
      2,017,453 warrants were not included in the computation of fully diluted
      earnings per share because the Company had a net loss and, therefore, the
      effects would be antidilutive. 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 in fiscal 2005.





***Stock-Based
      Compensation Plans***





As
      currently permitted by SFAS 123, ****** *Accounting
      for Stock-Based Compensation* ***,*** the
      Company has elected to continue to account for its stock-based employee
      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* and
      related Interpretations No. 44, *Accounting
      for Certain Transactions Involving Stock Compensation* (“FIN
      44”). Under APB 25, compensation expense for employees 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 plans. 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.




F-13


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES




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 revised standard will require the Company to expense the fair value of
      employee stock options and other share-based payments over the service
      period. 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, although it is likely that we will have to recognize additional
      compensation expense in periods after adoption.





On
      April
      20, 2006, the Company’s Board of Directors approved the accelerated vesting,
      from August 1, 2006 to April 30, 2006, of 114,021 stock options previously
      awarded to certain officers under the 2006 Incentive Stock Plan. All other
      terms
      and conditions applicable to such stock options, including the exercise price,
      remain unchanged. The exercise price of the options was $6.14 and the closing
      price of the Company’s common stock on April 19, 2006, the last trading day
      before the approval of acceleration was $7.96. The Board took the action with
      the belief that it is in the best interest of stockholders. The purpose of
      the
      accelerated vesting was to enable the Company to avoid recognizing future
      compensation expense associated with these options of $86,196, upon adoption
      of
      SFAS No. 123R discussed above. For the purpose of applying APB No. 25 and FIN
      44, the acceleration event was treated as the acceleration of the vesting of
      employee options that otherwise would have vested as scheduled and, accordingly,
      was not a modification requiring the remeasurement of the intrinsic value of
      the
      options. The stock options were held by officers with considerable service
      to
      the Company and, accordingly, the Company assumed a zero forfeiture rate and,
      therefore, no compensation expense was recognized for these
      options.




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





**2006**
            
            **2005**Net
                income (loss), as reported
            
            
            ($1,624,120
            )
            $
            1,328,981Deduct
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of tax
            
            
            (453,092
            )
            
            (452,820
            )Net
                income (loss), Pro forma
            
            
            ($2,077,212
            )
            $
            876,161Basic
                net income (loss) per shareAs
                reported
            
            
            ($0.40
            )
            $
            0.50Pro
                forma
            
            
            ($0.51
            )
            $
            0.33Diluted
                net income (loss) per shareAs
                reported
            
            
            ($0.40
            )
            $
            0.49Pro
                forma
            
            
            ($0.51
            )
            $
            0.32





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, 2006, risk-free interest range of 3.81% to 4.92%, dividend
      yield
      of 0%, expected life of 5 years and volatility range of 23.9% to 35.5%
      were used. For the year ended April 30, 2005, risk-free interest range of 3.51%
      to 4.22%, dividend yield of 0%, expected life of 5 years and volatility range
      of 28.4% to 44.9% 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, life of customer lists, and estimates of the fair value
      of reporting units and discounted cash flows used in determining whether
      goodwill has been impaired. Actual results could differ from those
      estimates.





F-14


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES




**NOTE
      4 - ACQUISITIONS**





In
      accordance with SFAS No. 141, “Business Combinations,” acquisitions are
      accounted for under the purchase 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.





***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 $176,356, was
      $7,457,913, of which $6,700,000 was paid at closing. Additional purchase price
      adjustments of $757,913 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 provides 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.





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, as adjusted, has been determined as
      follows:





Assets
                purchased:Cash
            
            $
            163,674Accounts
                receivable
            
            
            2,124,587Inventory
            
            
            244,053Fixed
                assets
            
            
            329,253Prepaid
                expenses
            
            
            70,447Customer
                lists
            
            
            580,000Other
                assets
            
            
            6,000Goodwill
            
            
            5,722,8619,240,875Liabilities
                assumed:Accounts
                payable
            
            
            (940,727
            )Accrued
                expenses
            
            
            (271,991
            )Income
                taxes payable
            
            
            (98,181
            )Line
                of credit borrowings
            
            
            (135,129
            )Notes
                payable
            
            
            (160,578
            )(1,606,606
            )Purchase
                price
            
            $
            7,634,269





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, after giving effect to certain adjustments, including
      the issuance of the Company’s common stock described in Note 12 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
      and
      Quality been a single entity during this period.








F-15


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES


**2005**Revenue
            
            $
            46,810,720Net
                income
            
            $
            1,474,004Weighted
                average number of shares used in calculation:Basic
                net income per share
            
            
            3,821,385Diluted
                net income per share
            
            
            3,871,722Pro
                forma net income per common shareBasic
            
            $
            0.39Diluted
            
            $
            0.38





For
      all
      acquisitions, customer lists are amortized over a period of five to six years
      from the date of acquisition. The expected amortization of customer lists for
      the next five years ending April 30 are as follows: 2007, $301,000; 2008,
      $257,000; 2009, $153,000; 2010, $97,000 and 2011, $56,000. The Company recorded
      amortization expense related to customer lists of $294,000 and $310,000 for
      the
      years ended April 30, 2006 and 2005, 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:





**2006**
            
            **2005**Costs
                incurred on uncompleted contracts
            
            $
            24,694,056
            
            $
            25,474,753Estimated
                contract profit
            
            
            6,593,218
            
            
            4,983,10231,287,274
            
            
            30,457,855Less:
                billings to date
            
            
            31,058,661
            
            
            30,753,391Net
                excess of costs (billings)
            
            $
            228,613
            
            
            ($295,536
            )Costs
                and estimated earnings in excess of billings
            
            $
            1,441,977
            
            $
            908,955Billings
                in excess of costs and estimated earningson
                uncompleted contracts
            
            
            (1,213,364
            )
            
            (1,204,491
            )Net
                excess of costs (billings)
            
            $
            228,613
            
            
            ($295,536
            )





**NOTE
      6 - PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following at April 30:





**Estimated
                useful life (years)**
            
            **2006**
            
            **2005**Furniture
                and fixtures
            
            
            5
                - 7
            
            $
            135,383
            
            $
            135,383Computers
                and software
            
            
            3
            
            
            476,342
            
            
            373,325Office
                equipment
            
            
            5-7
            
            
            55,612
            
            
            46,480Vehicles
            
            
            5
                - 7
            
            
            1,256,568
            
            
            1,141,011Machinery
                and equipment
            
            
            5
            
            
            393,436
            
            
            310,681Leasehold
                improvements
            
            
            3
            
            
            227,774
            
            
            218,9382,545,115
            
            
            2,225,818Less
                accumulated depreciation and amortization expense
            
            
            
            
            
            1,192,899
            
            
            665,547$
            1,352,216
            
            $
            1,560,271





Depreciation
      expense for property and equipment for the years ended April 30, 2006 and 2005
      was approximately $544,000 and $372,000, respectively.






