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

                                    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, 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 November 15, 2006.

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

                                        1
<PAGE>

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                                      INDEX

<TABLE><CAPTION>
<S>       <C>                                                                    <C>
PART I.   FINANCIAL INFORMATION                                                  Page Number

          Item 1. Financial Statements

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

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

          Condensed Consolidated Statements of Cash Flows (Unaudited)
          Three months ended October 31, 2006 and October 31, 2005..................   5-6

          Notes to Condensed Consolidated Financial Statements (Unaudited)..........   7-13

          Item 2. Management's Discussion and Analysis of
                  Financial Condition and Results of Operations.....................   14-19

          Item 3. Quantitative and Qualitative Disclosures about Market Risk........   20

          Item 4. Controls and Procedures...........................................   20


PART II.  OTHER INFORMATION

          Item 1.  Legal Proceedings................................................   21

          Item 1A. Risk Factors.....................................................   21

          Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds......   21

          Item 3.  Defaults Upon Senior Securities..................................   21

          Item 4.  Submission of Matters to a Vote of Security Holders..............   21

          Item 5.  Other Information................................................   21

          Item 6.  Exhibits.........................................................   21

SIGNATURES..........................................................................   22
</TABLE>

                                        2
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS

                  WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE><CAPTION>
                                                                                     October 31,    July 31,
                                                                                        2006          2006
                                                                                      --------      --------
                                                                                     (Unaudited)
          ASSETS
<S>                                                                                   <C>           <C>
Current assets:
     Cash and cash equivalents ..................................................     $    351      $  1,072
     Accounts receivable, less allowance for doubtful
       accounts of $ 935 and $ 864 ..............................................        6,818         9,078
     Inventories - net ..........................................................       40,134        42,483
     Deferred tax asset .........................................................          669           669
     Prepaid expenses ...........................................................           92           141
                                                                                      --------      --------
            Total current assets ................................................       48,064        53,443
                                                                                      --------      --------
Fixed assets:
     Property, plant and equipment (net) ........................................        6,039         5,230
     Rental equipment fleet (net) ...............................................        6,074         3,423
                                                                                      --------      --------
            Total fixed assets ..................................................       12,113         8,653
                                                                                      --------      --------
Other assets
     Security Deposits ..........................................................          371           379
     Deferred taxes .............................................................          830           831
     Deferred debt issuance costs ...............................................        1,205         1,297
                                                                                      --------      --------
         Total other assets .....................................................        2,406         2,507
                                                                                      --------      --------

Total assets ....................................................................     $ 62,583      $ 64,603
                                                                                      ========      ========

          LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
     Borrowings under floor plan financing ......................................     $ 22,387        22,627
     Convertible debt, net of discount of $ 1,046 and $ 1,046 ...................        5,621         6,176
     Notes payable-related parties, net of discount of $ 21 and $ 28 ............          379           472
     Notes payable ..............................................................          793           629
     Accounts payable ...........................................................       10,623         9,937
     Accrued payroll and vacation ...............................................        1,430         1,404
     Other accrued liabilities ..................................................        1,528         1,567
     Capital lease obligation ...................................................           58            56
                                                                                      --------      --------
         Total current liabilities ..............................................       42,819        42,868
                                                                                      --------      --------

Long-term liabilities
     Convertible Debt, net of discount of $ 1,689 and $ 1,951 ...................       12,641        14,047
     Notes Payable ..............................................................        1,800         1,573
     Deferred Lease Income ......................................................          228           236
     Capital lease obligation ...................................................          739           755
                                                                                      --------      --------
      Total long-term liabilities ...............................................       15,408        16,611
                                                                                      --------      --------
Total liabilities ...............................................................       58,227        59,479
                                                                                      --------      --------
Stockholders' equity:
     Preferred stock-10,000,000 shares authorized;
       none issued and outstanding ..............................................         --            --
     Common stock-$.001 par value; 50,000,000 shares
       authorized; 11,360,300 and 11,860,300 issued and 11,230,000 and 11,730,000
       outstanding as of October 31, 2006 and July 31, 2006, respectively .......           11            12
     Additional paid-in capital .................................................       23,432        24,072
     Deferred compensation ......................................................         --            (642)
     Accumulated deficit ........................................................      (18,243)      (17,474)
     Less common stock in treasury, at cost
       (130,300 shares) .........................................................         (844)         (844)
                                                                                      --------      --------
         Total stockholders' equity .............................................        4,356         5,124
                                                                                      --------      --------
Total liabilities and stockholders' equity ......................................     $ 62,583      $ 64,603
                                                                                      ========      ========
</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,
                                                           2006          2005

Net revenues ........................................    $ 29,377      $ 29,576

Cost of revenues (includes depreciation of
   $826 and $807, respectively) .....................      26,048        25,817
                                                         --------      --------
Gross profit ........................................       3,329         3,759

Selling, general and administrative expenses ........       2,857         2,818
                                                         --------      --------
Operating Income ....................................         472           941

Other income (expense):
     Interest expense ...............................      (1,270)       (1,311)
     Other income (expense) .........................         151          (125)
                                                         --------      --------
Loss before income tax provision ....................        (647)         (495)

Income tax provision ................................          16            16
                                                         --------      --------
Loss from continuing operations .....................        (663)         (511)

Income (loss) from discontinued operations ..........        (106)          302

Net loss ............................................    $   (769)     $   (209)
                                                         ========      ========
Basic and diluted earnings (loss) per common share
     Loss per share of continuing operations ........    $  (0.06)     $  (0.05)

     Discontinued operations ........................       (0.01)         0.03
                                                         --------      --------
     Loss per share .................................    $  (0.07)     $  (0.02)
                                                         ========      ========
Weighted average outstanding common shares for
     basic and diluted  loss per common share .......      11,230        10,130
                                                         ========      ========

                 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,
                                                                          2006          2005
                                                                        --------      --------
<S>                                                                     <C>           <C>
Cash flows from operating activities:
     Net loss ......................................................    $   (769)     $   (209)

Adjustments to reconcile net loss from operations to
net cash provided (used in) by operating activities:
     Depreciation ..................................................       1,762         2,041
     Bad Debts .....................................................         104             3
     Amortization of debt discount .................................         268           283
     Gain (loss) on sale of fixed assets and rental equipment ......          31          (179)
     Amortization of debt issuance costs ...........................          93           137
     Stock based compensation ......................................        --              18
     Changes in assets and liabilities:
         Accounts receivable .......................................       2,156         2,013
         Inventories ...............................................      (2,841)       (4,417)
         Prepaid expenses and other assets .........................          58           371
         Accounts payable and accrued expenses .....................         687          (923)
         Accrued payroll and vacation ..............................          26          (245)
         Other accrued liabilities .................................         (44)           76
         Deferred Lease Income .....................................          (7)           (7)
                                                                        --------      --------
Net cash provided by (used in) operating activities ................       1,524        (1,038)
                                                                        --------      --------

Cash flows from investing activities:
     Purchase of property, plant and equipment .....................        (555)         (223)
     Purchases of rental equipment .................................         (11)          (22)
     Proceeds on sale of fixed assets ..............................        --               2
     Proceeds on sale of rental equipment ..........................         505         1,062
Net cash provided by (used in) investing activities ................         (61)          819

Cash flows from financing activities:
     Principal payments on capital leases ..........................         (14)           (7)
     Payments on short-term borrowings .............................        (100)         --
     Inventory floor plan financing ................................        (240)        1,424
     Bridge loan payments ..........................................        --          (1,000)
     Long term debt borrowings .....................................         572          --
     Long term debt payments .......................................        (181)          (40)
     Payments on convertible debt ..................................      (2,221)         --
                                                                        --------      --------
Net cash provided by (used in) financing activities ................      (2,184)          377
                                                                        --------      --------

Increase (decrease) in cash and cash equivalents ...................        (721)          158
Cash and cash equivalents at beginning of period ...................       1,072           855
                                                                        --------      --------

Cash and cash equivalents at end of period .........................    $    351      $  1,013

Supplemental disclosures:
Interest paid ......................................................    $    930      $    770
Income taxes paid ..................................................           2          --
</TABLE>

                                        5
<PAGE>
<TABLE><CAPTION>
<S>                                                                     <C>           <C>
Supplemental disclosure 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

Return of common stock pursuant to cancellation of
consulting agreement................................................    $    642          --
</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, 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, 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 our consolidated financial statements included in the Annual
Report on Form 10-K for the fiscal year ended July 31, 2006 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, 2006 consolidated financial statements.

Cost of revenues includes the cost of products sold; costs 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 selling, general and administrative expenses directly related
to the production of revenues.

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

Interest expense includes the interest related to all debt related instruments,
the amortization of debt discount related to warrants issued 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 2006 financial statements have been
reclassified to conform with the fiscal year 2007 presentation. These
reclassifications had no impact on net income or cash flows as previously
reported other than to separately report discontinued operations.

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, 2006.

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 Company
does not expect SFAS 156 to have a material impact on the Company's financial
position or results of operations.

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 Company does not expect FIN 48 to have a material
impact on the

                                        7
<PAGE>

Company's financial position or results of operations.

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 September 2006, the FASB issued SFAS No. 158, "Employees' Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158"). SFAS 158
requires an employer to recognize the over-funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. SFAS 158 also requires an employer to measure the funded status of
a plan as of the date of its year-end statement of financial position, with
limited exceptions. SFAS 158 is effective for the Company for financial
statements issued subsequent to December 15, 2006. The Company does not expect
the new standard to have a material impact on the Company's financial position,
results of operations or cash flows.

In September 2006, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 ("SAB 108"), which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 becomes effective for the first fiscal year ending after November 15,
2006. The adoption of SAB 108 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.

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 October 31, 2006 was 25,828,624 and
28,350,218 as of October 31, 2005.

4. STOCK BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment", SFAS 123R. SFAS 123R requires the
compensation cost relating to stock-based payment transactions 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. SFAS 123R replaces SFAS
123 and supersedes APB Opinion 25. The Company has adopted SFAS 123R as of
August 1, 2005. As of July 31, 2006 and October 31, 2006, all options were fully
vested and during the year ended July 31, 2006 and the three months ended
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.

5. INVENTORIES

Inventories consist of the following (`000's):
                                                       October 31,      July 31,
                                                          2006           2006
                                                        --------       --------
    Equipment (net of reserves of $3,481 and
    $3,429, respectively):
      New                                               $ 29,426       $ 30,939
      Used                                                 4,793          4,724
    Mining products                                          772            825

                                        8
<PAGE>

    Parts (net of reserves of $864
     and $734, respectively)                               5,143          5,995
                                                        --------       --------
                                                        $ 40,134       $ 42,483
                                                        ========       ========

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 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 October 31, 2006, the LIFO
reserve was $ 171,000 and as of July 31, 2006 the LIFO reserve was $ 371,000.

6. FIXED ASSETS

Fixed assets consist of the following (`000's):

                                                       October 31,     July 31,
                                                          2006           2006
                                                        --------       --------
    Operating property, plant and equipment:
      Land                                              $  1,277       $  1,277
      Buildings                                            1,181          1,152
         Machinery and equipment                           5,694          4,751
      Office furniture and fixtures                        1,779          1,779
      Computer hardware and software                       1,083          1,068
      Vehicles                                             1,438          1,399
      Leasehold improvements                               1,087          1,082
                                                        --------       --------
                                                          13,539         12,508
      Less: accumulated depreciation                      (7,500)        (7,278)
                                                        --------       --------
    Property, plant, and equipment (net)                $  6,039       $  5,230
                                                        ========       ========

    Rental equipment fleet                              $  7,611       $  4,757
      Less: accumulated depreciation                      (1,537)        (1,334)
                                                        --------       --------
    Rental equipment (net)                              $  6,074       $  3,423
                                                        ========       ========

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, 2006 and July 31, 2006, fixed assets (net) includes property
under capital leases in the amount of $ 444 and $ 456, respectively.

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 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.
The maximum amount of the credit facility is $ 24.5 million and the interest
rate is prime plus 2% (currently 10.25%).

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.

                                        9
<PAGE>

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 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 warrants to
purchase 1,312,500 shares of common stock to be issued with this additional
debt. The value of these rights is $ 441 and was also recorded as 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 determined by
an independent appraiser) 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 the guidance of EITF 05-4, "The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF 00-19", as
discussed in Note 1.

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, 2006 is $18,262 (net of discount of $ 2,735) of which $ 5,621 (net
of discount of $ 1,046) is short term. The amounts amortized to interest expense
during the three months ended October 31, 2006 and October 31, 2005 were $ 262
and $ 264, 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.

  Notes Payable
  -------------
<TABLE><CAPTION>
     Notes payable consists of the following: (000's)
                                                                                      October 31,      July 31,
     Description                                                                         2006            2006
                                                                                       --------        --------
<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                                                                          584             621

     Note payable to CIT Financial dated beginning August 15, 2005 in the
     amount of $ 2,467, due in monthly installments of $ 45 beginning December
     2005, expiring November 2010, including interest ranging from 8.25% to
     9.5% per annum secured by
     specific equipment in inventory                                                      1,925           1,495

     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                                       34              36
                                                                                       --------        --------
      Total                                                                            $  2,593        $  2,202
        Less current portion                                                               (793)           (629)
                                                                                       --------        --------
      Total Long-Term Notes Payable                                                    $  1,800        $  1,573
                                                                                       ========        ========
</TABLE>

                                       10
<PAGE>

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


                                                Notes    Convertible
Twelve months ending October 31,               Payable       Debt      Total
--------------------------------               -------     -------    -------
   2007                                        $   793     $ 6,666    $ 7,459
   2008                                            726       6,666      7,392
   2009                                            726       6,667      7,393
   2010                                            324         998      1,322
   2011                                             24          --         24
   Thereafter                                       --          --         --
                                               -------     -------    -------
Total annual payments                            2,593      20,997     23,590

Less debt discount                                  --      (2,735)    (2,735)
                                               -------     -------    -------
Present value of minimum payments
(net of discount)                                2,593      18,262     20,855

Less current portion                              (793)     (5,621)    (6,414)
                                               -------     -------    -------
Long-term portion                              $ 1,800     $12,641    $14,441
                                               =======     =======    =======

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 $ 1,001,000 and $ 1,119,000 for
the three months ended October 31, 2006 and 2005, respectively.

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

                                                       Capital       Operating
     Twelve months ending October 31,                  leases          leases

     2007                                                 132           1,716
     2008                                                 132           1,233
     2009                                                 132           1,181
     2010                                                 132             959
     2011                                                 132             770
     Thereafter                                           539           1,616
     Total annual lease payments                      $ 1,199         $ 7,475
     Less amount representing interest
       at a rate of 6.5%                                 (402)

     Present value of minimum lease payments              797
     Less current portion                                 (58)
     Long-term portion                                $   739

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, 2006, such purchase commitments totaled $ 9,297.

Litigation
----------

                                       11
<PAGE>

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.

9. PRODUCT INFORMATION

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

Business product category                               Three Months Ended
     Net Revenues                                           October 31,
                                                      2006              2005
     -----------------------                        -------           -------
     Equipment Sales                                $19,749           $20,497

     Equipment Rental                                 1,856             2,305

     Mining Sales                                       523                90

     Product Support                                  7,249             6,684
                                                    -------           -------
     Total                                          $29,377           $29,576
                                                    =======           =======


     Business product category                          Three Months Ended
     Gross Profit (Loss)                                    October 30,
                                                      2006              2005
     -----------------------                        -------           -------
     Equipment Sales                                $ 1,482           $ 1,776

     Equipment Rental                                   403               308

     Mining Sales                                      (237)              247

     Product Support                                  1,681             1,428
                                                    -------           -------
     Total                                          $ 3,329           $ 3,759
                                                    =======           =======

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, 2006
     Net revenues                                               $28,946           $   431         $29,377
                                                                =======           =======         =======

     Income (loss) from continuing operations                   $   293           $  (956)        $  (663)
                                                                =======           =======         =======
     Net income (loss)                                          $   276           $(1,045)        $  (769)
                                                                =======           =======         =======
     Capital expenditures                                       $   150           $   416         $   566
                                                                =======           =======         =======
     Total identifiable assets at October 31, 2006              $56,463           $ 6,120         $62,583
                                                                =======           =======         =======

     For the Three Months Ended October 31, 2005
     Net revenues                                               $29,487           $    89         $29,576
                                                                =======           =======         =======

     Operating income (loss) from continuing operations         $  (138)          $  (373)        $  (511)
                                                                =======           =======         =======
     Net income (loss)                                          $   200           $  (409)        $  (209)
                                                                =======           =======         =======
     Capital expenditures                                       $    62           $   183         $   245
                                                                =======           =======         =======
     Total identifiable assets at October 31, 2005              $66,776           $ 4,231         $71,007
                                                                =======           =======         =======
</TABLE>

                                       12
<PAGE>

11. CONCENTRATION OF CREDIT RISK

Approximately 48% and 56% of the Company's net sales for the three months ended
October 31, 2006 and October 31, 2005, 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 in March 2006 and the closing of our Flagstaff, Arizona
mining facility commencing October 2006.

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.
Certain corporate level charges, such as general office expenses and interest
expense are not allocated to discontinued operations because the Company
believes that these expenses are not specific to the branch location's
operations.

The Company sold its Spokane and Clarkston, Washington locations in March 2006
for a total sales price of $ 2,871. Included in the sale was inventory with a
cost of $ 2,455. The Company also sold fixed assets with an original cost of $
662 (net book value of $ 150) resulting in a gain of $ 251.

In October 2006, the Company commenced the closing of its Flagstaff, Arizona
location for its subsidiary, APM and transferred the fixed assets to its
Phoenix, Arizona mining facility.

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


                                       Three Months Ended     Three Months Ended
                                        October 31, 2006       October 31, 2005

   Revenue from discontinued
   operations                               $     46               $  3,386

   Gross Profit (loss) from
   discontinued operations                  $    (84)              $    350

   SG & A from discontinued
   Operations                               $     23               $     48

   Income (loss) from discontinued
   operations                               $   (106)              $    302


13. EQUITY TRANSACTIONS

In June 2006, the Company issued 500,000 restricted common shares in connection
with a consulting agreement. The fair value of the consulting services is $ 700
and was recorded as deferred compensation and was being amortized over the
12-month agreement period beginning June of 2006. In September 2006, the
agreement was cancelled and the shares of common stock were surrendered to the
Company and the unamortized deferred compensation of $ 642 reversed. The shares
are in the process of being cancelled.

                                       13

<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 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 Repost on Form 10-K for the fiscal year ended July 31, 2006, as
well as Forms 10-Q filed previously by the Company. 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 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.

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 operate a mining company in Arizona. We
believe, based upon the number of locations owned and operated, that it is 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, California, and Alaska 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

                                       14
<PAGE>

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 stores to improve operating efficiency and profitability.

Arizona Pacific Materials, LLC, a wholly owned subsidiary purchased in September
2004, operates two surface mines producing cinder and basalt aggregate to supply
material for block manufactures, concrete and asphalt suppliers and landscape
contractors, in the Phoenix and Flagstaff, Arizona building/construction
markets. In October 2006, we commenced the closing process for our Flagstaff
location. The assets of the branch were transferred to our 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 and 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 area is still listed in the top 5 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.

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, 2006     October 31, 2005   (Decrease)
--------------------------    ----------------     ----------------   ----------
Revenue                            $29,377              $29,576         $(199)

Gross profit                       $ 3,329               $3,759         $(430)

SG&A                               $ 2,857               $2,818         $  39

Operating income                   $   472                $ 941         $(469)

Loss from operations               $  (663)               $(511)        $(152)

EBITDA (1)                         $ 2,347               $2,521         $(174)

     (1) EBITDA (earnings before interest, taxes, depreciation and amortization)
     is calculated as net income (including discontinued operations) plus
     interest, taxes, depreciation and amortization.

The Three Months ended October 31, 2006 compared to the Three ended October 31,
2005.

REVENUES

Revenues from continuing operations for the three-month period ended October 31,
2006 decreased by $ 199 or 0.6% over the comparative three-month period ended
October 31, 2005. For the three-month period ended October 31, 2006 equipment
sales and rental decreased by $ 1,197 while product support and mining sales
increased by $ 998. With the exception of our Sparks, Nevada and Buena Park,
California locations, sales continue to remain strong. Our Sparks location
exhibited an unusually strong first quarter in the prior comparative quarter.
Mining sales from our subsidiary in Phoenix, Arizona increased $ 433 or 437.4%
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.

GROSS MARGIN

The Company's gross profit margin of 11.3% for the three-month period ended
October 31, 2006 was slightly lower than the prior year's comparative period
margin of 12.7%. Equipment sales, which typically maintain lower margins,
declined and product support, which exhibit higher margins, increased over the
prior year's comparative. Both of these factors cause margins to increase,
however, the potential increase in margin was offset by expenses related to
production growth and equipment investment in APM, our mining subsidiary.
Production capacity has

                                       15
<PAGE>

been increased at the mining facility which we believe will assist in obtaining
improved production costs of the products produced.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three-month period ended October 31, 2006, selling, general, and
administrative ("SG&A") expenses from continuing operations as a percentage of
net revenue from continuing operations were 9.7% compared to 9.5% for the prior
year's comparative first quarter. The slight increase in SG&A from the prior
year's comparative period also reflects the impact of the increased business
activities and production levels at our mining subsidiary, APM.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the three months ended October 31, 2006
decreased by $ 469 compared to the three months ended October 31, 2005, again
reflecting the increased costs related to continued ramping up of production
activities of our mining operation in the first quarter of fiscal year 2007. The
acquisition of additional processing equipment, we believe, will substantially
increase our production capacity in the future. We anticipate that current
demand for our mining products will allow us to sell as much as we can produce
and contribute to overall income from operations. The decrease also reflects
higher levels of administrative expenses to support the increase in sales for
the equipment dealership.

INTEREST EXPENSE

Interest expense for the three months ended October 31, 2006 of $ 1,270 was down
from $ 1,311 in the prior year comparative period. This decrease from the prior
year's comparative period is the result of payments, beginning in December 2005,
against the convertible debt. As of October 31, 2006, interest bearing debt
totaled $ 47,116 compared to $ 49,304 as of October 31, 2005. In addition, $ 268
of debt discount (related to warrants issued with the convertible debt
transacted in June 2005) and $ 93 in debt issuance costs were amortized during
the three months ended October 31, 2006 while during the three months ended
October 31, 2005, these amounts were $ 283 and $137, respectively.

We had a net loss from continuing operations for the quarter ended October 31,
2006 of $ 769 compared with a net loss of $ 209 for the prior year's comparative
quarter. The change is primarily related to additional administrative and
production costs at our mining operation and warrant/debt issuance costs as
discussed above.

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

The following table presents unaudited selected financial data for the
discontinued operations (1) of our business (in thousands of dollars):


                                        Three Months Ended    Three Months Ended
                                         October 31, 2006      October 31, 2005
                                        ------------------    ------------------
     Revenue from discontinued
     operations                                $  46                $3,386

     Gross Profit from discontinued
     operations                                $ (84)               $  350

     SG&A from discontinued
     Operations                                $  23                $   48

     Operating income (loss) from
     discontinued operations                   $(106)               $  302


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

                                       16
<PAGE>

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.

LIQUITY AND CAPITAL RESOURCES

On a consolidated basis, our primary needs for liquidity and capital resources
are related to the acquisition of inventory for sale and our rental fleet. Our
primary source of internal liquidity has been from its 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. At October 31,
2006, the Company was indebted under manufacturer provided floor plan
arrangements in the aggregate amount of $22,387.

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 have the right to lend an additional
$7.5 million to us (within 18 months of the date of the original debt) 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, 2006 is $18,262 (net of
discount of $2,735) of which $5,621 (net of discount of $1,046) is short term.
See Footnote 7 of the consolidated financial statements.

CASH FLOW FROM OPERATING ACTIVITIES

                                       17
<PAGE>

During the three months ended October 31, 2006 we had positive cash flows from
operating activities of $1,524. Our cash flow from operating activities
consisted primarily of a reduction of accounts receivable of $2,156,
depreciation of $1,762 and an increase in accounts payable of $687. The increase
in inventories of $2,841 relates to our continued belief that equipment sales
will remain strong and with long delivery lead times, we must maintain higher
inventory levels by ordering to correspond with vendor production schedules.
Accounts receivable monitoring and collections have seen an increased focus over
the past year with the need to make payments to convertible debt, which replaced
the revolving line of credit maintained in prior years. Additional credit
personnel have been added to our staff to accomplish this goal. 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. 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 and the need for additional equipment in
our mining operation in Phoenix to improve production levels. Over the past few
years, we have focused less on our rental fleet inventory levels (allowing
inventory levels to decline), as equipment sales levels have been strong. 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 $240 and paid $2,221 against our
convertible debt balance during the three-month period ended October 31, 2006
which also required us to obtain additional financing through long term notes
payable, which increased by $572. 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. The need for future capital resources relates primarily to our obligation
to make monthly payments on our convertible debt as outlined in Footnote 7 of
the consolidated financial statements. We are actively exploring avenues that
will generate longer-term capital sources, including the generation of equity
capital. We also continue to analyze each branch location and its market to
assess the demand each location places on our financing activities and the
contribution each location will make to the overall profitability of the Company
as a result of these financing needs.

CASH AND CASH EQUIVALENTS

Our cash and cash equivalents was $351 as of October 31, 2006. Management
believes the current cash level and anticipated available cash flow from sales
and accounts receivable collections sufficient to support our operations during
the next twelve months.

OTHER

As of October 31, 2006, the Company had outstanding convertible instruments,
options and warrants convertible into 25,828,624 shares of common stock, which
would be dilutive to 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 Company
does not expect SFAS 156 to have a material impact on the financial position or
results of operations.

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 Company does not expect FIN 48 to have a material
impact on the financial position or results of operations.

                                       18
<PAGE>

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 September 2006, the FASB issued SFAS No. 158, "Employees' Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158"). SFAS 158
requires an employer to recognize the over-funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. SFAS 158 also requires an employer to measure the funded status of
a plan as of the date of its year-end statement of financial position, with
limited exceptions. SFAS 158 is effective for the Company for financial
statements issued subsequent to December 15, 2006. The Company does not expect
the new standard to have a material impact on the Company's financial position,
results of operations or cash flows.

In September 2006, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 becomes effective in fiscal year 2007. The adoption of SAB 108 is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.

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 52% of our net sales for the three months ended October 31, 2006
resulted from sales, rental, and servicing of products manufactured by companies
other than Case. That compares with a figure of 44% for the three-month period
ended October 31, 2005. 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, 2006. 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.

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.

                                       19
<PAGE>

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, 2006, we had variable rate floor plan
payables, notes payable, convertible debt and short-term debt of approximately
$47.1 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 $0.47 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, 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

          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

          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

December 12, 2006


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























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