form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

ACT OF 1934

For the Quarterly Period Ended January 31, 2008

[ ] 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)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] accelerated filer [ ] Non-accelerated filer [] Smaller reporting company [X]

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

As of March 13, 2008, there were 7,251,083 shares of registrant’s common stock outstanding.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Condensed consolidated balance sheets at January 31, 2008 (unaudited) and April 30, 2007	3-4

		Condensed consolidated statements of income for the three and nine months ended January 31, 2008 and 2007 (unaudited)	5

		Condensed consolidated statement of shareholders’ equity for the nine months ended January 31, 2008 (unaudited)	6

		Condensed consolidated statements of cash flows for the nine months ended January 31, 2008 and 2007 (unaudited)	7-8

		Notes to unaudited condensed consolidated financial statements	9-22

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-34

	ITEM 3.	Controls and Procedures	35

PART II.	OTHER INFORMATION

	ITEM 1	Legal proceedings	36
	ITEM 2	Unregistered sales of equity securities and use of proceeds	36
	ITEM 3	Defaults upon senior securities	36
	ITEM 4	Submission of matters to a vote of security holders	36
	ITEM 5	Other information	36
	ITEM 6	Exhibits	36

	SIGNATURES		37

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	January 31,		April 30,
ASSETS	2008		2007
	(Unaudited)		(Note 1)
CURRENT ASSETS:

Cash and cash equivalents	$	8,417,056	$	21,558,739
Accounts receivable, net of allowance of $98,786 at January 31, 2008 and April 30, 2007		25,017,770		16,560,636
Costs and estimated earnings in excess of billings on uncompleted contracts		4,599,455		2,499,940
Inventory		3,430,194		2,260,082
Prepaid expenses and other current assets		1,605,511		732,043
Deferred tax assets		75,271		27,000
Total current assets		43,145,257		43,638,440

PROPERTY AND EQUIPMENT, net		6,571,669		5,488,920

OTHER INTANGIBLE ASSETS, net		2,315,778		1,683,349

GOODWILL		23,966,807		20,469,608

OTHER ASSETS		439,999		273,353

Total assets	$	76,439,510	$	71,553,670

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

LIABILITIES AND SHAREHOLDERS' EQUITY	January 31,		April 30,
	2008		2007
	(Unaudited)		(Note 1)
CURRENT LIABILITIES:

Current portion of loans payable	$	3,059,968	$	2,598,872
Current portion of borrowings under line of credit		570,000		-
Current portion of capital lease obligations		30,205		-
Accounts payable and accrued expenses		8,931,405		6,802,110
Billings in excess of costs and estimated earnings on uncompleted contracts		2,680,072		2,272,688
Deferred revenue		740,381		504,458
Due to shareholders		168,365		707,000
Income taxes payable		354,767		433,361
Total current liabilities		16,535,163		13,318,489

Borrowings under line of credit		644,000		4,454,217
Loans payable, net of current portion		195,738		284,016
Capital lease obligations, net of current portion		307,270		-
Deferred tax liabilities		835,447		611,000
Total liabilities		18,517,618		18,667,722

Minority interest in subsidiary		1,390,846		1,353,965
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued		-		-

Common stock - $0.0001 par value, 75,000,000 shares authorized, 7,105,104 and 6,971,698 shares issued and outstanding at January 31, 2008 and April 30, 2007, respectively		710		697
Additional paid-in capital		49,494,446		47,901,159
Retained earnings		6,788,646		3,631,215
Accumulated other comprehensive income (loss) on foreign currency translation		247,244		(1,088	)

Total shareholders' equity		56,531,046		51,531,983

Total liabilities and shareholders' equity	$	76,439,510	$	71,553,670

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2008			2007			2008			2007


REVENUE	$	24,802,079		$	18,121,405		$	74,723,129		$	52,310,727

COSTS AND EXPENSES:
Cost of revenue		18,010,149			12,150,372			53,844,717			36,202,802
Selling, general and administrative expenses		5,573,644			3,538,395			14,151,781			9,874,455
Depreciation and amortization		618,002			310,074			1,616,204			880,965

Total costs and expenses		24,201,795			15,998,841			69,612,702			46,958,222

OPERATING INCOME		600,284			2,122,564			5,110,427			5,352,505

OTHER EXPENSE (INCOME):
Interest expense		69,269			112,387			377,487			326,823
Interest income		(81,082	)		(120,164	)		(436,257	)		(294,916	)
Minority interest		(23,907	)		-			36,881			-

INCOME BEFORE INCOME TAX PROVISION		636,004			2,130,341			5,132,316			5,320,598

Income tax provision		252,701			878,462			1,974,885			2,089,642

NET INCOME	$	383,303		$	1,251,879		$	3,157,431		$	3,230,956

Basic net income per common share	$	0.05		$	0.23		$	0.45		$	0.59

Diluted net income per common share	$	0.05		$	0.20		$	0.40		$	0.54

Basic weighted average number of common shares outstanding		7,093,662			5,547,671			7,049,099			5,454,911

Diluted weighted average number of common shares outstanding		7,801,597			6,323,169			7,951,545			6,011,224

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED JANUARY 31, 2008

(Unaudited)

