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                                    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 January 31, 2006
                         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 March 14, 2006.

      Title of Class                                     Number of shares
       Common Stock                                        Outstanding
(par value $.001 per share)                                11,130,000
================================================================================
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                                      INDEX

                                                                           Page
PART I.  FINANCIAL INFORMATION                                            Number

         Item 1. Financial Statements

         Condensed Consolidated Balance Sheets
            January 31, 2006 (Unaudited) and July 31, 2005.................  3

         Condensed Consolidated Statements of Operations
            Three months ended January 31, 2006 (Unaudited)
            and January 31, 2005 (Unaudited)...............................  4

         Condensed Consolidated Statements of Operations
            Six months ended January 31, 2006 (Unaudited)
            and January 31, 2005 (Unaudited)...............................  5

         Condensed Consolidated Statements of Cash Flows
            Six months ended January 31, 2006 (Unaudited)
            and January 31, 2005 (Unaudited)...............................  6

         Notes to Condensed Consolidated Financial Statements............. 7-14

         Item 2. Management's Discussion and Analysis of
                 Financial Condition and Results of Operations........... 15-19

         Item 3. Quantitative and Qualitative Disclosures about
                 Market Risk............................................... 19

         Item 4. Controls and Procedures................................... 19


PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings........................................ 20

         Item 1A. Risk Factors............................................. 20

         Item 2.  Unregistered Sales of Equity Securities and Use
                  of Proceeds.............................................. 20

         Item 3.  Defaults Upon Senior Securities.......................... 20

         Item 4.  Submission of Matters to a Vote of Security Holders...... 20

         Item 5.  Other Information........................................ 20

         Item 6.  Exhibits................................................. 20

SIGNATURES   .............................................................. 21

                                        2
<PAGE>

ITEM 1. FINANCIAL STATEMENTS

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE><CAPTION>
                                                                        January 31,      July 31,
                                                                           2006            2005
                                                                        ----------      ----------
                                                                        (Unaudited)

                                     ASSETS
<S>                                                                     <C>             <C>
Current assets:
     Cash and cash equivalents ....................................     $    1,526      $      855
     Accounts receivable, less allowance for doubtful
       accounts of $761 and $906 ..................................          7,393          10,449
     Inventories ..................................................         40,473          46,333
     Deferred tax asset ...........................................            664             664
     Prepaid expenses .............................................            333             564
            Total current assets ..................................         50,389          58,865
Fixed assets:
     Property, plant and equipment (net) ..........................          3,937           3,889
     Rental equipment fleet (net) .................................          5,141           6,068
            Total fixed assets ....................................          9,078           9,957
Other assets
     Security Deposits ............................................            317             318
     Deferred taxes ...............................................            836             836
     Deferred debt issuance costs .................................          1,480           1,661
         Total other assets .......................................          2,633           2,815

Total assets ......................................................     $   62,100      $   71,637


                       LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
     Borrowings under floor plan financing ........................     $   17,429          24,558
     Bridge loan, net of discount of $ 0 and $ 79 .................              0           1,254
     Convertible debt, net of discount of $ 836 and $ 836 .........          5,831           3,052
     Notes payable-related parties, net of discount of $ 41 and $82            459             418
     Notes payable ................................................            595             205
     Accounts payable .............................................          6,344           7,925
     Accrued payroll and vacation .................................            898             932
     Other accrued liabilities ....................................          1,520           1,313
     Capital lease obligation .....................................             54              43
         Total current liabilities ................................         33,130          39,700
Long-term liabilities
     Notes Payable ................................................          2,081             655
     Convertible Debt, net of discount of $ 1,986 and $ 2,404 .....         20,236          23,708
     Deferred Lease Income ........................................            250             264
     Capital lease obligation .....................................            782             810
      Total long-term liabilities .................................         23,349          25,437
Total liabilities .................................................         56,479          65,137
Stockholders' equity:
     Preferred stock-10,000,000 shares authorized;
       none issued and outstanding ................................           --              --
     Common stock-$.001 par value; 50,000,000 shares
       authorized; 10,310,300 issued and 10,180,000
       outstanding ................................................             10              10
     Additional paid-in capital ...................................         20,929          20,859
     Deferred compensation ........................................           --               (18)
     Accumulated deficit ..........................................        (14,474)        (13,507)
     Less common stock in treasury, at cost
       (130,300 shares) ...........................................           (844)           (844)
         Total stockholders' equity ...............................          5,621           6,500
Total liabilities and stockholders' equity ........................     $   62,100      $   71,637
</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
                                                         January 31,
                                                    2006            2005
                                                 ----------      ----------
Net revenue ................................     $   33,463      $   30,341

Cost of revenues (includes depreciation of
   $989 and $935, respectively) ............         29,920          27,346

Gross profit ...............................          3,543           2,995

Selling, general and administrative expenses          2,819           2,448

Operating income ...........................            724             547

Other income (expense):
     Interest expense ......................         (1,481)           (717)
     Other income ..........................             17             299

