================================================================================


                                    FORM 10-Q


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                   Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                     For the Quarter Ended October 31, 2007
                         Commission File Number 0-26230


                         WESTERN POWER & EQUIPMENT CORP.
             (Exact name of registrant as specified in its charter)


            DELAWARE                                        91-1688446
(State or other jurisdiction of                    (I.R.S. Employer I.D. number)
 incorporation or organization)

6407-B N.E. 117th Avenue, Vancouver, WA                        98662
(Address of principal executive offices)                    (Zip Code)


                    Registrant's telephone no.: 360-253-2346

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 and 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of December 13, 2007.

      Title of Class                                       Number of shares
       Common Stock                                           Outstanding
(par value $.001 per share)                                   11,230,000
================================================================================
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                                      INDEX

                                                                           Page
PART I. FINANCIAL INFORMATION                                             Number

    Item 1. Financial Statements

    Condensed Consolidated Balance Sheets
    October 31, 2007 (Unaudited) and July 31, 2007........................    3

    Condensed Consolidated Statements of Operations (Unaudited)
    Three months ended October 31, 2007 and October 31, 2006 .............    4

    Condensed Consolidated Statements of Cash Flows (Unaudited)
    Three months ended October 31, 2007 and October 31, 2006..............   5-6

    Notes to Condensed Consolidated Financial Statements (Unaudited)......  7-15

    Item 2. Management's Discussion and Analysis of
            Financial Condition and Results of Operations................. 16-23

    Item 3. Quantitative and Qualitative Disclosures about Market Risk....   24

    Item 4. Controls and Procedures.......................................   24

PART II. OTHER INFORMATION

    Item 1. Legal Proceedings.............................................   25

    Item 1A. Risk Factors.................................................   25

    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...   25

    Item 3. Defaults Upon Senior Securities...............................   25

    Item 4. Submission of Matters to a Vote of Security Holders...........   25

    Item 5. Other Information.............................................   25

    Item 6. Exhibits...................................................... 25-26

SIGNATURES................................................................   27

                                        2
<PAGE>

ITEM 1. FINANCIAL STATEMENTS
----------------------------

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE><CAPTION>
                                                                          October 31,      July 31,
                                                                             2007            2007
                                                                          ----------      ----------
                                                                          (Unaudited)

                                     ASSETS
                                     ------
<S>                                                                       <C>             <C>
Current assets:
     Cash and cash equivalents ......................................     $      --       $       62
     Accounts receivable, net .......................................          5,122           4,886
     Inventories - net ..............................................         24,062          28,576
     Prepaid expenses ...............................................            112             150
                                                                          ----------      ----------
            Total current assets ....................................         29,296          33,674
                                                                          ----------      ----------
Fixed assets:
     Property, plant and equipment (net) ............................          5,473           5,703
                                                                          ----------      ----------
     Rental equipment fleet (net) ...................................          7,785           5,671
            Total fixed assets ......................................         13,258          11,374
                                                                          ----------      ----------
Other assets
     Security Deposits ..............................................            430             465
     Deferred debt issuance costs ...................................            --              541
                                                                          ----------      ----------
         Total other assets .........................................            430           1,006
                                                                          ----------      ----------

Total assets ........................................................     $   42,984      $   46,054
                                                                          ==========      ==========

                       LIABILITIES & STOCKHOLDERS' EQUITY
                       ----------------------------------

Current liabilities:
     Borrowings under floor plan financing ..........................     $   20,384          20,521
     Convertible debt, net of discount of $ 0 and $ 1,190 ...........         19,674          18,193
     Notes payable-related parties, net of discount of $ 7 and $ 10 .            293             290
     Notes payable ..................................................            747             821
     Accounts payable ...............................................          6,952           8,149
     Accrued payroll and vacation ...................................          1,148           1,032
     Other accrued liabilities ......................................          2,132           2,156
     Capital lease obligation .......................................             66              64
                                                                          ----------      ----------
         Total current liabilities ..................................         51,396          51,226
                                                                          ----------      ----------
Long-term liabilities
     Notes Payable ..................................................          1,221           1,577
     Deferred lease income ..........................................            200             206
     Capital lease obligation .......................................            684             702
                                                                          ----------      ----------
      Total long-term liabilities ...................................          2,105           2,485
                                                                          ----------      ----------
Total liabilities ...................................................         53,501          53,711
                                                                          ----------      ----------
Stockholders' deficiency:
     Preferred stock-10,000,000 shares authorized;
       none issued and outstanding ..................................            --              --
     Common stock-$.001 par value; 50,000,000 shares
       authorized; 11,360,300 issued and 11,230,000 outstanding as of
       October 31, 2007 and July 31, 2007, respectively .............             11              11
     Additional paid-in capital .....................................         23,431          23,431
     Accumulated deficit ............................................        (33,115)        (30,255)
     Less common stock in treasury, at cost (130,300 shares) ........           (844)           (844)
                                                                          ----------      ----------
         Total stockholders' deficiency .............................        (10,517)         (7,657)
                                                                          ----------      ----------
Total liabilities and stockholders' deficiency ......................     $   42,984      $   46,054
                                                                          ==========      ==========
</TABLE>

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

                                        3
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                (Dollars in thousands, except per share amounts)

                                                           Three Months Ended
                                                              October 31,
                                                          2007           2006
                                                       ---------      ---------
Net revenues ......................................    $  19,532      $  23,611

Cost of revenues (includes depreciation of
   $976 and $826, respectively) ...................       17,432         20,951
                                                       ---------      ---------
Gross profit ......................................        2,100          2,660

Selling, general and administrative expenses ......        2,774          2,575
                                                       ---------      ---------
Operating (loss) income ...........................         (674)            85

Other income (expense):
     Interest expense .............................       (2,455)        (1,270)
     Gain on settlement of penalty ................          250             --
     Other income .................................           32            151
                                                       ---------      ---------
Loss before income tax provision ..................       (2,847)        (1,034)

Income tax provision ..............................           14             16
                                                       ---------      ---------
Loss from continuing operations ...................       (2,861)        (1,050)

Income from discontinued operations ...............           --            281
                                                       ---------      ---------
Net loss ..........................................    $  (2,861)     $    (769)
                                                       ---------      ---------
Basic and diluted loss per common share
     Continuing operations ........................    $   (0.25)     $   (0.09)
                                                       ---------      ---------
     Discontinued operations ......................           --           0.02
                                                       ---------      ---------
     Net loss per share ...........................    $   (0.25)     $   (0.07)
                                                       =========      =========
Weighted average outstanding common shares for
  basic and diluted  net loss per common share ....       11,230         11,230
                                                       =========      =========

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

                                        4
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                             (Dollars in thousands)
<TABLE><CAPTION>
                                                                      Three Months Ended
                                                                          October 31,
                                                                      2007          2006
                                                                    --------      --------
<S>                                                                 <C>           <C>
Cash flows from operating activities:
     Net loss ...................................................   $ (2,861)     $   (769)

Adjustments to reconcile net loss from operations to net
 cash (used in) provided by operating activities:
     Depreciation ...............................................      1,225         1,762
     Bad debts ..................................................        --            104
     Amortization of debt discount ..............................      1,193           268
     Loss (gain) on sale of fixed assets and rental equipment ...        (76)           31
     Gain on convertible debt penalty settlement ................       (250)          --
     Amortization of debt issuance costs ........................        541            93
     Changes in assets and liabilities:
         Accounts receivable ....................................       (236)        2,156
         Inventories ............................................      1,243        (2,841)
         Prepaid expenses and other assets ......................         73            58
         Accounts payable and accrued expenses ..................     (1,196)          687
         Accrued payroll and vacation ...........................        116            26
         Other accrued liabilities ..............................        228           (44)
         Deferred lease income ..................................         (7)           (7)
                                                                    --------      --------
Net cash (used in) provided by operating activities .............         (7)        1,524
                                                                    --------      --------