F-16




WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES


**NOTE
      7 - LINE OF CREDIT**




On
      June
      3, 2005, the Company entered into a credit agreement with a commercial bank.
      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 “Credit Agreement”). 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, as amended, the Company was permitted to borrow
      up to $3,000,000 under the revolving credit line, based upon eligible
      receivables as of April 30, 2006. Once the Company has provided financial
      statements to the bank which evidence that the Company had earnings before
      interest, taxes, depreciation and amortization and the effects of the change
      in
      the fair value of the warrant liability discussed in Note 2 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 the change in the warrant liability and (v) dividend
      restrictions. As of April 30, 2006, the Company was in compliance with the
      credit agreement covenants. 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 (8.000% as of April
      30, 2006). The Company paid a facility fee to the bank of $50,000 on the closing
      date. In addition to the loan, a $500,000 letter of credit was also re-issued
      in
      favor of Walker’s surety bonding company as collateral for performance and
      payment bonds.




The
      Company used the initial funds provided by the loan, in the gross amount of
      $3,000,000, to repay the balance of Walker’s existing bank line of credit of
      approximately $672,000, for the payment of approximately $758,000 to the former
      shareholders of its Quality subsidiary for monies due to them pursuant to the
      terms of the purchase of their company, and for working capital.




**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, 2006 and 2005, the rent paid
      for this lease was $88,000.




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. Through April 30,
      2006, payments of $204,000 have been made to the former Clayborn shareholders
      and the total remaining due is $896,000.





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 was paid in April 2006 and $50,000 is payable on April 30,
      2007.





In
      connection with the acquisition of Quality, approximately $758,000 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 $141,000 and $8,800 in contributions made for the years ended April
      30, 2006 and 2005, 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 $2,050,000 and $2,178,000 for such costs for the years
      ended April 30, 2006 and 2005, respectively.









F-17





WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES


**NOTE
          10 - INCOME TAXES**
 
 The
          provision for income taxes for the years ended at April 30, 2006 and 2005
          is
          summarized as follows:


**2006**
            
            **2005**CurrentFederal
            
            $
            1,248,000
            
            $
            99,000State
            
            
            310,773
            
            
            87,096DeferredFederal
            
            
            (70,000
            )
            
            (76,000
            )State
            
            
            27,000
            
            
            (58,000
            )Totals
            
            $
            1,515,773
            
            $
            52,096





The
      actual provision for income taxes reflected in the consolidated statements
      of
      operations for the years ended April 30, 2006 and 2005 differs from the
      provision (benefit) computed at the federal statutory tax rates. The principal
      differences between the statutory income tax and the actual provision for income
      taxes are summarized as follows:





**2006**
            
            **2005**Expected
                tax (benefit) provision at statutory rate (34%)
            
            $
            (36,838
            )
            $
            469,566State
                and local taxes, net of federal tax benefit
            
            
            205,530
            
            
            19,000Loss
                (gain) on fair value of warrants
            
            
            1,386,688
            
            
            (481,566
            )Other
            
            
            (39,607
            )
            
            45,096Totals
            
            $
            1,515,773
            
            $
            52,096




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





**2006**
            
            **2005**Deferred
                tax assets:Allowance
                for doubtful accounts
            
            $
            33,000
            
            $
            29,000Reserve
                for loss on work-in-progress
            
            
            31,000
            
            
            13,000Federal
                benefit of deferred state tax liabilities
            
            
            14,000
            
            
            20,000Deferred
                tax assets-current
            
            
            78,000
            
            
            62,000Customer
                lists
            
            
            51,000
            
            
            10,000Net
                operating loss carryforward
            
            
            83,000
            
            
            113,000Valuation
                allowance
            
            
            (83,000
            )
            
            (73,000
            )Deferred
                tax assets-long term
            
            
            51,000
            
            
            50,000Deferred
                tax liabilities:Adjustment
                for cash to accrual basis accounting
            
            
            -
            
            
            (104,000
            )Inventory
            
            
            (13,000
            )
            
            (15,000
            )Federal
                benefit of deferred state tax liabilities
            
            
            (8,000
            )
            
            (20,000
            )Deferred
                tax liabilities-current
            
            
            (21,000
            )
            
            (139,000
            )Fixed
                assets
            
            
            (126,000
            )
            
            (117,000
            )Customer
                lists
            
            
            (175,000
            )
            
            (257,000
            )Goodwill
            
            
            (230,000
            )
            
            (65,000
            )Deferred
                tax liabilities-long term
            
            
            (531,000
            )
            
            (439,000
            )Net
                deferred tax liabilities
            
            $
            (423,000
            )
            $
            (466,000
            )






At
        April
        30, 2006, the Company has net operating loss carryforwards for state tax
        purposes approximating $828,000 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 $83,000 against the total deferred tax
        asset
        of $83,000 related to these losses.




F-18


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES







**NOTE
      11 - STOCK OPTION PLANS**





In
      September 2005, the Company adopted the 2006 Incentive Stock Plan, under which
      officers, directors, key employees or consultants may be granted options. Under
      the 2006 Incentive Stock Plan, 400,000 shares of common stock were reserved
      for
      issuance upon the exercise of stock options, stock awards or restricted stock.
      Under the terms of the 2006 Incentive Stock Plan, stock options are granted
      at
      exercise prices equal to the fair market value of the common stock at the date
      of grant, and become exercisable and expire in accordance with the terms of
      the
      stock option agreement between the optionee and the Company at the date of
      grant. Through April 30, 2006, options to purchase 383,500 shares were granted
      at exercise prices ranging from $6.14 to $7.27. At April 30, 2006, there were
      16,500 options to purchase shares available for issuance under the 2006
      Incentive Stock Plan.





In
      March
      2003, 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, 2006, there were 2,317 shares available for grant under the 2002
      Plan.





The
      following table summarizes stock option activity for the years ended April
      30,
      2006 and 2005:





2002
                Plan
            
            2006
                Incentive Stock PlanNumber
                of Shares
            
            Weighted-average
                Exercise Price
            
            Number
                of Shares
            
            Weighted-average
                Exercise PriceOutstanding,
                May 1, 2004
            
            
            299,322
            
            $
            12.49
            
            
            -
            
            
            -Granted
            
            
            266,890
            
            
            6.15
            
            
            -
            
            
            -Cancelled
            
            
            (111,316
            )
            
            6.58
            
            
            -
            
            
            -Outstanding,
                May 1, 2005
            
            
            454,896
            
            
            8.77
            
            
            -
            
            
            -Granted
            
            
            18,730
            
            
            6.94
            
            
            383,500
            
            
            6.16Cancelled
            
            
            (59,443
            )
            
            14.96
            
            
            -
            
            
            -Exercised
            
            
            (11,251
            )
            
            5.22
            
            
            -
            
            
            -Outstanding,
                May 1, 2006
            
            
            402,932
            
            $
            7.87
            
            
            383,500
            
            $
            6.16





The
      following is a summary of information with respect to stock options granted
      under the 2002 Plan and 2006 Incentive Stock Plan at April 30,
      2006:





Options
                outstanding
            
            Options
                exercisableExercise
                prices
            
            Shares
                under option
            
            Weighted-average
              remaining
                life in years
            
            Weighted-
                average shares
            
            Exercise
                price$4.80
                - $5.52
            
            64,812
            
            3.74
            
            58,395
            
            $4.80
                - $5.52$6.10
                - $6.60
            
            558,542
            
            4.38
            
            558,542
            
            $6.10
                - $6.60$6.61
                - $9.00
            
            91,150
            
            2.09
            
            67,420
            
            $6.61
                - $9.00$10.92-$16.44
            
            69,844
            
            2.32
            
            68,732
            
            $10.92-$16.44$19.92
            
            2,084
            
            1.42
            
            2,084
            
            $19.92Total
            
            786,432
            
            
            
            755,173





F-19
 **WPCS
          INTERNATIONAL INCORPORATED AND SUBSIDIARIES**


**NOTE
      12 - SHAREHOLDERS' EQUITY**





***Common
      Stock Issuance***





On
      April
      12, 2006, the Company closed a purchase agreement with four selected
      institutional investors for the registered direct sale of 876,931 shares of
      common stock at an offering price of $7.00 per share. The Company paid the
      placement agent of the offering a cash fee of 6.5% of the proceeds of the
      offering. The Company received net proceeds of $5,528,166 from this offering.
      The Company made the sale pursuant to a registration statement declared
      effective by the Securities and Exchange Commission on April 11, 2006.




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. As a result of the closing of the public offering on April 12, 2006
      discussed above, the exercise price of 342,785 common stock purchase warrants
      were adjusted to $7.00 per share. 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 $109,051. Accordingly, the Company received
      net proceeds of $9,140,949 from the offering.




As
      discussed in Note 2, under the terms of the November 2004 private placement,
      the
      Company granted certain registration rights to the holders of the common stock
      and warrants that provided for liquidated damages in the event the Company
      failed to maintain effectiveness of the registration statement for a preset
      time. Therefore, the common stock subject to such liquidated damages did not
      meet the tests required for shareholders’ equity classification and would have
      to be reflected between liabilities and equity in the Company’s subsequent
      consolidated balance sheets. In addition, the Company would be required to
      account for the warrants as a derivative financial liability initially recorded
      at fair value rather than in shareholders’ equity, with the liability adjusted
      to fair value for each subsequent consolidated balance sheet. At the closing
      date, based on this determination, $3,408,833 of net proceeds was allocated
      to
      the warrant liability based on fair value determined using the Black-Scholes
      Option pricing model as of that date and the remaining $5,732,116 of net
      proceeds from the offering was allocated to the common stock subject to
      continuing registration rights.




On
      April
      11, 2006, the Company entered into a waiver agreement with the institutional
      investors in the Company’s November 2004 private placement. Pursuant to the
      waiver, the parties agreed to modify the registration rights agreement
      associated with the common stock and warrants issued in November 2004 affected
      by EITF 00-19. This modification eliminated the provision for penalties that
      could have resulted from not maintaining the effectiveness of the registration
      statement related to these common shares and shares underlying the
      warrants.




***Common
      Stock Purchase Warrants***




The
      following table summarizes the activity of the common stock purchase warrants
      for the year ended April 30, 2006:





Number
                of Shares
            
            Weighted
                Average Exercise PriceOutstanding,
                May 1, 2004
            
            
            425,784
            
            $
            10.57Granted
            
            
            2,146,387
            
            
            8.40Outstanding,
                May 1, 2005
            
            
            2,572,171
            
            
            8.76Granted
            
            
            -
            
            
            -Exercised
            
            
            (554,717
            )
            
            8.40Outstanding,
                April 30, 2006
            
            
            2,017,454
            
            $
            8.62





F-20




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, 2006 and 2005 are as follows:








**As
                of/Year ended April 30, 2006**
            
            **As
                of/Year ended April 30, 2005**Corporate
            
            WirelessInfrastructure
            
            SpecialtyCommunication
            
            Total
            
            Corporate
            
            WirelessInfrastructure
            
            SpecialtyCommunication
            
            TotalRevenue
            
            $
            -
            
            $
            9,300,228
            
            $
            42,844,347
            
            $
            52,144,575
            
            $
            -
            
            $
            8,651,555
            
            $
            31,496,678
            
            $
            40,148,233Depreciation
                and amortization
            
            $
            59,474
            
            $
            103,264
            
            $
            675,051
            
            $
            837,789
            
            $
            20,423
            
            $
            161,485
            
            $
            500,489
            
            $
            682,397Income
                (loss) before income taxes
            
            
            ($5,615,080
            )
            $
            1,240,928
            
            $
            4,265,805
            
            
            ($108,347
            )
            $
            207,777
            
            $
            783,014
            
            $
            390,286
            
            $
            1,381,077Goodwill
            
            $
            -
            
            $
            2,482,085
            
            $
            11,757,833
            
            $
            14,239,918
            
            $
            -
            
            $
            2,479,410
            
            $
            11,482,232
            
            $
            13,961,642Total
                assets
            
            $
            10,627,658
            
            $
            6,531,651
            
            $
            26,963,009
            
            $
            44,122,318
            
            $
            1,169,887
            
            $
            4,604,335
            
            $
            24,402,489
            
            $
            30,176,711





**NOTE
      14 - COMMITMENTS AND CONTINGENCIES**





***Employment
      Agreements***





The
      Company has entered into employment contracts ranging from one to three years
      with its executive officers. The aggregate base salary commitments under these
      contracts at April 30, 2006 are approximately $1,512,000.





***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, 2006 are summarized as follows:




Year
                ending April 30,2007
            
            $
            541,9572008
            
            
            385,1132009
            
            
            197,9232010
            
            
            175,1372011
            
            
            123,230Thereafter
            
            
            -Total
                minimum lease payments
            
            $
            1,423,360




Rent
      expense for all operating leases was approximately $396,000 and $358,000 in
      2006
      and 2005, respectively.




F-21


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES





***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 $896,000 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, $50,000 is payable on the third
      anniversary of the closing date.





**NOTE
      15 - SUBSEQUENT EVENTS**





Effective
      June 1, 2006, the Company acquired New England Communications Systems, Inc.,
      a
      Connecticut corporation (“NECS”), for $3,216,541 in cash, subject to adjustment,
      and $1,437,446 paid directly to a lender to pay-off outstanding debt owed by
      NECS. NECS was acquired pursuant to a Stock Purchase Agreement among WPCS
      International Incorporated, NECS, and the shareholders of NECS. In addition,
      for
      each $2.00 of earnings before interest and taxes for the calendar year ending
      December 31, 2006, the NECS shareholders shall be paid aggregate additional
      consideration of $1.00, up to a maximum of $468,000 (the “Earn-out Payment”). At
      the option of the Company, any amounts due to be paid for the Earn-out Payment,
      may be paid in cash or shares of our common stock (valued at the last sale
      price
      of the common stock on the date two days prior to the date the payment is due).
      In connection with the acquisition, NECS entered into employment agreements
      with
      two of the shareholders, each for a period of two years and a consulting
      agreement with one of the shareholders for a period of seven years.  Based
      on
      the historical net assets acquired from NECS, the Company preliminarily expects
      to recognize goodwill of approximately $3,200,000. Upon completion of a formal
      purchase price allocation there may be a decrease in the amount assigned to
      goodwill and a corresponding increase in tangible or intangible assets. The
      acquisition of NECS provides the Company with additional project engineering
      expertise for specialty communication systems, broadens our customer base
      especially in the public safety and gaming markets, including the Massachusetts
      State Police, University of Connecticut and Foxwoods Resort Casino, and expands
      our geographic presence in New England.





