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 July 31, 2011

o 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) (zip code)

(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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

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

As of September 12, 2011, there were 6,954,766 shares of registrant’s common stock outstanding.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Financial Statements

		Condensed consolidated balance sheets at July 31, 2011 (unaudited) and April 30, 2011	3-4

		Condensed consolidated statements of operations for the three months ended July 31, 2011 and 2010 (unaudited)	5

		Condensed consolidated statements of comprehensive loss for the three months ended July 31, 2011 and 2010 (unaudited)	6

		Condensed consolidated statement of equity for the three months ended July 31, 2011 (unaudited)	7

		Condensed consolidated statements of cash flows for the three months ended July 31, 2011 and 2010 (unaudited)	8-9

		Notes to unaudited condensed consolidated financial statements	10-24

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25-36

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	ITEM 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION

	ITEM 1	Legal Proceedings	39
	ITEM 1A	Risk Factors	39
	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
	ITEM 3	Defaults Upon Senior Securities	39
	ITEM 4	(Removed and Reserved)	39
	ITEM 5	Other Information	39
	ITEM 6	Exhibits	39

	SIGNATURES		41

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 31,		April 30,
ASSETS	2011		2011
	(Unaudited)		(Note 1)
CURRENT ASSETS:

Cash and cash equivalents	$	4,063,322	$	4,879,106
Accounts receivable, net of allowance of $1,631,985 and $1,662,168 at
July 31, 2011 and April 30, 2011, respectively		25,777,082		22,474,024
Costs and estimated earnings in excess of billings on uncompleted contracts		4,546,270		4,669,012
Inventory		1,606,385		1,972,905
Prepaid expenses and other current assets		1,592,500		1,413,151
Prepaid income taxes		214,897		173,700
Income taxes receivable		1,185,000		1,166,225
Deferred tax assets		2,642,598		2,621,329
Total current assets		41,628,054		39,369,452

PROPERTY AND EQUIPMENT, net		5,909,461		6,035,353

OTHER INTANGIBLE ASSETS, net		742,897		803,171

GOODWILL		2,038,978		2,044,856

DEFERRED TAX ASSETS		2,674,841		2,675,511

OTHER ASSETS		134,145		134,654

Total assets	$	53,128,376	$	51,062,997

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 EQUITY	July 31,			April 30,
	2011			2011
	(Unaudited)			(Note 1)
CURRENT LIABILITIES:

Current portion of loans payable	$	97,299		$	35,724
Borrowings under line of credit		5,560,977			7,000,000
Current portion of capital lease obligations		48,175			54,496
Accounts payable and accrued expenses		13,599,932			10,249,503
Billings in excess of costs and estimated earnings on uncompleted contracts		2,168,352			2,039,117
Deferred revenue		809,169			792,414
Due joint venture partner		3,134,583			3,415,641
Acquisition-related contingent consideration		1,049,011			1,008,200
Total current liabilities		26,467,498			24,595,095

Loans payable, net of current portion		211,677			10,554
Capital lease obligations, net of current portion		5,432			15,465
Total liabilities		26,684,607			24,621,114


COMMITMENTS AND CONTINGENCIES

EQUITY:
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued		-			-
Common stock - $0.0001 par value, 25,000,000 shares authorized, 6,954,766
shares issued and outstanding at July 31, 2011 and April 30, 2011		695			695
Additional paid-in capital		50,453,914			50,433,626
Accumulated deficit		(26,630,508	)		(26,595,831	)
Accumulated other comprehensive income on foreign currency translation, net of
tax effects of $191,979 and $185,060 at July 31, 2011 and April 30, 2011, respectively		1,560,411			1,564,965

Total WPCS shareholders' equity		25,384,512			25,403,455

Noncontrolling interest		1,059,257			1,038,428

Total equity		26,443,769			26,441,883

Total liabilities and equity	$	53,128,376		$	51,062,997

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	July 31,
	2011			2010

REVENUE	$	25,419,503		$	28,852,498

COSTS AND EXPENSES:
Cost of revenue		19,573,186			22,697,975
Selling, general and administrative expenses		5,156,522			5,916,327
Depreciation and amortization		604,832			734,615
Change in fair value of acquisition-related contingent consideration		43,068			63,052

		25,377,608			29,411,969

OPERATING INCOME (LOSS)		41,895			(559,471	)

OTHER EXPENSE (INCOME):
Interest expense		95,932			54,635
Interest income		(8,476	)		(10,069	)

LOSS BEFORE INCOME TAX BENEFIT		(45,561	)		(604,037	)

Income tax benefit		(26,340	)		(238,379	)

CONSOLIDATED NET LOSS		(19,221	)		(365,658	)

Net income attributable to noncontrolling interest		15,456			10,293

NET LOSS ATTRIBUTABLE TO WPCS	$	(34,677	)	$	(375,951	)

Basic net loss per common share attributable to WPCS	$	(0.00	)	$	(0.05	)

Diluted net loss per common share attributable to WPCS	$	(0.00	)	$	(0.05	)

Basic weighted average number of common shares outstanding		6,954,766			6,954,766

Diluted weighted average number of common shares outstanding		6,954,766			6,954,766

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended
	July 31,
	2011			2010
Net loss	$	(19,221	)	$	(365,658	)
Other comprehensive income (loss) - foreign currency translation
adjustments, net of tax effects of $6,919 and $7,578, respectively		819			(193,825	)

Comprehensive loss		(18,402	)		(559,483	)