														Accumulated
									Additional Paid-In Capital					Other Compre-			Total Shareholders' Equity
	Preferred Stock				Common Stock							Retained		hensive
	Shares		Amount		Shares		Amount					Earnings		Income (Loss)


BALANCE, May 1, 2007		-	$	-		6,971,698	$	697	$	47,901,159		$	3,631,215	$	(1,088	)	$	51,531,983

Net issuance of common stock, acquisitions
of TAGS, Voacolo, Major and Max		-		-		123,575		12		1,489,001			-		-			1,489,013

Fair value of stock options granted to employees		-		-		-		-		38,047			-		-			38,047

Proceeds from exercise of stock options		-		-		9,831		1		60,531			-		-			60,532

Equity issuance cost		-		-		-		-		(10,292	)		-		-			(10,292	)

Excess tax benefit from exercise of stock options		-		-		-		-		16,000			-		-			16,000

Accumulated other comprehensive income		-		-		-		-		-			-		248,332			248,332

Net income		-		-		-		-		-		$	3,157,431		-			3,157,431

BALANCE, JANUARY 31, 2008		-	$	-		7,105,104	$	710	$	49,494,446		$	6,788,646	$	247,244		$	56,531,046

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	January 31,
	2008			2007

OPERATING ACTIVITIES :
Net income	$	3,157,431		$	3,230,956
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,616,204			880,965
Fair value of stock options granted to employees		38,047			30,666
Recovery of doubtful accounts		-			(6,000	)
Amortization of debt issuance costs		-			39,623
Excess tax benefit from exercise of stock options		(16,000	)		-
Minority interest		36,881			-
Gain on sale of fixed assets		(2,335	)		(13,876	)
Deferred income taxes		135,314			(23,000	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(1,559,220	)		3,003,872
Costs and estimated earnings in excess of billings on uncompleted contracts		(148,787	)		(42,160	)
Inventory		(762,668	)		83,455
Prepaid expenses and other current assets		(307,902	)		(316,409	)
Other assets		(155,011	)		(119,964	)
Accounts payable and accrued expenses		(664,778	)		(999,295	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(734,400	)		1,012,993
Deferred revenue		235,804			272,579
Income taxes payable		(585,757	)		170,677
NET CASH PROVIDED BY OPERATING ACTIVITIES		282,823			7,205,082

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

	Nine Months Ended
	January 31,
	2008			2007

INVESTING ACTIVITIES:
Acquisition of property and equipment, net		(618,950	)		(433,541	)
Acquisition of NECS, net of cash received		(3,534	)		(4,458,465	)
Acquisition of SECS, net of cash received		57,451			(1,877,046	)
Acquisition of Voacolo, net of cash received		(69,601	)		-
Acquisition of Major, net of cash received		(3,091,777	)		-
Acquisition of Max, net of cash received		(523,045	)		-
Acquisition of Empire, net of cash received		(1,772,874	)		-
Acquisition of James, net of cash received		(914,237	)		-
NET CASH USED IN INVESTING ACTIVITIES		(6,936,567	)		(6,769,052	)

FINANCING ACTIVITIES:
Net proceeds from exercise of warrants		-			197,875
Net proceeds from issuance of common stock		-			8,972,112
Net proceeds from exercise of stock options		60,532			338,132
Excess tax benefit from exercise of stock options		16,000			-
Equity issuance costs		(10,292	)		(50,362	)
(Repayments)/borrowings under lines of credit, net		(5,726,991	)		1,437,446
Borrowings/(repayments) under loans payable, net		94,707			(417,116	)
Payments of amounts due to shareholders		(882,420	)		(149,000	)
Payments of capital lease obligations		(57,174	)		(15,778	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(6,505,638	)		10,313,309

Effect of exchange rate changes on cash		17,699			-

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(13,141,683	)		10,749,339
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		21,558,739			12,279,646
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	8,417,056		$	23,028,985

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q of Article 10 of Regulation S-X and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended April 30, 2007 included in the Company’s Annual Report on Form 10-K. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the management, considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Operating results for the three and nine month periods ended January 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2008. Certain reclassifications have been made to prior period financial statements to conform to the current presentation. The amounts for the April 30, 2007 balance sheet have been extracted from the audited consolidated financial statements included in Form 10-K for the year ended April 30, 2007.

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), Quality Communications & Alarm Company, Inc. (Quality), New England Communications Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern Communication Services, Inc. (SECS) from July 19, 2006 (date of acquisition), Voacolo Electric Incorporated (Voacolo) from March 30, 2007 (date of acquisition), Taian AGS Pipeline Construction Co., Ltd. (TAGS) from April 5, 2007 (date of acquisition), Major Electric, Inc. (Major) from August 1, 2007 (date of acquisition), Max Engineering LLC (Max) from August 2, 2007 (date of acquisition), Gomes and Gomes, Inc. dba Empire Electric (Empire) from November 1, 2007 (date of acquisition), WPCS Australia Pty Ltd from November 12, 2007 (date of formation), and James Design Pty Ltd (James) from November 30, 2007 (date of acquisition), collectively the "Company".