Effective
      July 19, 2006, the Company acquired Southeastern Communication Service, Inc.
      (“SECS”) of Sarasota, Florida for $1,800,000 in cash and 200,288 shares of
      common stock of the Company having a value of $1,400,000. SECS was acquired
      pursuant to a Stock Purchase Agreement among WPCS International Incorporated,
      SECS and the shareholders of SECS. In addition, the Company is required to
      file
      a registration statement with the SEC no later than thirty (30) days after
      the
      closing of the acquisition to register the shares of common stock issued to
      the
      former SECS shareholders, and the Company will use its best efforts to
      cause the registration statement to be declared effective by the SEC within
      one
      hundred twenty (120) days after the initial filing with the SEC. In connection
      with the acquisition, SECS entered into employment agreements and a consulting
      agreement with certain officers or former officers of SECS.  Based
      on
      the historical net assets acquired from SECS, the Company preliminarily expects
      to recognize goodwill of approximately $2,300,000. Upon completion of a formal
      purchase price allocation there may be a decrease in the amount assigned to
      goodwill and a corresponding increase in tangible or intangible assets. The
      acquisition of SECS provides the Company with additional project engineering
      expertise for wireless infrastructure services, broadens our customer base
      of
      corporate, government and educational clients, including the National Oceanic
      and Atmospheric Administration (“NOAA”), Verizon, BellSouth, Comcast, Time
      Warner, University of Florida and Puerto Rico Telephone, and expands the
      Company’s geographic presence in the Southeastern United States.





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




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





None





**ITEM
      8A - CONTROLS AND PROCEDURES**




*(a)
      Evaluation of disclosure controls and procedures.*




Our
      management, with the participation of our chief executive officer and chief
      financial officer, evaluated the effectiveness of our disclosure controls and
      procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934
      as
      of April 30, 2006. In designing and evaluating the disclosure controls and
      procedures, management recognizes that any controls and procedures, no matter
      how well designed and operated, can provide only reasonable assurance of
      achieving the desired control objectives. In addition, the design of disclosure
      controls and procedures must reflect the fact that there are resource
      constraints and that management is required to apply its judgment in evaluating
      the benefits of possible controls and procedures relative to their costs.




Based
      on our evaluation, our chief executive officer and chief financial officer
      concluded that our disclosure controls and procedures were designed at a
      reasonable assurance level and were effective as of April 30, 2006 to provide
      reasonable assurance that information required to be disclosed in reports filed
      or submitted under the Exchange Act was recorded, processed, summarized and
      reported within the time periods specified in Securities and Exchange Commission
      rules and forms, and that such information was accumulated and communicated
      to
      our management, including our chief executive officer and chief financial
      officer, as appropriate, to allow timely decisions regarding required
      disclosure.




*(b)
      Changes in internal control over financial reporting.*




We regularly
      review our system of internal control over financial reporting and make changes
      to our processes and systems to improve controls and increase efficiency, while
      ensuring that we maintain an effective internal control environment. Changes
      may
      include such activities as implementing new, more efficient systems,
      consolidating activities, and migrating processes.




There
      were no changes in our internal control over financial reporting that occurred
      during our most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




**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**





Our
      directors and executive officers and their ages as of the date hereof are as
      follows:





NAME
            
            AGE
            
            OFFICES
                HELDAndrew
                Hidalgo
            
            50
            
            Chairman,
                Chief Executive Officer and DirectorJoseph
                Heater
            
            42
            
            Chief
                Financial OfficerDonald
                Walker
            
            43
            
            Executive
                Vice PresidentJames
                Heinz
            
            46
            
            Executive
                Vice PresidentRichard
                Schubiger
            
            41
            
            Executive
                Vice PresidentNorm
                Dumbroff
            
            45
            
            DirectorNeil
                Hebenton
            
            50
            
            DirectorGary
                Walker
            
            51
            
            DirectorWilliam
                Whitehead
            
            50
            
            Director





Set
      forth
      below is a biographical description of each director and executive
      officer.





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





Mr.
      Hidalgo has been our Chairman of the Board and Chief Executive Officer since
      our
      inception in May 2002 and served in the same capacity with the predecessor
      company WPCS Holdings, Inc. since September 2000. He is responsible for our
      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.




***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 its 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 engineering 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.




***Norm
      Dumbroff, Director***





Mr.
      Dumbroff became a Director of WPCS in November 2002. Since April 1990, he has
      been the Chief Executive Officer of Wav Incorporated, 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, Director***





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, Director***





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, Director***





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 and 2006 Incentive Stock
      Plan
      as determined by the Board of Directors. We reimburse our directors for expenses
      incurred in connection with attending Board meetings.





23


WPCS
        INTERNATIONAL INCORPORATED AND
        SUBSIDIARIES








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





Audit
      Committee




Our
      Audit
      Committee currently consists 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.





Our
      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 auditor, (iii)
      pre-approving the professional services provided by the independent auditor,
      (iv) reviewing the scope of the annual audit and reports and recommendations
      submitted by the independent auditor, and (v) reviewing our financial reporting
      and accounting policies, including any significant changes, with management
      and
      the independent auditor. Our Audit Committee also prepares the Audit Committee
      report that is required pursuant to the rules of the SEC.





Executive
      Committee





Our
      Executive Committee currently consists of Norm Dumbroff, Neil Hebenton and
      William Whitehead, with Mr. Dumbroff elected as Chairman of the Committee.
      Our
      Board of Directors has determined that all of the members are “independent”
under the current listing standards of the NASDAQ Stock Market. Our Board of
      Directors has adopted a written charter setting forth the authority and
      responsibilities of the Executive Committee.




Our
      Executive Committee has responsibility for assisting the Board of Directors
      in,
      among other things, evaluating and making recommendations regarding the
      compensation of our executive officers and directors, assuring that the
      executive officers are compensated effectively in a manner consistent with
      our
      stated compensation strategy, 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 our incentive
      plans
      and benefit programs and monitoring of compliance with the legal prohibition
      on
      loans to our directors and executive officers.





Nominating
      Committee





Our
      Nominating Committee currently consists 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.





Our
      Nominating Committee has responsibility for assisting the Board in, among other
      things, effecting the organization, membership and function of the Board and
      its
      committees. 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 2006, 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 2006.





24
 **WPCS
          INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth in summary form the compensation received during
      the
      fiscal years ended April 30, 2006, 2005, and 2004 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 2006 fiscal
      year.