Comprehensive income attributable to noncontrolling interest		(20,829	)		(16,178	)
Comprehensive loss attributable to WPCS		(39,231	)		(575,661	)

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

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

THREE MONTHS ENDED JULY 31, 2011

(Unaudited)

														Accumulated
														Other Compre-
	Preferred Stock				Common Stock				Additional Paid-In		Retained			hensive Income,			WPCS Shareholders'			Noncontrolling		Total
	Shares		Amount		Shares		Amount		Capital		Earnings			net of taxes			Equity			Interest		Equity

BALANCE, MAY 1, 2011		-	$	-		6,954,766	$	695	$	50,433,626	$	(26,595,831	)	$	1,564,965		$	25,403,455		$	1,038,428	$	26,441,883

Stock-based compensation		-		-		-		-		20,288		-			-			20,288			-		20,288

Accumulated other comprehensive income (loss)		-		-		-		-		-		-			(4,554	)		(4,554	)		5,373		819

Net income attributable to noncontrolling interest		-		-		-		-		-		-			-			-			15,456		15,456

Net loss attributable to WPCS		-		-		-		-		-		(34,677	)		-			(34,677	)		-		(34,677	)

BALANCE, JULY 31, 2011		-	$	-		6,954,766	$	695	$	50,453,914	$	(26,630,508	)	$	1,560,411		$	25,384,512		$	1,059,257	$	26,443,769

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)

	Three Months Ended
	July 31
	2011			2010
OPERATING ACTIVITIES :
Consolidated net loss	$	(19,221	)	$	(365,658	)
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		604,832			734,615
Stock-based compensation		20,288			26,866
Provision for doubtful accounts		54,059			28,783
Amortization of debt issuance costs		-			3,212
Change in the fair value of acquisition-related contingent consideration		43,068			63,052
Gain on sale of fixed assets		(14,658	)		(21,270	)
Deferred income taxes		(26,080	)		2,425
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(3,351,665	)		2,213,606
Costs and estimated earnings in excess of billings on uncompleted contracts		125,843			(2,446,144	)
Inventory		366,610			(114,983	)
Prepaid expenses and other current assets		(173,491	)		(585,951	)
Income taxes receivable		(52,507	)		-
Prepaid taxes		(7,929	)		(564,390	)
Other assets		482			30,224
Accounts payable and accrued expenses		3,330,157			(660,828	)
Billings in excess of costs and estimated earnings on uncompleted contracts		124,699			194,880
Deferred revenue		16,755			90,543
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		1,041,242			(1,371,018	)

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)

(Unaudited)

	Three Months Ended
	July 31
	2011			2010

INVESTING ACTIVITIES:
Acquisition of property and equipment, net	$	(116,473	)	$	(455,717	)

FINANCING ACTIVITIES:
Repayments under lines of credit		(1,439,023	)		-
Repayments under loans payable, net		(9,718	)		(18,020	)
(Repayments) borrowings to joint venture partner		(304,623	)		226,493
Repayments of capital lease obligations		(16,354	)		(22,938	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(1,769,718	)		185,535

Effect of exchange rate changes on cash		29,165			(44,224	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(815,784	)		(1,685,424	)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD		4,879,106			5,584,309
CASH AND CASH EQUIVALENTS, END OF THE PERIOD	$	4,063,322		$	3,898,885

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 - LIQUIDITY AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At July 31, 2011, the Company had cash and cash equivalents of $4,063,322 and working capital of $15,160,556, which consisted of current assets of $41,628,054 and current liabilities of $26,467,498. For the three months ended July 31, 2011, the Company provided or generated operating cash flow of approximately $1.0 million compared to using approximately $69,000 of operating cash flow in the preceding three months ended April 30, 2011, and using $1.4 million of operating cash flow for the three months ended July 31, 2010. The Company expects to meet its cash requirements through a combination of existing cash balances, internally generated cash from operations, expense management and future operating income and existing or future credit facilities.

As described in Note 4, “Debt”, for the first quarter ended July 31, 2011, the Company was in compliance with the financial covenants under the Loan Agreement compared to each of the fiscal quarters in fiscal 2011 when the Company was in default of the financial covenants under the Loan Agreement due to the operating losses incurred during the previous fiscal year. In the first quarter of fiscal 2011, the Company obtained a waiver for this non-compliance from Bank of America, N.A. (BOA). On December 22, 2010, the Company executed the terms of a forbearance agreement with BOA (the Forbearance Agreement). On March 28, 2011, but effective February 28, 2011, the Company entered into a first amendment (the Forbearance Amendment) of the Forbearance Agreement. Under the terms of the Forbearance Amendment, BOA agreed not to exercise its rights or remedies against the Company as a result of these events of default until the earlier of (a) September 30, 2011 or (b) an event of termination under the Forbearance Agreement.