The Company provides design-build engineering services that focus on the implementation requirements of wireless technology. The Company serves the specialty communication systems and wireless infrastructure sectors. The Company provides services that include site design, technology integration, electrical contracting, construction, and project management for corporations, government entities and educational institutions worldwide.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements follows (additional policies are set forth in the Company’s Annual Report on Form 10-K):

Principles of Consolidation

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

Goodwill and Other Intangible Assets

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.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Company performs its annual impairment test during the fourth quarter absent any interim impairment indicators.

Changes in goodwill consist of the following during the nine months ended January 31, 2008:

Ending balance, April 30, 2007	$	20,469,608

Voacolo acquisition - purchase price adjustment		53,309
NECS acquisition - purchase price adjustment		35,595
SECS acquisition - purchase price adjustment		(39,775	)
Major acquisition		1,727,136
Max acquisition		302,880
Empire acquisition		586,103
James acquisition		820,818
Foreign currency translation adjustment - James		11,133
Ending balance, January 31, 2008	$	23,966,807

Other intangible assets consist of the following at January 31, 2008 and April 30, 2007:

	Estimated useful life (years)		January 31, 2008			April 30, 2007

Customer lists		5 - 9	$	3,313,000		$	2,607,000
Contract backlog		1 - 3		800,100			325,200
				4,113,100			2,932,200
Less accumulated amortization expense				(1,797,322	)		(1,248,851	)
			$	2,315,778		$	1,683,349

Amortization expense for other intangible assets for the nine months ended January 31, 2008 and 2007 was approximately $548,471 and $233,750, respectively. There are no expected residual values related to these intangible assets.

Inventory

Inventory consists of materials, parts and supplies principally valued at the lower of cost using the first-in-first-out (FIFO) method, or market.

Revenue Recognition

The Company generates its revenue by providing design-build engineering services for specialty communication systems and wireless infrastructure services. The Company provides services that include site design, technology integration, electrical contracting, construction and project management. The Company’s engineering services report revenue pursuant to customer contracts that span varying periods of time. The Company reports revenue from contracts when persuasive evidence of an arrangement exists, fees are fixed or determinable and collection is reasonably assured.

The Company records revenue and profit from long-term contracts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to the estimated total costs for each contract. Contracts in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts. Contract costs include direct materials, direct labor, third party subcontractor services and those indirect costs related to contract performance. Contracts are generally considered substantially complete when engineering is completed and/or site construction is completed.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, a provision is made currently for the total loss anticipated.

The Company also recognizes certain revenue from short-term contracts when equipment is delivered or the services have been provided to the customer. For maintenance contracts, revenue is recognized ratably over the service period.

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.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FAS No. 109” (FIN 48), which clarifies the accounting for uncertainty in income taxes is subject to significant and varied interpretations that have resulted in diverse and inconsistent accounting practices and measurements. Addressing such diversity, FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring changes in such tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. The adoption of FIN 48 on May 1, 2007 had no impact on the Company’s financial position, results of operations, cash flows or financial statements disclosures.

Earning Per Common Share

Earning per common share is computed pursuant to SFAS No. 128, "Earnings Per Share". Basic net income per common share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur from common stock issuable through stock options and warrants. The table below presents the computation of basic and diluted earnings per share for the three and nine months ended January 31, 2008 and 2007, respectively:

Basic earnings per share computation	Three Months Ended				Nine Months Ended
	January 31,				January 31,
Numerator:	2008		2007		2008		2007

Net Income	$	383,303	$	1,251,879	$	3,157,431	$	3,230,956

Denominator:

Basic weighted average shares outstanding		7,093,662		5,547,671		7,049,099		5,454,911

Basic net income per common share	$	0.05	$	0.23	$	0.45	$	0.59

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Diluted earnings per share computation	Three Months Ended				Nine Months Ended
	January 31,				January 31,
Numerator:	2008		2007		2008		2007

Net Income	$	383,303	$	1,251,879	$	3,157,431	$	3,230,956

Denominator:

Basic weighted average shares outstanding		7,093,662		5,547,671		7,049,099		5,454,911

Incremental shares from assumed conversion:

Conversion of stock options		165,049		218,932		200,673		170,440

Conversion of common stock warrants		542,886		556,566		701,773		385,873

Diluted weighted average shares		7,801,597		6,323,169		7,951,545		6,011,224

Diluted net income per common share	$	0.05	$	0.20	$	0.40	$	0.54

For the three months ended January 31, 2008 and 2007, 94,362 and 100,248 stock options were excluded from the computation of the diluted earnings per share, respectively. For the nine months ended January 31, 2008 and 2007, 80,191 and 131,000 stock options were excluded from the computation of the diluted earnings per share, respectively. These potentially dilutive securities were excluded because the stock option exercise prices exceeded the average market price of the common stock and, therefore, the effects would be antidilutive.

Other Comprehensive Income

Other comprehensive income for the three and nine months ended January 31, 2008 consists of the following:


	Three Months Ended		Nine Months Ended
	January, 31, 2008		January, 31, 2008

Net income	$	383,303	$	3,157,431

Other comprehensive income – foreign currency translation adjustments		138,367		248,332

Comprehensive income	$	521,670	$	3,405,763

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, useful life of customer lists, deferred tax valuation allowance, the fair values of the assets and liabilities of purchased businesses and the factors related to determining if goodwill is impaired. Actual results will likely differ from those estimates.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Pronouncements

On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. On February 12, 2008, the FASB issued staff position No. FAS 157-2, “effective date of FASB No. 157 Fair Value Measurements”, which delays the effective date of SFAS 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 157 on the consolidated financial position, results of operations and cash flows or financial statement disclosures.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact SFAS 159 may have on our results of operations or financial position.