**Summary
      Compensation Table**






Annual
                  Compensation
              
              
              Long
                  Term CompensationName
                  and Principal Position
              
              Year
              
              Salary
                  ($)
              
              Bonus
                  ($)
              
              Other
                  Annual Compensation ($)
              
              
              Restricted
                  Stock Awards
              
              Securities
                  Underlying Options (6)
              
              LTIP
                  Payouts
              
              All
                  Other Compensation ($)Andrew
                  Hidalgo
              
              
              2006
              
              
              168,000
              
              
              -
              
              
              11,492
              (7
              )
              
              -
              
              
              126,690
              
              
              -
              
              
              -Chairman,
                  Chief Executive Officer
              
              
              2005
              
              
              168,000
              
              
              -
              
              
              9,549
              (7
              )
              
              -
              
              
              154,167
              
              
              -
              
              
              -and
                  Director
              
              
              2004
              
              
              155,250
              
              
              17,000
              
              
              7,958
              (7
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Donald
                  Walker
              
              
              2006
              
              
              140,000
              
              
              37,215
              
              
              -
              
              
              
              -
              
              
              38,007
              
              
              -
              
              
              -Executive
                  Vice President (1)
              
              
              2005
              
              
              140,000
              
              
              10,269
              
              
              -
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -2004
              
              
              140,000
              
              
              26,962
              
              
              -
              
              
              
              -
              
              
              16,667
              
              
              -
              
              
              -Gary
                  Walker
              
              
              2006
              
              
              140,000
              
              
              37,215
              
              
              -
              
              
              
              -
              
              
              17,736
              
              
              -
              
              
              -President-
                  Walker and Director(2)
              
              
              2005
              
              
              140,000
              
              
              10,269
              
              
              -
              
              
              
              -
              
              
              2,084
              
              
              -
              
              
              -2004
              
              
              140,000
              
              
              26,962
              
              
              -
              
              
              
              -
              
              
              16,667
              
              
              -
              
              
              -James
                  Heinz
              
              
              2006
              
              
              140,005
              
              
              31,985
              
              
              -
              
              
              
              -
              
              
              38,007
              
              
              -
              
              
              -Executive
                  Vice President (3)
              
              
              2005
              
              
              140,000
              
              
              -
              
              
              -
              
              
              
              -
              
              
              10,000
              
              
              -
              
              
              -2004
              
              
              10,231
              
              
              -
              
              
              -
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -Joseph
                  Heater
              
              
              2006
              
              
              139,333
              
              
              -
              
              
              -
              
              
              
              -
              
              
              63,345
              
              
              -
              
              
              -Chief
                  Financial Officer (4)
              
              
              2005
              
              
              132,000
              
              
              -
              
              
              -
              
              
              
              -
              
              
              40,000
              
              
              -
              
              
              -2004
              
              
              97,654
              
              
              8,000
              
              
              -
              
              
              
              -
              
              
              33,334
              
              
              -
              
              
              -Richard
                  Schubiger
              
              
              2006
              
              
              140,000
              
              
              73,658
              
              
              -
              
              
              
              -
              
              
              38,007
              
              
              -
              
              
              -Executive
                  Vice President (5)
              
              
              2005
              
              
              50,000
              
              
              -
              
              
              -
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -


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


(2) Mr.
      Walker has served as
      President of Walker Comm 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)
      Mr.
      Schubiger has served as Executive Vice President since Novermber 24,
      2004.


(6)  The
      number of securities under options granted reflects the number of WPCS shares
      that may be purchased upon the exercise of options. We do not have any
      outstanding stock


appreciation rights.


(7)  Represents
      car allowance payments.







**EMPLOYMENT
      AGREEMENTS**





***Contract
      with Andrew Hidalgo***





On
      February 1, 2005, we entered into a three-year employment contract with Andrew
      Hidalgo, our Chairman and Chief Executive 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
      $168,000 per annum. In addition, Mr. Hidalgo is entitled to participate in
      any
      and all benefit plans, from time to time, in effect for our employees, along
      with vacation, sick and holiday pay in accordance with our policies established
      and in effect from time to time.




25




**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**




***Contract
      with Joseph Heater***





On
      June
      1, 2005, we entered into a three-year employment contract with Joseph Heater,
      our 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.
      In
      addition, Mr. Heater is entitled to participate in any and all benefit plans,
      from time to time, in effect for our employees, along with vacation, sick and
      holiday pay in accordance with our policies established and in effect from
      time
      to time.




***Contract
      with Donald Walker***





On
      December 30, 2002, we entered into a four-year employment contract with an
      option to renew for an additional year, with Donald Walker, the Vice-President
      of Walker Comm, who is also an Executive Vice President. The base salary under
      the agreement is $140,000 per annum. In addition, Mr. Walker is entitled to
      participate in any and all benefit plans, from time to time, in effect for
      our
      employees, along with vacation, sick and holiday pay in accordance with our
      policies established and in effect from time to time. Mr. Walker is also
      entitled to the full-time use of an automobile owned or leased by us, for which
      we reimburse Mr. Walker for all maintenance and gasoline expenses associated
      with the use of the automobile. Mr. Walker is also entitled to receive an annual
      bonus of 3% of the operating income of Walker Comm: (i) after the elimination
      of
      all expenses related to services provided to Walker Comm by WPCS or any
      affiliate thereof and transactions between Walker Comm and WPCS or any affiliate
      thereof; and (ii) prior to the deduction of interest, taxes, depreciation and
      amortization.




***Contract
      with Gary Walker***




On
      December 30, 2002, we entered into a four-year employment contract with an
      option to renew for an additional year, with Gary Walker, the President of
      Walker Comm, who is also a Director. The base salary under the agreement is
      $140,000 per annum. In addition, Mr. Walker is entitled to participate in any
      and all benefit plans, from time to time, in effect for our employees, along
      with vacation, sick and holiday pay in accordance with our policies established
      and in effect from time to time. Mr. Walker is also entitled to the full-time
      use of an automobile owned or leased by us, for which we reimburse Mr. Walker
      for all maintenance and gasoline expenses associated with the use of the
      automobile. Mr. Walker is also entitled to receive an annual bonus of 3% of
      the
      operating income of Walker Comm: (i) after the elimination of all expenses
      related to  services provided to Walker Comm by WPCS or any affiliate
      thereof and  transactions between Walker Comm and WPCS or any affiliate
      thereof; and (ii) prior to the deduction of interest, taxes, depreciation and
      amortization.




***Contract
      with James Heinz***




On
      April
      2, 2004, we entered into a three-year employment contract with James Heinz,
      the
      President of Heinz, who is also an Executive Vice President. The base salary
      under the agreement is $140,000 per annum. In addition, Mr. Heinz is entitled
      to
      participate in any and all benefit plans, from time to time, in effect for
      our
      employees, along with vacation, sick and holiday pay in accordance with our
      policies established and in effect from time to time. Mr. Heinz is also entitled
      to the full-time use of an automobile owned or leased by us, for which we
      reimburse Mr. Heinz for all maintenance and gasoline expenses associated with
      the use of the automobile. Mr. Heinz is also entitled to receive an annual
      bonus
      of 2.5% of quarterly operating income, before the deduction of interest and
      income taxes of Heinz, WPCS Incorporated and Invisinet, Inc.




