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

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 April 30, 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 May 14, 2006.

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

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

WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
INDEX

Page
PART I. FINANCIAL INFORMATION Number

Item 1. Financial Statements

Condensed Consolidated Balance Sheets
April 30, 2006 (Unaudited) and July 31, 2005.................. 3

Condensed Consolidated Statements of Operations (Unaudited)
Three months ended April 30, 2006 and April 30, 2005.......... 4

Condensed Consolidated Statements of Operations (Unaudited)
Nine months ended April 30, 2006 and April 30, 2005........... 5

Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended April 30, 2006 and April 30, 2005........... 6-7

Notes to Condensed Consolidated Financial Statements
(Unaudited)..................................................... 8-15

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

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

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

PART II. OTHER INFORMATION

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

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

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

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

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

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

Item 6. Exhibits............................................... 25

SIGNATURES............................................................... 26

ITEM 1. FINANCIAL STATEMENTS
--------------------
WESTERN POWER & EQUIPMENT CORP. & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

April 30, July 31,
2006 2005
---------- ----------
(Unaudited)

ASSETS
------
Current assets:
Cash and cash equivalents ....................................................... $ 674 $ 855
Accounts receivable, less allowance for doubtful
accounts of $838 and $906 ..................................................... 8,147 10,449
Inventories - net ............................................................... 36,626 42,937
Deferred tax asset .............................................................. 664 664
Prepaid expenses ................................................................ 233 564
---------- ----------
Total current assets ..................................................... 46,344 55,469
---------- ----------
Fixed assets:
Property, plant and equipment (net) ............................................. 4,972 3,775
Rental equipment fleet (net) .................................................... 3,507 5,707
---------- ----------
Total fixed assets ....................................................... 8,479 9,482
---------- ----------

Assets held for sale - net ........................................................... -- 3,871

Other assets
Security Deposits ............................................................... 362 318
Deferred taxes .................................................................. 836 836
Deferred debt issuance costs .................................................... 1,390 1,661
---------- ----------
Total other assets .......................................................... 2,588 2,815
---------- ----------

Total assets ......................................................................... $ 57,411 $ 71,637
========== ==========

LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities:
Borrowings under floor plan financing ........................................... $ 16,445 24,558
Bridge loan, net of discount of $ 0 and $ 79 .................................... 0 1,254
Convertible debt, net of discount of $ 981 and $ 836 ............................ 5,686 3,052
Notes payable-related parties, net of discount of $ 34 and $82 .................. 466 418
Notes payable ................................................................... 618 205
Accounts payable ................................................................ 6,700 7,925
Accrued payroll and vacation .................................................... 992 932
Other accrued liabilities ....................................................... 1,507 1,313
Capital lease obligation ........................................................ 55 43
---------- ----------
Total current liabilities ................................................... 32,469 39,700
---------- ----------
Long-term liabilities
Convertible Debt, net of discount of $ 2,228 and $ 2,404 ........................ 15,436 23,708
Notes Payable ................................................................... 1,724 655
Deferred Lease Income ........................................................... 243 264
Capital lease obligation ........................................................ 768 810
---------- ----------
Total long-term liabilities .................................................... 18,171 25,437
---------- ----------
Total liabilities .................................................................... 50,640 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; 11,260,300 and 10,310,000 issued and 11,130,000 and 10,180,000
outstanding as of April 30, 2006 and July 31, 2005, respectively .............. 20 10
Additional paid-in capital ...................................................... 23,258 20,859
Deferred compensation ........................................................... -- (18)
Accumulated deficit ............................................................. (15,663) (13,507)
Less common stock in treasury, at cost
(130,300 shares) .............................................................. (844) (844)
---------- ----------
Total stockholders' equity .................................................. 6,771 6,500
---------- ----------
Total liabilities and stockholders' equity ........................................... $ 57,411 $ 71,637
========== ==========

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

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

Three Months Ended
April 30,
2006 2005
---------- ----------

Net revenue .......................................................................... $ 29,910 $ 25,899