On December 4, 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (SFAS 141(R)), and SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). These new standards will significantly change the accounting for and reporting for business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141(R) and SFAS 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will evaluate the impact of adopting SFAS 141(R) and SFAS 160 on its financial position, or results of operations.

NOTE 3 - 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.

Voacolo

On March 30, 2007, the Company acquired Voacolo. The aggregate consideration paid by the Company to the Voacolo selling shareholders, including acquisition transaction costs of $31,389, was $2,563,863 of which $1,250,000 was paid in cash, and the Company issued 116,497 shares of common stock valued at $1,282,473. In addition, the Company shall pay an additional $2,500,000 in cash or Company common stock if Voacolo’s earnings before interest and taxes for the twelve months ended March 31, 2008 shall equal or exceed $1,100,000. Voacolo was acquired pursuant to a Stock Purchase Agreement among WPCS International Incorporated, and the former Voacolo shareholders, dated and effective as of March 31, 2007. In connection with the acquisition, Voacolo entered into employment agreements with the former Voacolo shareholders, each for a period of two years. The acquisition of Voacolo expands the Company’s geographic presence in the Mid-Atlantic region and provides additional electrical contracting services in both high and low voltage applications, structured cabling and voice/data/video solutions, as well as the expansion of its operations into wireless video surveillance.

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The purchase price allocation has been determined as follows:

Assets purchased:
Cash	$	584,094
Accounts receivable		2,102,984
Inventory		217,500
Prepaid expenses		101,974
Costs in excess of billings		215,143
Fixed assets		346,569
Backlog		200,200
Customer lists		132,000
Goodwill		1,065,902
		4,966,366
Liabilities assumed:
Accounts payable		(732,252	)
Accrued expenses		(102,832	)
Payroll and other payables		(80,672	)
Billings in excess of costs		(686,327	)
Deferred income tax payable		(97,000	)
Loan payable		(602,984	)
Notes payable		(100,436	)
		(2,402,503	)
Purchase price	$	2,563,863

TAGS

On April 5, 2007, the Company acquired a 60% Equity Interest and a 60% Profit Interest (together the Interest) in TAGS, a joint venture enterprise in the City of Taian, Shandong province, the People's Republic of China, from American Gas Services, Inc. (AGS) and American Gas Services, Inc. Consultants (AGS Consultants), respectively. The aggregate consideration paid by the Company to AGS and AGS Consultants, including acquisition transaction costs of $185,409, was $1,785,409 of which $800,000 was paid in cash, and the Company issued 68,085 shares of common stock valued at approximately $800,000.

Founded in 1997, TAGS is a communications infrastructure engineering company serving the China market. TAGS is certified by the People's Republic of China as both a Construction Enterprise of Reform Development company and a Technically Advanced Construction Enterprise company for the Province of Shandong. TAGS is also licensed in 17 other provinces and has completed projects for a diverse customer base of businesses and government institutions in over 30 cities in China. The acquisition of TAGS provides the Company international expansion into China consistent with its emphasis on China and surrounding Pacific Rim countries.

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

The purchase price allocation has been determined as follows:

Assets purchased:
Cash	$	141,564
Accounts receivable		1,727,953
Inventory		621,725
Other current assets		399,664
Fixed assets		3,415,035
		6,305,941
Liabilities assumed:
Accounts payable		(72,710	)
Accrued expenses and other payable		(714,126	)
Payroll and other payables		(171,463	)
Dividends payable		(252,724	)
Income tax payable		(235,279	)
Notes payable		(1,681,846	)
Deferred revenue		(61,519	)
Minority interest		(1,330,865	)
		(4,520,532	)
Purchase price	$	1,785,409

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Major

On August 1, 2007, the Company acquired Major, a Washington corporation. Through January 31 2008, the aggregate consideration paid by the Company to the Major selling shareholders, including acquisition transaction costs of $39,158, was $4,215,698, of which $3,000,000 was paid in cash and the Company issued 97,797 shares of common stock valued at $1,176,540. In February 2008, aggregate additional consideration of $2,542,950 was paid to the major selling shareholders based on the earnout settlement for the calendar year ending December 31, 2007, of which $1,271,475 was paid in cash and the Company issued 145,979 shares of common stock valued at $1,271,475. Major was acquired pursuant to a Stock Purchase Agreement among the Company and the former Major shareholders, dated and effective as of August 1, 2007. In connection with the acquisition, Major entered into employment agreements with the former president and vice president, for a period of one and two years, respectively. The acquisition of Major expands the Company’s geographic presence in the Pacific Northwest region and provides additional wireless and electrical contracting services in direct digital controls, security, wireless SCADA applications and wireless infrastructure.