***Contract
      with Richard Schubiger***




On
      August
      1, 2005, we entered into a three-year employment contract with Richard
      Schubiger, the President of Quality, who is also an Executive Vice President.
      The base salary under the agreement is $140,000 per annum. In addition, Mr.
      Schubiger is entitled to participate in any and all benefit plans, from time
      to
      time, in effect for our employees, along with vacation, sick and holiday pay
      in
      accordance with our policies established and in effect from time to time.
      Pursuant to the agreement, Mr. Schubiger earned a bonus of $36,000 for the
      calendar year ended December 31, 2005, resulting from Quality achieving at
      least
      $13 million in revenue and such revenue yielded a minimum of 12% in earnings
      before interest and taxes. Effective January 1, 2006, Mr. Schubiger is entitled
      to receive an annual bonus of 3.0% of earnings before the deduction of interest
      and income taxes of Quality.


26
 **WPCS
            INTERNATIONAL INCORPORATED AND
            SUBSIDIARIES**


**Option
      Grants During 2006 Fiscal Year**





The
      following table provides information related to options granted to the named
      executive officers during the 2006 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
              
              
              126,690
              
              
              31.5%
              
              
              6.14
              
              
              2/1/2011Donald
                  Walker
              
              
              38,007
              
              
              9.4%
              
              
              6.14
              
              
              2/1/2011Gary
                  Walker
              
              
              17,736
              
              
              4.4%
              
              
              6.14
              
              
              4/30/2011James
                  Heinz
              
              
              38,007
              
              
              9.4%
              
              
              6.14
              
              
              4/30/2011Joseph
                  Heater
              
              
              63,345
              
              
              15.7%
              
              
              6.14
              
              
              2/1/2011Richard
                  Schubiger
              
              
              38,007
              
              
              9.4%
              
              
              6.14
              
              
              4/30/2011




**Aggregated
      Option Exercises During 2006 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 2006 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
            
            
            -
            
            
            -
            
            
            126,690
            
            
            -
            
            $
            290,120
            
            
            -Donald
                Walker
            
            
            -
            
            
            -
            
            
            38,007
            
            
            -
            
            
            87,036
            
            
            -Gary
                Walker
            
            
            -
            
            
            -
            
            
            17,736
            
            
            -
            
            
            40,615
            
            
            -James
                Heinz
            
            
            -
            
            
            -
            
            
            38,007
            
            
            -
            
            
            87,036
            
            
            -Joseph
                Heater
            
            
            -
            
            
            -
            
            
            63,345
            
            
            -
            
            
            145,060
            
            
            -Richard
                Schubiger
            
            
            -
            
            
            -
            
            
            38,007
            
            
            -
            
            
            87,036
            
            
            -






(1).
      Value based on the closing price of $8.43 per share on April 28, 2006, less
      the
      option exercise price.





**** ***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 table sets forth certain information regarding beneficial ownership
      of
      our common stock as of July 14, 2006:




•
            by
                each person who is known by us to beneficially own more than 5% of
                our
                common stock;




•
            by
                each of our officers and directors;
                and




•
            by
                all of our officers and directors as a
                group.
















**Number
                  of**
              
              
              
              
              **Percentage****of****Name
                And Address Of Beneficial
                Owner (1)**
              
              
              **Shares
                  Owned (2)**
              
              
              
              
              **Class
                  (3)**Andrew
                  Hidalgo
              
              
              485,074
              
              (4)
              
              
              8.70
              %Joseph
                  Heater
              
              
              131,679
              
              (4)
              
              
              2.43
              %Donald
                  Walker
              
              
              54,674
              
              (4)
              
              
              1.02
              %James
                  Heinz
              
              
              107,531
              
              (4)
              
              
              2.01
              %Richard
                  Schubiger
              
              
              48,007
              
              (4)
              
              
              *Norm
                  Dumbroff
              
              
              92,738
              
              (4)
              
              
              1.74
              %Neil
                  Hebenton
              
              
              23,988
              
              (4)
              
              
              *Gary
                  Walker
              
              
              114,051
              
              (4)
              
              
              2.14
              %William
                  Whitehead
              
              
              30,155
              
              (4)
              
              
              *All
                  Officers and Directors as a Group (9 persons)
              
              
              1,087,897
              
              (4)
              
              
              18.23
              %Special
                  Situations Private Equity Fund, L.P.
              
              
              1,110,236
              
              (5)
              
              
              19.09
              %153
                  E. 53rd Street, 55th FloorNew
                  York, NY 10022Special
                  Situations Fund III QP, L.P.
              
              
              1,047,485
              
              (5)
              
              
              17.56
              %527
                  Madison Avenue, Suite 2600New
                York, NY 10022Special
                  Situations Fund III LP.
              
              
              520,256
              
              (5)
              
              
              9.72
              %527
                  Madison Avenue, Suite 2600New
                  York, NY 10022Zander
                  Capital Management, LLC.
              
              
              310,494
              
              (6)
              
              
              5.86
              %152
                  West 57thStreetNew
                  York, NY 10019




___________




*  Less
      than
      1%.




(1) The
      address for each of our officers and directors is One East Uwchlan Avenue,
      Exton, PA 19341.


(2) 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 14, 2006 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.


(3) Percentage
      based on 5,294,565 shares of common stock outstanding.


(4) 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 14, 2006 or become exercisable within 60 days of that
      date: Andrew Hidalgo, 280,857 shares; Joseph Heater, 131,679 shares; Donald
      Walker, 54,674 shares; James Heinz, 48,007 shares; Richard Schubiger, 48,007
      shares; Norm Dumbroff, 21,904 shares; Neil Hebenton, 23,988; Gary Walker, 36,487
      shares; William Whitehead, 28,155 shares; and all officers and directors as
      a
      group, 673,758 shares.


(5) 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
      14,
      2006 or become exercisable within 60 days of that date: Special Situations
      Private Equity Fund, L.P., 520,834 shares, Special Situations Fund III QP,
      L.P.,
      670,405 shares, and Special Situations Fund III, LP, 58,762 shares.


(6)  
      Information based on Schedule 13-G filed on May 5, 2006 by Zander Capital
      Management, LLC.


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,
      the
      2006 Incentive Stock Plan approved by the Board of Directors and shareholders,
      as well as certain 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 plan approved by security holders (1)
              
              
              402,932
              
              $
              7.87
              
              
              2,484Equity
                  compensation plan approved by security holders (2)
              
              
              383,500
              
              $
              6.16
              
              
              16,500Equity
                  compensation plan not approved by security holders
              
              
              -
              
              
              -
              
              
              -Total
              
              
              786,432
              
              $
              7.04
              
              
              18,984





(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 (the “2002 Plan”). As of April 30, 2006,
                included above in the 2002 Plan are 373,765 shares issuable upon
                exercise
                of options granted to employees and directors, and 29,167 granted
                to
                outside consultants for services rendered to the
                company.