Cost of revenues (includes depreciation of
$826 and $807, respectively) ...................................................... 27,078 23,364
---------- ----------

Gross profit ......................................................................... 2,832 2,535

Selling, general and administrative expenses ......................................... 2,767 2,129
---------- ----------

Operating Income ..................................................................... 65 406

Other income (expense):
Interest expense ................................................................ (1,352) (696)
Other income .................................................................... (87) 55
---------- ----------

Loss before income tax provision ..................................................... (1,374) (235)

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

Loss from continuing operations ...................................................... (1,392) (247)

Income (loss) from discontinued operations ........................................... (48) 112
Gain on disposal of discontinued operations .......................................... 251 --
---------- ----------
Income from discontinued operations .................................................. 203 112

Net loss ............................................................................. $ (1,189) $ (135)
========== ==========

Basic and diluted earnings (loss) per common share
Loss per share of continuing operations ......................................... $ (0.13) $ (0.02)

Discontinued operations ......................................................... -- 0.01
Gain on disposal of discontinued operations ..................................... 0.02 --
---------- ----------
Earnings per share of discontinued operations ................................... 0.02 0.01

Loss per share .................................................................. $ (0.11) $ (0.01)
========== ==========

Basic and diluted weighted average common shares (in thousands) ...................... 10,970 10,130
========== ==========

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

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

Nine Months Ended
April 30,
2006 2005
---------- ----------

Net revenue .......................................................................... $ 90,969 $ 75,567

Cost of revenues (includes depreciation of
$3,614 and $2,995, respectively) .................................................. 81,069 67,505
---------- ----------

Gross profit ......................................................................... 9,900 8,062

Selling, general and administrative expenses ......................................... 8,277 6,358
---------- ----------

Operating income ..................................................................... 1,623 1,704

Other income (expense):
Interest expense ................................................................ (4,283) (2,036)
Other income .................................................................... (55) 124
---------- ----------

Loss before income tax provision ..................................................... (2,715) (208)

Income tax provision ................................................................. 52 36
---------- ----------

Loss from continuing operations ...................................................... $ (2,767) $ (244)

Income from discontinued operations .................................................. 360 468
Gain on disposal of discontinued operations .......................................... 251 277
---------- ----------
Income from discontinued operations .................................................. 611 745

Net Income (loss) .................................................................... $ (2,156) $ 501
========== ==========

Basic and diluted earnings (loss) per common share
Loss per share of continuing operations ......................................... $ (0.26) $ (0.02)

Discontinued operations ......................................................... 0.03 0.05
Gain on disposal of discontinued operations ..................................... 0.02 0.02
---------- ----------
Earnings per share of discontinued operations ................................... 0.05 0.07

Earnings (loss) per share ....................................................... $ (0.21) $ 0.05
========== ==========

Basic and diluted weighted average common shares (in thousands) ...................... 10,438 10,130
========== ==========

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

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

Nine Months Ended
April 30,
2006 2005
---------- ----------

Cash flows from operating activities:
Net income (loss) ............................................................... $ (2,156) $ 501

Adjustments to reconcile net income (loss) from operations to net cash provided
by operating activities:
Depreciation .................................................................... 4,258 3,659
Bad Debts ....................................................................... 77 7
Amortization of debt discount ................................................... 787 171
Gain on sale of fixed assets and rental equipment ............................... (624) (1,136)
Amortization of debt issuance costs ............................................. 341 --
Stock based compensation ........................................................ 18 68
Changes in assets and liabilities:
Accounts receivable ......................................................... 2,225 2,152
Restricted Cash ............................................................. -- (145)
Inventories ................................................................. 6,475 (7,958)
Prepaid expenses and other assets ........................................... 286 (332)
Accounts payable and accrued expenses ....................................... (1,225) 3,789
Accrued payroll and vacation ................................................ 61 (547)
Other accrued liabilities ................................................... 195 27
Deferred Lease Income ....................................................... (22) 271
---------- ----------
Net cash provided by operating activities ............................................ 10,696 527
---------- ----------

Cash flows from investing activities:
Purchase of property, plant and equipment ....................................... (1,629) (744)
Purchases of rental equipment ................................................... -- (3,142)
Purchase of assets of Arizona Pacific Materials, LLC ............................ -- (500)
Proceeds on sale of fixed assets ................................................ 37 1,584
Proceeds on sale of rental equipment ............................................ 2,668 4,579
---------- ----------
Net cash provided by investing activities ............................................ 1,076 1,777
---------- ----------

Cash flows from financing activities:
Principal payments on capital leases ............................................ (30) (21)
Payments on short-term borrowings ............................................... -- 1,984
Issuance of Common Stock ........................................................ 1,710 --
Inventory floor plan financing .................................................. (8,112) (5,555)
Bridge loan payments ............................................................ (1,333) --
Notes Payable from purchase of Arizona Pacific Materials, LLC ................... -- 500
Long term debt borrowings ....................................................... 1,896 795
Long term debt payments ......................................................... (415) (9)
Payments on convertible debt .................................................... (5,669) --
---------- ----------
Net cash used in financing activities ................................................ (11,953) (2,306)
---------- ----------

Decrease in cash and cash equivalents ................................................ (181) (2)
Cash and cash equivalents at beginning of period ..................................... 855 9
---------- ----------

Cash and cash equivalents at end of period ........................................... $ 674 $ 7
========== ==========

Supplemental disclosures:
Interest paid ........................................................................ $ 3,136 $ 2,158
Income taxes paid .................................................................... -- --

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

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
February 2005, warrants were issued in lieu of cash payment .......................... -- 20

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

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

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, we 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 nine month periods
ended April 30, 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, 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.

Cost of goods sold includes the cost of products sold; costs of services
provided; depreciation related to the rental of inventoried equipment and rental
fleet; in-bound freight expenses; accrual expenses related to inventory reserves
for obsolescence; and certain allocated selling, general and administrative
expenses directly related to the production of revenues.

Selling, general and administrative expenses (SG&A) include payroll and benefit
costs (except payroll expenses directly related to the production of sales, such
as commissions, service mechanics and parts salesperson, which are allocated to
cost of goods sold; occupancy costs; depreciation of property, plant and
equipment; outside service fees; repairs & maintenance; and vehicle expenses.

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 2005 financial statements have been
reclassified to conform with the fiscal year 2006 presentation. These
reclassifications had no impact on net income or cash flows as previously
reported other than to separately report discontinuing operations.

2. ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

The accounting policies we follow are set forth in Note 1 to our 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 using the fair-value-based method of
accounting for stock-based payments in compliance with SFAS 123(R) "Share-Based
Payment" using the modified-prospective-transition method. 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. We adopted this accounting pronouncement
during the current fiscal year. Upon adoption there was no impact on the
consolidated financial statements.

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 our 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. We have applied the
requirements of EITF No. 05-2 since the required implementation date. The
adoption of this pronouncement did not have an impact on our 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 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 our 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 our consolidated financial statements.

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 our 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 April 30, 2006 was 27,553,386 and
4,890,000 as of April 30, 2005.

Earnings (loss) per common share is as follows:
Three Months Ended
April 30,
(`000's)
2006 2005
---------- ----------
BASIC AND DILUTED

Numerator:
Net loss available to common shareholders $ (1,189) $ (135)
========== ==========
Denominator:
Weighted average shares outstanding 10,970 10,130
========== ==========

Loss per common share $ (0.11) $ (0.01)
========== ==========

Nine Months Ended
April 30,
(`000's)
2006 2005
---------- ----------
BASIC AND DILUTED

Numerator:
Net earnings (loss) available to common
shareholders $ (2,156) $ 501
========== ==========
Denominator:
Weighted average shares outstanding 10,438 10,130
========== ==========

Earnings (loss) per common share $ (0.21) $ 0.05
========== ==========

4. STOCK BASED COMPENSATION

Effective August 1, 2005, we 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 nine months ending April 30, 2006 and 2005. All previously
issued and outstanding stock options were fully vested as of April 30, 2006.

5. INVENTORIES

Inventories consist of the following (`000's):

April 30, July 31,
2006 2005
---------- ----------
Equipment (net of reserves of
$2,956 and $2,937, respectively):
New $ 26,151 $ 32,702
Used 4,424 4,232
Mining products 1,024 886
Parts (net of reserves of $981
and $977, respectively) 5,027 5,117
---------- ----------
$ 36,626 $ 42,937
========== ==========

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 April 30,
2006, the LIFO reserve was $357,000 and as of July 31, 2005 the LIFO reserve was
$223,000.

6. FIXED ASSETS

Fixed assets consist of the following (`000's):
April 30, July 31,
2006 2005
---------- ----------
Operating property, plant and equipment:
Land $ 1,277 $ 1,277
Buildings 1,153 1,152
Machinery and equipment 4,365 2,913
Office furniture and fixtures 1,777 1,806
Computer hardware and software 1,058 1,261
Vehicles 1,329 1,269
Leasehold improvements 1,056 977
---------- ----------
12,015 10,655
Less: accumulated depreciation (7,043) (6,880)
---------- ----------
Property, plant, and equipment (net) $ 4,972 $ 3,775

Rental equipment fleet $ 5,225 $ 8,576
Less: accumulated depreciation (1,718) (2,869)
---------- ----------
Rental equipment (net) $ 3,507 $ 5,707
========== ==========

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
- --------------

We have 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 + 1 1/2 to 3%.

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. The balance
of borrowings under the floor plan financing as of April 30, 2006 was
$16,445,000.

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

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%. We 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 us (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 $441,000 and is 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 our Spokane and Clarkston
locations. The value of this conversion price change was calculated to be
$630,000 (based on a Black-Scholes model determined by an independent appraiser)
and is also 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), we paid a $1,600,000 finders fee and 300,000 warrants to purchase
common shares 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 liquidated damages, we
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.

We began making monthly principal payments in January 2006. The balance of the
unpaid principal on the convertible notes (net of discount) as of April 30, 2006
is $21,122,000 (net of discount of $3,209,000) of which $5,686,000 (net of
discount of $981,000) is short term.

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

In June 2005, we 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 April 30, 2006.

Notes Payable
- -------------

Notes payable consists of the following: (000's)
April 30, July 31,
Description 2006 2005
---------- ----------

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 ............. 658 761

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 ............. 1,595 --

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 ................................... 39 49
---------- ----------

Total $ 2,342 $ 860
Less current portion (618) (205)
---------- ----------
Total Long-Term Notes Payable $ 1,724 $ 655
========== ==========

Future minimum payments under these noncancelable notes payable as of
April 30, 2006, are as follows:

Notes Convertible
Twelve months ending April 30, Payable Debt Total
-------- -------- --------

2007 $ 618 $ 6,666 $ 7,284
2008 583 6,666 7,249
2009 590 6,667 7,257
2010 523 4,332 4,855
2011 28 -- 28
Thereafter -- -- --
-------- -------- --------
Total annual payments 2,342 24,331 26,673
Less debt discount -- 3,209 3,209
-------- -------- --------
Present value of minimum payments (net of discount)
2,342 21,122 23,464
Less current portion (618) (5,686) (6,304)
-------- -------- --------
Long-term portion $ 1,724 $ 15,436 $ 17,160
======== ======== ========

8. COMMITMENTS AND CONTINGENCIES

Leases
- ------

We lease certain facilities under noncancelable lease agreements. Certain of our
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 us 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 nine months ended
April 30, 2006 and 2005, respectively.

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

April 30, July 31,
2006 2005
-------- --------
Capitalized asset value $ 953 $ 953
Less accumulated amortization (486) (450)
-------- --------
Net capitalized asset value $ 467 $ 503
======== ========

Future minimum lease payments under all noncancelable leases as of April 30,
2006, are as follows (`000's):

Capital Operating
Twelve months ending April 30, leases leases
-------- --------
2007 132 1,288
2008 132 893
2009 132 583
2010 132 471
2011 132 326
Thereafter 605 956
-------- --------
Total annual lease payments $ 1,265 $ 4,517
========
Less amount representing interest
at a rate of 6.5% (442)
--------

Present value of minimum lease payments 823
Less current portion (55)
--------
Long-term portion $ 768
========

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

We issue purchase orders to Case Corporation for equipment purchases. Upon
acceptance by Case, these purchases become noncancelable by us. As of April 30,
2006, such purchase commitments totaled $13,347,000.

Litigation
- ----------

We are 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, we have recorded accruals for estimated settlements.
Management believes that any liability which may result from these proceedings
will not have a material adverse effect on our 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 Nine Months Ended
Net Revenues April 30, April 30,
2006 2005 2006 2005
------------------ -------- -------- -------- --------
Equipment Sales $ 22,906 $ 19,272 $ 69,510 $ 55,080

Equipment Rental 191 386 1,156 2,297

Mining Sales 455 205 1,193 480

Product Support 6,358 6,036 19,110 17,710
-------- -------- -------- --------

Total $ 29,910 $ 25,899 $ 90,969 $ 75,567
======== ======== ======== ========

Business product category Three Months Ended Nine Months Ended
Gross Margins April 30, April 30,
2006 2005 2006 2005
------------------ -------- -------- -------- --------
Equipment Sales $ 1,731 $ 1,372 $ 5,788 $ 4,600

Equipment Rental (51) (18) 98 269

Mining Sales (55) 117 211 94

Product Support 1,207 1,064 3,803 3,099
-------- -------- -------- --------

Total $ 2,832 $ 2,535 $ 9,900 $ 8,062
======== ======== ======== ========

10. SEGMENT INFORMATION

Summarized financial information concerning our reportable segments is shown in
the following tables (`000's).

Western Power & Arizona Pacific
Equipment Corp Materials, LLC Total
-------- -------- --------

For the Three Months Ended April 30, 2006
Revenue from continuing operations $ 29,455 $ 455 $ 29,910
======== ======== ========
Operating income (loss) from continuing operations $ 527 $ (462) $ 65
======== ======== ========
Net loss $ (578) $ (611) $ (1,189)
======== ======== ========
Capital expenditures $ 27 $ 73 $ 100
======== ======== ========
Total identifiable assets at April 30, 2006 $ 52,083 $ 5,328 $ 57,411
======== ======== ========

For the Three Months Ended April 30, 2005
Revenue from continuing operations $ 25,694 $ 205 $ 25,899
======== ======== ========
Operating income (loss) from continuing operations $ 701 $ (295) $ 406
======== ======== ========
Net income (loss) $ 162 $ (297) $ (135)
======== ======== ========
Capital expenditures $ 1,027 $ 214 $ 1,241
======== ======== ========

For the Nine Months Ended April 30, 2006
Revenue from continuing operations $ 89,776 $ 1,193 $ 90,969
======== ======== ========
Operating income (loss) from continuing operations $ 2,902 $ (1,279) $ 1,623
======== ======== ========
Net loss $ (719) $ (1,437) $ (2,156)
======== ======== ========
Capital expenditures $ 1,196 $ 433 $ 1,629
======== ======== ========

For the Nine Months Ended April 30, 2005
Revenue from continuing operations $ 75,087 $ 480 $ 75,567
======== ======== ========
Operating income (loss) from continuing operations $ 2,424 $ (720) $ 1,704
======== ======== ========
Net income (loss) $ 1,222 $ (721) $ 501
======== ======== ========
Capital expenditures $ 3,395 $ 491 $ 3,886
======== ======== ========

11. CONCENTRATION OF CREDIT RISK

Approximately 52% of our net sales for the nine months ended April 30, 2006
resulted from sales, rental, and servicing of products manufactured by Case.
That compares with a figure of 50% for the nine-month period ended April 3,
2005.

12. DISCONTINUED OPERATIONS

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. 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.

We sold our 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. We also sold fixed assets with an original cost of $662 (net book value
of $150) resulting in a gain of $251. Total sales for these locations were
$2,939 and $8,377 for the three and nine months ending April 30, 2006,
respectively. Total sales for these locations were $2,733 and $7,650 for the
three and nine months ending April 30, 2005, respectively.

We sold our Hayward, California location in February 2005 for a total sales
price of $321. We sold fixed assets with an original cost of $476 (net book
value of $44) resulting in a gain of $277. Total sales for this location were
$45 and $2,545 for the three and nine months ending April 30, 2005,
respectively.

13. EQUITY TRANSACTIONS

In February 2006, we issued 950,000 shares of previously unissued common stock
at a price of $1.80 per share or $1,710,000. In May of 2006, warrants to
purchase 100,000 common shares were exercised with an exercise price of $0.55
per share or $55,000.

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, 2005, 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.

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.

In February 2005, we sold our Hayward, California branch which resulted in a
$277 gain from the sale of discontinued operations. In October 2005, we closed
our Santa Rosa branch and moved most of the operating assets to our Sacramento
branch. In March of 2006, we sold our Spokane and Clarkston, Washington branches
resulting in a $251 gain from sale of discontinued operations.

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.

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):

Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Consolidated (in 000's) April 30, April 30, Increase April 30, April 30, Increase
2006 2005 (Decrease) 2006 2005 (Decrease)
---------- ---------- ---------- ---------- ---------- ----------

Revenue from continuing
operations $ 29,910 $ 25,899 $ 4,011 $ 90,969 $ 75,567 $ 15,402

Gross profit from continuing
operations $ 2,832 $ 2,535 $ 297 $ 9,900 $ 8,062 $ 1,838

SG&A from continuing
operations $ 2,767 $ 2,129 $ 638 $ 8,277 $ 6,358 $ 1,919

Operating income from
continuing operations $ 65 $ 406 $ (341) $ 1,623 $ 1,704 $ (81)

EBITDA (1) $ 1,139 $ 1,592 $ (453) $ 6,435 $ 6,232 $ 203

(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 and Nine Months ended April 30, 2006 compared to the Three and
- -------------------------------------------------------------------------------
Nine Months ended April 30, 2005.
- ---------------------------------

REVENUES

Revenues from continuing operations for the three-month period ended April 30,
2006 increased by $4,011 or 15.5% over the comparative three-month period ended
April 30, 2005. For the three-month period ended April 30, 2006 equipment sales
accounted for $3,634 of this increase. The equipment market continues to remain
strong in all our markets with sales up over the prior year in all our branch
locations. With the increase in equipment sales there has been a decrease in
rental revenue, as customers currently prefer purchasing rather than renting.
Mining sales from our subsidiary, Arizona Pacific Materials, LLC (APM),
increased $250 or 121.8% over the prior year's comparative three month period as
a result of increased basalt production and sales of crushed aggregates for
road, housing and related construction, specifically in the fast growing area
southeast of Phoenix.

Revenues from continuing operations for the nine-month period ended April 30,
2006 increased by $15,402 or 20.4% for the nine-month period ended April 30,
2005. Equipment sales increased by $14,430 or 26.2%. All branch locations have
shown significant increases this year, illustrating the continuing improvements
in economic conditions over the past few years on the west coast of the United
States. Loader backhoes and excavators, which exhibit higher prices, accounted
for $5,754 of the equipment sales increase. With the increase in equipment sales
over the past several years, we have experienced a decline in our rental
revenues, $1,156 for the nine-month period

ending April 30, 2006 compared to $2,297 for the comparative period ending April
30, 2005. The construction industry is affected by many economic conditions of
which interest rates have a significant impact. We anticipate interest rates to
rise and therefore are continue to analyze the need to increase our rental fleet
to provide additional product, as customers alter their "buy versus rent"
decisions. Mining sales for the nine-month period ended April 30, 2006 increased
by $713 or 148.4% over the nine-month period ending April 30, 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. We are currently in
the process of acquiring more processing equipment, which 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.

GROSS MARGIN

The Company's gross profit margin of 9.5% for the three-month period ended April
30, 2006 was slightly lower than the prior year's comparative period margin of
9.8%. Equipment sales, which typically maintain lower margins, accounted for a
significant proportion of our sales increase causing the decline in overall
product margins. However, higher product support sales and its related higher
margin levels, helped offset the lower margins caused by the significant
increase in equipment sales for the quarter.

The Company's gross profit margin of 10.9% for the nine-month period ended April
30, 2006 was slightly higher than the prior year's comparative period of 10.7%.
Product support's contribution to gross margin increased by $852 for the
nine-month period over the prior years comparative period. This increase has
contributed to overall margins in offsetting the impact of higher equipment
sales, which typically exhibit lower margin percentages. Increased sales volumes
from our subsidiary, Arizona Pacific Materials (APM), have also helped offset
more of the fixed costs of production and contributed to overall gross margin.
With the anticipated increases in production capacity generated by new
processing equipment, we expect larger contributions to gross margin by APM in
the future.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three-month period ended April 30, 2006, selling, general, and
administrative ("SG&A") expenses from continuing operations as a percentage of
net revenue from continuing operations were 9.3% compared to 8.2% for the prior
year's comparative third quarter. The increase in SG&A is partly associated with
higher administrative expenses related to our higher level of sales activity.
The increase from the prior year's comparative period also reflects the impact
of the increased business activities and production levels at our mining
subsidiary, APM.

For the nine-month period ended April 30, 2006, SG&A expenses from continuing
operations as a percentage of revenues from continuing operations were 9.1%
compared to 8.4% for the prior year's comparative period. The increase in SG&A
is associated with the higher administrative expenses related to our higher
level of sales activity. The increase from the prior year's comparative period
reflects the impact higher production related support expenses of the increased
business activities at our mining subsidiary.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the three months ended April 30, 2006
decreased by $341 compared to the three months ended April 30, 2005, again
reflecting the increased costs related to continued ramping up of production
activities of our mining operation in the third quarter of fiscal year 2006. 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.

Income from operations for the nine months ended April 30, 2006 decreased by $81
compared to the nine months ended April 30, 2005. Although sales levels for both
the equipment dealership and APM are significantly higher than the comparative
nine-month period, increased SG&A expenses (particularly at APM) have diminished
the impact to income from operations. The acquisition of additional processing
equipment at APM, 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 on a consolidated basis. We have and will
continue to monitor our SG&A expenses to maximize the near future benefit of the
current strong economic conditions in the equipment and mining markets.

INTEREST EXPENSE

Interest expense for the three months ended April 30, 2006 of $1,352 was up from
$696 in the prior year comparative period. This increase from the prior year's
comparative period is the result of approximately 4% higher interest rate
related to convertible debt versus the interest rate associated with the line of
credit with GE in existence as of April 30, 2005. As of April 30, 2006, interest
bearing debt totaled $44,386 compared to $47,298 as of April 30, 2005 with the
primary difference in the nature of the debt related to a transition from a line
of credit in fiscal year 2005 to convertible debt in fiscal year 2006 requiring
monthly principal payments beginning in January 2006. In addition, $242 of debt
discount (related to warrants issued with the convertible debt transacted in
June 2005) and $91 in debt issuance costs were amortized during the three months
ending April 30, 2006. No such charges were required during the three months
ending April 30, 2005.

Interest expense for the nine months ended April 30, 2006 of $4,283 was up from
$2,036 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 April 30, 2005. As of April 30, 2006, interest
bearing debt totaled $44,386 compared to $47,298 as of April 30, 2005 with the
primary difference in the nature of the debt related to a transition from a
$26,155 line of credit in fiscal year 2005 to a $30,000 convertible debt (and
$2,000 bridge loan) in June 2005 requiring monthly principal payments beginning
in January 2006. The bridge loan was paid in December of 2005. In addition, $787
of debt discount (related to warrants issued with the convertible debt
transacted in June 2005) and $341 in debt issuance costs were amortized during
the six months ending April 30, 2006. No such charges were required during the
nine months ending April 30, 2005.

We had a net loss from continuing operations for the quarter ended April 30,
2006 of $1,392 compared with a net loss of $247 for the prior year's comparative
quarter. The change is primarily related to additional interest costs, warrant
and debt issuance costs as discussed above.

We had a net loss from continuing operations for the nine months ended April 30,
2006 of $2,767 compared with a net loss of $244 for the prior year's comparative
period. The change is primarily related to additional interest costs, warrant
and 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 Three Months Nine Months Nine Months
Ended Ended Ended Ended
April 30, April 30, April 30, April 30,
2006 2005 2006 2005
---------- ---------- ---------- ----------

Revenue from discontinued
operations $ 2,939 $ 2,779 $ 8,377 $ 10,195

Gross Profit from discontinued
operations $ 21 $ 653 $ 677 $ 1,452

SG&A from discontinued
Operations $ 70 $ 541 $ 318 $ 984

Operating income from discontinued
operations $ (48) $ 112 $ 360 $ 468

Gain on sale of discontinued
operations $ 251 -- $ 251 $ 277

(1) In February 2005, we sold our Hayward, California location, in
October 2005, closed our Santa Rosa, California location and in
March 2006, we sold our Spokane and Clarkston, Washington
locations. All four locations are included in the above table for
the three and nine month periods ending April 30, 2006 and April
30, 2005.

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

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

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 April 30,
2006, the Company was indebted under manufacturer provided floor plan
arrangements in the aggregate amount of $16,445.

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
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 April 30, 2006 is $21,122 (net of discount of $3,209) of
which $5,686 (net of discount of $981) is short term. See Footnote 7 of the
consolidated financial statements.

CASH FLOW FROM OPERATING ACTIVITIES

During the nine months ended April 30, 2006 we had positive cash flows from
operating activities from continuing operations of $10,696. Our cash flow from
operating activities from continuing operations consisted primarily of a
reduction of accounts receivable of $2,225, depreciation of $4,258 and a
decrease in inventories of $6,475. The decrease in inventories supported the
increased level of sales volume in an effort to generate additional cash flow
and included $2,455 related to the sale of our Spokane and Clarkston, Washington
locations. 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 also 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 rental equipment sold during the
period. The fixed assets related to the sale of our Spokane and Clarkston,
Washington locations were sold for a gross sales price of $401 resulting in a
gain on sale of fixed assets of $251. 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. 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 paid down our floor plan financing by $8,112 during the nine-month period
ending April 30, 2006 (which included $1,451 related to the sale of our Spokane
and Clarkston, Washington locations), made payments of $5,669 on the convertible
debt and borrowed $1,896 under long term notes payable. 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 $674,000 as of April 30, 2006. Management
believes the current cash level and anticipated available cash flow is
sufficient to support our operations during the next twelve months.

OTHER

As of April 30, 2006, the Company had outstanding convertible instruments,
options and warrants convertible into 27,553,386 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 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 using the fair-value-based method of accounting for stock-based
payments in compliance with SFAS 123(R) "Share-Based Payment" using the
modified-prospective-transition method. 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. We adopted this accounting pronouncement during
the current fiscal year. 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 our consolidated financial statements.

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 our consolidated
financial position, results of operations or cash flows.

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 our 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. 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 48% of our net sales for the nine months ended April 30, 2006
resulted from sales, rental, and servicing of products manufactured by companies
other than Case. That compares with a figure of 50% for the nine-month period
ended April 30, 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 nine months ended April 30, 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.

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 April 30, 2006, we had variable rate floor plan
payables, notes payable, convertible debt and short-term debt of approximately
$40.5 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 $0.4 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 April 30, 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.

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
-----------------------------------------------------------
On February 15, 2006, the Company sold 950,000 shares of
its unregistered common stock for $1,776,500. We
utilized all of such proceeds to repay a portion of our
convertible debenture. The shares were subsequently
registered with an S-1 filed on May 5, 2006 with the
Securities Exchange Commission.

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.

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

June 14, 2006

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