The preliminary purchase price allocation has been determined as follows:

Assets purchased:
Accounts receivable	$	3,830,626
Inventory		162,647
Prepaid expenses		117,349
Costs in excess of billings		1,769,462
Fixed assets		682,637
Other assets		8,855
Backlog		130,000
Customer lists		390,000
Goodwill		1,727,136
		8,818,712
Liabilities assumed:
Cash overdraft		(52,618	)
Accounts payable		(424,513	)
Accrued expenses		(6,094	)
Payroll and other payable		(605,456	)
Billings in excess of costs		(985,204	)
Line of credit		(2,086,774	)
Loan payable		(24,638	)
Capital lease obligation		(242,297	)
Shareholder loan		(175,420	)
		(4,603,014	)
Purchase price	$	4,215,698

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Max

On August 2, 2007, the Company acquired Max, a Texas limited liability company. The aggregate consideration paid by the Company to the Max selling shareholders, including acquisition transaction costs of $28,971, was $828,971, of which $600,000 was paid in cash and the Company issued 17,007 shares of common stock valued at $200,000. In addition, the Company shall pay an additional: (i) $350,000 in cash or Company common stock if Max’s earnings before interest and taxes for the twelve months period ending August 1, 2008 shall equal or exceed $275,000; and (ii) $375,000 in cash or Company common stock if Max’s earnings before interest and taxes for the twelve months period ending August 1, 2009 shall equal or exceed $375,000. Max was acquired pursuant to a Membership Interest Purchase Agreement among the Company and the former Max members, dated and effective as of August 2, 2007. In connection with the acquisition, Max entered into employment agreements with the former members, each for a period of two years. The acquisition of Max expands the Company’s geographic expansion into Texas and provides additional engineering services that specialize in the design of specialty communication systems and wireless infrastructure for the telecommunications, oil, gas and wind energy markets.

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

The preliminary purchase price allocation has been determined as follows:

Assets purchased:
Cash	$	105,926
Accounts receivable		256,829
Costs in excess of billings		4,500
Fixed assets		21,890
Other assets		1,950
Customer lists		216,000
Goodwill		302,880
		909,975
Liabilities assumed:
Accrued expenses		(59,186	)
Payroll and other payables		(19,318	)
Accrued tax payable		(2,500	)
		(81,004	)
Purchase price	$	828,971

Empire

On November 1, 2007, the Company acquired Gomes and Gomes, Inc. dba Empire Electric, a California corporation (Empire). The aggregate consideration paid by the Company to the Empire selling shareholders, including acquisition transaction costs of $31,029, was $1,856,029, of which $1,825,000 was paid in cash, subject to adjustment. In addition, the Company shall pay an additional $1,000,000 in cash if Empire’s earnings before interest and taxes for the year ended October 31, 2007 shall equal or exceed $850,000. The Company expects to settle the earnout payment by March 31, 2008. Empire was acquired pursuant to a Stock Purchase Agreement among the Company and the former shareholders of Empire, dated as of November 1, 2007. In connection with the acquisition, Empire entered into employment agreements with the former shareholders for a period of two years. The acquisition of Empire expands the Company’s geographic presence in California and provides additional electrical contractor services that specialize in low voltage applications for healthcare, state government and military customers.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Based on the preliminary information currently available, the preliminary allocation has been made resulting in goodwill and other intangible assets of approximately $1,031,000. Upon completion of a final purchase price allocation, there may be an increase or decrease in the amount assigned to goodwill and a corresponding increase or decrease in tangible or other intangible assets.

The preliminary purchase price allocation has been determined as follows:

Assets purchased:
Cash	$	83,155
Accounts receivable		2,326,029
Inventory		197,961
Prepaid expenses		371,453
Costs in excess of billings		149,677
Fixed assets		212,230
Backlog		344,900
Customer lists		100,000
Goodwill		586,103
		4,371,508
Liabilities assumed:

Accounts payable		(1,113,789	)
Accrued expenses		(47,165	)
Payroll and other payable		(327,112	)
Billings in excess of costs		(156,580	)
Line of credit		(400,000	)
Income tax payable		(240,000	)
Deferred tax liability		(15,444	)
Notes payable		(47,024	)
Shareholder loan		(168,365	)
		(2,515,479	)
Purchase price	$	1,856,029

James

On November 30, 2007, the Company acquired James Design Pty Ltd, an Australia corporation (James). The aggregate consideration paid by the Company to the James selling shareholders, including acquisition transaction costs of $65,625, was $1,145,625, of which $1,080,000 was paid in cash, subject to adjustment. James was acquired pursuant to a Stock Purchase Agreement among the Company and the former shareholders of James, dated as of November 30, 2007. In connection with the acquisition, the Company entered into an employment agreement with the former president for a period of two years. James is a design engineering services company specializing in building automation including mechanical, electrical, hydraulic, fire protection, lift, security access and wireless systems. The acquisition of James provides the Company international expansion into Australia consistent with our emphasis on Australia, China and surrounding Pacific Rim countries.