Cash flows from investing activities:
     Purchases of property, plant and equipment .................         (9)         (555)
     Purchases of rental equipment ..............................        (23)          (11)
     Proceeds on sale of rental equipment .......................        271           505
                                                                    --------      --------
Net cash provided by (used in) investing activities .............        239           (61)
                                                                    --------      --------

Cash flows from financing activities:
     Principal payments on capital leases .......................        (16)          (14)
     Payments on short-term borrowings ..........................         --          (100)
     Inventory floor plan financing .............................       (137)         (240)
     Long term debt borrowings ..................................         96           572
     Long term debt payments ....................................       (526)         (181)
     Convertible debt borrowings ................................        289           --
     Payments on convertible debt ...............................        --         (2,221)
                                                                    --------      --------
Net cash used in financing activities ...........................       (294)       (2,184)
                                                                    --------      --------

Decrease in cash and cash equivalents ...........................        (62)         (721)
Cash and cash equivalents at beginning of period ................         62         1,072
                                                                    --------      --------

Cash and cash equivalents at end of period ......................   $    --       $    351
                                                                    ========      ========

Supplemental disclosures:
Interest paid ...................................................   $    266      $    930
Income taxes paid ...............................................          1             2

Return of common stock pursuant to cancellation of
  consulting agreement...........................................   $    --       $    642

Transfer of equipment inventory to the rental fleet..............   $  2,727      $  3,559
</TABLE>

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

                                        5
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Western Power & Equipment Corp and its 85% owned subsidiary, Arizona
Pacific Materials, LLC, collectively ("The Company"). All intercompany
transactions have been eliminated.

The accompanying condensed consolidated financial statements are unaudited and
in the opinion of management contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the condensed
consolidated balance sheet and the condensed consolidated results of operations
and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States of America applicable to
interim periods. The results of operations for the three month period ended
October 31, 2007 are not necessarily indicative of results that may be expected
for any other interim periods or for the full year. This report should be read
in conjunction with our consolidated financial statements included in the Annual
Report on Form 10-K for the fiscal year ended July 31, 2007 filed with the
Securities and Exchange Commission. The accounting policies used in preparing
these unaudited condensed consolidated financial statements are consistent with
those described in the July 31, 2007 consolidated financial statements.

Cost of revenues includes the cost of products sold; the cost of services
provided in connection with product support; depreciation related to the rental
equipment; in-bound freight expenses; inventory reserves for obsolescence; and
certain allocated general and administrative expenses directly related to the
generation of revenues.

Selling, general and administrative expenses include payroll and benefit costs;
occupancy costs; depreciation of property, plant and equipment; outside service
fees; and other costs.

Interest expense includes the interest related to all debt instruments, the
amortization of debt discount related to warrants and the amortization of
capitalized debt issuance costs in association with convertible debt issued in
June of 2005. See Note 7 for additional information.

Certain amounts in the fiscal year 2007 financial statements have been
reclassified to conform with the fiscal year 2008 presentation. These
reclassifications had no impact on net income or cash flows as previously
reported other than to separately report discontinued operations.

Liquidity and Going Concern

The Company has incurred a net loss from continuing operations of $2,861 for the
three-month period ended October 31, 2007 compared to a loss of $1,050 for the
comparable period in fiscal year 2007. During the fiscal year 2008 period, the
Company experienced a weaker market and changes in product mix both of which
contributed to lower sales and weaker margins. In addition, during the
three-month period ending October 31, 2007, the Company expensed $541 in debt
issuance costs and $1,190 in debt discount related to the convertible debt
issued in June of 2005. This compares to $93 in debt issuance costs and $262 in
debt discount amortized during the same period in fiscal year 2007. The Company
generated negative cash flows from operations of $7 for the three-month period
ended October 31, 2007 as compared to positive cash flows of $1,524 for the
fiscal year 2007 comparative period. A significant amount of resources continue
to be used to fund losses of the mining operations.

In January 2007, the Company was in technical default of the convertible debt
agreement because of a late payment, which, under the terms of the agreement,
would result in a penalty of 20% of the loan balance at the time of the default.
The Company recorded an expense of $3,866 in the second quarter of 2007 for this
penalty. The Company entered into a waiver agreement in April of 2007 with the
convertible debt holders whereby 50% of the penalty was paid in cash and the
remaining 50% of the penalty was satisfied by the transfer of a 10% ownership
interest in the Company's subsidiary, Arizona Pacific Materials, LLC in lieu of
the remaining $1,933 obligation.

As of July 2007, the Company was in technical default of the terms of the April
default waiver, as the Company did not make all of the required principal
payment due June 30, 2007. The Company negotiated a waiver of that default in
exchange for a transfer of an additional 5% ownership interest (valued at $250)
in the Company's subsidiary, Arizona Pacific Materials, LLC. A revised due date
of October 15, 2007 was negotiated to pay the entire loan

                                        6
<PAGE>

balance. The Company did not make the required full loan repayment on October
15, 2007 and continues to be in default with the debt agreement. The Company
recorded an expense of $3,200 (representing a 20% default penalty) in the fourth
quarter of fiscal year 2007.

As a result of the above defaults, the Company recorded total convertible debt
penalties of $5,383 in fiscal year 2007.

The loss for the three-month period ended October 31, 2007 includes a gain of
$250 related to the issuance of the 5% ownership interest in the Company's
subsidiary, Arizona Pacific Materials, LLC related to the June 2007 default
waiver discussed above.

Management is currently in discussions to refinance the debt but there is no
assurance it will succeed in these refinancing efforts. If management is not
successful in obtaining alternative financing, the Company may have to sell off
certain assets or the Company's operations may not be able to continue. The
previously described conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments related to the recoverability of assets or classifications of
liabilities that might be necessary should the Company be unable to continue as
a going concern.

2. ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

The Company's accounting policies are set forth in Note 1 to the consolidated
financial statements as filed in Form 10-K for the year ended July 31, 2007.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The
adoption of this pronouncement did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.

In July 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN 48 prescribes
a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 shall be effective for fiscal years
beginning after December 15, 2006. Earlier adoption is permitted as of the
beginning of an enterprise's fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN 48
will be recorded as an adjustment to retained earnings as of the beginning of
the period of adoption. The adoption of this pronouncement did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows. (See Note 13)

In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements". SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective for the
Company for financial statements issued subsequent to November 15, 2007. The
Company does not expect the new standard to have any material impact on the
financial position and results of operations.

In December 2006, the FASB approved FASB Staff Position ("FSP") No. EITF
00-19-2, "Accounting for Registration Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, " Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", to include scope exceptions for
registration payment arrangement.

                                        7
<PAGE>

FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date (December 21, 2006) of this
FSP, or for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years, for
registration payment arrangements entered into prior to the issuance date of
this FSP. The adoption of this pronouncement did not have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principals have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. The FASB has indicated it believes that SFAS 159 helps to mitigate
this type of accounting-induced volatility be enabling companies to report
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities.

3. EARNINGS OR LOSS PER SHARE

Basic net income or loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period. The
Company computes earnings per share in accordance with SFAS No. 128, "Earnings
Per Share." SFAS No. 128 requires dual presentation of basic and diluted
earnings per share.

Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share is computed by dividing net loss by the weighted average number of
common shares outstanding, plus the issuance of common shares, if dilutive,
resulting from the exercise of outstanding stock options, warrants and
convertible debt. These potentially dilutive securities were not included in the
calculation of loss per common share for the three months ended October 31, 2007
and 2006 because the Company incurred a loss during such periods and thus their
inclusion would have been anti-dilutive. Accordingly, basic and diluted loss per
common share are the same for all periods presented.

Potentially dilutive securities consisted of outstanding stock options, warrants
and convertible debt to acquire 18,532,582 shares as of October 31, 2007. As of
October 31, 2007, potentially dilutive securities consisted of outstanding stock
options and warrants to acquire 23,562,582 shares.

4. STOCK BASED COMPENSATION

The Company accounts for stock based compensation arrangements in accordance
with SFAS No. 123 (revised 2004), "Share-Based Payment", SFAS 123R. SFAS 123R
requires the compensation cost relating to stock-based payment transactions to
be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued on the grant date of
such instruments, and will be recognized over the period during which an
individual is required to provide service in exchange for the award (typically
the vesting period). SFAS 123R covers a wide range of stock-based compensation
arrangements including stock options, restricted stock plans, performance-based
awards, stock appreciation rights, and employee stock purchase plans. As of July
31, 2007 and October 31, 2007, all options were fully vested and during the year
ended July 31, 2007 and the three months ended October 31, 2007 and October 31,
2006, the Company did not grant any options to employees to purchase common
stock. Accordingly, no additional compensation charge was recorded and therefore
there was no impact on the consolidated financial statements.

                                        8
<PAGE>

5. INVENTORIES

Inventories consist of the following (`000's):
                                                         October 31,    July 31,
                                                             2007         2007
                                                         ----------     -------
                                                         (Unaudited)

    Equipment (net of reserves of $ 1,588 and
    $ 1,835, respectively):
      New                                                 $ 16,537     $ 20,685
      Used                                                   2,756        2,793
    Mining products                                            853          829
    Parts (net of reserves of $ 618
     and $ 453, respectively)                                3,916        4,269
                                                          --------     --------
                                                          $ 24,062     $ 28,576
                                                          ========     ========

6. FIXED ASSETS

Fixed assets consist of the following (`000's):
                                                         October 31,   July 31,
                                                            2007         2007
                                                          --------     --------
                                                         (Unaudited)

    Operating property, plant and equipment:
      Land                                                $  1,277     $  1,277
      Buildings                                              1,205        1,205
      Machinery and equipment                                5,645        5,631
      Office furniture and fixtures                          1,660        1,660
      Computer hardware and software                         1,057        1,051
      Vehicles                                               1,221        1,247
      Leasehold improvements                                 1,058        1,054
                                                          --------     --------
                                                            13,123       13,125
      Less: accumulated depreciation                        (7,650)      (7,422)
                                                          --------     --------
    Property, plant, and equipment (net)                  $  5,473     $  5,703
                                                          ========     ========

    Rental equipment fleet                                $  9,395     $  6,735
      Less: accumulated depreciation                        (1,610)      (1,064)
                                                          --------     --------
    Rental equipment (net)                                $  7,785     $  5,671
                                                          ========     ========

Depreciation and amortization on the property, plant, and equipment are computed
using the straight-line method over the estimated useful lives of the assets,
ranging from 5 to 20 years. Depreciation on the rental fleet is calculated using
the straight-line method over the estimated useful lives, ranging from 3 to 7
years after considering salvage values.

As of October 31, 2007 and July 31, 2007, fixed assets (net) includes property
under capital leases in the amount of $397 and $408, respectively.

7. DEBT OBLIGATIONS

Floor Planning
--------------

The Company has inventory floor plan financing arrangements with Case Credit
Corporation (Case), an affiliate of Case Corporation (for Case inventory) and
with other finance companies and equipment manufacturers. The terms of these
agreements generally include a one-month to twelve-month interest free term
followed by a term during which interest is charged. Principal payments are
generally due at the earlier of sale of the equipment or twelve to forty-eight
months from the invoice date. All floor plan debt is classified as current since
the inventory to which it relates is generally sold within twelve months of the
invoice date.

Convertible Debt
----------------

In June 2005, the Company closed a new $30 million convertible debt facility
(convertible into common shares of the Company at $2.00 per share) payable over
the next five years, with a variable interest rate of LIBOR plus 6%. The Company
allocated the proceeds to the debt and the warrants in accordance with EITF 98-5
and EITF 00-27. The lenders were also granted warrants to purchase approximately
8.1 million common shares of the Company at $1.75 per share. The value of these
warrants is $2,920 and was recorded as debt discount to be amortized over the
life of the related debt. The lenders also had the right to lend an additional
$7.5 million to the Company (within 18 months of the date of the original debt,
which has expired as of January 31, 2007) under the same terms as the existing
five year convertible debt with warrants to purchase 1,312,500 shares of common
stock to be issued with

                                        9
<PAGE>

this additional debt. The value of these rights is $441 and was also recorded a
debt discount to be amortized over 18 months. In March 2006, the convertible
debt agreement was modified whereby the conversion price was reduced from $2.00
per share to $1.75 per share related to certain conditions associated with
selling the Company's Spokane and Clarkston locations. The value of this
conversion price change was calculated to be $680 (based on a Black-Scholes
model) and was recorded as debt discount to be amortized over the remaining life
of the related debt. In connection with the convertible debt and the bridge loan
(see below), the Company paid a $1,600 finders fee and 300,000 warrants to
purchase common shares were issued, valued at $70. The finders fee and the
warrants are recorded as debt issuance costs and are being amortized over the
life of the related convertible debt.

The convertible debt agreement contains a provision whereby the holders of such
debt obligations (after 36 months from the original issue date) may require the
Company to redeem up to 50% of the outstanding principal balance of the
debenture.

The financial instruments discussed above were accounted for in accordance with
EITF 98-5 and EITF 00-27, "Application of Issue No. 98-5 ("Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios") to Certain Convertible Instruments". The Company
also considered EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
`Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock" ("EITF No. 05-4") which addresses financial
instruments, such as stock purchase warrants, that are accounted for under EITF
00-19 that may be issued at the same time and in contemplation of a registration
rights agreement that includes a liquidated damages clause. In June 2005, the
Company entered into a private placement agreement for convertible debentures, a
registration rights agreement and warrants in connection with the private
placement (see Note 7). The Company has adopted EITF-00-19-2, "Accounting for
Registration Payment Arrangements", which specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with FASB Statement No. 5,
"Accounting for Contingencies". If the registration statement ceases to be
continuously effective during the 5-year period in which the Company is required
to maintain its effectiveness, the investors are entitled to "partial liquidated
damages" in the form of cash, computed as 2 percent of the aggregate purchase
price of the securities per month. Management believes that it is not probable
that it will be required to remit any payments to the investors for failing to
maintain effectiveness of the registration statement and therefore no liability
has been recorded in the consolidated financial statements.

The Company began making monthly principal payments in December 2005. The
balance of the unpaid principal on the convertible notes (net of discount) as of
October 31, 2007 is $19,674 (net of discount of $0), all of which is short term.
The amounts amortized to interest expense during the three months ended October
31, 2007 and October 31, 2006 were $1,190 and $262, respectively.

Western used $23.0 million of the loan proceeds to repay and terminate its
credit facility and forbearance agreement with GE Commercial Distribution
Finance Corporation and $2.5 million to pay off the purchase note of Arizona
Pacific Materials.

In January 2007 the Company was in technical default of the convertible debt
agreement because of a late payment, which, under the terms of the agreement,
would result in a penalty of 20% of the loan balance at the time of the default.
The Company has recorded an expense of $3,866 in the second quarter of 2007 for
this penalty. The Company has negotiated an agreement with the convertible debt
holders to have 50% of the penalty paid in cash and the remaining 50% of the
penalty satisfied by a transfer of a 10% ownership interest in the Company's
subsidiary, Arizona Pacific Materials, LLC in lieu of the remaining $1,933
obligation. This resulted in a gain of $1,967 and a net penalty of $1,933. The
carrying amount of the subsidiary's common stock sold was removed from the
parent company's investment in subsidiary's common stock account and the
difference between the carrying amount and current value of the consideration is
recorded as a gain.

As of July 2007, the Company was in technical default of the terms of the April
default waiver agreement, as the Company did not make all of the required
principal payment due June 2007. The Company negotiated a waiver of that default
in consideration for a transfer of an additional 5% ownership interest (valued
at $250) in the Company's subsidiary, Arizona Pacific Materials, LLC. A revised
payment due date of October 15, 2007 was negotiated to pay the entire loan
balance. The Company did not make the required full loan payment on October 15,
2007 and continues to be in default with the debt agreement. The Company
recorded an expense of $3,200 (representing a 20% default penalty) in the fourth
quarter of 2007.

                                       10
<PAGE>

As a result of the above defaults, the Company recorded total convertible debt
penalties of $5,383 during fiscal year 2007.

For the quarter ended October 31, 2007, the Company recorded as a charge $1,190
for deferred debt issuance costs and $540 of debt issuance costs related to the
above defaults. The Company also transferred the additional 5% ownership in the
Company's subsidiary, Arizona Pacific Materials, LLC resulting in a gain of
$250.

With this technical default, the convertible debt becomes immediately due.
Management is currently in discussions with the debt holders and is seeking to
refinance the debt but there is no assurance they will succeed in these efforts.
If management is not successful in obtaining alternative financing, the Company
may have to sell off certain assets and the business may suffer.

Notes Payable
-------------
<TABLE><CAPTION>
  Notes payable consists of the following: (000's)
                                                                                    October 31,     July 31,
  Description                                                                          2007           2007
                                                                                    ----------      -------
<S>                                                                                 <C>             <C>
  Note Payable to Investor dated March 30, 2001 due on
  demand and non-interest bearing                                                        50            50

  Note payable to West Coast Bank dated March 15, 2005 in the amount of $
  795, due in monthly installments of $ 16 beginning May 15, 2005, expiring
  April 2010 including interest at 6.50% per annum secured by specific
  equipment
   in inventory                                                                         432           471

  Note payable to Wells Fargo Construction Funding (formerly CIT Financial)
   dated beginning August 15, 2005 in the amount
  of $ 2,643, due in monthly installments of $ 31 beginning December 2005,
  expiring November 2010, including interest ranging from 8.25% to 9.5% per
  annum secured by specific
  equipment in inventory                                                              1,383         1,767

  Notes payable to GMAC dated November 15, 2003 in the amount of $66 with
  payments of $1 per month including
  interest at 7.2% per annum, expiring January 2009                                     103           110
                                                                                    -------       -------
  Total                                                                             $ 1,968       $ 2,398
    Less current portion                                                               (747)         (821)
                                                                                    -------       -------
  Total Long-Term Notes Payable                                                     $ 1,221       $ 1,577
                                                                                    =======       =======
</TABLE>

    Future minimum payments under these noncancelable notes payable as of
October 31, 2007, are as follows:

Twelve months ending               Notes    Convertible
October 31,                       Payable       Debt      Flooring      Total
                                 --------     --------    --------    --------

   2008                          $    747    $  19,674    $ 20,384    $ 40,805
   2009                               564         --          --           564
   2010                               383         --          --           383
   2011                               167         --          --           167
   2012                               107         --          --           107
   Thereafter                         --          --          --          --
                                 --------     --------    --------    --------
Total annual payments               1,968       19,674      20,384      42,026
Less current portion                 (747)     (19,674)    (20,384)    (40,805)
                                 --------     --------    --------    --------
Long-term portion                $  1,221     $   --      $   --      $  1,221
                                 ========     ========    ========    ========

                                       11
<PAGE>

8. COMMITMENTS AND CONTINGENCIES

Leases
------

The Company leases certain facilities under noncancelable lease agreements.
Certain of the Company's building leases have been accounted for as capital
leases. Other facility lease agreements have terms ranging from month-to-month
to nine years and are accounted for as operating leases. Certain of the facility
lease agreements provide for options to renew and generally require the Company
to pay property taxes, insurance, and maintenance and repair costs. Total rent
expense under all operating leases aggregated $324 and $571 for the three months
ended October 31, 2007 and 2006, respectively.

Future minimum lease payments under all noncancelable leases as of October 31,
2007, are as follows (`000's):

                                                     Capital         Operating
     Twelve months ending October 31,                 leases          leases

     2008                                                135           1,081
     2009                                                135           1,090
     2010                                                135             871
     2011                                                135             613
     2012                                                133             288
     Thereafter                                          407             986
                                                     -------         -------
     Total annual lease payments                     $ 1,080         $ 4,929
     Less amount representing interest
       at a rate of 6.5%                                (330)
                                                     -------
     Present value of minimum lease payments             750
     Less current portion                                (66)
                                                     -------
     Long-term portion                               $   684
                                                     =======

Purchase Commitments
--------------------

The Company issued purchase orders to Case Corporation for equipment purchases.
Upon acceptance by Case, these purchases become noncancelable by the Company. As
of October 31, 2007, such purchase commitments totaled $3,803.

Litigation
----------

Incident to the Company's business activities, it may at times be a party to
legal proceedings, lawsuits and claims. Such matters are subject to
uncertainties whose outcomes are not predictable with assurance. Management
believes, at this time, there are no ongoing matters which will have a material
adverse effect on the Company's condensed consolidated financial statements.

9. PRODUCT INFORMATION

Revenue and gross profit from continuing operations by product categories are
summarized as follows (`000's):

Business product category                           Three Months Ended
     Net Revenues                                       October 31,
                                                    2007          2006
                                                  -------       -------
     Equipment Sales                              $11,763        15,188

     Equipment Rental                               1,371         1,710

     Mining Sales                                     874           431

     Product Support                                5,524         6,282
                                                  -------       -------
     Total                                        $19,532       $23,611
                                                  =======       =======

                                       12
<PAGE>

     Business product category                      Three Months Ended
     Gross Profit                                       October 31,
                                                    2007          2006
                                                  -------       -------
     Equipment Sales                              $   307       $ 1,033

     Equipment Rental                                 328           379

     Mining Sales                                     191          (329)

     Product Support                                1,274         1,577
                                                  -------       -------
     Total                                        $ 2,100       $ 2,660
                                                  =======       =======

10. SEGMENT INFORMATION

Summarized financial information concerning the Company's reportable segments is
shown in the following tables (`000's).
<TABLE><CAPTION>
                                                     Western Power &    Arizona Pacific
                                                     Equipment Corp     Materials, LLC      Total
<S>                                                     <C>                <C>            <C>
For the Three Months Ended October 31, 2007
Net revenues                                            $ 18,658           $    874       $ 19,532
                                                        ========           ========       ========
Loss from continuing operations                         $ (2,257)          $   (604)      $ (2,861)
                                                        ========           ========       ========
Net loss                                                $ (2,257)          $   (604)      $ (2,861)
                                                        ========           ========       ========
Capital expenditures                                    $     32           $    --        $     32
                                                        ========           ========       ========
Total identifiable assets at October 31, 2007           $ 38,509           $  4,475       $ 42,984
                                                        ========           ========       ========

For the Three Months Ended October 31, 2006
Net revenues                                            $ 23,180           $    431       $ 23,611
                                                        ========           ========       ========
Operating income (loss) from continuing operations      $     25           $ (1,075)      $ (1,050)
                                                        ========           ========       ========
Net income (loss)                                       $    320           $ (1,089)      $   (769)
                                                        ========           ========       ========
Capital expenditures                                    $    150           $    416       $    566
                                                        ========           ========       ========
Total identifiable assets at October 31, 2006           $ 56,463           $  6,120       $ 62,583
                                                        ========           ========       ========
</TABLE>

11. CONCENTRATION OF CREDIT RISK

Approximately 43% and 49% of the Company's net sales for the three month periods
ended October 31, 2007 and October 31, 2006, respectively, resulted from sales,
rental, and servicing of products manufactured by Case.

12. DISCONTINUED OPERATIONS

The accompanying financial statements for all periods presented have been
presented to reflect the accounting of discontinued operations for certain
branch locations sold or closed in fiscal year 2006. There were no operations
discontinued in the three months ended October 31, 2007.

The Company classifies closed or sold branch locations in discontinued
operations when the operations and cash flows of the location have been
eliminated from ongoing operations and when the Company will not have any
significant continuing involvement in the operation of the branch after
disposal. For purposes of reporting the operations of branch locations meeting
the criteria of discontinued operations, the Company reports net revenue, gross
profit and related selling, general and administrative expenses that are
specifically identifiable to those branch locations as discontinued operations.
Assets to be sold shall be classified as held for sale in the period in which
all of the criteria as outlined in SFAS No. 144 `Accounting for the Impairment
or Disposal of Long Lived Assets" have been met. In accordance with these
provisions, management must have committed to a definitive plan of disposal and
the sale must be deemed probable to occur.

                                       13
<PAGE>

In November 2006, the Company closed its Flagstaff, Arizona location, a location
of its subsidiary, APM and transferred the fixed assets to its Phoenix, Arizona
mining facility.

The Company sold its Anchorage and Fairbanks, Alaska locations in May 2007 for a
total sales price of $12,158. Included in the sale was inventory with a cost of
$11,409. The Company also sold fixed assets with an original cost of $503 (net
book value of $230) resulting in a gain of $690.

The following table presents selected financial data for the discontinued
operations of the Company's business (in thousands of dollars):

                                                        Three Months Ended
                                                         October 31, 2006

   Revenue from discontinued operations                      $  5,746
   Gross profit from discontinued operations                 $    611
   SG & A from discontinued Operations                       $    330
   Income from discontinued operations                       $    281
   Gain on disposal                                          $   --


13. ACCOUNTING FOR THE UNCERTAINTY IN INCOME TAXES

The Company has adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN48"), on August 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes," and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
period, disclosure and transition.

The Company has identified its federal tax return and its state tax returns in
Oregon, California, Arizona and Alaska as "major" tax jurisdictions, as defined.
Based on the Company's evaluation, it has been concluded that there are no
significant uncertain tax positions requiring recognition in the Company's
financial statements. The Company's evaluation was performed for the tax years
ended July 31, 2005 through 2007, the periods subject to examination. The
Company believes that its income tax positions and deductions would be sustained
on audit and does not anticipate any adjustments that would result in a material
change to its financial position. In addition, the Company did not record a
cumulative effect adjustment related to adoption of FIN48.

The Company's policy for recording interest and penalties associated with audits
is to record such items as a component of income before income taxes. Penalties
are recorded in other expense and interest paid or received is recorded in
interest expense or interest income, respectively, in the statement of
operations. There were no amounts accrued for penalties and interest as of or
during the three months ended October 31, 2007. The Company does not expect its
unrecognized tax benefit position to change during the next twelve months.
Management is currently unaware of any issues under review that could result in
significant payments, accruals or material deviations from its position.

                                       14
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES

Management's Discussion and Analysis of Results of Operations and Liquidity and
Capital Resources (MD&A) is designed to provide a reader of the financial
statements with a narrative on our financial condition, results of operations,
liquidity, critical accounting policies and the future impact of accounting
standards that have been issued but are not yet effective. Our MD&A is presented
in six sections: Overview, Results of Operations, Liquidity and Capital
Resources, Off-Balance Sheet Arrangements, New Accounting Pronouncements and
General Economic Conditions. We believe it is useful to read our MD&A in
conjunction with our Annual Report on Form 10-K for the fiscal year ended July
31, 2007. Amounts are stated in `thousands of dollars' unless otherwise stated.

Section 27A of the Securities Act of 1933, as amended, and Section 21E if the
Securities Act of 1934, as amended (Exchange Act), provide a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about their companies. With the exception of historical information,
the matters discussed in this Quarterly Report on Form 10-Q are forward-looking
statements and may be identified by the use of words such as "believe",
"expect", "anticipate", plan, "estimate", "intend" and "potential". The
following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-Q. Information included herein relating to projected
growth and future results and events constitutes forward-looking statements.

Actual results in future periods may differ materially from the forward-looking
statements due to a number of risks and uncertainties, including but not limited
to fluctuations in the construction, agricultural, and industrial sectors; the
success of our restructuring and cost reduction plans; the success of our
equipment rental business; rental industry conditions and competitors;
competitive pricing; our relationship with its suppliers; relations with our
employees; our ability to manage its operating costs; the continued availability
of financing; our ability to refinance/restructure our existing debt;
governmental regulations and environmental matters; risks associated with
regional, national, and world economies; and consummation of the merger and
asset purchase transactions. Any forward-looking statements should be considered
in light of these factors.

OVERVIEW

Western Power & Equipment Corp., a Delaware corporation, (the "Company", "us",
"we" or "our"), is engaged in the sale, rental, and servicing of light,
medium-sized, and heavy construction, agricultural, and industrial equipment,
parts, and related products which are manufactured by Case Corporation ("Case")
and certain other manufacturers and operates a mining company in Arizona. We
believe, based upon the number of locations owned and operated, that we are one
of the largest independent dealers of Case construction equipment in the United
States. Products sold, rented, and serviced include backhoes, excavators,
crawler dozers, skid steer loaders, forklifts, compactors, log loaders,
trenchers, street sweepers, sewer vacuums, and mobile highway signs.

We maintain two distinct segments which include Western Power & Equipment Corp.,
the equipment dealership and Arizona Pacific Materials, LLC, a mining operation.

We operate out of facilities located in the states of Washington, Oregon, Nevada
and California for our equipment dealership. Our revenue sources are generated
from equipment (new and used) sales, parts sales, equipment service and
equipment rental. The equipment is distributed to contractors, governmental
agencies, and other customers, primarily for use in the construction of
residential and commercial buildings, roads, levees, dams, underground power
projects, forestry projects, municipal construction and other projects.

Certain matters discussed herein contain forward-looking statements that are
subject to risks and uncertainties that could cause results to differ materially
from those projected.

Due to the seasonal nature of our business, interim results are not necessarily
indicative of results for the entire year. Our revenue and earnings are
typically greater in the first and fourth quarters of the year, which include
early spring through late fall seasons.

Our strategy had focused on acquiring additional existing distributorships and
rental operations, opening new locations as market conditions warrant, and
increasing sales at its existing locations. In such connection, we had sought to
operate additional Case or other equipment retail distributorships, and sell,
lease, and service additional lines of construction equipment and related
products not manufactured by Case. For the past few years, we have

                                       15
<PAGE>

concentrated on consolidating or closing certain of our stores to improve
operating efficiency and profitability.

Arizona Pacific Materials, LLC, an 85% owned subsidiary purchased in September
2004, operates a surface mine producing cinder and basalt aggregate to supply
material for block manufactures, concrete and asphalt suppliers and landscape
contractors, in the Phoenix, Arizona building/construction market. In November
2006, we closed our Flagstaff location. The assets of the branch were
transferred to our remaining mining location in Phoenix, Arizona.

We have focused on developing the mining operation over the past year to
primarily provide basalt in the Phoenix area housing development construction
market. Over the past few years there has been significant increases in
construction in the Phoenix area, especially in Pinal County, where the mining
operation is located. Although the level of construction starts in the Phoenix
area has slowed in the last year, the Company believes the area is still one of
the top growth areas in the United States. Close proximity to the construction
sites provides basalt and cinder to the contractors at a lower cost, as freight
costs are minimized. Based upon a 2004 study, our Phoenix location had
approximately 39,000,000 tons of proven reserves and an additional 38,000,000
tons of indicated reserves of high grade basalt available to be processed to
meet the future demands of the Phoenix market.


RESULTS OF OPERATIONS

Consolidated results

The following table presents unaudited selected financial data for our
consolidated business activities (in thousands of dollars):



Consolidated - continuing   Three Months Ended   Three Months Ended    Increase
operations (in 000's)         October 31, 2007     October 31, 2006   (Decrease)

Revenue                          $  19,532            $  23,611        $ (4,079)
 Gross profit                    $   2,100            $   2,660        $   (560)
SG&A                             $   2,774            $   2,575        $    199
Operating (loss) income          $    (674)           $      85        $   (759)
Loss from continuing
operations                       $  (2,861)           $  (1,050)       $ (1,811)


The Three Months ended October 31, 2007 compared to the Three Months ended
--------------------------------------------------------------------------
October 31, 2006.
-----------------

REVENUES

Revenues from continuing operations for the three-month period ended October 31,
2007 decreased by $4,079 or 17.3% over the comparative three-month period ended
October 31, 2006. For the three-month period ended October 31, 2007 equipment
sales and rentals decreased by $3,764 and product sales decreased by $758 while
mining sales increased by $443. Sales in all of our locations have declined in
the first quarter as compared to the prior year's first quarter, with the
exception of our Buena Park, California location, which had an increase of
$1,876 as a result of several large sweeper sales to municipalities.
Governmental sales, which can change dramatically based upon budget cycles,
comprise a significant amount of the sales in our Buena Park location. Our
equipment sales have also been reduced as a result of significant declines over
the past year in the residential construction market as the economy softens.
This has resulted in declining equipment sales throughout the equipment
industry. Through this we have been able to retain our relative market share.
The decline in the number of branches has also affected the Company's ability to
transfer specific inventory to a larger market area.

Mining sales from our subsidiary in Phoenix, Arizona increased $443 or 102.8%
over the prior year's comparative three-month period as a result of increased
basalt production and sales of crushed aggregates for road, housing and related
construction, specifically in the fast growing area southeast of Phoenix. Our
subsidiary is also experiencing more demand for rip rap (larger sized rock used
in support for topography stabilizing and ballast for train and light rail
construction).

                                       16
<PAGE>

GROSS MARGIN

The Company's gross profit margin of 10.8% for the three-month period ended
October 31, 2007 was slightly lower than the prior year's comparative period
margin of 11.3%. During the quarter, the Company made several used equipment
sales at sales prices below cost through auctions. These auction sales consisted
of severely aged equipment that the Company is no longer the manufacturers'
representative for and resulted in a loss of approximately $200. In addition,
gross margin was adversely affected by the expenses related to the production
growth and equipment investment in APM, our mining subsidiary. Production
capacity has increased at the mining facility which we believe will assist in
obtaining improved production costs of the products produced. We now have two
processing plants, one for basalt and one for cinder, which enables us to
process multiple products more efficiently.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three-month period ended October 31, 2007, selling, general, and
administrative ("SG&A") expenses from continuing operations were only slightly
higher by $199 compared to the prior year's comparative first quarter. The
majority of these expenses, such as rent, depreciation and salaries, are fixed
in nature and are not impacted by the level of sales. The Company prepaid $100
in fiscal 2007 and $110 in the first quarter of fiscal year 2008 in bank fees
related to potential re-financing with a bank. The financing arrangement did not
materialize and these loan fees were expensed in the first quarter of fiscal
year 2008.

OPERATING INCOME

The Company had an operating loss for the three months ended October 31, 2007 of
$674 compared to operating income of $85 for the three months ended October 31,
2006, reflecting the decrease in margin percentages in equipment sales and added
costs related to increased production activities of our mining operation.

INTEREST EXPENSE

Interest expense for the three months ended October 31, 2007 of $2,455 was up
from $1,270 in the prior year comparative period. The Company is in technical
default of their convertible debt agreement (see Note 7), causing the debt to
become immediately due. As a result the Company expensed the remainder of the
debt discount (related to warrants issued with the convertible debt transaction
in June 2005) and deferred debt issuance costs during the quarter ended October
31, 2007. The Company amortized $1,190 of debt discount and $540 in debt
issuance costs during the three months ended October 31, 2007 while during the
three months ended October 31, 2006, these amounts were $268 and $93,
respectively.

NET LOSS

The Company had a net loss from continuing operations for the quarter ended
October 31, 2007 of $2,861 compared with a net loss of $1,050 for the prior
year's comparative quarter. The additional increase in the net loss is a result
of lower revenues, lower margins on equipment sales and additional
administrative, production costs at our mining operation and the accelerated
amortization of the debt discount and deferred debt issuance costs, as discussed
above.

Discontinued Operations
-----------------------

The following table presents unaudited selected financial data for the
discontinued operations of our business (in thousands of dollars):

                                                  Three Months Ended
                                                   October 31, 2006
                                                   ----------------

   Revenue from discontinued operations                $  5,746
   Gross Profit from discontinued operations           $    611
   SG&A from discontinued Operations                   $    330
   Income from discontinued operations                 $    281
   Gain on disposal                                    $   --

                                       17
<PAGE>

We classify closed or sold branch locations in discontinued operations when the
operations and cash flows of the location have been eliminated from ongoing
operations and when we will not have any significant continuing involvement in
the operation of the branch after disposal. To determine if cash flows had been
or would be eliminated from ongoing operations, we evaluate a number of
qualitative and quantitative factors, including, but not limited to, proximity
to remaining open branch locations and estimates of sales migration from the
closed or sold branch to any branch locations remaining open. The estimated
sales migration is primarily based on our continued level of involvement as a
Case dealer once the branch location is sold or closed and whether there is
continued active solicitation of sales in that market. For purposes of reporting
the operations of branch locations meeting the criteria of discontinued
operations, we report net revenue, gross profit and related selling, general and
administrative expenses that are specifically identifiable to those branch
locations as discontinued operations. Certain corporate level charges, such as
general office expenses and interest expense are not allocated to discontinued
operations because we believe that these expenses are not specific to the branch
location's operations.

Our strategy had focused on acquiring additional existing distributorships and
rental operations, opening new locations as market conditions warrant, and
increasing sales at its existing locations. In such connection, we had sought to
operate additional Case or other equipment retail distributorships, and sell,
lease, and service additional lines of construction equipment and related
products not manufactured by Case. For the past few years, we have concentrated
on consolidating or closing certain of our store locations to improve operating
efficiency and profitability. The locations that have been sold or closed in the
past few years represent locations that we believe were more difficult markets
to maintain in comparison to other locations within our organization. We believe
that focusing our efforts and capital resources on more profitable locations
will result in overall long-term benefits to the Company.

In November 2006, the Company closed its Flagstaff, Arizona location, a location
of its subsidiary, APM and transferred the fixed assets to its Phoenix, Arizona
mining facility.

The Company sold its Anchorage and Fairbanks, Alaska locations in May 2007 for a
total sales price of $12,158. Included in the sale was inventory with a cost of
$11,409. The Company also sold fixed assets with an original cost of $503 (net
book value of $230) resulting in a gain of $690.

LIQUITY AND CAPITAL RESOURCES

Primary needs for liquidity and capital resources are related to the acquisition
of inventory for sale and our rental fleet. Our primary source of liquidity has
been from operations. As more fully described below, our primary sources of
external liquidity are equipment inventory floor plan financing arrangements
provided to us by the manufacturers of the products we sell as well as the
credit facility or long-term convertible debt more fully described below.

Under inventory floor planning arrangements, the manufacturers of products
provide interest free credit terms on new equipment purchases for periods
ranging from one to twelve months, after which interest commences to accrue
monthly at rates ranging from zero to two percent over the prime rate of
interest. Principal payments are typically made under these agreements at
scheduled intervals and/or as the equipment is rented, with the balance due at
the earlier of a specified date or upon sale of the equipment.

In June 2005, we closed a new $30 million convertible debt facility (convertible
into common shares of the Company at $2.00 per share) payable over the next five
years, with a variable interest rate of LIBOR plus 6%. In March 2006, the
conversion price in the convertible debt agreement was modified from $2.00 per
share to $1.75 per share as part of the approval process for selling our Spokane
and Clarkston locations. The lenders also had the right to lend an additional
$7.5 million to us (within 18 months of the date of the original debt, which has
expired as of January 31, 2007) under the same terms as the existing five year
convertible debt. We began making monthly principal payments in January 2006.
The balance of the unpaid principal on the convertible notes (net of discount)
as of October 31, 2007 is $19,674 (net of discount of $0) all of which is short
term.

                                       18
<PAGE>

In January 2007, the Company was in technical default of the convertible debt
agreement because of a late payment, which, under the terms of the agreement,
would result in a penalty of 20% of the loan balance at the time of the default.
The Company has recorded an expense of $3,866 in the second quarter of 2007 for
this penalty. The Company has negotiated an agreement with the convertible debt
holders to have 50% of the penalty paid in cash and the remaining 50% of the
penalty satisfied by a transfer of a 10% ownership interest in the Company's
subsidiary, Arizona Pacific Materials, LLC in lieu of the remaining $1,933
obligation. This resulted in a gain of $1,967 and a net penalty of $1,933. The
carrying amount of the subsidiary's common stock sold was removed from the
parent company's investment in subsidiary's common stock account and the
difference between the carrying amount and current value of the consideration
was recorded as a gain.

As of July 2007, the Company was in technical default of the terms of the April
default waiver agreement, as the Company did not make all of the required
principal payment due June 2007. The Company negotiated a waiver of that default
in consideration for a transfer of an additional 5% ownership interest (valued
at $250) in the Company's subsidiary, Arizona Pacific Materials, LLC. A revised
payment due date of October 15, 2007 was negotiated to pay the entire loan
balance. The Company did not make the required full loan payment on October 15,
2007 and continues to be in default with the debt agreement. The Company
recorded an expense of $3,200 (representing a 20% default penalty) in the fourth
quarter of 2007.

As a result of the above defaults, the Company recorded total convertible debt
penalties of $5,383 during fiscal year 2007.

For the quarter ended October 31, 2007, the Company recorded as a charge $1,190
for deferred debt issuance costs and $540 of debt issuance costs as a result of
the above defaults. The Company also transferred the additional 5% ownership in
the Company's subsidiary, Arizona Pacific Materials, LLC resulting in a gain of
$250.

With this technical default, the convertible debt becomes due immediately due.
Management is currently in discussions with the debt holders and is seeking to
refinance the debt but there is no assurance they will succeed in these efforts.
If management is not successful in obtaining alternative financing, the Company
may have to sell off certain assets or the Company's operations may not be able
to continue. The previously described conditions raise substantial doubt about
the Company's ability to continue as a going concern.

CASH FLOW FROM OPERATING ACTIVITIES

During the three months ended October 31, 2007 we had negative cash flows from
operating activities of $7. Our cash flow from operating activities consisted
primarily of a reduction of inventory of $1,243, depreciation of $1,225 and the
amortization of debt discount and deferred debt issuance costs of $1,734. These
were offset by the use of funds to decrease accounts payable by $1,196. We
continue to analyze our inventory levels and projected equipment and parts
future sales to minimize our investment in inventory and maximize our ability to
support future sales with consideration given to manufacture delivery lead
times. As we sell inventory the proceeds are used to manage our accounts payable
in an effort to maintain good relations with our vendors. We also continue to
analyze each branch location and its market to assess the past and future
contribution each location has and will make to the overall profitability of the
Company.

CASH FLOW FROM INVESTING ACTIVITIES

Purchases of fixed assets during the period were related mainly to the ongoing
replacement of aged operating assets, particularly in our rental fleet. In prior
years, we had focused less on our rental fleet inventory levels (allowing
inventory levels to decline). We focus on the utilization of the rental fleet
and continue to sell older equipment with less utilization and replace, as
needed, with newer equipment where there is demand. As interest rates rise, we
will continue to analyze the need to rebuild our rental fleet as customer "buy
versus rent" decisions change with economic conditions.

CASH FLOW FROM FINANCING ACTIVITIES

We decreased our floor plan financing by $138 and paid $526 against our long
term debt balances during the three-month period ended October 31, 2007. Sales
and collections of accounts receivable continue to be our major source for the
payment of long-term debt. We continue to analyze liquidity and our ability to
maintain a balance between inventory levels and capital resources available for
inventory and varying levels of sales.

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<PAGE>

The need for future capital resources relates primarily to our obligation to pay
amounts owed on the convertible debt as well as other long term notes payable as
outlined in Note 7 of the consolidated financial statements. Management is
currently in discussions with the debt holders and is seeking to refinance the
debt with longer-term capital resources, including the generation of equity
capital, but there is no assurance they will succeed in these efforts. If
management is not successful in obtaining alternative financing, the Company may
have to sell off certain assets or the Company's operations may not be able to
continue.

CASH AND CASH EQUIVALENTS

Our cash and cash equivalents was $0 as of October 31, 2007. As a result of the
accelerated due date of the convertible debt, the Company will be required to
obtain alternate third party financing to support its current operations and to
meet the accelerated convertible debt pay-off. There can be no assurance that
the Company can obtain such third party financing. We are actively exploring
avenues that will generate both short-term and long-term financing sources, as
well as the generation of additional equity capital.

OTHER

As of October 31, 2007, the Company had outstanding convertible instruments,
options and warrants convertible into 23,562,582 shares of common stock, which
could potentially dilute earnings per share.

OFF-BALANCE SHEET ARRANGEMENTS

Our off-balance sheet arrangements are principally lease arrangements associated
with the retail stores and the corporate office.

NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The
adoption of this pronouncement did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.

In July 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN 48 prescribes
a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 shall be effective for fiscal years
beginning after December 15, 2006. Earlier adoption is permitted as of the
beginning of an enterprise's fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN 48
will be recorded as an adjustment to retained earnings as of the beginning of
the period of adoption. The adoption of this pronouncement did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements". SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective for the
Company for financial statements issued subsequent to November 15, 2007. The
Company does not expect the new standard to have any material impact on the
financial position and results of operations.