(2)
            The
                Company established the 2006 Incentive Stock Plan, under which 400,000
                shares of common stock were reserved for issuance upon the exercise
                of
                stock options, stock awards or restricted stock. As of April 30,
                2006,
                383,500 shares were issuable upon exercise of options granted to
                employees
                and directors.





29


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**




**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 obligations resulting from these transactions were ongoing
        after
        the close, resulting in payoffs to the other parties who became
        affiliates.
 
 In
        connection with the acquisition of Walker Comm, we assumed a lease with a
        living
        trust established by Gary Walker, one of our Directors, who is the trustee
        and
        whose heirs are the beneficiaries of the trust. The lease is 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 each of the fiscal
        years
        ended April 30, 2006, and 2005, the rent paid for this lease was $88,000.
        We
        believe the terms of this lease are no less favorable than those which could
        have been obtained between unrelated parties for similar transactions acting
        at
        arm’s length.
  On
        August
        22, 2003, we acquired all of the outstanding shares of Clayborn, our wholly
        owned subsidiary, in exchange for an aggregate $900,000 cash consideration
        and
        68,871 newly issued shares of our common stock. The Clayborn stockholders
        consisted of David Gove, the former President of Clayborn, and his spouse.
        An
        additional $1,100,000 is due by September 30, 2007, payable in quarterly
        distributions, by payment to the Clayborn stockholders of 50% of the quarterly
        post tax profits, as defined, of Clayborn and a final payment of any remaining
        balance on that date. Through April 30, 2006, payments of $204,000 have been
        made to the former Clayborn stockholders and the total remaining due is
        $896,000.


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 from James Heinz,
      our
      Executive Vice President, 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 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 was issued. Of
      the
      $200,000, $75,000 was paid in April 2005, $75,000 was paid in April 2006 and
      $50,000 is payable in April 2007.




On
      November 24, 2004, we acquired all of the issued and outstanding common stock
      of
      Quality, of which Richard Schubiger, our Executive Vice President, owned 33.33%.
      The aggregate consideration we paid to the Quality selling stockholders, net
      of
      acquisition transaction costs, was $7,457,913, of which $6,700,000 was paid
      pro
      rata to the Quality stockholders at closing. Additional purchase price
      adjustments of $757,913 were paid in June 2005 to settle working capital
      adjustments and income tax reimbursements related to our Internal Revenue Code
      Section 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.







30
 **WPCS
          INTERNATIONAL INCORPORATED AND SUBSIDIARIES**


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





***Exhibits:***




3.1
            Certificate
                of Incorporation, as amended, incorporated by reference to Exhibit
                3.1 of
                WPCS International Incorporated’s registration statement on Form SB-2,
                filed April 7, 2006.





3.2
            Amended
                and Restated Bylaws, incorporated by reference to Exhibit 3.2 of
                WPCS
                International Incorporated’s registration statement on Form SB-2, filed
                April 7, 2006.





4.1
            Certificate
                of Designation of Series A Convertible Preferred Stock, incorporated
                by
                reference to Exhibit 4.1 of wowtown.com, Inc.’s Form SB-2, filed June 8,
                2000.





4.2
            Certificate
                of Designation of Series B Convertible Preferred Stock, incorporated
                by
                reference to Exhibit 4.2 of WPCS International Incorporated’s Annual
                Report on Form 10-KSB, filed July 29,
                2002.





4.3
            Certificate
                of Designation of Series C Convertible Preferred Stock, incorporated
                by
                reference to Exhibit 4.3 of WPCS International Incorporated’s Annual
                Report on Form 10-KSB, filed August 14,
                2003.





4.4
            2002
                Employee Stock Option Plan, incorporated by reference to Exhibit
                4.4 of
                WPCS International Incorporated’s Annual Report on Form 10-KSB, filed
                August 14, 2003.





4.5
            Form
                of 2003 Common Stock Purchase Warrant, incorporated by reference
                to
                Exhibit 4.5 of WPCS International Incorporated’s Annual Report on Form
                10-KSB, filed August 14, 2003.





4.6
            2006
                Incentive Stock Plan, incorporated by reference to Exhibit 4.2 of
                WPCS
                International Incorporated’s registration statement on Form S-8, filed
                September 21, 2005.





10.1
            Employment
                Agreement by and between WPCS International Incorporated and Andrew
                Hidalgo, dated as of February 1, 2004, incorporated by reference
                to
                Exhibit 10.1 of WPCS International Incorporated’s registration statement
                on Form SB-2/A, filed April 30,
                2004.





10.2
            Employment
                Agreement by and among WPCS International Incorporated, Walker Comm,
                Inc,
                and Donald Walker, incorporated by reference to Exhibit 10.3 of WPCS
                International Incorporated’s Annual Report on Form 10-KSB, filed August
                14, 2003.





10.3
            Employment
                Agreement by and among WPCS International Incorporated, Walker Comm,
                Inc,
                and Gary Walker, incorporated by reference to Exhibit 10.4 of WPCS
                International Incorporated’s Annual Report on Form 10-KSB, filed August
                14, 2003.





10.4
            Employment
                Agreement by and between WPCS International Incorporated and Joseph
                Heater, dated as of June 1, 2005, incorporated by reference to Exhibit
                10.4 of WPCS International Incorporated’s Annual Report on Form 10-KSB,
                filed July 29, 2005.





10.5
            Employment
                Agreement by and between Heinz Corporation and James Heinz, dated
                as of
                April 1, 2004, incorporated by reference to Exhibit 10.12 of WPCS
                International Incorporated’s registration statement on Form SB-2/A, filed
                April 30, 2004.





10.6
            Employment
                Agreement by and between Quality Communications & Alarm Company, Inc.
                and Richard Schubiger, dated as of August 1, 2005, incorporated by
                reference to Exhibit 10.6 of WPCS International Incorporated’s
                registration statement on Form SB-2, filed February 8,
                2006.





10.7
            Agreement
                and Plan of Merger by and among Phoenix Star Ventures, Inc., WPCS
                Acquisition Corp., a Delaware corporation, WPCS Holdings, Inc., a
                Delaware
                corporation, and Andy Hidalgo, dated as of May 17, 2002, incorporated
                by
                reference to Exhibit 1 of WPCS International Incorporated’s Current Report
                on Form 8-K/A, filed June 12, 2002.





10.8
            Agreement
                and Plan of Merger by and among WPCS International Incorporated,
                Invisinet
                Acquisitions Inc., Invisinet, Inc., J. Johnson LLC and E. J. von
                Schaumburg made as of the 13th day of November, 2002, incorporated
                by
                reference to Exhibit 3 of WPCS International Incorporated’s Current Report
                on Form 8-K, filed November 27,
                2002.






31


**WPCS
        INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





10.9
            Amendment
                to Invisinet Bonus Agreement, dated as of May 27, 2003, incorporated
                by
                reference to Exhibit 10.8 of WPCS International Incorporated’s Annual
                Report on Form 10-KSB, filed August 14,
                2003.