Based on the preliminary information currently available, the preliminary allocation has been made resulting in goodwill and other intangible assets of approximately $821,000. Upon completion of a final purchase price allocation, there may be an increase or decrease in the amount assigned to goodwill and a corresponding increase or decrease in tangible or other intangible assets.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The preliminary purchase price allocation has been determined as follows:

Assets purchased:
Cash	231,386
Accounts receivable	312,135
Prepaid expenses	23,881
Costs in excess of billings	26,271
Fixed assets	103,951
Other assets	830
Goodwill and other intangibles	820,818
	1,519,272
Liabilities assumed:

Accounts payable	(26,287	)
Accrued expenses	(74,510	)
Payroll and other payable	(9,409	)
Loan payable	(6,099	)
Sales and use tax payable	(40,516	)
Income tax payable	(216,826	)
	(373,647	)
Purchase price	1,145,625

Pro forma Information

The following unaudited pro forma financial information presents the combined results of operations of the Company, NECS, SECS, Voacolo, TAGS, Major, Max, Empire and James for the three and nine months ended January 31, 2008 and 2007 as if the acquisitions had occurred at May 1, 2006, including the issuance of the Company’s common stock as part of the consideration for the applicable acquisitions. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company, NECS, SECS, Voacolo, TAGS, Major, Max, Empire and James been a single entity during this period.

	Consolidated Pro Forma

	Three months ended				Nine months ended
	January 31,				January 31,
	2008		2007		2008		2007

Revenues	$	25,010,045	$	27,078,764	$	84,499,454	$	81,704,027

Net income		431,940		1,509,217		3,506,184		5,244,918

Basic weighted common shares		7,093,662		5,852,865		7,101,533		5,817,434
Diluted weighted common shares		7,801,597		6,628,363		8,003,979		6,373,747

Basic net income per common share	$	0.06	$	0.26	$	0.49	$	0.90
Diluted net income per common share	$	0.06	$	0.23	$	0.44	$	0.82

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”, represents revenue recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenue recognized. Costs and estimated earnings on uncompleted contracts consist of the following at January 31, 2008 and April 30, 2007:

	January 31, 2008			April 30, 2007
Costs incurred on uncompleted contracts	$	62,945,703		$	39,431,006
Estimated contract profit		20,793,056			12,513,277
		83,738,759			51,944,283
Less: billings to date		81,819,376			51,717,031
Net excess of costs	$	1,919,383		$	227,252

Costs and estimated earnings in excess of billings	$	4,599,455		$	2,499,940

Billings in excess of costs and estimated earnings on uncompleted contracts		(2,680,072	)		(2,272,688	)
Net excess of costs	$	1,919,383		$	227,252

NOTE 5 – DEBT

Lines of Credit

On April 10, 2007, the Company entered into a loan agreement with Bank of America, N.A. (BOA). The loan agreement (the Loan Agreement), provides for a revolving line of credit in an amount not to exceed $12,000,000, together with a letter of credit facility not to exceed $2,000,000. The Company and its subsidiaries also entered into security agreements with BOA, pursuant to which each entity granted a security interest to BOA in all of their assets. The Loan Agreement contains customary covenants, including but not limited to (i) funded debt to tangible net worth, and (ii) minimum interest coverage ratio. As of January 31, 2008, the Company was in compliance with the loan agreement covenants. The loan commitment shall expire on April 10, 2010. The Company may prepay the loan at any time.

Loans under the Loan Agreement bear interest at a rate equal to BOA’s prime rate, minus one percentage point. The Company has the option to elect to use the optional interest rate of LIBOR plus one hundred seventy-five basis points (3.28% LIBOR rate plus one and three quarters percent as of January 31, 2008). As of January 31, 2008, there was $644,000 in borrowings outstanding under the Loan Agreement.

In connection with the acquisition of Empire, the Company assumed a revolving line of credit facility with a commercial bank in the amount of $750,000. As of January 31, 2008, the outstanding balance was $570,000 and bore interest at 9.25%. This line is expected to be repaid by the Company by March 31, 2008.

Loans Payable

The Company’s long-term debt also consists of notes issued by the Company or assumed in acquisitions related to the purchase of property and equipment in the ordinary course of business. At January 31, 2008, loans payable totaled approximately $3,255,700 with interest rates ranging from 0% to 9.49%.

NOTE 6 - 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 nine months ended January 31, 2008 and 2007, the rent paid for this lease was $67,756 and $66,210, respectively.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In connection with the acquisition of Clayborn, the Company was obligated to pay an additional $1,100,000 in quarterly distributions to the former Clayborn shareholders by December 31, 2007. For the nine months ended January 31, 2008, payments of $707,000 were made to the former Clayborn shareholders. The remaining $393,000 was paid in prior fiscal years.

In connection with the acquisition of SECS in fiscal 2007, the Company leases its Sarasota, Florida location from a trust, of which one of the former shareholders of SECS is the trustee. For the nine months ended January 31, 2008, the rent paid for this lease was $39,290.

In connection with the acquisition of Voacolo in fiscal 2007, the Company leases its Trenton, New Jersey location from Voacolo Properties LLC, of which the former shareholders of Voacolo are the members. For the nine months ended January 31, 2008, the rent paid for this lease was $40,500.

NOTE 7 – STOCK-BASED COMPENSATION

In September 2006, the Company adopted the 2007 Incentive Stock Plan, under which officers, directors, key employees or consultants may be granted options. Under the 2007 Incentive Stock Plan, 400,000 shares of common stock were reserved for issuance upon the exercise of stock options, stock awards or restricted stock. At January 31, 2008, there were no stock options granted under this plan.