In December 2006, the FASB approved FASB Staff Position ("FSP") No. EITF
00-19-2, "Accounting for Registration Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires

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<PAGE>

additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, " Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", to include scope exceptions for
registration payment arrangement.

FSP EITF 00-19-2 is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the issuance date (December 21, 2006) of this
FSP, or for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years, for
registration payment arrangements entered into prior to the issuance date of
this FSP. The adoption of this pronouncement did not have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The objective of SFAS 159 is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principals have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. The FASB has indicated it believes that SFAS 159 helps to mitigate
this type of accounting-induced volatility be enabling companies to report
assets and liabilities at fair value, which would likely reduce the need for
companies to comply with detailed rules for hedge accounting. SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities.


GENERAL ECONOMIC CONDITIONS

Controlling inventory is a key ingredient to the success of an equipment
distributor because the equipment is characterized by long order cycles,
high-ticket prices, and the related exposure to "flooring" interest. Our
interest expense may increase if inventory is too high or interest rates rise.
We manage our inventory through Company-wide information and inventory sharing
systems wherein all locations have access to the Company's entire inventory. In
addition, we closely monitor inventory turnover by product categories and we
place equipment orders based upon targeted turn ratios.

All of the products and services we provide are either capital equipment or
included in capital equipment, which are used in the construction, industrial,
and agricultural sectors. Accordingly, our sales are affected by inflation or
increased interest rates, which tend to hold down new construction, and
consequently adversely affect demand for the equipment sold and rented by us. In
addition, although agricultural equipment sales are less than 2% of our total
revenues, factors adversely affecting the farming and commodity markets also can
adversely affect our agricultural equipment related business.

Our business can also be affected by general economic conditions in its
geographic markets as well as general national and global economic conditions
that affect the construction, industrial, and agricultural sectors. Further
erosion in North American and/or other countries' economies could adversely
affect our business.

Although the principal products sold, rented, and serviced by us are
manufactured by Case, we also sell, rent, and service equipment and sell related
parts (e.g., tires, trailers, and compaction equipment) manufactured by others.
Approximately 57% of our net sales for the three months ended October 31, 2007
resulted from sales, rental, and servicing of products manufactured by companies
other than Case. That compares with a figure of 51% for the three-month period
ended October 31, 2006. These other manufacturers offer various levels of
supplies and marketing support along with purchase terms, which vary from cash
upon delivery to interest-free, 12-month flooring.

We purchase equipment and parts inventory from Case and other manufacturers. No
supplier other than Case accounted for more than 10% of such inventory purchases
during the three months ended October 31, 2007. While maintaining its commitment
to Case to primarily purchase Case Equipment and parts as an authorized Case
dealer, we plan to expand the number of products and increase the aggregate
dollar value of those products which we purchases from manufacturers other than
Case in the future.

                                       21
<PAGE>

The generally soft economic conditions in the equipment market, particularly in
the northwest, have contributed to a decline in equipment sales in prior years.
A further softening in the industry could severely affect our sales and
profitability. Market specific factors could also adversely affect one or more
of our target markets and/or products.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates. Market risk is the
potential loss arising from adverse changes in market rates and prices such as
interest rates. For fixed rate debt, interest rate changes affect the fair value
of financial instruments but do not impact earnings or cash flows. Conversely
for floating rate debt, interest rate changes generally do not affect the fair
market value but do impact future earnings and cash flows, assuming other
factors are held constant. At October 31, 2007, we had variable rate floor plan
payables, notes payable, convertible debt and short-term debt of approximately
$43.7 million. Holding other variables constant, the pre-tax earnings and cash
flow impact for the next year resulting from a one-percentage point increase in
interest rates would be approximately $0.44 million. Our policy is not to enter
into derivatives or other financial instruments for trading or speculative
purposes.


ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our CEO and CFO, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(e) and 15d-15(e), we carried out an evaluation,
under the supervision and with the participation of our management, including
our CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on the foregoing, the CEO and CFO concluded that our disclosure
controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.

Changes in Internal Controls
----------------------------

There were no significant changes in our internal controls over financial
reporting that occurred during the three months ended October 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Limitations on the Effectiveness of Controls
--------------------------------------------

We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.

                                       22
<PAGE>

PART II. OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS

     Incident to the Company's business activities, it may at times be a party
     to legal proceedings, lawsuits and claims. Such matters are subject to
     uncertainties whose outcomes are not predictable with assurance. Management
     believes, at this time, there are no ongoing matters, which will have a
     material adverse effect on the Company's consolidated financial statements.

     ITEM 1A. RISK FACTORS

             None.

     ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

             None

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     In January 2007, the Company was in technical default of the convertible
     debt agreement because of a late payment, which, under the terms of the
     agreement, would result in a penalty of 20% of the loan balance at the time
     of the default. The Company has negotiated an agreement with the
     convertible debt holders to have 50% of the penalty paid in cash and the
     remaining 50% of the penalty satisfied by a transfer of 10% ownership
     interest in our subsidiary, Arizona Pacific Materials, LLC. In January
     2007, the Company recorded a $3.9 million expense for this penalty. With
     the technical default, the convertible debt becomes due immediately due. A
     revised due date of December 31, 2007 has been negotiated. The convertible
     debt holders are also requiring several additional large principal payments
     prior to December 31, 2007.

     As of July 2007, the Company was in technical default of the terms of the
     April default waiver agreement, as the Company did not make all of the
     required principal payment due June 2007. The Company negotiated a waiver
     of that default in consideration for a transfer of an additional 5%
     ownership interest (valued at $250) in the Company's subsidiary, Arizona
     Pacific Materials, LLC. A revised payment due date of October 15, 2007 was
     negotiated to pay the entire loan balance. The Company did not make the
     required full loan payment on October 15, 2007 and continues to be in
     default with the debt agreement. The Company recorded an expense of $3,200
     (representing a 20% default penalty) in the fourth quarter of 2007.

     As a result of the above defaults, the Company recorded total convertible
     debt penalties of $5,383 during fiscal year 2007. For the quarter ended
     October 31, 2007, the Company recorded as a charge $1,190 for deferred debt
     issuance costs and $540 of debt issuance costs as a result of the above
     defaults. The Company also transferred the additional 5% ownership in the
     Company's subsidiary, Arizona Pacific Materials, LLC resulting in a gain of
     $250.

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

             None.

     ITEM 5. OTHER INFORMATION

             None.

     ITEM 6. EXHIBITS

             Exhibit 31.1, 31.2   Rule 13a-14(a)/15d-14(a) Certification

                                       23
<PAGE>

             Exhibit 32.1         Certification by the Chief Executive Officer
                                  Relating to a Periodic Report Containing
                                  Financial Statements.*
             Exhibit 32.2         Certification by the Chief Financial Officer
                                  Relating to a Periodic Report Containing
                                  Financial Statements.*

             * The Exhibit attached to this Form 10-Q shall not be deemed
             "filed" for purposes of Section 18 of the Securities Exchange Act
             of 1934 (the "Exchange Act") or otherwise subject to liability
             under that section, nor shall it be deemed incorporated by
             reference in any filing under the Securities Act of 1933, as
             amended, or the Exchange Act, except as expressly set forth by
             specific reference in such filing.





















                                       24
<PAGE>

                                    SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY

December 17, 2007

     By: /s/Mark J. Wright
         ---------------------
         Mark J. Wright
         Vice President of Finance and
         Chief Financial Officer


















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