10.10
            Agreement
                and Plan of Merger by and among WPCS International Incorporated,
                Walker
                Comm Merger Corp., Walker Comm, Inc., Donald C. Walker, Gary R. Walker,
                and Tanya D. Sanchez made as of the 30th day of December, 2002,
                incorporated by reference to Exhibit 10.10 of WPCS International
                Incorporated’s registration statement on Form SB-2, filed February 8,
                2006.





10.11
            Agreement
                and Plan of Merger by and among WPCS International Incorporated,
                Clayborn
                Contracting Acquisition Corp., Clayborn Contracting Group, Inc.,
                David G.
                Gove and Sharon Gove made as of the 22nd day of August, 2003, incorporated
                by reference to Exhibit 3 of WPCS International Incorporated’s Current
                Report on Form 8-K, filed August 29,
                2003.





10.12
            Agreement
                and Plan of Merger by and among WPCS International Incorporated,
                Heinz
                Acquisition Corp., Heinz Corporation and James Heinz made as of the
                2nd
                day of April, 2004, incorporated by reference to Exhibit 3 of WPCS
                International Incorporated’s Current Report on Form 8-K, filed April 9,
                2004.





10.13
            Stock
                Purchase Agreement by and among WPCS International Incorporated and
                Richard Schubiger, Matthew Haber and Brian Fortier, dated as of November
                24, 2004, incorporated by reference to Exhibit 10.1 of WPCS International
                Incorporated’s current report on Form 8-K, filed November 30,
                2004.





10.14
            Form
                of Securities Purchase Agreement, dated as of November 16, 2004,
                incorporated by reference to Exhibit 10.1 of WPCS International
                Incorporated’s current report on Form 8-K, filed November 19,
                2004.





10.15
            Form
                of Common Stock Purchase Warrant, dated as of November 16, 2004,
                incorporated by reference to Exhibit 10.2 of WPCS International
                Incorporated’s current report on Form 8-K, filed November 19,
                2004.





10.16
            Form
                of Registration Rights Agreement, dated as of November 16, 2004,
                incorporated by reference to Exhibit 10.3 of WPCS International
                Incorporated’s current report on Form 8-K, filed November 19,
                2004.





10.17
            Credit
                Agreement by and among WPCS International Incorporated, Clayborn
                Contracting Group, Inc., Heinz Corporation, Invisinet, Inc., Quality
                Communications & Alarm Company, Inc., Walker Comm, Inc. and Bank Leumi
                USA, dated as of June 3, 2005, incorporated by reference to Exhibit
                10.1
                of WPCS International Incorporated’s current report on Form 8-K, filed
                June 8, 2005.





10.18
            Form
                of Security Agreement with Bank Leumi, dated as of June 3, 2005,
                incorporated by reference to Exhibit 10.2 of WPCS International
                Incorporated’s current report on Form 8-K, filed June 8,
                2005.





10.19
            Purchase
                Agreement, dated as of April 11, 2006, incorporated by reference
                to
                Exhibit 10.1 of WPCS International Incorporated’s current report on Form
                8-K, filed April 12, 2006.





10.20
            Waiver,
                dated as of April 11, 2006, incorporated by reference to Exhibit
                10.2 of
                WPCS International Incorporated’s current report on Form 8-K, filed April
                12, 2006.





10.21
            Stock
                Purchase Agreement, dated as of June 7, 2006, by and among WPCS
                International Incorporated, New England Communications Systems, Inc.,
                Myron Polulak, Carolyn Windesheim and Gary Tallmon, incorporated
                by
                reference to Exhibit 10.1 of WPCS International Incorporated’s current
                report on Form 8-K, filed June 9,
                2006.





10.22
            Employment
                Agreement, dated as of June 7, 2006, between New England Communications
                Systems, Inc. and Myron Polulak, incorporated by reference to Exhibit
                10.2
                of WPCS International Incorporated’s current report on Form 8-K, filed
                June 9, 2006.





10.23
            Employment
                Agreement, dated as of June 7, 2006, between New England Communications
                Systems, Inc. and Carolyn Windesheim, incorporated by reference to
                Exhibit
                10.3 of WPCS International Incorporated’s current report on Form 8-K,
                filed June 9, 2006.





10.24
            Stock
                Purchase Agreement, dated as of July 19, 2006, by and among WPCS
                International Incorporated, Southeastern Communication Service,
                Inc., Daniel G. Lester, Christopher P. Lester, Michael D. Lester,
                Thomas A. Lester, Karl F. Eickemeyer and Anthony Ankersmit, incorporated
                by reference to Exhibit 10.1 of WPCS International Incorporated’s current
                report on Form 8-K, filed July 20,
                2006.






32


**WPCS
      INTERNATIONAL INCORPORATED AND SUBSIDIARIES**





14
            Code
                of Ethics and Business Conduct, incorporated by reference to Exhibit
                14 of
                WPCS International Incorporated’s annual report on Form 10-KSB, filed
                August 14, 2003.





21.1
            Subsidiaries
                of the registrant, incorporated by reference to Exhibit 21.1 of WPCS
                International Incorporated’s registration statement on Form SB-2, filed
                February 8, 2006.




23.1
            Consent
                of  J.H. Cohn LLP, Independent Registered Public Accounting Firm




31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as
                amended


31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
                promulgated under the Securities and Exchange Act of 1934, as
                amended





32.1
            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)





33
 **WPCS
            INTERNATIONAL INCORPORATED AND
            SUBSIDIARIES**


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





Audit
      Fees. The aggregate fees billed by our independent auditors, for professional
      services rendered for the audit of our annual financial statements for the
      years
      ended April 30, 2006 and 2005, and for the reviews of the financial statements
      included in our Quarterly Reports on Form 10-QSB during that fiscal year were
      $250,161 and $133,000, respectively.





Audit
      Related Fees. We incurred fees to our independent auditors of $57,150 and
      $39,473, respectively, for audit related fees during the fiscal years ended
      April 30, 2006 and 2005.





Tax
      Fees.
      We incurred fees to our independent auditors of $0 and $3,900, respectively,
      for
      tax compliance services during the fiscal years ended April 30, 2006 and
      2005.





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





34
 **WPCS
          INTERNATIONAL INCORPORATED AND
          SUBSIDIARIES**




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized.





**WPCS
      INTERNATIONAL INCORPORATED**





Date:
                July 27, 2006
            By:**/s/
                ANDREW HIDALGO
              
              Andrew
                HidalgoChief
                Executive Officer (Principal Executive Officer)Date:
                July 27, 2006
            By:**/s/
                JOSEPH HEATER
              
              Joseph
                HeaterChief
                Financial Officer (Principal Accounting
                Officer)





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





Name
            Position
            Date/s/
                ANDREW HIDALGO
              
              Andrew
                Hidalgo
            Chairman
                of the Board
            July
                27, 2006/s/
                NORM DUMBROFF
              
              Norm
                Dumbroff
            Director
            July
                27, 2006/s/
                NEIL HEBENTON
              Neil
                Hebenton
            Director
            July
                27, 2006/s/
                GARY WALKER
              
              Gary
                Walker
            Director
            July
                27, 2006/s/
                WILLIAM WHITEHEAD
              
              William
                Whitehead
            Director
            July
                27, 2006