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. These shares were registered under Form S-8. 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. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At January 31, 2008, options to purchase 326,726 shares were outstanding at exercise prices ranging from $6.14 to $12.10. At January 31, 2008, there were 1,698 options available for grant under the 2006 Incentive Stock Plan.

In March 2003, the Company established a 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). These shares were registered under Form S-8. Under the terms of the 2002 Plan, the options 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. These options generally vest based on between one to three years of continuous service and have five-year contractual terms. At January 31, 2008, options to purchase 232,009 shares were outstanding at exercise prices ranging from $4.80 to $16.20. At January 31, 2008, there were 42,141 shares available for grant under the 2002 Plan.

In accordance with SFAS 123(R) (revised December 2004), “Share-Based Payment, an amendment of SFAS 123, Accounting for Stock-Based Compensation”, the Company recognizes stock-based employee compensation expense. The Company recorded stock-based compensation of $38,047 for the nine months ended January 31, 2008, compared to $30,666 for the nine months ended January 31, 2007.

At January 31, 2008, the total compensation cost related to unvested stock options granted to employees under the Company’s stock option plans but not yet recognized was approximately $86,000 and is expected to be recognized over a weighted-average period of 1.9 years. For the nine months ended January 31, 2008 and 2007, the weighted average fair value of stock options granted was $5.23 and $3.86, respectively.

The Company has elected to adopt the shortcut method provided in Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards,” for determining the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation subsequent to the adoption of SFAS 123R. The shortcut method includes simplified procedures for establishing the beginning balance of the pool of excess tax benefits (the APIC Tax Pool) and for determining the subsequent effect on the APIC Tax Pool and the Company’s Consolidated Statements of Cash Flows of the tax effects of share-based compensation awards. SFAS 123R requires that excess tax benefits related to share-based compensation be reflected as financing cash inflows.

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. Compensation cost is then recognized on a straight-line basis over the vesting or service period and is net of estimated forfeitures. There were no stock options granted by the Company in the three months ended January 31, 2008 or 2007. The following assumptions were used to compute the fair value of stock options granted during the nine months ended January 31, 2008 and 2007, respectively:

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended
	January 31,
	2008		2007

Risk-free interest rate	4.31% to 4.74%		4.73% to 4.96%
Expected volatility	57.0% to 58.3%		61.0% to 62.4%
Expected dividend yield		0.00%		0.00%
Expected term (in years)		3.5		3.5

The risk-free rate is based on the rate of U.S Treasury zero-coupon issues with a remaining term equal to the expected term of the option grants. Expected volatility is based on the historical volatility of the Company’s common stock using the weekly closing price of the Company’s common stock, pursuant to SEC Staff Accounting Bulletin No. 107 (SAB 107). The expected dividend yield is zero based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was calculated using the simplified method pursuant to SAB 107.

The following table summarizes stock option activity for the nine months ended January 31, 2008, during which there were 9,831 options exercised under the Company’s stock option plans:

	2002 Plan									2006 Plan
	Number of Shares			Weighted-average Exercise Price		Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value		Number of Shares			Weighted-average Exercise Price		Weighted-average Remaining Contractual Term		Aggregate Intrinsic Value





Outstanding, May 1, 2007		233,575		$	8.43						327,259		$	6.22

Granted		9,200		$	10.95						6,000		$	12.10
Exercised		(4,498	)	$	5.76						(5,333	)	$	6.65
Forfeited/Expired		(6,268	)	$	13.75						(1,200	)	$	7.23

Outstanding, January 31, 2008		232,009		$	8.44		1.5	$	257,049		326,726		$	6.31		2.8	$	636,686

Vested and expected to vested, January 31, 2008		229,650		$	8.43		1.4	$	256,296		325,091		$	6.29		2.8	$	636,213

Exercisable, January 31, 2008		215,097		$	8.38		1.3	$	249,893		313,900		$	6.17		2.7	$	632,622

NOTE 8 - 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 income (loss) before income taxes. Corporate includes corporate salaries and external professional fees, such as accounting, legal and investor relations costs. Corporate assets primarily include cash and prepaid expenses. Segment results for the three and nine months ended January 31, 2008 and 2007 are as follows:

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	For Three Months Ended January 31, 2008										For Three Months Ended January 31, 2007
	Corporate			Wireless Infrastructure			Specialty Communication		Total		Corporate			Wireless Infrastructure		Specialty Communication		Total

Revenue	$	-		$	2,800,380		$	22,001,699	$	24,802,079	$	-		$	3,012,031	$	15,109,374	$	18,121,405

Depreciation and amortization	$	8,309		$	58,983		$	550,710	$	618,002	$	13,917		$	75,724	$	220,433	$	310,074

Income (loss) before income taxes	$	(528,127	)	$	(151,500	)	$	1,315,631	$	636,004	$	(431,438	)	$	42,043	$	2,519,736	$	2,130,341


	As of and for the Nine Months Ended January 31, 2008										As of and for the Nine Months Ended January 31, 2007
	Corporate			Wireless Infrastructure			Specialty Communication		Total		Corporate			Wireless Infrastructure		Specialty Communication		Total

Revenue	$	-		$	9,394,315		$	65,328,814	$	74,723,129	$	-		$	9,427,000	$	42,883,727	$	52,310,727