On June 28, 2011, the Company received a letter dated June 27, 2011 from counsel of BOA pursuant to which BOA alleged that certain events of default considered to be events of termination under the Forbearance Agreement have occurred under the Loan Agreement (including the Forbearance Agreement), including failures to (i) provide a compliance certificate pursuant to section 8.2(f) of the Loan Agreement, (ii) maintain EBITDA on a quarterly basis of not less than $425,000 for the quarter ending April 30, 2011 pursuant to section 8.3 of the Loan Agreement, (iii) maintain, on a consolidated basis, a Funded Debt to Tangible Net Worth Ratio of not more than 1.00 to 1.00 as of April 30, 2011 pursuant to section 8.4 of the Loan Agreement, (iv) maintain, on a consolidated basis, an Interest Coverage Ratio, on a quarterly (and not a rolling four-quarter) basis, of at least 3.00 to 1.00 for the quarter ending April 30, 2011 pursuant to section 8.5 of the Loan Agreement, (v) maintain, on a consolidated basis, a Funded Debt to EBITDA Ratio on a quarterly basis of not more than 21.00 to 1.00 for the quarter ending April 30, 2011 pursuant to section 8.25 of the Loan Agreement, and (vi) maintain, on a consolidated basis, a Basic Fixed Charge Ratio of not less than 1.20 to 1.00 as of the April 30, 2011 quarter end pursuant to section 2(d)(iii) of the Forbearance Amendment.

The Company is currently negotiating and expects to complete the terms of another forbearance amendment with BOA. Under the expected terms of the new forbearance amendment, the maturity of the Loan Agreement will be November 30, 2011. Upon execution of the new forbearance amendment, availability under the credit facility will be limited to a lesser of (a) $3,800,000 or (b) 60% of eligible accounts receivable plus 30% of eligible inventory. Subsequent to October 21, 2011, availability under the credit facility will be limited to a lesser of (a) $3,500,000 or (b) 60% of eligible accounts receivable plus 30% of eligible inventory to November 30, 2011. Borrowings on the line of credit will bear interest at BOA’s prime rate (currently 3.25%) plus three hundred basis points at October 1, 2011, BOA’s prime rate plus four hundred basis points at November 1, 2011, and BOA’s prime rate plus five hundred basis points, if the outstanding balance is not paid at maturity. In connection with the new forbearance amendment the Company expects to pay a fee of $50,000 plus related legal and documentation fees, and an additional fee of $75,000 will be paid only if the credit line is not paid at maturity.

As further described in Note 9, “Subsequent Event”, on September 1, 2011, the Company completed the sale of its St. Louis and Sarasota operations centers to Multiband Corporation (Multiband) for $2,000,000 in cash. The $2,000,000 in cash proceeds was paid to BOA to reduce the outstanding borrowings under the Loan Agreement to $3,560,977 as of September 13, 2011.

Although BOA has not demanded payment on the amounts outstanding, the Company is seeking alternative debt financing and has conducted discussions with other senior lenders to replace the Loan Agreement. The Company may not be successful in obtaining alternative debt financing or additional financing sources may not be available on acceptable terms. If the Loan Agreement is called and the Company was unable to obtain alternative debt financing, the Company would need to use its existing cash and cash equivalents.

Finally, as described in Note 6, “Shareholders’ Equity”, the Company has filed a shelf registration statement on Form S-3. Sales of the Company’s common stock may be offered in amounts and at prices and terms that the Company would determine at the time of the offering. The issuance of additional stock is considered to be another alternative to generate additional funds for corporate purposes. The Company may not be successful in issuing additional common stock on acceptable terms or at all.

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, 2011 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 condensed consolidated financial position, results of operations and cash flows for the interim periods. Operating results for the three month period ended July 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2012. The amounts for the April 30, 2011 balance sheet have been extracted from the audited consolidated financial statements included in Form 10-K for the year ended April 30, 2011.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements include the accounts of WPCS International Incorporated (WPCS) and its wholly and majority-owned subsidiaries, as follows, collectively referred to as “we”, “us” or the "Company". Domestic operations include WPCS Incorporated, WPCS International – Suisun City, Inc. (Suisun City Operations), WPCS International - St. Louis, Inc. (St. Louis Operations), WPCS International – Lakewood, Inc. (Lakewood Operations), WPCS International – Hartford, Inc. (Hartford Operations), WPCS International – Sarasota, Inc. (Sarasota Operations), WPCS International – Trenton, Inc. (Trenton Operations), WPCS International – Seattle, Inc. (Seattle Operations), and WPCS International – Portland, Inc. (Portland Operations). International operations include WPCS Asia Limited, Taian AGS Pipeline Construction Co. Ltd. (China Operations), and WPCS Australia Pty Ltd., WPCS International – Brisbane, Pty Ltd., WPCS International – Brendale, Pty Ltd., and The Pride Group (QLD) Pty Ltd. (Pride), (collectively the Australia Operations).

The Company provides design-build engineering services that focus on the implementation requirements of communications infrastructure. The Company provides its engineering capabilities including wireless communication, specialty construction and electrical power to the public services, healthcare, energy and corporate enterprise markets worldwide.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

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

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

The Company’s material financial instruments at July 31, 2011 and for which disclosure of estimated fair value is required by certain accounting standards consisted of cash and cash equivalents, accounts receivable, account payable, line of credit and loans payable. The fair values of cash and cash equivalents, accounts receivable, and account payable are equal to their carrying value because of their liquidity and short-term maturity. Management believes that the fair values of the line of credit and loans payable do not differ materially from their aggregate carrying values in that substantially all the obligations bear variable interest rates that are based on market rates or interest rates that are periodically adjustable to rates that are based on market rates.

Goodwill and Other Intangible Assets

Goodwill represents the amount by which the purchase prices of the Company's wholly-owned subsidiaries were in excess of the fair value of identifiable net assets as of date of acquisition. Other intangible assets have finite useful lives and are comprised of customer lists and backlog.

Goodwill is tested at least annually for impairment, and otherwise on an interim basis should events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Determination of impairment requires the Company to compare the fair value of the business acquired (reporting unit) to its 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 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 at April 30 absent any interim impairment indicators. Significant adverse changes in general economic conditions could impact the Company's valuation of its reporting units.

The Company reviews its other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted cash flows from the use of the asset and eventual disposition. If the estimated undiscounted future cash flows are less than carrying value, an impairment loss is charged to operations based on the difference between the carrying amount and the fair value of the asset.

The Company recorded an estimated non-cash goodwill impairment charge of $26.6 million, in the fourth quarter of fiscal 2011 ended April 30, 2011. The Company expects to complete the second step of the goodwill impairment test in the second fiscal quarter of fiscal 2012, which includes calculating an implied fair value of the goodwill of the reporting units, by allocating the fair values of substantially all of its individual assets, liabilities and identified intangible assets, as if the reporting units had been acquired in a business combination. The Company does not expect the completion of this second step to result in a material adjustment to the goodwill impairment charge previously recorded in fiscal 2011.

Changes in goodwill consist of the following during the three months ended July 31, 2011:

	Wireless		Specialty		Electrical
	Communication		Construction		Power			Total

Beginning balance, May 1, 2011	$	-	$	-	$	2,044,856		$	2,044,856

Foreign currency translation adjustments		-		-		(5,878	)		(5,878	)

Ending balance, July 31, 2011	$	-	$	-	$	2,038,978		$	2,038,978

Other intangible assets consist of the following at July 31, 2011 and April 30, 2011:

	Estimated useful life	July 31,			April 30,
	(years)	2011			2011

Customer list	3-9	$	4,634,278		$	4,638,398
Less accumulated amortization			(3,026,542	)		(2,972,341	)
Less accumulated customer list impairments			(868,777	)		(868,777	)
			738,959			797,280

Contract backlog	1-3		1,173,582			1,174,332
Less accumulated amortization			(1,169,644	)		(1,168,441	)
			3,938			5,891

Totals		$	742,897		$	803,171

Amortization expense of other intangible assets for the three months ended July 31, 2011 and 2010 was $58,703 and $171,834, respectively. There are no expected residual values related to these intangible assets.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The Company generates its revenue by providing design-build engineering services for communications infrastructure. The Company’s design-build 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.

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.

The length of the Company’s contracts varies. Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets as they will be liquidated in the normal course of contract completion, although this may require more than one year.

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

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 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. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

The Company performed a review for uncertainty in income tax positions in accordance with authoritative guidance. This review did not result in the recognition of any material unrecognized tax benefits. Management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. For the three months ended July 31, 2011 and 2010, the Company recognized no interest or penalties. The Company's U.S. Federal, state and foreign income tax returns prior to fiscal year 2007 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

Loss Per Common Share

Basic net loss per common share is computed as net loss divided by the weighted average number of common shares outstanding for the period. The table below presents the computation of basic and diluted net loss per common share for the three months ended July 31, 2011 and 2010, respectively:

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basic net loss per share computation	Three Months Ended
	July 31,
	2011			2010
Numerator:

Net loss attributable to WPCS	$	(34,677	)	$	(375,951	)

Denominator:

Basic weighted average shares outstanding		6,954,766			6,954,766

Basic net loss per common share attributable to WPCS	$	(0.00	)	$	(0.05	)

Diluted net loss per share computation
	Three Months Ended
	July 31,
		2011			2010
Numerator:

Net loss attributable to WPCS	$	(34,677	)	$	(375,951	)

Denominator:

Basic weighted average shares outstanding		6,954,766			6,954,766

Incremental shares from assumed conversion:

Conversion of stock options		-			-

Diluted weighted average shares		6,954,766			6,954,766

Diluted net loss per common share attributable to WPCS	$	(0.00	)	$	(0.05	)

At July 31, 2011 and 2010, the Company had 272,938 and 590,155 outstanding stock options, respectively. For the three months ended July 31, 2011 and 2010, 272,938 and 590,155 stock options were not included in the computation of diluted loss per share as a result of the net loss in each period, respectively.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Noncontrolling Interest

Noncontrolling interest for the three months ended July 31, 2011 and 2010 consists of the following:

	July 31,
	2011		2010
Balance, beginning of period	$	1,038,428	$	1,173,000

Net income attributable to noncontrolling interest		15,456		10,293

Other comprehensive income attributable to noncontrolling interest		5,373		5,885

Balance, end of period	$	1,059,257	$	1,189,178

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 calculation of percentage-of-completion on uncompleted contracts, allowance for doubtful accounts, valuation of inventory, realization of deferred tax assets, amortization method and lives of customer lists, acquisition-related contingency consideration 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.

Recently Issued Accounting Pronouncements

No recently issued accounting pronouncement issued or effective after the end of the fiscal year is expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.

NOTE 3 - 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. Although management believes it has established adequate procedures for estimating costs to complete open contracts, additional costs could occur on contracts prior to completion. Costs and estimated earnings on uncompleted contracts consist of the following at July 31, 2011 and April 30, 2011:

	July 31, 2011			April 30, 2011
Costs incurred on uncompleted contracts	$	74,894,886		$	74,468,342
Estimated contract profit		15,307,903			14,355,700
		90,202,789			88,824,042
Less: billings to date		87,824,871			86,194,147
Net excess of costs	$	2,377,918		$	2,629,895

Costs and estimated earnings in excess of billings on uncompleted contracts	$	4,546,270		$	4,669,012
Billings in excess of costs and estimated earnings
on uncompleted contracts		(2,168,352	)		(2,039,117	)
Net excess of costs	$	2,377,918		$	2,629,895

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revisions in the estimated gross profits on contracts and contract amounts are made in the period in which circumstances requiring the revisions become known. During the three months ended July 31, 2011, the effect of such revisions in estimated contract profits resulted in an increase to gross profits of approximately $406,000, from that which would have been reported had the revised estimates been used as the basis of recognition for contract profits in prior years. Although management believes it has established adequate procedures for estimating costs to complete open contracts, it is at least reasonably possible that additional costs could occur on contracts prior to completion.

NOTE 4 - DEBT

Lines of Credit

On April 10, 2010, the Company renewed the loan agreement (Loan Agreement) with BOA for three years under terms similar to the prior Loan Agreement, including the same customary covenants. The Loan Agreement provides for a revolving line of credit in an amount not to exceed $15,000,000, 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 the Company granted a security interest to BOA in all of its domestic assets and 65% of the capital stock of the Australian Operations. At July 31, 2011, outstanding borrowings were $5,560,977 under the Loan Agreement.

For the first quarter ended July 31, 2011, the Company was in compliance with the financial covenants under the Loan Agreement compared to each of the fiscal quarters in fiscal 2011 when the Company was in default of the financial covenants under the Loan Agreement due to the operating losses incurred during the previous fiscal year. In the first quarter of fiscal 2011, the Company obtained a waiver for this non-compliance from BOA. However, as a result of the non-compliance with the financial covenants at the completion of our second fiscal quarter of 2011, on December 22, 2010 the Company executed the terms of a forbearance agreement with BOA (the Forbearance Agreement). On March 28, 2011 but effective February 28, 2011, the Company entered into a first amendment (the Forbearance Amendment) of the Forbearance Agreement. Under the terms of the Forbearance Amendment, BOA agreed not to exercise its rights or remedies against the Company as a result of these events of default until the earlier of (a) September 30, 2011 or (b) an event of termination under the Forbearance Agreement.

On June 28, 2011, the Company received a letter dated June 27, 2011 from counsel to BOA pursuant to which BOA alleged that certain events of default considered to be events of termination under the Forbearance Agreement have occurred under the Loan Agreement ( including the Forbearance Agreement), including failures to (i) provide a compliance certificate pursuant to section 8.2(f) of the Loan Agreement, (ii) maintain EBITDA on a quarterly basis of not less than $425,000 for the quarter ending April 30, 2011 pursuant to section 8.3 of the Loan Agreement, (iii) maintain, on a consolidated basis, a Funded Debt to Tangible Net Worth Ratio of not more than 1.00 to 1.00 as of April 30, 2011 pursuant to section 8.4 of the Loan Agreement, (iv) maintain, on a consolidated basis, an Interest Coverage Ratio, on a quarterly (and not a rolling four-quarter) basis, of at least 3.00 to 1.00 for the quarter ending April 30, 2011 pursuant to section 8.5 of the Loan Agreement, (v) maintain, on a consolidated basis, a Funded Debt to EBITDA Ratio on a quarterly basis of not more than 21.00 to 1.00 for the quarter ending April 30, 2011 pursuant to section 8.25 of the Loan Agreement, and (vi) maintain, on a consolidated basis, a Basic Fixed Charge Ratio of not less than 1.20 to 1.00 as of the April 30, 2011 quarter end pursuant to section 2(d)(iii) of the Forbearance Amendment.

While the Company and BOA have commenced discussions concerning the Loan Agreement and the events of default, there can be no assurance that the Company and BOA will come to any agreement regarding repayment, future forbearance terms, waiver and/or modification of the Loan Agreement and/or the default of the financial covenants.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Due to the short-term nature of the Forbearance Agreement and Forbearance Amendment, the line of credit borrowings under the Loan Agreement are classified as a current liability.

Loans Payable

The Company’s long-term debt also consists of notes issued by the Company or assumed in acquisitions related to working capital funding and the purchase of property and equipment in the ordinary course of business. At July 31, 2011, loans payable and capital lease obligations totaled $362,583 with interest rates ranging from 0% to 14.3%.

Due Joint Venture Partner

As of July 31, 2011, the China Operations had outstanding loans due the joint venture partner, Taian Gas Group (TGG), totaling $3,134,583, of which $2,875,973 matures on December 31, 2011, and bears interest at 5.81%. The Company expects to renew the outstanding loans on or prior to maturity consistent with historical practice. The remaining balance of $258,610 is due on demand and represents interest accrued and working capital loans from TGG to the China Operations in the normal course of business.

NOTE 5 - RELATED PARTY TRANSACTIONS

In connection with the acquisition of the Trenton Operations, the Company leases its Trenton, New Jersey location from Voacolo Properties LLC, of which the former shareholders of the Trenton Operations are the members. For the three months ended July 31, 2011 and 2010, the rent paid for this lease was $17,400 and $17,250, respectively.

The China Operations revenue earned from TGG and subsidiaries was $689,235 and $0 for the three months ended July 31, 2011 and 2010, respectively. The China Operations accounts receivable due from TGG and subsidiaries was $425,975 and $86,990 as of July 31, 2011 and 2010, respectively.

NOTE 6 - SHAREHOLDERS’ EQUITY

Stock-Based Compensation Plans

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. These shares were registered under Form S-8. At July 31, 2011, options to purchase 207,000 shares were outstanding at exercise prices ranging from $2.37 to $6.33. At July 31, 2011, there were 180,500 options available for grant under the 2007 Incentive Stock 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 July 31, 2011, options to purchase 12,452 shares were outstanding at exercise prices ranging from $6.33 to $12.10. At July 31, 2011, there were 315,972 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 July 31, 2011, options to purchase 53,486 shares were outstanding at exercise prices ranging from $2.37 to $12.10. At July 31, 2011, there were 220,664 shares available for grant under the 2002 Plan.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 during the three months ended July 31, 2011. There were 7,000 stock options granted during the three months ended July 31, 2010.

The Company recorded stock-based compensation of $20,288 and $26,866 for the three months ended July 31, 2011 and 2010, respectively. At July 31, 2011, 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 $78,000 and is expected to be recognized over a weighted-average period of 1.05 years.

The Company has elected to adopt the shortcut method for determining the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation. 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. Excess tax benefits related to share-based compensation are reflected as financing cash inflows.

Stockholder Rights Plan

On February 24, 2010, the Company adopted a stockholder rights plan. The stockholder rights plan is embodied in the Rights Agreement dated as of February 24, 2010 (the Rights Agreement) between the Company and Interwest Transfer Co., Inc., the Rights Agent. In connection with the Rights Agreement, the Company declared a dividend of one preferred share purchase right (a Right) for each outstanding share of the Company’s common stock to stockholders of record at the close of business on March 8, 2010. Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth (1/1000th) of a share of Series D Junior Participating Preferred Stock, $0.0001 par value (the Preferred Stock) at a purchase price of $15.00, subject to adjustment. The Rights will expire at the close of business on February 24, 2020, unless earlier redeemed or exchanged by the Company. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.

The Rights are not immediately exercisable. The Rights will initially trade only with the shares of the Company’s common stock to which they are attached, and generally become exercisable only if a person or group becomes an Acquiring Person (as defined in the Rights Agreement) by accumulating beneficial ownership (as defined in the Rights Agreement) of 15% or more of the Company’s outstanding common stock. If a person becomes an Acquiring Person, the holders of each Right (other than an Acquiring Person) are entitled to purchase shares of the Company’s preferred stock or, in some circumstances, shares of the Acquiring Person’s common stock, having a value equal to twice the exercise price of the Right, which is initially $15.00 per Right. The Rights Agreement provides that a person or group currently owning 15% or more of the Company’s outstanding common stock will not be deemed to be an Acquiring Person if the person or group does not subsequently accumulate an additional 1% of the Company’s outstanding common stock through open market purchases, expansion of the group or other means.

At any time prior to a person becoming an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.0001 per Right. The Rights Agreement requires a committee of independent directors to review and evaluate every five years whether the Rights Agreement remains in the best interests of the Company’s stockholders.

Shelf Registration Statement

On April 15, 2010, the Company filed a registration statement on Form S-3 using a “shelf” registration process. Under this shelf registration process, the Company may offer up to 2,314,088 shares of its common stock, from time to time, in amounts, at prices, and terms that will be determined at the time of the offering. Each share of the Company’s common stock automatically includes one right to purchase one one-thousandth of a share of Series D Junior Participating Preferred Stock, par value $0.0001 per share, which becomes exercisable pursuant to the terms and conditions set forth in the Rights Plan Agreement as described above. The net proceeds from securities sold by the Company will be added to our general corporate funds and may be used for general corporate purposes. As of July 31, 2011, no shares of the Company’s common stock have been issued under this shelf registration statement.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - 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 organizes its reportable segments to correspond with its primary service lines: wireless communications, specialty construction and electrical power. 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 which are not allocated to the other segments. Corporate assets primarily include cash and prepaid expenses. Segment results for the three months ended July 31, 2011 and 2010 are as follows:

	As of and for the Three Months Ended July 31, 2011														As of and for the Three Months Ended July 31, 2010
	Corporate			Wireless Communications			Specialty Construction			Electrical Power		Total			Corporate			Wireless Communications			Specialty Construction		Electrical Power			Total

Revenue	$	-		$	6,115,746		$	1,987,794		$	17,315,963	$	25,419,503		$	-		$	6,352,558		$	5,692,513	$	16,807,427		$	28,852,498

Depreciation and amortization	$	16,373		$	137,749		$	209,909		$	240,801	$	604,832		$	16,690		$	178,488		$	200,817	$	338,620		$	734,615

Income (loss) before income taxes	$	(910,609	)	$	(391,279	)	$	(162,710	)	$	1,419,037	$	(45,561	)	$	(942,481	)	$	(121,966	)	$	682,006	$	(221,599	)	$	(604,040	)

Goodwill	$	-		$	0		$	0		$	2,038,978	$	2,038,978		$	-		$	10,921,998		$	3,339,843	$	20,520,783		$	34,782,624

Total assets	$	8,922,917		$	8,853,245		$	8,734,268		$	26,617,946	$	53,128,376		$	4,208,635		$	21,166,168		$	16,275,974	$	45,756,234		$	87,407,011

Additions of property and equipment	$	2,662		$	311,034		$	71,437		$	39,043	$	424,176		$	11,101		$	91,164		$	137,200	$	260,862		$	500,327

As of and for the three months ended July 31, 2011 and 2010, the specialty construction segment includes approximately $1,300,000 and $1,086,000 in revenue and $854,000 and $1,042,000 of net assets held in China related to the Company’s 60% interest in the China Operations, respectively. As of and for the three months ended July 31, 2011 and 2010, the electrical power segment includes approximately $3,283,000 and $3,116,000 in revenue and $2,697,000 and $5,479,000 of net assets held in Australia related to the Company’s Australia Operations, respectively.

NOTE 8 - FAIR VALUE MEASUREMENTS

As defined by the Accounting Standard Codification (ASC), fair value measurements and disclosures establish a hierarchy that prioritizes fair value measurements based on the type of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of hierarchy are described below:

●	Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

●	Level 2: Inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals.

●	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.

The following table sets forth the assets and liabilities measured at fair value on a nonrecurring basis, by input level, in the consolidated balance sheet at July 31, 2011:

Quoted Prices in

Active Markets for

Significant Other

Significant

Balance Sheet

Identical Assets or

Observable Inputs

Unobservable

July 31, 2011

April 30, 2011

Location

Liabilities (Level 1)

(Level 2)

Inputs (Level 3)

Total

Liabilities:

Acquisition-related

contingent consideration

1,049,011

1,008,200

Following the first year contingent payment, and the recording of $43,068 of additional non-cash expense for the three months ended July 31, 2011 for the change in the fair value of the contingent consideration from the present value of the future payments of this obligation, the fair value of the acquisition-related contingent consideration was $1,049,011 as of July 31, 2011. The Level 3 measurements included an estimated discount rate of 18.02%, future revenue growth rate of 10%, earnings before interest and taxes (EBIT) margins ranging from 7.5% to 13.32%, and weighted probability of EBIT achievement ranging from 0% to 100%.

NOTE 9 – SUBSEQUENT EVENT

Effective September 1, 2011, the Company entered into a Securities Purchase Agreement and Amendment No. 1 to the Escrow Agreement (the Agreements) with Multiband, for the acquisition by Multiband of the common stock of the Company’s subsidiaries comprising the St. Louis and Sarasota operations for $2,000,000 in cash. The $2,000,000 in proceeds was paid to BOA to reduce the outstanding borrowings under the Loan Agreement.

The Agreements also provide that Multiband will use its best efforts to complete the acquisition of the outstanding common stock of the Company on terms consistent with the non-binding letter of intent dated June 1, 2011, as amended August 11, 2011. Under the terms of the non-binding letter of intent, Multiband is offering $3.20 in cash per common share for the outstanding common stock of the Company, and the Company has provided Multiband an exclusive period until February 1, 2012 (the Exclusivity Period) in which to complete the transaction. In exchange for the Exclusivity Period, Multiband has agreed that it will not sell any of the 709,271 shares of Company common stock it currently owns for the duration of the Exclusivity Period. In addition, Multiband will maintain $250,000 in earnest money down payment in an escrow account in connection with completing the acquisition of the common stock of the Company. The potential acquisition of the common stock of the Company is subject to customary due diligence, negotiation of a definitive merger agreement and other conditions, including the approval of the Company’s shareholders. Multiband, traded under the NASDAQ symbol MBND, is the largest nationwide DIRECTV master system operator in the multiple dwelling unit market and one of the largest full-service home service providers of DIRECTV’s installations, maintenance and upgrades for residents of single-family homes.

The following presents the unaudited pro forma financial information as of and for the three months ended July 31, 2011 and 2010, respectively, to give effect to the sale of the St. Louis and Sarasota operations and the application of the $2,000,000 in proceeds, net of transaction costs, as if each had occurred as of and for the three months ended July 31, 2011. The net proceeds were used to reduce the outstanding borrowings under the Loan Agreement with BOA. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The unaudited pro forma financial information is for informational purposes only and does not purport to present what our results would actually have been had these transactions actually occurred on the dates presented or to project our results of operations or financial position for any future period.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Pro Forma Unaudited Condensed Consolidated Balance Sheet at July 31, 2011

	As Reported							Pro Forma
	July 31,		Pro Forma					July 31,
ASSETS	2011		Adjustments					2011

CURRENT ASSETS:

Cash and cash equivalents	$	4,063,322	$	26,455		(1	)	$	4,089,777
Accounts receivable, net of allowance of $1,631,985 at July 31, 2011		25,777,082		(1,657,922	)	(1	)		24,119,160
Costs and estimated earnings in excess of billings on uncompleted contracts		4,546,270		(772,277	)	(1	)		3,773,993
Inventory		1,606,385		(83,941	)	(1	)		1,522,444
Prepaid expenses and other current assets		1,592,500		(28,582	)	(1	)		1,563,918
Prepaid income taxes		214,897		(46,822	)	(1	)		168,075
Income taxes receivable		1,185,000		-		(1	)		1,185,000
Deferred tax assets		2,642,598		(27,000	)	(1	)		2,615,598
Total current assets		41,628,054		(2,590,089	)				39,037,965

PROPERTY AND EQUIPMENT, net		5,909,461		(435,758	)	(1	)		5,473,703

OTHER INTANGIBLE ASSETS, net		742,897		-					742,897

GOODWILL		2,038,978		-					2,038,978

DEFERRED TAX ASSETS		2,674,841		(751,000	)	(1	)		1,923,841

OTHER ASSETS		134,145		(60,558	)	(1	)		73,587

Total assets	$	53,128,376	$	(3,837,405	)			$	49,290,971

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	As Reported								Pro Forma
LIABILITIES AND EQUITY	July 31,			Pro Forma					July 31,
	2011			Adjustments					2011

CURRENT LIABILITIES:

Current portion of loans payable	$	97,299		$	(12,261	)	(1	)	$	85,038
Borrowings under line of credit		5,560,977			(2,000,000	)	(2	)		3,560,977
Current portion of capital lease obligations		48,175			-					48,175
Accounts payable and accrued expenses		13,599,932			(817,669	)	(1	)		12,782,263
Billings in excess of costs and estimated earnings on uncompleted contracts		2,168,352			(37,777	)	(1	)		2,130,575
Deferred revenue		809,169			-					809,169
Due joint venture partner		3,134,583			-					3,134,583
Acquisition-related contingent consideration		1,049,011			-					1,049,011
Total current liabilities		26,467,498			(2,867,707	)				23,599,791

Loans payable, net of current portion		211,677			(64,634	)	(1	)		147,043
Capital lease obligations, net of current portion		5,432			-					5,432
Total liabilities		26,684,607			(2,932,341	)				23,752,266



EQUITY:
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued		-			-
Common stock - $0.0001 par value, 25,000,000 shares authorized, 6,954,766
shares issued and outstanding at July 31, 2011		695			-					695
Additional paid-in capital		50,453,914								50,453,914
Accumulated deficit		(26,630,508	)		(905,064	)	(1	), (2)		(27,535,572	)
Accumulated other comprehensive income on foreign currency translation, net of										-
tax effects of $191,979 at July 31, 2011		1,560,411			-					1,560,411

Total WPCS shareholders' equity		25,384,512			(905,064	)				24,479,448

Noncontrolling interest		1,059,257			-					1,059,257

Total equity		26,443,769			(905,064	)				25,538,705

Total liabilities and equity	$	53,128,376		$	(3,837,405	)			$	49,290,971

Notes to Pro Forma Unaudited Condensed Consolidated Balance Sheet as of July 31, 2011:

(1)	The adjustments reflect the disposition of the St. Louis and Sarasota Operations.

(2)	The adjustments reflect the use of the $2,000,000 in proceeds from the sale of the St. Louis and Sarasota Operations to reduce total amounts outstanding under the Loan Agreement with BOA.

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Pro Forma Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended July 31, 2011 and 2010

	Three Months Ended July 31, 2011
				Pro Forma
	As Reported			Adjustments					Pro Forma

REVENUE	$	25,419,503		$	(1,855,908	)	(1	)	$	23,563,595

COSTS AND EXPENSES:
Cost of revenue		19,573,186			(1,541,032	)	(1	)		18,032,154
Selling, general and administrative expenses		5,156,522			(712,493	)	(1	)		4,444,029
Depreciation and amortization		604,832			(52,581	)	(1	)		552,251
Change in fair value of acquisition-related contingent consideration		43,068			-					43,068

		25,377,608			(2,306,106	)				23,071,502

OPERATING INCOME		41,895			450,198					492,093

OTHER EXPENSE (INCOME):
Interest expense		95,932			(26,342	)	(1	),(2)		69,590
Interest income		(8,476	)		-					(8,476	)

(Loss) income from continuing operations before income tax (benefit) provision		(45,561	)		476,540					430,979

Income tax (benefit) provision		(26,340	)		295,409		(1	)		269,069

(LOSS) INCOME FROM CONTINUING OPERATIONS		(19,221	)		181,131					161,910

Discontinued operations:

Loss from operations		-			(476,540	)				(476,540	)
Loss from disposal		-			(905,064	)	(3	)		(905,064	)
Income tax benefit		-			295,409					295,409

Loss from discontinued operations		-			(1,086,195	)				(1,086,195	)

CONSOLIDATED NET LOSS		(19,221	)		(905,064	)				(924,285	)

Net income attributable to noncontrolling interest		15,456			-					15,456

NET LOSS ATTRIBUTABLE TO WPCS	$	(34,677	)	$	(905,064	)			$	(939,741	)

Basic net loss per common share attributable to WPCS:
(Loss) income from continuing operations attributable to WPCS	$	(0.00	)	$	0.03				$	0.03
Loss from discontinued operations attributable to WPCS	$	0.00		$	(0.16	)			$	(0.16	)
Basic net loss income per common share attributable to WPCS	$	(0.00	)	$	(0.13	)			$	(0.13	)

Diluted net (loss) income per common share attributable to WPCS:
(Loss) income from continuing operations attributable to WPCS	$	(0.00	)	$	0.03				$	0.03
Loss from discontinued operations attributable to WPCS	$	0.00		$	(0.16	)			$	(0.16	)
Diluted net loss per common share attributable to WPCS	$	(0.00	)	$	(0.13	)			$	(0.13	)

Basic weighted average number of common shares outstanding		6,954,766			6,954,766					6,954,766
Diluted weighted average number of common shares outstanding		6,954,766			6,964,211					6,964,211

WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Three Months Ended July 31, 2010
				Pro Forma
	As Reported			Adjustments					Pro Forma

REVENUE	$	28,852,498		$	(5,586,627	)	(1	)	$	23,265,871

COSTS AND EXPENSES:
Cost of revenue		22,697,975			(4,086,993	)	(1	)		18,610,982
Selling, general and administrative expenses		5,916,327			(1,037,182	)	(1	)		4,879,145
Depreciation and amortization		734,615			(77,265	)	(1	)		657,350
Change in fair value of acquisition-related contingent consideration		63,052			-					63,052

		29,411,969			(5,201,440	)				24,210,529

OPERATING LOSS		(559,471	)		(385,187	)				(944,658	)