Income (loss) before income tax provision ..           (740)            129

Income tax provision .......................             18              12

Net income (loss) ..........................     $     (758)     $      117


Basic earnings (loss) per common share .....     $     (.07)     $     0.01

Diluted earnings (loss) per common share ...     $     (.07)     $     0.01


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

                                        4
<PAGE>

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


                                                      Six Months Ended
                                                         January 31,
                                                    2006            2005
                                                 ----------      ----------
Net revenue ................................     $   66,498      $   57,085

Cost of revenues (includes depreciation of
   $2,640 and $2,602, respectively) ........         58,773          50,759

Gross profit ...............................          7,725           6,326

Selling, general and administrative expenses          5,758           4,673

Operating income ...........................          1,967           1,653

Other income (expense):
     Interest expense ......................         (2,930)         (1,340)
     Other income ..........................             30             347

Income (loss) before income tax provision ..           (933)            660

Income tax provision .......................             34              24

Net income (loss) ..........................     $     (967)     $      636


Basic earnings (loss) per common share           $    (0.10)     $     0.06

Diluted earnings (loss) per common share         $    (0.10)     $     0.05


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

                                        5
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                             (Dollars in thousands)
<TABLE><CAPTION>

                                                                                               Six Months Ended
                                                                                                  January 31,
                                                                                             2006            2005
                                                                                          ----------      ----------
<S>                                                                                       <C>             <C>
Cash flows from operating activities:
     Net income(loss) ................................................................    $     (967)     $      636
Adjustments to reconcile net income to net cash provided by operating activities:
     Depreciation ....................................................................         3,303           2,639
     Bad Debts .......................................................................             9               5
     Amortization of debt discount ...................................................           538              98
     Gain on sale of fixed assets and rental equipment ...............................          (308)         (1,012)
     Amortization of debt issuance costs .............................................           250            --
     Stock based compensation ........................................................            18              24
     Changes in assets and liabilities:
         Accounts receivable .........................................................         3,047           4,104
         Restricted Cash .............................................................          --              (215)
         Inventories .................................................................         3,308           2,295
         Prepaid expenses and other assets ...........................................           232             (18)
         Accounts payable and accrued expenses .......................................        (1,584)          2,177
         Accrued payroll and vacation ................................................           (34)           (540)
         Other accrued liabilities ...................................................           210             (74)
         Sale of other assets ........................................................          --               (38)
         Deferred Lease Income .......................................................           (14)            278
        Net cash provided by operating activities ....................................         8,008          10,359

Cash flows from investing activities:
     Purchase of property, plant and equipment .......................................          (355)            (42)
     Purchases of rental equipment ...................................................        (1,069)         (2,629)
     Purchase of assets of Arizona Pacific Materials, LLC ............................          --              (500)
     Proceeds on sale of fixed assets ................................................            42           1,584
     Proceeds on sale of rental equipment ............................................         1,819           3,212
     Net cash provided by investing activities .......................................           437           1,625

Cash flows from financing activities:
     Principal payments on capital leases ............................................           (17)            (17)
     Payments on short-term borrowings ...............................................          --            (8,019)
     Inventory floor plan financing ..................................................        (7,128)         (4,442)
     Bridge loan payments ............................................................        (1,333)           --
     Notes Payable from purchase of Arizona Pacific Materials, LLC ...................          --               500
     Long term debt borrowings .......................................................         1,928            --
     Long term debt payments .........................................................          (113)             (6)
     Payments on convertible debt ....................................................        (1,111)           --
Net cash used in financing activities ................................................        (7,774)        (11,984)

Increase in cash and cash equivalents ................................................           671            --
Cash and cash equivalents at beginning of period .....................................           855               9

Cash and cash equivalents at end of period ...........................................    $    1,526      $        9


Supplemental disclosures:
Interest paid ........................................................................    $    2,372      $    1,283
Income taxes paid ....................................................................          --              --



Supplemental schedule of non-cash investing and financing activities:
Notes payable issued for purchase of Arizona Pacific Materials, LLC ..................          --        $    2,500

Options valued at $292 were issued in connection with a $500 note payable related
to the down payment at closing for the purchase of Arizona Pacific Materials..........          --               292

In connection with consulting service agreements entered into in November 2004,
options were issued in lieu of cash payment ..........................................          --                97

 In connection with consulting service agreements entered into in June 2005,
warrants were issued in lieu of cash payment .........................................            69            --
</TABLE>

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

                                        6
<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 wholly owned subsidiary,
Arizona Pacific Materials, LLC, acquired in September 2004. 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 and six month periods
ended January 31, 2006 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 the Company's consolidated financial statements
included in the Annual Report on Form 10-K for the fiscal year ended July 31,
2005 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, 2005 consolidated financial
statements.

2. ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements as filed in its Form 10-K for the
year ended July 31, 2005.

In December 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), "Share-Based Payment." This statement requires
companies to expense the value of employee stock options and similar awards.
Under Financial Accounting Standard (FAS) 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest. Compensation cost for awards that
vest would not be reversed if the awards expire without being exercised. The
statement's effective date for a company is the first annual period beginning
August 1, 2005, and it applies to all outstanding and unvested SBP awards at a
company's adoption. The Company adopted this accounting pronouncement during the
current fiscal quarter. Upon adoption there was no impact on the consolidated
financial statements.

In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections." This statement replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. The statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.

The Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF
No. 05-1, "Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer's Exercise of a Call Option" ("EITF No. 05-1") that
no gain or loss should be recognized upon the conversion of an instrument that
becomes convertible as a result of an issuer's exercise of a call option
pursuant to the original terms of the instrument. The consensus for EITF No.
05-1 has not been finalized. The adoption of this pronouncement is not expected
to have an impact on our consolidated financial position, results of operations,
or cash flows.

In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, `Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered `conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible

                                        7
<PAGE>

preferred stock having a mandatory redemption date may qualify for the exemption
provided under EITF No. 00-19 for conventional convertible debt if the
instrument's economic characteristics are more similar to debt than equity. EITF
No. 05-2 is effective for new instruments entered into and instruments modified
in periods beginning after June 29, 2005. The Company has applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.

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") addresses financial instruments, such as stock purchase
warrants, which 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. The consensus for EITF No. 05-4 has not been
finalized. 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). Based on the interpretive
guidance in EITF Issue No. 05-4, view C, since the registration rights agreement
includes provisions for uncapped liquidated damages, the Company determined that
the registration rights is a derivative liability. However due to the
registration statement becoming effective in January 2006 and other relevant
factors, the value of the registration rights was deemed to be de minimus and
therefore no liability was recorded in the Condensed Consolidated financial
statements.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. The adoption of this pronouncement did
not have a material impact on the Company's consolidated statements.

In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7. "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues", which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification, and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. Management does not believe this pronouncement will have a material impact
on the Company's consolidated financial statements.

In September 2005, the FASB ratified the following consensus reached in EITF
Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes; b) The resulting
basis difference should be deemed a temporary difference because it will result
in a taxable amount when the recorded amount of the liability is recovered or
settled; and c) Recognition of deferred taxes for the temporary difference
should be reported as an adjustment to additional paid-in capital. Both of these
issues (EITF Issue No. 05-7 and 05-8) are effective in the first interim or
annual reporting period commencing after December 15, 2005, with early
application permitted. The effect of applying the consensus should be accounted
for retroactively to all debt instruments containing a beneficial conversion
feature that are subject to EITF Issue 00-27, "Application of Issue No. 98-5 to
Certain Convertible Debt Instruments" (and thus is applicable to debt
instruments converted or extinguished in prior periods but which are still
presented in the financial statements). Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.

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.

Diluted net income or loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period plus any
dilutive securities outstanding such as stock options, warrants or convertible
instruments. Total number of shares underlying the outstanding convertible
instruments, options and warrants as of January 31, 2006 was 28,650,218 and
4,690,000 as of January 31, 2005.

                                        8
<PAGE>

Earnings (loss) per common share is as follows:

                                                         Three Months Ended
                                                             January 31,
                                                              (`000's)
                                                         2006          2005
                                                       --------      --------
BASIC

Numerator:
Net income (loss) available to common shareholders     $   (758)     $    117
                                                       ========      ========
Denominator:
Weighted average shares outstanding                      10,180        10,130

Basic earnings (loss) per common share                 $  (0.07)     $   0.01
                                                       ========      ========

DILUTED

Weighted average shares outstanding                      10,180        10,130
Stock options                                              --           1,372
                                                       --------      --------
Denominator for diluted earnings per share               10,180        11,502
                                                       ========      ========

Diluted earnings (loss) per common share               $ (0.07)      $   0.01
                                                       ========      ========

                                                          Six Months Ended
                                                             January 31,
                                                              (`000's)
                                                         2006          2005
                                                       --------      --------
BASIC

Numerator:
Net income (loss) available to common shareholders     $   (967)     $    636
                                                       ========      ========
Denominator:
Weighted average shares outstanding                      10,180        10,130
                                                       ========      ========

Basic earnings (loss) per common share                 $  (0.10)     $   0.06
                                                       ========      ========
DILUTED

Weighted average shares outstanding                      10,180        10,130
Stock options                                              --           1,654
                                                       --------      --------
Denominator for diluted earnings per share               10,180        11,784
                                                       ========      ========

Diluted earnings (loss) per common share               $  (0.10)     $   0.05
                                                       ========      ========

4. STOCK BASED COMPENSATION

Effective August 1, 2005, the Company adopted FASB Statement of Financial
Accounting Standard ("SFAS") No. 123R "Share Based Payment". This statement is a
revision of SFAS Statement 123, and supersedes APB Opinion No. 25, and its
related implementation guidance. SAFS 123R addresses all forms of share based
payment ("SBP") awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. Under SAFS
123R, SBP awards result in a cost that will be measured at fair value on the
award's grant date, based on the estimated number of awards that are expected to
vest that will result in a charge to operations. There were no options issued to
employees during the six months ending January 31, 2006 and 2005. All previously
issued and outstanding stock options were fully vested as of January 31, 2006.

                                        9
<PAGE>

5. INVENTORIES

Inventories consist of the following (`000's):
                                                      January 31,     July 31,
                                                         2006          2005
                                                       --------      --------
     Equipment (net of reserve allowances of
     $3,114 and $2,937 respectively):
       New                                             $ 29,191      $ 35,408
       Used                                               4,530         4,545
     Mining products                                      1,014           886
     Parts (net of reserve allowance of $917
      and $977, respectively)                             5,738         5,494
                                                       $ 40,473      $ 46,333

Mining products is comprised substantially of processed cinder aggregate in a
finished state ready for resale. Inventory costs of the mining products are
comprised of direct costs of production and overhead charges including mining
and other plant administrative expenses. Inventory of mining products is valued
at the lower of cost or market, with cost generally stated on a last-in,
first-out (LIFO) basis. Mining product reserves for obsolescence or slow moving
inventory are recorded when such conditions are identified. As of January 31,
2006, the LIFO reserve was $131,000 and as of July 31, 2005 the LIFO reserve was
$223,000.

6. FIXED ASSETS

Fixed assets consist of the following (`000's):
                                                      January 31,     July 31,
                                                         2006          2005
                                                       --------      --------
     Operating property, plant and equipment:
       Land                                            $  1,277      $  1,277
       Buildings                                          1,153         1,152
          Machinery and equipment                         3,120         3,059
       Office furniture and fixtures                      2,051         2,055
       Computer hardware and software                     1,104         1,332
       Vehicles                                           1,488         1,404
       Leasehold improvements                             1,097         1,010
                                                       --------      --------
                                                         11,290        11,289
       Less: accumulated depreciation                    (7,353)       (7,400)
                                                       --------      --------
     Property, plant, and equipment (net)              $  3,937      $  3,889
                                                       ========      ========
     Rental equipment fleet                            $  7,292      $  9,145
       Less: accumulated depreciation                    (2,151)       (3,077)
                                                       --------      --------
     Rental equipment (net)                            $  5,141      $  6,068
                                                       ========      ========

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.

7. DEBT OBLIGATIONS

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

The Company has inventory floor plan financing arrangements with Case Credit
Corporation, an affiliate of Case, for Case inventory and with other finance
companies affiliated with other 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 and interest is at prime + 2%.

All floor plan debt is classified as current since the inventory to which it
relates is generally sold within twelve

                                       10
<PAGE>

months of the invoice date. The balance of borrowings under the floor plan
financing as of January 31, 2006 was $17,429,000.

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 $2,920,000 and is recorded as debt discount to be amortized over the
life of the related debt. The lenders also have the right to lend an additional
$7.5 million to the Company (within 18 months of the date of the original debt)
under the same terms as the existing five year convertible debt with 1,312,500
warrants to be issued with this additional debt. The value of these rights is
$441,000 and is also recorded as debt discount to be amortized over 18 months.
In connection with the convertible debt and the bridge loan (see below), the
Company paid a $1,600,000 finders fee and 300,000 warrants were issued, valued
at $69,678. The finders fee and the warrants are recorded as debt issuance costs
and are being amortized over the life of the related convertible debt.

Based on the interpretive guidance in EITF Issue No. 05-4, view C, since the
registration rights agreement includes provisions for uncapped liquidated
damages, the Company determined that the registration rights is a derivative
liability. However due to the registration statement becoming effective in
January 2006 and other relevant factors, the value of the registration rights
was deemed to be de minimus and therefore no liability was recorded in the
Condensed Consolidated financial statements.

The Company began making monthly principal payments in January 2006. The balance
of the unpaid principal on the convertible notes (net of discount) as of January
31, 2006 is $26,067,000 (net of discount of $2,822,000) of which $5,831,000 (net
of discount of $836,000) is short term.

Bridge Loan
-----------

In June 2005, the Company closed a new $2 million six month bridge loan, with a
variable interest rate of LIBOR plus 6%. The lenders were granted warrants to
purchase approximately 312,000 common shares of the Company at $1.75 per share.
The value of these warrants was $111,000 and is recorded as debt discount to be
amortized over the life of the related debt. This bridge loan was fully paid and
the debt discount fully amortized as of January 31, 2006.

Notes Payable
-------------
<TABLE><CAPTION>

 Notes payable consists of the following: (000's)
                                                                                 January 31,     July 31,
 Description                                                                        2006           2005
<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 including
 interest at 6.50% per annum secured by specific equipment in inventory                693            761

 Note payable to CIT Financial dated November 30, 2005 in the amount of
 $1,897, due in monthly installments of $ 28 beginning December 31, 2005
 including interest at 8.25% per annum secured by specific equipment in
 inventory                                                                           1,859           --

 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                          43             49

 Notes payable to Cougar Leasing dated January 10, 2005 in the amount of
 $32 with payments of $1 per month including interest at 11.1% per annum                31           --
                                                                                  --------        -------
  Total                                                                           $  2,676        $   860
    Less current portion                                                              (595)          (205)
                                                                                  --------        -------
  Total Long-Term Notes Payable                                                   $  2,081        $   655
                                                                                  ========        =======
</TABLE>

                                       11
<PAGE>

     Future minimum payments under these noncancelable notes payable as of
January 31, 2006, are as follows:

----------------------------------------- ----------- ------------ ---------
                                             Notes     Convertible
Twelve months ending January 31,            Payable        Debt      Total
----------------------------------------- ----------- ------------ ---------
   2007                                       $  595       $6,666    $7,261
----------------------------------------- ----------- ------------ ---------
   2008                                          585        6,666     7,251
----------------------------------------- ----------- ------------ ---------
   2009                                          598        6,667     7,265
----------------------------------------- ----------- ------------ ---------
   2010                                          654        6,667     7,321
----------------------------------------- ----------- ------------ ---------
   2011                                          244        2,223     2,467
----------------------------------------- ----------- ------------ ---------
   Thereafter                                     --           --        --
----------------------------------------- ----------- ------------ ---------
Total annual payments                          2,676       28,889    31,565
----------------------------------------- ----------- ------------ ---------
Less debt discount                                --        2,822     2,822
----------------------------------------- ----------- ------------ ---------
Present value of minimum payments
(net of discount)                              2,676       26,067    28,743
----------------------------------------- ----------- ------------ ---------
Less current portion                            (595)      (5,831)   (6,426)
----------------------------------------- ----------- ------------ ---------
Long-term portion                            $ 2,081      $20,236   $22,317
----------------------------------------- ----------- ------------ ---------


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 $ 675,000 and $ 846,000 for the
six months ended January 31, 2006 and 2005, respectively.

Assets recorded under capital leases are recorded in fixed assets and are as
follows (`000's):

                                               January 31,      July 31,
                                                  2006            2005
     Capitalized asset value                   $     953       $     953
     Less accumulated amortization                  (474)           (450)
                                               ---------       ---------
     Net capitalized asset value               $     479       $     503
                                               =========       =========

Future minimum lease payments under all noncancelable leases as of January 31,
2006, are as follows (`000's):

                                                 Capital       Operating
      Twelve months ending January 31,           leases          leases

      2007                                           132          1,210
      2008                                           132            925
      2009                                           132            528
      2010                                           132            436
      2011                                           132            228
      Thereafter                                     638          1,013
                                                 -------        -------
      Total annual lease payments                $ 1,298        $ 4,340
      Less amount representing interest
        at a rate of 6.5%                           (462)
                                                 -------

      Present value of minimum lease payments        836
      Less current portion                          ( 54)
                                                 -------
      Long-term portion                          $   782
                                                 =======

                                       12
<PAGE>

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

The Company issues purchase orders to Case Corporation for equipment purchases.
Upon acceptance by Case, these purchases become noncancelable by the Company. As
of January 31, 2006, such purchase commitments totaled $12,729,000.

Litigation

The Company is involved in various legal proceedings which are incidental to the
industry and for which certain matters are covered in whole or in part by
insurance or, otherwise, the Company has recorded accruals for estimated
settlements. Management believes that any liability which may result from these
proceedings will not have a material adverse effect on the Company's
consolidated financial statements.

9. PRODUCT INFORMATION

Revenue and gross margin by product categories are summarized as follows
(`000's):

Business product category            Three Months Ended       Six Months Ended
     Net Revenues                        January 31,             January 31,
                                      2006        2005        2006        2005
                                    -------     -------     -------     -------
     Equipment Sales                $25,806     $23,005     $50,570     $40,796

     Equipment Rental                   426         619       1,009       2,086

     Mining Sales                       570         182         738         275

     Product Support                  6,661       6,535      14,181      13,928
                                    -------     -------     -------     -------
     Total                          $33,463     $30,341     $66,498     $57,085
                                    =======     =======     =======     =======

Business product category           Three Months Ended       Six Months Ended
     Gross Margins                       January 31,             January 31,
                                      2006       2005         2006        2005
                                    -------     -------     -------     -------
     Equipment Sales                $ 2,197     $ 2,136     $ 4,404     $ 3,673

     Equipment Rental                    (2)         16         164         290

     Mining Sales                        88         (16)        266         (23)

     Product Support                  1,260         859       2,891       2,386
                                    -------     -------     -------     -------
     Total                          $ 3,543     $ 2,995     $ 7,725     $ 6,326
                                    =======     =======     =======     =======

10. SEGMENT INFORMATION

Summarized financial information concerning the Company's reportable segments
are 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 January 31, 2006
Revenue                                                $30,893               $  570         $33,463
Operating Income (Loss)                                $ 1,084               $ (360)        $   724
Net Income (Loss)                                      $ (347)               $ (411)        $  (758)
Capital Expenditures                                   $ 1,152               $   33         $ 1,185
Total identifiable assets at January 31, 2006          $57,776               $4,324         $62,100
</TABLE>

                                       13
<PAGE>
<TABLE><CAPTION>
<S>                                                    <C>                   <C>            <C>
For the Three Months Ended January 31, 2005
Revenue                                                $30,200               $  141         $30,341
Operating Income                                       $   830               $ (283)        $   547
Net Income                                             $   401               $ (284)        $   117
Capital Expenditures                                   $    44               $  219         $   313


For the Six Months Ended January 31, 2006
Revenue                                                $65,760               $  738         $66,498
Operating Income (Loss)                                $ 2,697               $ (730)        $ 1,967
Net Income (Loss)                                      $ (141)               $ (826)        $ (967)
Capital Expenditures                                   $ 1,208               $  216         $ 1,424


For the Six Months Ended January 31, 2005
Revenue                                                $56,852               $  233         $57,085
Operating Income                                       $ 2,078               $ (425)        $ 1,653
Net Income                                             $ 1,061               $ (425)        $   636
Capital Expenditures                                   $ 2,428               $  243         $ 2,671
</TABLE>

11. CONCENTRATION OF CREDIT RISK

Approximately 57% of the Company's net sales for the six months ended January
31, 2006 resulted from sales, rental, and servicing of products manufactured by
Case. That compares with a figure of 54% for the six-month period ended January
31, 2005.

12. SUBSEQUENT EVENTS

On February 14, 2006, the Company issued 950,000 shares of common stock to an
outside investor for $1,710,000. In connection with the stock issuance, the
convertible debt holders required a 10% or $171,000 waiver fee in exchange for
their approval of the transaction. The remaining $1,539,000 was used to pay down
the convertible debt.

On March 1, 2006, the Company sold its Spokane and Clarkston locations to a
third party for $2,901,000. The $30 million convertible debt note holders
required a reduction in the conversion price from $2.00 per share to $1.75 per
share as a condition for the approval of the sale. In connection with the debt
modification, the Company may be required to record additional debt discount to
account for the reduction in conversion price.

                                       14
<PAGE>

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

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 the Company's restructuring and cost reduction plans; the success of
the Company's equipment rental business; rental industry conditions and
competitors; competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing; the Company's ability
to refinance/restructure its 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.

RESULTS OF OPERATIONS

The Three Months and Six Months ended January 31, 2006 compared to the Three and
Six Months ended January 31, 2005.

Revenues for the three-month period ended January 31, 2006 increased 10.3% to
$33.5 million compared with $ 30.3 million for the three-month period ended
January 31, 2005. For the three-month period ended January 31, 2006 equipment
sales increased by 12.2%, equipment rental revenues decreased by 31.2% and
product support revenues increased 2.0% over the comparative three month period
ended January 31, 2005. Revenues (with the exception of equipment rental) were
up from the prior year's comparative period because of increased construction
related activity and economic conditions, especially in the Oregon, Washington,
California and Nevada markets. Mining sales from our subsidiary, Arizona Pacific
Materials, LLC (APM), increased by 213.2 % 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 are southeast of Phoenix.

Revenues for the six-month period ended January 31, 2006 increased 16.5% to
$66.0 million compared with $ 57.1 million for the six-month period ended
January 31, 2005. For the six-month period ended January 31, 2006 equipment
sales increased by 24.0%, equipment rental revenues decreased by 51.6% and
product support revenues increased 1.8% over the comparative six month period
ended January 31, 2005. Revenues were up from the prior year's comparative
period because of improvement in economic conditions, specifically in the
regions noted above. Mining sales for the six-month period ended January 31,
2006 increased by 168.4% to $738,000 compared to $275,000 for the six-month
period ending January 31, 2005. The increase is a result of continued high level
of construction activity in the Phoenix area and for which APM now is
participating at a higher level.

The Company's gross profit margin of 10.6% for the three-month period ended
January 31, 2006 was slightly higher than the prior year's comparative period
margin of 9.9%. Gross margin for equipment sales was 8.5% compared to 9.3% for
the prior year's comparative period. Equipment rental gross margin was (.05)%
compared to 2.6% for the prior year's comparative period. Product support gross
margin was 18.9% compared to 13.1% for the prior year's comparative period. The
increase in overall margins is associated with a change in the equipment sales,
parts sales and rental mix of products, with higher margins from parts sales
having the greatest impact. Improved economic conditions in the Oregon,
Washington, California and Nevada markets have created more demand for the
purchase of equipment rather than renting. Increased production and sales by APM
also resulted in an improvement in gross margin as more fixed direct expenses
were covered by higher sales levels during the three-month period ended January
31, 2006.

The Company's gross profit margin of 11.6% for the six-month period ended
January 31, 2006 was slightly higher than the prior year's comparative period of
11.1%. Gross margin for equipment sales was 8.7% which is slightly lower than
the 9.0% for the prior year's comparative period. Equipment rental gross margin
was 16.2% compared to 13.9% for the prior year's comparative period. Product
support gross margin was 20.4% compared to 17.1% for the prior year's
comparative period. The slight increase in overall margins is associated with a
change in the sales and rental mix of products and the increased margins
generated higher production and sales levels from APM.

                                       15
<PAGE>

For the three-month period ended January 31, 2006, selling, general, and
administrative ("SG&A") expenses as a percentage of net revenue were 8.4%,
slightly higher than the 8.1% for the prior year's first quarter. The increase
from the prior year's comparative period reflects the impact of the increased
business activities at our mining subsidiary, Arizona Pacific Materials, LLC,
purchased in September 2004.

For the six-month period ended January 31, 2006, SG&A expenses as a percentage
of sales were 8.7%, slightly higher than the 8.2% for the prior year's
comparative period. The increase from the prior year's comparative period
reflects the impact of the increased business activities at our mining
subsidiary.

Interest expense for the three months ended January 31, 2006 of $1,481,000 was
up from $717,000 in the prior year comparative period. This increase from the
prior year's comparative period is the result of approximately 3% higher
interest rate related to convertible debt versus the interest rate associated
with the line of credit with GE in existence as of January 31, 2005. In
addition, $212,000 of debt discount (related to warrants issued with the
convertible debt transacted in June 2005) and is $113,000 in debt issuance costs
were amortized during the three months ending January 31, 2006. No such charges
were required during the three months ending January 31, 2005.

Interest expense for the six months ended January 31, 2006 of $2,930,000 was up
from $1,340,000 in the prior year comparative period. This increase from the
prior year's comparative period is the result of approximately 3% higher
interest rate related to convertible debt versus the interest rate associated
with the line of credit with GE in existence as of January 31, 2005. In
addition, $497,000 of debt discount (related to warrants issued with the
convertible debt transacted in June 2005) and $250,000 in debt issuance costs
were amortized during the six months ending January 31, 2006. No such charges
were required during the six months ending January 31, 2005.

Other income(expense) for the three-month period ended January 31, 2006 was $
17,000 compared to $299,000 for the comparative period. Included in the
three-month period ended January 31, 2005 is a non recurring gain of $247,000
related to the sale of the Company's Hayward branch in January of 2005.

Other income(expense) for the six-month period ended January 31, 2006 was $
30,000 compared to $347,000 for the comparative period. Included in the
six-month period ended January 31, 2005 is a non recurring gain of $247,000
related to the sale of the Company's Hayward branch in January of 2005.

The Company had a net loss for the quarter ended January 31, 2006 of $758,000
compared with net income of $117,000 for the prior year's comparative quarter.
The change is primarily related to additional interest costs, warrant and debt
issuance costs as discussed above.

The Company had a net loss for the six months ended January 31, 2006 of $967,000
compared with a net income of $636,000 for the prior year's comparative period.
The change is primarily related to additional interest costs, warrant and debt
issuance costs as discussed above.

Liquidity and Capital Resources
-------------------------------

The Company's primary needs for liquidity and capital resources are related to
its acquisition of inventory for sale and its rental fleet. The Company's
primary source of internal liquidity has been from its operations. As more fully
described below, the Company's primary sources of external liquidity are
equipment inventory floor plan financing arrangements provided to the Company by
the manufacturers of the products the Company sells as well as the credit
facility more fully described below.

Under inventory floor planning arrangements the manufacturers of products sold
by the Company 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. At January 31,
2006, the Company was indebted under manufacturer provided floor plan
arrangements in the aggregate amount of $ 17,429,000.

During the six months ended January 31, 2006 the Company had positive cash flow
from operating activities of $8,008,000. The Company's cash flow from operating
activities consisted primarily of a reduction of accounts receivable of
$3,047,000, depreciation of $3,303,000 and a decrease in inventories of
$3,308,000. Purchases of fixed assets during the period were related mainly to
the ongoing replacement of aged operating assets and rental

                                       16
<PAGE>

equipment sold during the period. The Company paid down its floor plan financing
by $7,128,000 during the six-month period ending January 31, 2006, made payments
of $1,111,000 on the convertible debt and borrowed $1,928,000 under long term
notes payable.

The Company's cash and cash equivalents was $1,526,000 as of January 31, 2006.
Management believes the Company's current cash level and anticipated available
cash flow is sufficient to support the Company's operations during the next
twelve months.

As of January 31, 2006, the Company had outstanding convertible instruments,
options and warrants convertible into 28,650,218 shares of stock, which would be
dilutive to earnings per share.

Off-Balance Sheet Arrangements
------------------------------

The Company's off-balance sheet arrangements are principally lease arrangements
associated with the retail stores and the corporate office.

New Accounting Pronouncements
-----------------------------

In December 2004, the Financial Accounting Standards Board ("FASB") issued its
final standard on accounting for share-based payments ("SBP"), FASB Statement
No. 123R (revised 2004), "Share-Based Payment." This statement requires
companies to expense the value of employee stock options and similar awards.
Under FAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards' grant date, based on the estimated number of awards that are
expected to vest. Compensation cost for awards that vest would not be reversed
if the awards expire without being exercised. The statement's effective date for
a company is the first annual reporting period beginning August 1, 2005, and it
applies to all outstanding and unvested SBP awards at a company's adoption. The
Company adopted this accounting pronouncement during the current fiscal quarter.
Upon adoption there was no impact on the consolidated financial statements. All
outstanding stock options were fully vested as of July 31, 2005

In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections." This statement replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. The statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.

The Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF
No. 05-1, "Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer's Exercise of a Call Option" ("EITF No. 05-1") that
no gain or loss should be recognized upon the conversion of an instrument that
becomes convertible as a result of an issuer's exercise of a call option
pursuant to the original terms of the instrument. The consensus for EITF No.
05-1 has not been finalized. The adoption of this pronouncement is not expected
to have an impact on our consolidated financial position, results of operations,
or cash flows.

In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, `Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered `conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The Company has applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.

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

                                       17
<PAGE>

Potentially Settled in, a Company's Own Stock" ("EITF No. 05-4") addresses
financial instruments, such as stock purchase warrants, which 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. The
consensus for EITF No. 05-4 has not been finalized. 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). Based on the interpretive guidance in EITF Issue No.
05-4, view C, since the registration rights agreement includes provisions for
uncapped liquidated damages, the Company determined that the registration rights
is a derivative liability. However due to the registration statement becoming
effective in January 2006 and other relevant factors, the value of the
registration rights was deemed to be de minimus and therefore no liability was
recorded in the Condensed Consolidated financial statements.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. The adoption of this pronouncement did
not have a material impact on the Company's consolidated financial position or
results of operations.

In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7. "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues", which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification, and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. Management does not believe this pronouncement will have a material impact
on the Company's consolidated financial statements.

In September 2005, the FASB ratified the following consensus reached in EITF
Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes; b) The resulting
basis difference should be deemed a temporary difference because it will result
in a taxable amount when the recorded amount of the liability is recovered or
settled; and c) Recognition of deferred taxes for the temporary difference
should be reported as an adjustment to additional paid-in capital. Both of these
issues (EIFT Issue No. 05-7 and 05-8) are effective in the first interim or
annual reporting period commencing after December 15, 2005, with early
application permitted. The effect of applying the consensus should be accounted
for retroactively to all debt instruments containing a beneficial conversion
feature that are subject to EITF Issue 00-27, "Application of Issue No. 98-5 to
Certain Convertible Debt Instruments" (and thus is applicable to debt
instruments converted or extinguished in prior periods but which are still
presented in the financial statements). Management does not believe this
pronouncement will have a material impact on the Company's consolidated
financial statements.

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. The Company's
interest expense may increase if inventory is too high or interest rates rise.
The Company manages its inventory through Company-wide information and inventory
sharing systems wherein all locations have access to the Company's entire
inventory. In addition, the Company closely monitors inventory turnover by
product categories and places equipment orders based upon targeted turn ratios.

All of the products and services provided by the Company are either capital
equipment or included in capital equipment, which are used in the construction,
industrial, and agricultural sectors. Accordingly, the Company's 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 the Company. In addition, although agricultural equipment sales
are less than 2% of the Company's total revenues, factors adversely affecting
the farming and commodity markets also can adversely affect the Company's
agricultural equipment related business.

The Company's 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. A
further erosion in North American and/or other countries' economies could
adversely affect the Company's business.

Although the principal products sold, rented, and serviced by the Company are
manufactured by Case, the Company also sells, rents, and services equipment and
sells related parts (e.g., tires, trailers, and compaction equipment)
manufactured by others. Approximately 43% of the Company's net sales for the six
months ended January 31, 2006

                                       18
<PAGE>

resulted from sales, rental, and servicing of products manufactured by companies
other than Case. That compares with a figure of 46% for the six-month period
ended January 31, 2005. Manufacturers other than Case represented by the Company
offer various levels of supplies and marketing support along with purchase terms
which vary from cash upon delivery to interest-free, 12-month flooring.

The Company purchases its 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 six months ended January 31, 2005. While
maintaining its commitment to Case to primarily purchase Case Equipment and
parts as an authorized Case dealer, the Company plans to expand the number of
products and increase the aggregate dollar value of those products which the
Company purchases from manufacturers other than Case in the future.

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 the Company's sales
and profitability. Market specific factors could also adversely affect one or
more of the Company's target markets and/or products.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is 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 January 31, 2006, the Company had
variable rate floor plan payables, notes payable, convertible debt and
short-term debt of approximately $46.2 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
$0.5 million. The Company's 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 January 31, 2006 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.

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<PAGE>
PART II.    OTHER INFORMATION

            ITEM 1. LEGAL PROCEEDINGS

                    The Company is involved in various legal proceedings which
                    are incidental to the industry and for which certain matters
                    are covered in whole or in part by insurance or, otherwise,
                    the Company has recorded accruals for estimated settlements.
                    Management believes that any liability which may result from
                    these proceedings will not have a material adverse effect on
                    the Company's business, results of operations, and financial
                    condition.

            ITEM 1A. RISK FACTORS

                    None.

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

                    None.

            ITEM 3. DEFAULTS UPON SENIOR SECURITIES

                    None.

            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
                    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.

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<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

March 14, 2006

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





















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