Depreciation and amortization	$	27,720		$	193,381		$	1,395,103	$	1,616,204	$	42,760		$	200,749	$	637,456	$	880,965

Income (loss) before income taxes	$	(1,809,475	)	$	599,050		$	6,342,741	$	5,132,316	$	(1,439,989	)	$	585,171	$	6,175,416	$	5,320,598

Goodwill	$	-		$	4,582,176		$	19,384,631	$	23,966,807	$	-		$	4,294,631	$	14,724,821	$	19,019,452

Total assets	$	1,557,930		$	11,546,354		$	63,335,226	$	76,439,510	$	12,955,887		$	10,511,580	$	38,696,476	$	62,163,943

As of and for the nine months ended January 31, 2008, the specialty communication systems segment includes approximately $1,367,000 in revenue and $1,844,000 of net assets held in China related to the Company’s 60% interest in TAGS and $206,000 in revenue and $1,170,000 of net assets held in Australia related to the Company’s 100% ownership in James.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The increasing demand for wireless services has become the 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 its broad acceptance. The advantages of wireless over land line communication are apparent in the aspects of mobility, capacity, cost, and deployment. The use of dedicated wireless networks for specified applications has improved productivity for individuals and organizations alike. We provide design-build engineering services that focus on the implementation requirements of wireless technology. We serve the specialty communication systems and wireless infrastructure sectors. We provide services that include site design, technology integration, electrical contracting, construction, and project management for corporations, government entities and educational institutions worldwide. 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 obtain the most appropriate solution for their communication needs on a cost effective basis.

Specialty Communication Systems

We provide specialty communication systems which 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. The types of specialty communication systems that we implement are used for mobile communication and general wireless connectivity purposes. In mobile communication, the most popular applications include asset tracking, telematics and telemetry.

In general wireless connectivity, we design and deploy networks that allow entities to reduce their dependence on high cost leased land lines. 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 an in-depth knowledge of radio frequency 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. For the nine months ended January 31, 2008, specialty communication systems represented approximately 87% of our total revenue.

Wireless Infrastructure Services

We provide wireless infrastructure services to major wireless carriers, which are services that include the engineering, installation, integration and maintenance of wireless carrier equipment. Wireless carriers continue to be 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 installation of new equipment, technology upgrades, equipment modifications and reconfigurations. These services may also include tower construction.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Major wireless carriers have come to depend on our experience in providing engineering and support services that keep their networks technologically advanced and consistently operational. We have extensive experience in the installation, testing and commissioning of base station equipment. We provide complete services including testing, equipment modification, reconfiguration, structured cabling and relocating equipment at the cell site. In addition, WPCS also performs network modifications, antenna sectorization, electrical work and maintenance. For the nine months ended January 31, 2008, wireless infrastructure services represented approximately 13% of our total revenue.

Significant Events, Trends and Financial Highlights

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

For the nine months ended January 31, 2008, the specialty communication systems segment represented approximately 87% of total revenue, and the wireless infrastructure services segment represented approximately 13%. This revenue mix remains consistent with our historical performance and focus, in which over 80% of our total revenue has been derived from specialty communication systems.

	·	As we continue to search for acquisitions, our primary goal is to identify companies which are performing well financially, that expand our customer base 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.
	·	With regard to our acquisition strategy, we are also focused on expanding in the international sector with an emphasis on China, Australia and surrounding Pacific Rim countries. This trend could lead to a change of revenue composition in which as much as 50% of our revenue could be generated from international sales in the future.

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 wireless market continues to display strong growth and the demand for our engineering services remains favorable domestically and in China and Australia, particularly in public safety and healthcare. We believe that the advancement of wireless technology will create additional opportunities for us to design and deploy wireless solutions. Also, we continue to identify new vertical sectors for wireless technology.
	·	We believe that our two most important economic indicators for measuring our future revenue producing capability are our backlog and bid list. At January 31, 2008, our backlog of unfilled orders was approximately $67 million and our bid list, which represents project bids under proposal for new and existing customers, was approximately $129 million, which are at their highest levels historical, and indicates that demand for our services remains high. By comparison, our backlog and bid list was approximately $36 million and $125 million respectively, at October 31, 2007.

In general, we plan for our consolidated cost of revenue to fall in the range of 70 to 72% of revenue. For the nine months ended January 31, 2008, consolidated cost of revenue was 72% compared to 69% for the same period in the prior year. We are experiencing modest gross margin pressure compared to the same period in the prior year due to: (1) the subprime credit issues and the lack of residential housing projects, where in certain markets there are a growing number of general contractors competing for non-wireless projects and bidding down prices. While we are primarily focused on the high-end wireless design and deployment market, we have a modest exposure to this type of low-end contracting work; and (2) delays or postponements of certain projects with wireless carriers, resulting in contractors bidding down prices on remaining work. Management is addressing these issues through continued focus and diversification to specialty communication systems projects.

We continue to maintain a healthy balance sheet with approximately $27 million in working capital and credit facility borrowings of only approximately $1.2 million. We expect to use our working capital and availability under the credit facility to fund our continued growth.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended January 31, 2008 Compared to the Three Months Ended January 31, 2007

Consolidated results for the three months ended January 31, 2008 and 2007 were as follows: