10-K405

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2001

Commission File Number 0-26230

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

DELAWARE (State or other jurisdiction of incorporation or organization)	91-1688446 (I.R.S. Employer Identification Number)
6407-B N.E. 117TH AVENUE VANCOUVER, WA (Address of principal executive offices)	98662 (Zip Code)

Registrant's telephone number, including area code: (360) 253-2346

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
(Title of Class)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / /  No /x/

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. /x/

    As of October 31 2001: (a) 3,403,162 shares of Common Stock, $.001 par value, of the registrant (the "Common Stock") were outstanding; (b) 615,748 shares of Common Stock were held by non-affiliates ; and (c) the aggregate market value of the Common Stock held by non-affiliates was $135,464.56 based on the closing sale price of $0.22 per share on October 31, 2001.

    Portions of the Registrant's Proxy Statement to be filed in connection with its Annual Meeting of Shareholders are incorporated by reference in Part III.

PART I

ITEM 1. BUSINESS

General

    Western Power & Equipment Corp., a Delaware corporation (the "Company"), 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. The Company believes, 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 by the Company include backhoes, excavators, crawler dozers, skid steer loaders, forklifts, compactors, log loaders, trenchers, street sweepers, sewer vacuums, and mobile highway signs.

    The Company operates out of facilities located in the states of Washington, Oregon, Nevada, California, and Alaska. The equipment distributed by the Company is furnished 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.

    The Company's 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, it 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 three years, the Company has concentrated on consolidating or closing its stores to improve operating efficiency and profitability. See "Business Strategy."

History and Acquisitions

    The Company commenced business in November 1992 with the acquisition from Case of seven retail distribution facilities located in Oregon and Washington. The Company became a subsidiary of American United Global, Inc. ("AUGI"), simultaneous with such acquisition. AUGI holds 36 percent of the outstanding shares of the Company as of July 31, 2001.

    In September 1994 and February 1996, in two different transactions, the Company acquired from Case four retail construction equipment stores located in California and Nevada. In addition, in June 1996 and January 1997, the Company made two additional acquisitions of distributorships of predominantly non-competing lines of equipment, with locations in California, Oregon, Washington, and Alaska. From fiscal 1993 through fiscal 1997, the Company also opened nine new stores in the states served by the acquired stores, ending fiscal year 1997 with 23 stores.

    In fiscal 1998, the Company acquired four additional facilities through acquisition, located in California and Alaska. The pre-existing Alaska facility was discontinued as it was combined with the acquired Alaska facility. In addition, in fiscal 1998 the Company opened one new store in Washington. On December 11, 1997, the Company acquired substantially all of the operating assets used by Case in connection with its business of servicing and distributing Case agricultural equipment at a facility located in Yuba City, California.

    On April 30, 1998, the Company acquired substantially all of the operating assets of Yukon Equipment, Inc. (Yukon) in connection with Yukon's business of servicing and distributing construction, industrial, and agricultural equipment in Alaska. Yukon has facilities in Anchorage, Fairbanks, and Juneau, Alaska.

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    In fiscal 1999, the Company closed three of its smaller facilities and began servicing the territories served by these small stores by larger facilities in the region.

    The Company consolidated four facilities in the first quarter of fiscal 2000 into larger stores in each region. One branch office in Washington was sold during the third quarter while two temporary locations were established in Southern California. The closures are intended to increase efficiencies and reduce costs. The two branches in California were established in an effort to assist Case Corporation in a dealership transition for Southern California.

    The Company consolidated one branch in Washington during the first quarter of fiscal 2001 and sold the two branches in Southern California in the third quarter of fiscal 2001. There were 18 branches as of the end of fiscal year 2001.

Business Strategy

    The Company's strategy is to streamline the Company's structure and close or consolidate stores and operations to increase efficiency and profitability. The Company is concentrating its efforts on making all of its ongoing operations profitable and in capitalizing on its existing operations' strengths to restore profitability. The Company has selectively pared down its product offerings to reduce inventory carrying costs and to improve turnover in the remaining product lines that it offers.

    The Company's business strategy includes efforts to expand sales at its existing locations. The Company will continue to seek to improve its product line and generate incremental sales increases by adding equipment and parts produced by manufacturers other than Case, where appropriate. The Company will also seek to increase sales of parts and service—both of which have considerably higher margins than equipment sales. This increase will be accomplished through targeted sales efforts to parts and service customers and the continued diversification of our parts product lines and the servicing of equipment produced by manufacturers other than Case, where appropriate. The Company plans to continue emphasis of its fleet of rental equipment. As the cost of purchasing equipment escalates, short and long-term rental will become increasingly attractive to the Company's customers.

    The Company's business strategy had previously focused on acquiring additional existing distributorships and rental operations, opening new locations, and increasing sales at its existing locations. The Company reduced its acquisition activity in fiscal years 1999 through 2001 due to market conditions. When market conditions improve and opportunities arise, the Company intends to make strategic acquisitions of other authorized Case construction equipment retail dealers located in established or growing markets, as well as dealers or distributors of construction, industrial, or agricultural equipment, and related parts, manufactured by companies other than Case. In addition to acquisitions, in the future the Company may open new retail outlets and opportunities and conditions permit. The strategy in opening additional retail outlets has been to test market areas by placing sales, parts, and service personnel in the target market. If the results are favorable, a retail outlet is opened with its own inventory of equipment. This approach reduces both the business risk and the cost of market development.

Products

Case Construction Equipment.

    The construction equipment (the "Equipment") sold, rented, and serviced by the Company generally consists of: backhoes (used to dig large, wide and deep trenches); excavators (used to dig deeply for the construction of foundations, basements, and other projects); log loaders (used to cut, process and load logs); crawler dozers (bulldozers used for earth moving, leveling and shallower digging than excavators); wheel loaders (used for loading trucks and other carriers with excavated dirt, gravel and rock); roller compactors (used to compact roads and other surfaces); trenchers (a smaller machine

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that digs trenches for sewer lines, electrical power and other utility pipes and wires); forklifts (used to load and unload pallets of materials); and skid steer loaders (smaller version of a wheel loader, used to load and transport small quantities of material—e.g., dirt and rocks— around a job site). Selling prices for these units range from $15,000 to $350,000 per piece of Equipment.

    Under the terms of standard Case dealer agreements, the Company is an authorized Case dealer for sales of Equipment and related parts and services at locations in Oregon, Washington, Nevada, northern California, and Alaska (the "Territory"). The dealer agreements have no defined term or duration, but are reviewed on an annual basis by both parties, and can be terminated without cause at any time either by the Company on 30 days' notice or by Case on 90 days' notice. Although the dealer agreements do not prevent Case from arbitrarily exercising its right of termination, based upon Case's established history of dealer relationships and industry practice, the Company does not believe that Case would terminate its dealer agreements without good cause.

    The dealer agreements do not contain requirements for specific minimum purchases from Case. In consideration for the Company's agreement to act as dealer, Case supplies to the Company items of Equipment for sale and lease, parts, cooperative advertising benefits, marketing brochures related to Case products, access to Case product specialists for field support, the ability to use the Case name and logo in connection with the Company's sales of Case products, and access to Case floor plan financing for Equipment purchases. Such floor planning arrangement currently provides the Company with interest free credit terms on new equipment purchases ranging from one to six months, depending upon the type of equipment floored, after which interest commences to accrue monthly at an annual rate equal to 2% over the prime rate of interest. The invoice price of each item of Equipment is payable at the earlier of the time of its sale by the Company or six months after the date of shipment to the Company by Case.

Other Products.

    Although the principal products sold, rented, and serviced by the Company are manufactured by Case, the Company also sells, rents, and services equipment and sells related parts (e.g., tires, trailers, and compaction equipment) manufactured by others. Approximately 50% and 42% of the Company's net sales for fiscal year 2001 and fiscal 2000, respectively, resulted from sales, rental, and servicing of products manufactured by companies other than Case. Manufacturers other than Case represented by the Company offer various levels of supplies and marketing support along with purchase terms which vary from cash upon delivery to interest-free, 12-month flooring.

    The Company's distribution business is divided into three general categories of activity: (i) Equipment sales, (ii) Equipment rentals, and (iii) Product Support.

Equipment Sales.

    At each of its distribution outlets, the Company maintains a fleet of various new and used Equipment for sale. The Equipment purchased for each outlet is selected by the Company's marketing staff based upon the types of customers in the geographical areas surrounding each outlet, historical purchases as well as anticipated trends. Subject to applicable limitations in the Company's manufacturers' dealer contracts, each distribution outlet has access to the Company's full inventory of Equipment.

    The Company provides only the standard manufacturer's limited warranty for new Equipment, generally a one-year parts and service repair warranty. Customers can purchase extended warranty contracts.

    The Company sells used Equipment that has been reconditioned in its own service shops. It generally obtains such used Equipment as "trade-ins" from customers who purchase new items of

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Equipment and from Equipment previously rented and not purchased. Unlike new Equipment, the Company's used Equipment is generally sold "as is" and without a warranty.

Equipment Rental.

    The Company maintains a separate fleet of Equipment that it holds solely for rental. Such Equipment is generally held in the rental fleet for 12 to 36 months and then sold as used Equipment with appropriate discounts reflecting prior rental usage. As rental Equipment is taken out of the rental fleet, the Company adds new Equipment to its rental fleet as needed. The rental charges vary, with different rates for different types of Equipment rented. In October 1998, the Company opened its first rental-only store, located in the Seattle, Washington area, under the name Western Power Rents. This store was consolidated with the Company's Auburn, Washington store in August 2000. Rentals have decreased to 15% of revenue in fiscal year 2001 from 17% of revenue in fiscal year 2000. See Sales and Marketing below.

Product Support.

    The Company operates a service center and yard at each retail distribution outlet for the repair and storage of Equipment. Both warranty and non-warranty service work is performed, with the cost of warranty work being reimbursed by the manufacturer following the receipt of invoices from the Company. The Company employs approximately 120 manufacturer-trained service technicians who perform Equipment repair, preparation for sale, and other servicing activities. Equipment servicing is one of the higher profit margin businesses operated by the Company. The Company has expanded this business by hiring additional personnel and developing extended warranty contracts to be purchased by customers for Equipment sold and serviced by the Company, and independently marketing such contracts to its customers. The Company services items and types of Equipment that include those that are neither sold by the Company nor manufactured by Case.

    The Company purchases parts for use in its Equipment service business, as well as for sale to other customers who are independent servicers of Case Equipment. Generally, parts purchases are made on standard net 30-day terms. The Company employs one or more persons who take orders from customers for parts purchases at each retail distribution outlet. The Company provides only the standard manufacturer's warranty on the parts that it sells, which is generally a 90-day replacement guaranty.

Sales and Marketing

    The Company's customers are typically residential and commercial building general contractors, road and bridge contractors, sewer and septic contractors, underground utility contractors, persons engaged in the forestry industry, equipment rental companies and state and municipal authorities. The Company estimates that it has approximately 19,000 customers, with most being small business owners, none of which accounted for more than 3% of its total sales in the fiscal year ended July 31, 2001.

    For fiscal years 2001, 2000, and 1999, the revenue breakdown by source for the business operated by the Company were approximately as follows:

	FY 2001		FY 2000		FY 1999
Equipment Sales	60	%	59	%	60	%
Equipment Rental	15	%	17	%	16	%
Product Support	25	%	24	%	24	%
	100	%	100	%	100	%

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    The Company advertises its products in trade publications and appears at trade shows throughout its Territory. It also encourages its salespersons to visit customer sites and offer Equipment demonstrations when requested.

    The Company's sales and marketing activities do not result in any significant backlog of orders. Although the Company accepts orders from customers for future delivery following manufacture by Case or other manufacturers, during fiscal 2001 a majority of its sales revenues resulted from products sold directly out of inventory, or the providing of services upon customer request.

    The Company employed approximately 52 Equipment salespersons on July 31, 2001. All of the Company's sales personnel are employees of the Company, and all are under the general supervision of C. Dean McLain, the President of the Company. Each Equipment salesperson is assigned a separate exclusive territory, the size of which varies based upon the number of potential customers and anticipated volume of sales, as well as the geographical characteristics of each area.

    On July 31, 2001, the Company employed 6 product support salespersons who sell the Company's parts and repair services to customers in assigned territories. The Company has no independent distributors or non-employee sales representatives.

Suppliers

    The Company purchases of its inventory of equipment and parts from Case and other manufacturers. No supplier other than Case accounted for more than 10% of such inventory purchases during fiscal 2001. While maintaining its commitment to Case to primarily purchase Case Equipment and parts as an authorized Case dealer, the Company plans to expand the number of products and increase the aggregate dollar value of those products which the Company purchases from manufacturers other than Case in the future.

Competition

    The Company competes with distributors of construction, agricultural, and industrial equipment and parts manufactured by companies other than Case on the basis of price, the product support (including technical service) that it provides to its customers, brand name recognition for its products, the accessibility and number of its distribution outlets, and the overall quality of the products that it sells. The Company's management believes that it is able to effectively compete with distributors of products produced and distributed by such other manufacturers primarily on the basis of overall product quality and the superior product support and other customer services provided by the Company.

    Case's two major competitors in the manufacture of full lines of construction equipment of comparable sizes and quality are Caterpillar Corporation and Deere & Company. In addition, other manufacturers produce specific types of equipment which compete with Case Equipment and other Equipment distributed by the Company. These competitors and their product specialties include, but are not limited to, JCB Corporation—backhoes, Kobelco Corporation—excavators, Dresser Industries—light and medium duty dozers, Komatsu Corporation—wheel loaders and crawler dozers, and Bobcat, Inc.—skid steer loaders.

    The Company is currently the only Case dealer for construction equipment in Alaska, northern Nevada, and in the northern California area (other than Case-owned distribution outlets), and is one of two Case dealers in Oregon and Washington. However, Case has the right to establish other dealerships in the future in the same territories in which the Company operates. In order to maintain and improve its competitive position, revenues and profit margins, the Company plans to increase its sales of products produced by companies other than Case.

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Environmental Standards and Government Regulation

    The Company's operations are subject to numerous rules and regulations at the federal, state, and local levels which are designed to protect the environment and to regulate the discharge of materials into the environment. Based upon current laws and regulations, the Company believes that its policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and the resultant financial liability to the Company. No assurance can be given that future changes in such laws, regulations, or interpretations thereof, changes in the nature of the Company's operations, or the effects of former occupants' past activities at the various sites at which the Company operates, will not have an adverse impact on the Company's operations.

    The Company is subject to federal environmental standards because in connection with its operations it handles and disposes of hazardous materials, and discharges sewer water in its equipment rental and servicing operations. The Company's internal staff is trained to keep appropriate records with respect to its handling of hazardous waste, to establish appropriate on-site storage locations for hazardous waste, and to select regulated carriers to transport and dispose of hazardous waste. Local rules and regulations also exist to govern the discharge of waste water into sewer systems.

Employees

    At July 31, 2001, the Company employed 308 full-time employees. Of that number, 14 are in corporate administration, 28 are involved in administration at the branch locations, 80 are employed in Equipment sales and rental, and 186 are employed in product support. At July 31, 2001, approximately 16 of the Company's service technicians and parts employees at the Sacramento, California operation were being represented by Operating Engineers Local Union No. 3 of the International Union of Operating Engineers, AFL-CIO under the terms of a five-year contract expiring August 31, 2001. As of July 2001, approximately 6 service technicians and 3 parts employees employed at the Springfield, Oregon operation were represented in collective bargaining agreements through Operating Engineers Local Union No. 701 of the Operating Engineers. The Company believes that its relations with its employees are generally satisfactory.

Insurance

    The Company currently has general, product liability, and umbrella insurance policies covering the Company with limits, terms, and conditions which the Company believes to be consistent with reasonable business practice, although there is no assurance that such coverage will prove to be adequate in the future. An uninsured or partially insured claim, or a claim for which indemnification is not available, could have a material adverse effect upon the Company's business, results of operations, and financial condition.

Forward-Looking Statements

    Information included above relating to projected growth and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties, including but not limited to fluctuations in the construction, agricultural, and industrial sectors; the success of the Company's entry into new markets; the success of the Company's expansion of its equipment rental business; rental industry conditions and competitors; competitive pricing; the Company's relationship with its suppliers; relations with the Company's employees; the Company's ability to manage its operating costs; the continued availability of financing; governmental regulations and environmental matters; risks associated with regional, national, and world economies. Any forward-looking statements should be considered in light of these factors.

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ITEM 2. PROPERTIES

    The following table sets forth information as to each of the properties which the Company owns or leases (all of which are retail sales, rental, service, storage, and repair facilities except as otherwise noted) at July 31, 2001. The Store located in Kent, Washington was closed in the first quarter of fiscal 2001.

Location and Use	Lessor	Expiration Date	Annual Rental	Size/Square Feet	Purchase Options
1745 N.E. Columbia Blvd. Portland, Oregon 97211	Carlton O. Fisher, CNJ Enterprises	12/31/2010	$84,0001 plus CPI adjustments	Approx. 4 acres; building 17,622 sq. ft.	No
1665 Silverton Road, N.E. Salem, Oregon 97303	LaNoel Elston Myers Living Trust	07/10/2004	$36,0001	Approx. 1 acre; buildings 14,860 sq. ft.	No
1702 North 28th Street Springfield, Oregon 97477	McKay Investment Company	Month-to- Month	$73,2001	Approx. 5 acres; building 17,024 sq. ft.	No
West 7916 Sunset Hwy. Spokane, Washington 99204	U.S. Bank	09/30/2003	$69,6001	Approx. 5 acres; building 19,200 sq. ft.	No
12406 Mukilteo Speedway Mukilteo, Washington 98275	Phil & Jana Pickering	10/31/2008	$114,0001	Approx. 2.1 acres; building 13,600 sq. ft.	No
620 N. Oregon Ave Pasco, Washington 99301	Dress Bros. Partnership	Month-to- Month	$66,0001	Approx. 3 acres; building 10,000 sq. ft.	No
6407-B NE 117th Ave Vancouver, Washington 98662 (Executive Offices)	McLain-Rubin Realty Company, LLC3	03/31/2006	$98,400	Building 8,627 sq. ft.	No
2702 W. Valley Hwy No. Auburn, Washington 98001	Avalon Island LLC	11/30/2015	$204,0001	Approx. 8 acres; building 33,000 sq. ft.	No
500 Prospect Lane Moxee, Washington 98936 (Subleased to 3rd Party)	Owned	N/A	N/A	Approx. 1.5 acres; building 4,320 sq. ft.	N/A
1455 Glendale Ave. Sparks, Nevada 89431	McLain-Rubin Realty Company, LLC3	01/31/2007	$276,0002	Approx. 5 acres; building 22,475 sq. ft.	No
25886 Clawiter Road Hayward, California 94545	Fred Kewel II, Agency	11/30/2004	$108,9031	Approx. 2.8 acres; building 21,580 sq. ft.	No
3540 D Regional Parkway Santa Rosa, California 95403	Soiland	02/28/05	$45,4501 plus annual CPI adjustments	Approx. 1.25 acres; building 5,140 sq. ft.	No

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1751 Bell Avenue Sacramento, California 95838	McLain-Rubin Realty Company, LLC3	09/30/2007	$228,0002	Approx. 8 acres; building 35,940 sq. ft.	No
2535 Ellis Street Redding, Oregon 96001	Hart Enterprises	02/15/2002	$33,600	Approx. 2 acres; building 6,200 sq. ft.	Yes
1041 S Pershing Ave Stockton, CA 95206	Stockton Further Processing	03/14/2006	$44,400	Approx. .5 acres; building 1,794 sq. ft.	Yes
723 15th Street Clarkston, Washington 99403	Mark Flerchinger	11/02/2002	$18,600	Approx. 1.2 acres; building 3,750 sq. ft.	Yes
3199 E. Onstott Road Yuba City, California 95991	McLain-Rubin Realty III3	09/30/2007	$66,0002	Approx. 13 acres; building 23, 900 sq. ft.	No
2020 E. Third Avenue Anchorage, Alaska 99501	Owned	N/A	N/A	Approx. 4 acres; building 15,650 sq. ft.	N/A
3511 International Street Fairbanks, Alaska 99701	Airport Rentals	11/30/2009	$74,400	Approx. 1.5 acres; building 8,500 sq. ft.	No

¹

Net lease with payment of insurance, property taxes, and maintenance costs paid by the Company.

²

Net lease with payment of insurance, property taxes and maintenance costs, including structural repairs, paid by the Company.

³

Related party lease.

    The Company's operating facilities at July 31, 2001 were separated into ten "hub" outlets, eight "sub-stores", Washington. In addition the Company maintains its headquarters operations in Vancouver, Washington. The hub stores are the main distribution centers located in Auburn, and Spokane, Washington; Portland and Springfield, Oregon; Sparks, Nevada; Hayward, Buena Park and Sacramento, California; and Anchorage, Alaska; and the sub-stores are the smaller facilities located in Mukilteo, Pasco and Clarkston, Washington; Salem, Oregon; Santa Rosa, Stockton, Redding, and Yuba City, California; and Fairbanks, Alaska.

    The rental store in Kent was closed in the first quarter of fiscal year 2001 and the operations combined with the operations in Auburn, Washington. The stores in Escondido and Fontana, California were sold in the third quarter of fiscal 2001.

    All of the leased and owned facilities used by the Company are believed to be adequate in all material respects for the needs of the Company's current and anticipated business operations.

    In the first quarter of fiscal year 2001, the Company renegotiated the terms of the Sacramento, Yuba City, and Sparks leases to shorten the terms of the leases. These leases were then reclassified as operating leases.

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ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT(1)

Name	Officer Since	Age	Position Held With the Registrant
C. Dean McLain	1993	48	Chairman, President, and Chief Executive Officer(2)
Mark J. Wright	1997	45	Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary

(1)

The officers serve for a term of one year and until their successors are elected.

(2)

Elected Chairman in 1998, Chief Executive Officer and President in 1993.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The Company's stock is traded on the NASDAQ National Market System (until May 20, 1999) and the NASDAQ SmallCap Market (since May 20, 1999) under the symbol WPEC. The high and low closing prices for the Company's common stock for the years ended July 31, 2000 and July 31, 2001 were as follows:

	High		Low
Fiscal 2000
1st Quarter—August 1, 1999 through October 31, 1999	$	2.750	$	1.000
2nd Quarter—November 1, 1999 through January 31, 2000	$	1.938	$	1.000
3rd Quarter—February 1, 2000 through April 30, 2000	$	8.500	$	1.063
4th Quarter—May 1, 2000 through July 31, 2000	$	10.000	$	4.188
Fiscal 2001
1st Quarter—August 1, 2000 through October 31, 2000	$	6.440	$	2.000
2nd Quarter—November 1, 2000 through January 31, 2001	$	4.594	$	0.281
3rd Quarter—February 1, 2001 through April 30, 2001	$	2.063	$	0.550
4th Quarter—May 1, 2001 through July 31, 2001	$	1.500	$	0.370

    The number of shareholders of record of the Company's Common Stock on October 31, 2001 was 33 and the number of beneficial holders of the Company's Common Stock is estimated by management to be approximately 310 holders.

    The Company has never paid cash dividends on its Common Stock and it does not anticipate that it will pay cash dividends or alter its dividend policy in the foreseeable future. The payment of dividends by the Company on its Common Stock will depend on its earnings and financial condition, and such other factors as the Board of Directors of the Company may consider relevant. The Company currently intends to retain its earnings to assist in financing the development of its business.

II–1

ITEM 6. SELECTED FINANCIAL DATA

    The following selected financial data have been derived from the audited financial statements of the Company. See notes to Consolidated Financial Statements in Part IV, Item 14(a)(1) for information concerning the effect of acquisitions completed by the Company during the periods reflected.

		Fiscal Year Ended July 31,
		2001			2000			1999			1998			1997
		(Amounts in thousands, except per share data)
Net sales		$	139,902		$	155,637		$	163,650		$	163,478		$	148,130
Gross profit		$	9,820		$	11,538		$	14,594		$	19,176		$	15,870
	(% of sales)		7.0			7.4			8.9			11.7			10.7
Selling, general and administrative		$	12,840		$	13,534		$	12,586		$	12,092		$	11,194
	(% of sales)		9.2			8.7			7.7			7.4			7.6
(Loss) income before income taxes			(7,537	)	$	(6,419	)	$	(2,916	)	$	3,193		$	1,664
	(% of sales)		(5.4	)		(4.1	)		(1.8	)		2.0			1.1
Tax rate (%)			0.2			12			(38	)		42			42
Net (loss) income		$	(7,842	)	$	(7,198	)	$	(1,815	)	$	1,839		$	971
Net (loss) income per common share		$	(2.30	)	$	(2.18	)	$	0.55	)	$	0 .53		$	0 .27
Shares used in basic earnings per share calculations			3,403			3,306			3,303			3,473			3,533
Net (loss) income per diluted common share		$	(2.30	)	$	(2.18	)	$	(0.55	)	$	0.49		$	0.27
Shares used in diluted earnings per share calculations			3,403			3,306			3,303			3,772			3,609
Working capital deficit		$	(20,102	)	$	(15,910	)	$	(16,117	)	$	(6,339	)	$	(2,569	)
Long-term debt (including capital leases and deferred lease income)		$	3,469		$	10,796		$	11,124		$	7,457		$	3,767
Stockholders' equity		$	6,751		$	14,381		$	21,322		$	23,138		$	22,765
Total assets		$	93,092		$	122,710		$	136,594		$	138,766		$	107,423

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this annual report. Certain matters discussed herein contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including, but not limited to, projected sales levels, expense reductions, reduced interest expense, and increased inventory turnover, one or more of which may not be realized.

General

    The Company acquired its first seven retail distribution stores in November 1992. The Company expanded to 18 stores in four states by the end of fiscal 1996, to 23 stores in five states by the end of fiscal 1997, and to 27 stores in five states by the end of fiscal 1998. In fiscal 1999, the Company closed its Milton-Freewater, Oregon store, its Elko, Nevada store, and its Juneau, Alaska store. At the end of fiscal 2001, the Company had 18 stores in operation.

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    For the last three years, the Company has concentrated on consolidating or closing stores to improve operating efficiency and profitability. Store activity for the last three years is summarized as follows:

Fiscal Year	No. of Stores at Beginning of Year	No. of Stores Opened	No. of Stores Closed/Sold	No. of Stores Acquired	No. of Stores at End of Year
1999	27	0	3	0	24
2000	24	2	5	0	21
2001	21	0	3	0	18

    Subsequent to the end of fiscal 2001, the Company has closed three additional stores. The Company is evaluating additional store closures or sales. In addition, in the future the Company may open and acquire additional distribution outlets for Case products, as well as for products which may be manufactured by other companies as circumstances permit. The Company's results can be impacted by the timing of, and costs incurred in connection with, new store openings and acquisitions as well as the costs of closing existing stores.

Results of Operations

Fiscal Year 2001, as Compared with Fiscal Year 2000

    The Company reported net revenue for fiscal 2001 of $139,902,000 compared with net revenue of $155,637,000 for fiscal 2000. Stores opened longer than 12 months showed an overall revenue decrease of 7.4 percent from prior year revenue reflecting a general softening in economic conditions in the northwest (resulting in lower sales volume) along with increased competitive pressures (which negatively affected average sales prices of equipment the Company sold). The Company consolidated four of its facilities during fiscal 2000 into larger facilities in the region in order to reduce costs and leverage existing, larger facilities in the region to cover the territories previously served by the closed facilities.

    The Company had a net loss for fiscal 2001 of $7,842,000 or $2.30 per share compared with a net loss of $7,198,000 or $2.18 per share in fiscal 2000. In the fourth quarter of fiscal 2001, the Company recognized an inventory charge of approximately $4,106,000 to provide allowances in recognition of decreasing market prices for aged equipment inventory in the fourth quarter. In fiscal 2000, the Company recognized a fourth quarter inventory charge of approximately $2,547,000 to provide allowances in recognition of decreasing market prices on aged equipment inventory in the last half of the year.

    Gross margin was 7.0 percent during fiscal 2001 which is lower than the 7.4 percent gross margin during fiscal 2000. Margins decreased in fiscal 2001 due mainly to the additional equipment reserve accrued for in the fourth quarter of fiscal 2001. Management continues to place a high priority on improving overall gross margins by working to increase higher margin service, parts, and rental revenues, focusing more sales efforts on specialty and niche product lines, and by obtaining higher prices for new and used equipment.

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    Selling, general, and administrative expenses were $12,840,000 or 9.2 percent of revenues for fiscal 2001 compared to $13,534,000 or 8.7 percent of sales for fiscal 2000. The increase in selling, general, and administrative expenses as a percent of revenues resulted in part from the decrease in revenue volume and in parts due to the costs of store closures during the year.

    Interest expense for fiscal 2001 was $5,982,000, down from $6,069,000 in fiscal 2000 due in part to an decrease in interest rates and lower inventory levels. The Company has a $50 million inventory flooring and operating line of credit facility through Deutsche Financial Services ("DFS"). The agreement was amended in the first quarter of fiscal 2001 with terms maturing December 31, 2001 and with a floating rate based on prime with rates between 0.75% under prime to 2.25% over prime depending on the amount of total debt leverage of the Company. Management has used this facility to allow the Company to take advantage of more purchase discounts and to lower overall interest expense. See Liquidity and Capital Resources below for a description of the status of the DFS facility.

Fiscal Year 2000, as Compared with Fiscal Year 1999

    The Company reported net revenue for fiscal 2000 of $155,637,000 compared with net revenue of $163,650,000 for fiscal 1999. Stores opened prior to fiscal 1998 showed an overall revenue decrease of 4.9 percent from prior year revenue reflecting a general softening in economic conditions in the northwest along with increased competitive pressures. The Company consolidated five of its facilities during fiscal 2000 into larger facilities in the region in order to reduce costs and leverage existing, larger facilities in the region to cover the territories previously served by the closed facilities.

    The Company had a net loss for fiscal 2000 of $7,198,000 or $2.18 per share compared with a net loss of $1,815,000 or $0.55 per share in fiscal 1999. In fiscal 2000, the Company recognized a fourth quarter inventory charge of approximately $2,547,000 to provide allowances to recognize decreasing market prices on aged equipment inventory in the last half of fiscal 2000. In addition, the Company recorded a valuation allowance of $2,956,000 related to its deferred tax asset.

    Gross margin was 7.4 percent during fiscal 2000 which is lower than the 8.9 percent gross margin during fiscal 1999. Margins decreased in fiscal 2000 due primarily to continued competitive pressures and the fourth quarter equipment reserve. Management continues to place a high priority on improving overall gross margins by working to increase higher margin service, parts, and rental revenues, focusing more sales efforts on specialty and niche product lines, and by obtaining higher prices for new equipment.

    Selling, general, and administrative expenses were $13,534,000 or 8.7 percent of revenues for fiscal 2000 compared to $12,586,000 or 7.7 percent of sales for fiscal 1999. The increase in selling, general, and administrative expenses as a percent of revenues resulted in part from lower than expected revenue levels and the costs of closing stores during the year.

    Interest expense for fiscal 2000 was $6,069,000, up from $5,454,000 in fiscal 1999 due in part to an increase in interest rates. The Company has a $50 million inventory flooring and operating line of credit facility through DFS. The facility is a floating rate facility at rates as low as 50 basis points under the prime rate. Prime interest rates have increased from those in fiscal 1999. Management has used this facility to allow the Company to take advantage of more purchase discounts and to lower overall interest expense.

Liquidity and Capital Resources

    The Company's primary needs for liquidity and capital resources are related to its inventory for sale and its rental and lease fleets, store openings, and acquisitions of additional stores. The Company's primary source of internal liquidity has been from its operations. As more fully described below, the Company's primary sources of external liquidity are equipment inventory floor plan financing

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arrangements provided to the Company by the manufacturers of the products the Company sells, and DFS and, with respect to acquisitions, secured loans from Case.

    Under inventory floor planning arrangements the manufacturers of products sold by the Company provide interest free credit terms on new equipment purchases for periods ranging from one to twelve months, after which interest commences to accrue monthly at rates ranging from zero percent 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 sale of the equipment. At July 31, 2001, the Company was indebted under manufacturer provided floor planning arrangements in the aggregate amount of $14,237,000.

    The Company has a $50 million inventory flooring and operating line of credit through DFS. Amounts are advanced against the Company's assets, including accounts receivable, parts, new equipment, rental fleet, and used equipment. The agreement was amended as of October 31, 2000 with terms maturing December 31, 2001 and with a floating rate based on prime with rates between 0.75% under prime to 2.25% over prime depending on the amount of total debt leverage of the Company. This amendment waived all prior defaults under the agreement and established revised financial covenants to be measured at the Company's second and fourth quarters. In addition, the amendment included several, periodic mandatory reductions in the credit limit. The Company expects to use this borrowing facility to lower flooring related interest expense by using advances under such line to finance inventory purchases in lieu of financing provided by suppliers, to take advantage of cash purchase discounts from its suppliers, to provide operating capital for further growth, and to refinance some its acquisition related debt at a lower interest rate. Borrowings are collateralized by the Company's assets, including accounts receivable, parts inventory, new and used equipment inventory and rental fleet equipment. As of July 31, 2001, approximately $53,384,000 was outstanding under the DFS credit facility.

    At July 31, 2001, the Company was in technical default of the leverage covenant and the minimum tangible net worth covenant in the DFS Loan Agreement. As of October 31, 2001 the Company has requested but has not obtained a waiver letter for the period July 31, 2001 or thereafter. Although DFS has not called the debt due to such defaults, there is no guarantee that DFS will not call this debt at any time after July 31, 2001.

    During the year ended July 31, 2001, cash and cash equivalents decreased by $54,000. The Company had positive cash flow from operating activities during the year of $13,261,000. The Company's cash flow from operating activities consisted primarily of an inventory reduction of $8,545,000, accounts receivable reduction of $3,052,000, and depreciation of $9,835,000 offset by the net loss of $7,842,000 and gains on the disposal of fixed assets of $2,016,000. Purchases of fixed assets during the period were related mainly to the ongoing replacement of aged operating assets. The Company paid down its short-term financing by $14,287,000 during the year.

    The Company's cash and cash equivalents of $770,000 as of July 31, 2001 and available credit facilities are considered sufficient to support current levels of operations for at least the next twelve months.

Risk Factors

Inventory

    Controlling inventory is a key ingredient to the success of an equipment distributor because the equipment industry is characterized by long order cycles, high ticket prices, and the related exposure to "flooring" interest. The Company's interest expense may increase if inventory is too high or interest rates rise. The Company manages its inventory through company-wide information and inventory sharing systems wherein all locations have access to the Company's entire inventory. In addition, the

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Company closely monitors inventory turnover by product categories and places equipment orders based upon targeted turn ratios.

Inflation

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

Economic Conditions

    The Company's business can also be affected by general economic conditions in its geographic markets as well as general national and global economic conditions that affect the construction, agricultural, and industrial sectors. An erosion in North American and/or other countries' economies could adversely affect the Company's business. Market specific factors could also adversely affect one or more of the Company's target markets and/or products.

Seasonality; Fluctuations in Results

    Historically, sales of our products have varied substantially from quarter to quarter due to the seasonality of the construction business. We attempt to accurately forecast orders for our products and commence purchasing prior to the receipt of such orders. However, it is highly unlikely that we will consistently accurately forecast the timing and rate of orders. This aspect of our business makes our planning inexact and, in turn, affects our shipments, costs, inventories, operating results and cash flow for any given quarter. In addition, our quarterly operating results are affected by competitive pricing, announcements regarding new product developments and cyclical conditions in the industry. Accordingly, we may experience wide quarterly fluctuations in our operating performance and profitability, which may adversely affect our stock price even if our year-to-year performance is more stable, which it also may not be. In addition, many of our products require significant manufacturing lead-time, making it difficult to order products on short notice. If we are unable to satisfy unexpected customer orders, our business and customer relationships could suffer and result in the loss of future business.

Inventory Lead-Times; Potential Write-Downs

    To be competitive in certain of its markets, particularly markets for products with long lead time, the Company will be required to build up inventories of certain products in anticipation of future orders. There can be no assurance that the Company will not experience problems of obsolete, excess, or slow-moving inventory if it is not able to properly balance inventories against the prospect of future orders, and the Company's operations may, therefore, be adversely affected by inventory write-downs from time to time. In periods of general economic slowdown or slowdowns in the construction sector we could be especially affected by such problems.

Potential Write-downs of Goodwill and Intangibles

    Goodwill and other intangible assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount may not be recoverable. If the carrying value of the Company's intangible assets exceeds the expected undiscounted future cash flows, a loss would be

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recognized to the extent the carrying amount of assets exceeds their fair values. This loss may negatively impact the Company's results of operation.

Competition

    Many of the Company's existing and potential competitors have substantially greater marketing, financial, and service resources than we have. In addition, some of the Company's competitors have broader product offerings, placing the Company at a disadvantage to some of its competitors. In addition, the Company believes that some of its competitors have obtained and maintained business that loses money—"loss leading"—in order to maintain a competitive advantage with regard to specific customers or products. If the Company's competitors were to use such tactics in the future, the Company would be unable to maintain its market position without incurring a negative impact on its profitability.

Cyclicality of Industry

    The construction equipment industry is always very competitive. Advances in technology may reduce the cost for current or potential competitors to gain market share, particularly for lower priced products. We cannot guarantee that sales of our products will continue at current volumes or prices in any event, but especially if our current competitors or new market entrants introduce new products with better features, better performance, or lower prices or having other characteristics that are more attractive than our own. Competitive pressures or other factors also may result in significant price competition that could have a material adverse effect on our results of operations.

Dependence Upon Third-Party Manufacturers

    All of our products are supplied by third parties. From time to time, we experience delays and disruptions in our supply chain. To date, these delays and disruptions have not materially adversely affected our business, but they could do so in the future. Wherever possible, we try to assure ourselves of adequate inventory supply, but we do not always succeed. To the extent that we experience significant supply or quality control problems with our vendors, these problems can have a significant adverse effect on our ability to meet future delivery commitments to our customers.

    Currently, Case Corporation provides approximately 50% of our products. Case dealer contracts are non-exclusive and terminable by either party upon minimum notice. There can be no assurances that Case will continue to supply the Company with products or continue its relationship with the Company. If we are unable to obtain Case products or to continue our relationship with Case, we will likely experience reductions in product and service sales and increased expenses. Our operations will be negatively affected if we experience inadequate supplies of any key products.

Recent Accounting Pronouncements

    On June 29, 2001, the Financial Accounting Standards Board (FASB or the "Board") unanimously voted in favor of issuing two Statements: Statement No. 141 (FAS141), Business Combinations, and Statement No. 142 (FAS 142), Goodwill and OtherIntangible Assets. FAS 141 primarily addresses the accounting for the cost of an acquired business (i.e., the purchase price allocation), including any subsequent adjustments to its cost. FAS 141 supercedes APB 16, Business Combinations. The most significant changes made by FAS 141 are:

•

It requires use of the purchase method of accounting for all business combinations, thereby eliminating use of the pooling-of-interests method.



•

It provides new criteria for determining whether intangible assets acquired in a business combination should be recognized separately from goodwill.

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    FAS 141 is effective for all business combinations (as defined in the Statement) initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of acquisition is July 1, 2001, or later).

    FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142 supercedes APB 17, Intangible Assets. The most significant changes made by FAS 142 are:

•

Goodwill and indefinite lived intangible assets will no longer be amortized and will be tested for impairment at least annually.



•

Goodwill will be tested at least annually at the reporting unit level.



•

The amortization period of intangible assets with finite lives is no longer limited to forty years

    FAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been issued previously. In all cases, the provisions of FAS 142 should be applied at the beginning of a fiscal year. Retroactive application is not permitted.

    On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144). SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction." SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged.

    The Company is in the process of evaluating the effect of SFAS 142 and 144 on its financial statements.

Dividend Policy

    The Company has never paid cash dividends on its Common Stock and it does not anticipate that it will pay cash dividends or alter its dividend policy in the foreseeable future. The payment of dividends by the Company on its Common Stock will depend on its earnings and financial condition, and such other factors as the Board of Directors of the Company may consider relevant. The Company currently intends to retain its earnings to assist in financing the growth of its business.

Merger Agreement; Asset Sale Agreement

    On May 14, 2001, the Company announced that its merger with Supply Point, Inc., based in San Jose, California, closed, subject to certain conditions including the approval of Deutsche Financial Services, its chief lender, and Case Corporation. The closing documents are being held in escrow subject to such conditions. The Company currently does not know whether these conditions will be satisfied.

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    On September 18, 2001, the Company announced that it had entered into an agreement to sell substantially all of assets and liabilities of the equipment distribution business owned by Western Power & Equipment Corp. (Oregon), a wholly owned subsidiary, to e*machinery.net, inc. (EMAC) for $500,000 in cash, a seven-year, 7% promissory note for $700,000, and 1.2 million shares of EMAC restricted common stock. Closing is subject to a number of conditions including, but not limited to, due diligence, approval of Case Corporation, and Deutsche Financial Services. There is no assurance that the transaction will be consummated.

Forward Looking Statements

    Information included within this section relating to growth projections and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements because of a number of risks and uncertainties, including but not limited to fluctuations in the construction, agricultural, and industrial sectors; the success of the Company's entry into new markets; the success of the Company's expansion of its equipment rental business; rental industry conditions, and competitors; competitive pricing; the Company's relationship with its suppliers; relations with the Company's employees; the Company's ability to manage its operating costs; the continued availability of financing; governmental regulations and environmental matters; risks associated with regional, national, and world economies; and implementation and consummation of the merger transaction (see Letter of Intent to Merge above). Any forward-looking statements should be considered in light of these factors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Company is exposed to market risk from changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices such as interest rates. For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. At July 31, 2001, the Company had variable rate floor plan payables, notes payable, and long-term debt of approximately $67.8 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 $0.7 million. The Company's policy is not to enter into derivatives or other financial instruments for trading or speculative purposes.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The following financial statements and financial schedule are attached to this Report on Form 10-K following Part IV, Item 14:

Consolidated Statements of Operations for the years ended July 31, 2001, 2000, and 1999	F-1
Consolidated Balance Sheets as of July 31, 2001 and 2000	F-2
Consolidated Statements of Stockholders' Equity for the years ended July 31, 2001, 2000, and 1999	F-3
Consolidated Statements of Cash Flows for the years ended July 31, 2001, 2000, and 1999	F-4
Notes to Consolidated Financial Statements	F-5
Report of Independent Accountants	F-18
Financial Statement Schedule:
Report of Independent Accountants—Financial Statement Schedule	F-19
Schedule II—Valuation and Qualifying Accounts	F-20

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

    Information with respect to Directors of the Company is incorporated herein by reference to "Proposal 1: Election of Directors" continuing through "Report of the Compensation Committee on Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. The information required by this Item with respect to the Company's Executive Officers follows Part I, Item 4A of this document.

ITEM 11.    EXECUTIVE COMPENSATION

    Information with respect to Executive Compensation is incorporated herein by reference to "Compensation of Executive Officers" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 12.    PRINCIPAL STOCKHOLDERS

    Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to "Board Compensation, Attendance and Committees, Certain Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

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PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)	1.	Financial Statements.
		Consolidated Statements of Operations for the years ended July 31, 2001, 2000, and 1999		F-1
		Consolidated Balance Sheets as of July 31, 2001 and 2000		F-2
		Consolidated Statements of Stockholders' Equity for the years ended July 31, 2001, 2000, and 1999		F-3
		Consolidated Statements of Cash Flows for the years ended July 31, 2001, 2000, and 1999		F-4
		Notes to Consolidated Financial Statements		F-5
		Report of Independent Accountants		F-18
	2.	Financial Statement Schedule.
		Report of Independent Accountants—Financial Statement Schedule		F-19
		Schedule II—Valuation and Qualifying Accounts		F-20
	3.	Exhibits.
		Exhibit Number	Description
		3.1	Certificate of Incorporation of Registrant.(2)
		3.2	By-laws of Registrant.(2)
		10.1	1995 Employee Stock Option Plan.(3)
		10.2	Second Amended and Restated Stock Option Plan for Non-Employee Directors.(3)
		10.3	Case New Dealer Agreement Package.(1)
		10.4	Lease Agreement—Hayward, California.(2)
		10.5	Lease Agreement—Auburn, Washington.(7)
		10.6	Loan Agreement, dated January 17, 1997, between Registrant and Case Credit Corp. including related promissory notes.(5)
		10.7	Security Agreement, dated January 17, 1997, made by Registrant in favor of Case Credit Corporation to secure payment for and collateralized by all assets acquired by Registrant from Sahlberg Equipment, Inc.(5)
		10.8	Loan and Security Agreement dated as of June 5, 1997 between Registrant and Deutsche Financial Services Corporation.(6)
		10.9	Asset Purchase Agreement, dated April 30, 1998, between Yukon Equipment, Inc. and Registrant.(8)
		10.10	Employment Agreement dated May 1, 1998 between Maurice Hollowell and Registrant.(8)
		10.11	Employment Agreement dated August 1, 2000 between C. Dean McLain and Registrant.
		10.12	Consulting Agreement dated August 1, 2000 by and between Registrant and Robert M. Rubin.

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10.13	Commercial Lease dated October 1, 2000 between McLain-Rubin Realty Company III, LLC and Registrant for Yuba City, California facility.
10.14	Commercial Lease dated October 1, 2000 between McLain-Rubin Realty Company III, LLC and Registrant for Sacramento, California facility.
10.15	Commercial Lease, dated as of October 1, 2000 between McLain-Rubin Realty Company, LLC and Registrant for the Sparks, Nevada facility.
10.16	Commercial Lease, dated as of April 1, 2001 between McLain-Rubin Realty Company II, LLC and Registrant for the Vancouver, Washington corporate office.
21.	Subsidiaries of the Company.
23.	Consent of Independent Accountants.

(1)

Filed as an Exhibit to the AUGI Annual Report on Form 10-K, as filed on October 29, 1993 and incorporated herein by reference thereto.

(2)

Filed as an Exhibit to Amendment No. 1 to the Registrant's Registration Statement on Form S-1, filed on May 16, 1995 and incorporated herein by reference thereto.(Registration No. 33-89762).

(3)

Filed as an Exhibit to the Registrant's Registration Statement on Form S-8, filed on September 18, 1998 and incorporated herein by reference thereto. (Registration No. 33-63775).

(4)

Filed as an Exhibit to the Quarterly Report on Form 10-Q of the Registrant, as filed on June 11, 1997 and incorporated herein by reference thereto.

(5)

Filed as an Exhibit to the Annual Report on Form 10-K of the Registrant, as filed on October 28, 1996 and incorporated herein by reference thereto.

(6)

Filed as an Exhibit to the Annual Report on Form 10-K of the Registrant, as filed on October 29, 1998 and incorporated herein by reference thereto.

(7)

Filed as an Exhibit to the Quarterly Report on Form 10-Q of the Registrant, as filed on June 14, 1999 and incorporated herein by reference thereto.

(8)

Filed as an Exhibit to Form 8-K of the Registrant, as filed on May 11, 1998 and incorporated herein by reference thereto.

(b) Reports on Form 8-K.

    The Company field a current report on Form 8-K on May 14, 2001 regarding the Company's conditional closing of its merger with Supply Point, Inc. The Company filed a current report on Form 8-K on September 24, 2001 regarding the Company signing an agreement to sell substantially all of its assets to e-machinery.net, Inc.

(c) Exhibits

    See (a)(3) above.

(d) Additional Financial Statement Schedules

    See (a)(2) above.

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WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

		Year Ended July 31,
		2001			2000			1999
Net revenue		$	139,902		$	155,637		$	163,650
Cost of goods sold			130,082			144,099			149,056
Gross profit			9,820			11,538			14,594
Selling, general and administrative expenses			12,840			13,534			12,586
			(3,020	)		(1,996	)		2,008
Other income (expense):
	Interest expense		(5,982	)		(6,069	)		(5,454	)
	Other income		1,465			1,646			530
Loss before income taxes			(7,537	)		(6,419	)		(2,916	)
Provision (benefit) for income taxes			305			779			(1,101	)
Net loss		$	(7,842	)	$	(7,198	)	$	(1,815	)
Basic loss per common share		$	(2.30	)	$	(2.18	)	$	(0.55	)
Average Outstanding Common Shares for Basic EPS			3,403			3,306			3,303
Diluted loss per common share		$	(2.30	)	$	(2.18	)	$	(0.55	)
Average Outstanding Common Shares And Equivalents for Diluted EPS			3,403			3,306			3,303

See accompanying notes to consolidated financial statements.

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WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

			July 31, 2001			July 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	770		$	824
	Accounts receivable, less allowance for doubtful accounts of $948 and $563			14,295			17,347
	Inventories			44,867			58,297
	Prepaid expenses			298			210
	Income taxes receivable			—			400
	Deferred income taxes			2,541			2,273
		Total current assets		62,771			79,351
Fixed assets (net):
	Property, plant and equipment			5,584			9,450
	Rental equipment fleet			22,027			26,076
	Lease equipment fleet			—			4,975
		Total fixed assets		27,611			40,501
Intangibles and other assets, net of accumulated amortization of $808 and $683				2,720			2,858
		Total assets	$	93,102		$	122,710
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
	Borrowings under floor plan financing		$	14,237		$	14,768
	Short-term borrowings			53,384			67,671
	Convertible Debt			182			—
	Accounts payable			11,591			10,730
	Accrued payroll and vacation			1,754			751
	Other accrued liabilities			1,716			1,323
	Capital lease obligations			18			17
		Total current liabilities		82,882			95,260
Deferred income taxes				2,541			2,273
Capital lease obligations				920			4,786
Long-term borrowings				8			28
Deferred income				—			5,982
		Total liabilities		86,351			108,329
Commitments and contingencies
Stockholders' equity:
	Preferred stock-10,000,000 shares authorized; none outstanding			—			—
	Common stock, $.001 par value—Authorized, 20,000,000 shares Outstanding, 3,403,162 and 3,353,162 shares, respectively			4			4
	Additional paid-in capital			15,894			16,005
	Accumulated deficit			(8,303	)		(460	)
	Less common stock in treasury, at cost (130,300 and 180,300 shares, respectively)			(844	)		(1,168	)
		Total stockholders' equity		6,751			14,381
		Total liabilities and stockholders' equity	$	93,102		$	122,710

See accompanying notes to consolidated financial statements.

F–2

WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)

	Common Stock
	Number of Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Treasury Stock			Total Stockholders' Equity
Balance at July 31, 1998	3,303,462	$	4	$	16,072		$	8,553		$	(1,491	)	$	23,138
Net loss	—		—		—			(1,815	)		—			(1,815	)
Balance at July 31, 1999	3,303,162		4		16,072			6,738			(1,491	)		21,323
Issuance of Treasury Stock	50,000				(67	)					323			256
Net loss								(7,198	)					(7,198	)
Balance at July 31, 2000	3,353,162		4		16,005			(460	)		(1,168	)		14,381
Issuance of Treasury Stock	50,000				(111	)					324			213
Net loss								(7,842	)					(7,842	)
Balance at July 31, 2001	3,403,162	$	4	$	15,894		$	(8,303	)	$	(844	)	$	6,751

See accompanying notes to consolidated financial statements.

F–3

WESTERN POWER & EQUIPMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

				Year Ended July 31,
				2001			2000			1999
Cash flows from operating activities:
	Net loss			$	(7,842	)	$	(7,198	)	$	(1,815	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation			9,835			11,599			11,554
		Gain on disposal of fixed assets			(2,016	)		(59	)		(45	)
		Amortization			125			113			225
		Changes in assets and liabilities (excluding effects of acquisitions):
			Accounts receivable		3,052			(1,847	)		8,126
			Inventories		8,545			2,903			1,299
			Prepaid expenses		(88	)		23			(61	)
			Deferred income taxes		—			574			35
			Accounts payable		861			(1,972	)		(4,872	)
			Accrued payroll and vacation		1,003			(74	)		(33	)
			Other accrued liabilities		393			(433	)		103
			Income taxes receivable/payable		400			(46	)		(609	)
			Deferred lease income		(1,007	)		(333	)		2,707
			Other assets/liabilities		—			—			(8	)
Net cash provided by operating activities					13,261			3,250			16,606
Cash flow from investing activities:
	Purchase of fixed assets				(964	)		(1,254	)		(2,711	)
	Purchase of rental equipment				(6,500	)		(9,531	)		(27,984	)
	Sale of rental equipment				8,512			10,574			14,668
	Proceeds on sale of fixed assets				283			189			2,235
	Sale (purchase) of leased equipment fleet				—			289			(2,504	)
	Covenant not to compete				—			—			(21	)
	Purchase of other assets				12			(18	)		—
		Net cash provided by (used in) investing activities			1,343			249			(16,317	)
Cash flows from financing activities:
	Principal payments on capital leases				(2	)		32			(60	)
	Treasury stock sales				—			256			—
	Inventory floor plan financing				(531	)		(2,380	)		6,090
	Short-term financing				(14,287	)		(3,192	)		(5,136	)
	Convertible debt issuance				182			—			—
	Long-term debt repayments				(20	)		(20	)		(1,109	)
		Net cash used in financing activities			(14,658	)		(5,304	)		(215	)
(Decrease) increase in cash and cash equivalents					(54	)		(1,805	)		74
Cash and cash equivalents at beginning of year					824			2,629			2,555
Cash and cash equivalents at end of year				$	770		$	824		$	2,629

See accompanying notes to consolidated financial statements.

F–4

Western Power & Equipment Corp.

Notes to Consolidated Financial Statements
(Dollars in thousands, except per share and options data)

1.  Summary of Significant Accounting Policies

Basis of Presentation

    The Company is engaged in the sale, rental, and servicing of light, medium, and heavy construction and industrial, and agricultural equipment and related parts in Washington, Oregon, California, Nevada, and Alaska. Case serves as the manufacturer of the single largest portion of the Company's products.

    The consolidated financial statements include the accounts of the Company and its Oregon subsidiary after elimination of all intercompany accounts and transactions.

    The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in note 5 below, the Company has significant borrowings that require, among other things, compliance with certain financial ratios on a quarterly basis. As s result of losses incurred during the last year, the Company was not in compliance with the financial ratio covenants under its credit facility with Deutsch Financial Services (DFS). The Company requested, but did not receive a waiver of such non-compliance. There can be no assurance that the Company will be able to meet the financial ratio covenants in the future, which could result in DFS calling the debt at any time and requiring the Company to discontinue operations.

    The Company is in discussions with DFS regarding renewal or extension of the current credit facility. In addition, the Company is exploring alternative financing arrangements with other potential lenders. The Company's continuation as a going concern is dependent, in part, upon its ability to successfully establish the necessary financing arrangements and to comply with the terms thereof.

    Subsequent breaches of any of the terms and conditions of the current DFS credit facility or any renewal or replacement thereof could result in acceleration of the Company's indebtedness, in which case the debt would become immediately due and payable. Based upon the Company's current projections, it does not believe that it will comply with the existing financial covenants unless they are modified or waived. If there is no modification or waiver, the Company may not be able to repay its debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to the Company.

    The Company is concentrating its efforts on making all of its ongoing operations profitable and in capitalizing on its existing operations' strengths to restore profitability. The Company has selectively pared down the number of stores it operates and its product offerings to reduce overall costs and to improve turnover in the remaining product lines that it offers. Subsequent to July 31, 2001, the Company has sold or closed, or is in the process of closing, three additional stores.

    On September 18, 2001, the Company announced that it had entered into an agreement to sell substantially all of the assets and liabilities of the equipment distribution business owned by Western Power & Equipment Corp. (Oregon), a wholly owned subsidiary, to e*machinery.net, inc. (EMAC) for $500 in cash, a seven-year, 7% promissory note for $700, and 1.2 million shares of EMAC restricted common stock. Closing is subject to a number of conditions including, but not limited to, due diligence, approval of Case Corporation, and Deutsche Financial Services. There is no assurance that the transaction will be consummated.

F–5

Cash Equivalents

    For financial reporting purposes, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents, which balances may, at times, exceed the federally insured limits.

Restricted Cash

    In accordance with the borrowing agreement with Deutsche Financial Services (DFS), the Company has a cash account restricted by DFS for the purpose of paying down the line of credit. Restricted cash included in the cash balances totaled $242 and $543 at July 31, 2001 and 2000, respectively.

Inventories

    Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for parts inventories and the specific identification method for equipment inventories.

Intangible Assets

    The Company's acquisition strategy has been focused on existing businesses with established market share in a contiguous geographic area. Items with an indeterminate useful life, such as name recognition, geographical location and presence represent value to the Company. The Company uses estimates of the useful life of these intangible assets ranging from twenty to forty years. These lives are based on the factors influencing the acquisition decision and on industry practice. The Company reviews for asset impairment on a periodic basis and whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Based on this review, no write-down for impairment loss on intangible assets has been recorded during the three-year period ended July 31, 2001.

Property, Plant, and Equipment

    Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 20 years. Expenditures for replacements and major improvements are capitalized. Expenditures for repairs, maintenance, and routine replacements are charged to expenses as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts; any resulting gain or loss is included in the results of operations.

    At each balance sheet date, management assesses whether there has been permanent impairment in the value of long-lived assets. The amount of any such impairment is determined by comparing anticipated undiscounted future cash flows from operating activities with the associated carrying value. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors.

Revenue Recognition

    Revenue on equipment and parts sales is recognized upon shipment of products and passage of title. Rental and service revenue is generally recognized at the time such services are provided.

    The Company has entered into sales contracts under which the customer may require the Company to repurchase equipment at specified dates and specified prices. The Company records the proceeds from such sales contracts as deferred lease income. The difference between the sale contract amount and the repurchase obligation is recognized as revenue over the period of the repurchase

F–6

obligation. The remaining repurchase obligation is recorded as a sale if and when the customer does not exercise the repurchase option. At July 31, 2001, no repurchase obligations were in existence.

Advertising Expense

    The Company expenses all advertising costs as incurred. Total advertising expense for the years ended July 31, 2001, 2000 and 1999 was $221, $320, and $311 respectively.

Income Taxes

    The Company recognizes deferred tax assets and liabilities based upon differences between the financial reporting and tax bases of the assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

Treasury Stock

    In April 1998, the Board of Directors authorized the repurchase of up to 350,000 shares of the Company's common stock in the open market, subject to normal trading restrictions. Under this program, the Company purchased a total of 230,300 shares of common stock at a cost of $1.49 million in fiscal year 1998. Currently, the Company uses shares of treasury stock to issue shares upon exercise of outstanding stock options and/or for private placements of common stock.

Reclassifications

    Certain amounts in the 2000 financial statements have been reclassified to conform with the 2001 presentation. These reclassifications had no impact on net loss or cash flows as previously reported.

Financial Instruments

    The recorded amounts of cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities as presented in the financial statements approximate fair value because of the short-term nature of these instruments. The recorded amount of short and long-term borrowings approximates fair value as the actual interest rates approximate current competitive rates.

Net Income (loss) Per Common Share

    Basic net income (loss) per common share is computed using the average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the average number of common shares and common share equivalents outstanding during the period, unless inclusion of common share equivalents would be antidilutive.

Supplemental disclosures of cash flow information

    A capital lease obligation of $1,942 was incurred in February 1999 when the Company entered into a 20-year lease for the Sparks, Nevada facility. In the first quarter of fiscal 2001 certain capital leases were converted to operating leases resulting in a gain of $720.

		Year ended July 31,
		2001			2000		1999
Cash paid (received) during the year for:
	Interest	$	5,887		$	5,922	$	5,922
	Income taxes, net of refunds		(12	)		219		(834	)

F–7

    During fiscal year 2001, the Company's obligations under various guaranteed buyback obligations were terminated resulting in elimination of leased equipment assets of $4,975 and deferred income of $5,982 from the prior fiscal year. In fiscal year 2001, in lieu of payment for certain professional services provided to the Company, the Company issued 50 shares of its common stock for $213 to the provider of such professional services.

Use of Estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal periods presented. Actual results could differ from those estimates.

Recent Accounting Pronouncements

    Business Combinations and Goodwill and Other Intangible Assets

    The Financial Accounting Standards Board (FASB) recently announced the issuance of No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." The Company has goodwill for which amortization has been recorded against in prior periods. The impact of the future adoption of FAS 142 has yet to be determined. Amortization of goodwill per quarter is $31; amortization of goodwill for the year would be $125. The Company will need to review the potential impairment of carrying values of goodwill to determine if there will be a write-down. Currently, goodwill is valued at $2,650.

    On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144). SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction." SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company is in the process of evaluating the effect of SFAS 144 on its financial statements.

2.  Related Party Transactions

    The real property and improvements used in connection with the Sacramento Operations, and upon which the Sacramento Operation is located, were sold by Case for $1,500 to the McLain-Rubin Realty Company, LLC ("MRR"), a Delaware limited liability company the owners of which are Messrs. C. Dean McLain, the President and a director of the Company, and Robert M. Rubin, the Chairman and a director of the Company. Simultaneous with its acquisition of the Sacramento Operation real property and improvements, MRR leased such real property and improvements to the Company under the terms of a 20-year commercial lease agreement dated March 1, 1996 with the Company paying an initial annual rate of $168. As of October 1, 2000, the Company entered into a renegotiated 7-year lease with an initial annual rate of $228. In addition to base rent, the Company is responsible for the

F–8

payment of all related taxes and other assessments, utilities, insurance and repairs (both structural and regular maintenance) with respect to the leased real property during the term of the lease. The new lease qualifies for treatment as an operating lease.

    On December 11, 1997, the real property and improvements used in connection with Case's Yuba City, California operation, was purchased by McLain-Rubin Realty Company III, LLC ("MRR III"), a Delaware limited liability company, the owners of which are Messrs. C. Dean McLain, the President and a director of the Company, and Robert M. Rubin, the Chairman and a director of the Company. Simultaneous with its acquisition of the Yuba City, California real property and improvements, MRR III leased such real property and improvements to the Company under the terms of a 20-year commercial lease agreement dated effective December 11, 1997 with the Company paying an initial annual rate of $54. As of October 1, 2000, the Company entered into a renegotiated 7-year lease with an initial annual rate of $66. In addition to base rent, the Company is responsible for the payment of all related taxes and other assessments, utilities, insurance, and repairs (both structural and regular maintenance) with respect to the leased real property during the term of the lease. The new lease qualifies for treatment as an operating lease.

    In February 1999, the real property and improvements used in connection with the Company's Sparks, Nevada operation and upon which such operation is located, were sold to McLain-Rubin Realty, L.L.C. (MRR) under the terms of a real property purchase and sale agreement. MRR is a Delaware limited liability company the owners of which are Messrs. C. Dean McLain, the President and Chairman of the Company, and Robert M. Rubin, a director of the Company. The sale price was $2,210 in cash at closing. Subsequent to the closing of the sale, the Company entered into a 20-year commercial lease agreement with MRR for the Sparks, Nevada facility at an initial rental rate of $252 per year. The lease is a net lease with payment of insurance, property taxes and maintenance costs paid by the Company. The sale resulted in a deferred gain which will be amortized over the life of the lease pursuant to generally accepted accounting principles. As of October 1, 2000, the Company entered into a renegotiated 7-year lease with an initial annual rate of $276. The new lease qualifies for treatment as an operating lease and the remainder of the deferred gain which was previously being amortized over the life of the cancelled lease was all recognized in the first quarter of fiscal year 2001.

    On April 1, 2000, the Company entered into a lease with McLain-Rubin Realty Company II, LLC ("MRR II"), a Delaware limited liability company, the owners of which are Messrs. C. Dean McLain, the President and a director of the Company, and Robert M. Rubin, the Chairman and a director of the Company, for a 5-year lease on its Vancouver, Washington corporate office with an annual rate of $98. In addition to base rent, the Company is responsible for the payment of all related taxes and other assessments, utilities, insurance, and repairs (both structural and regular maintenance) with respect to the leased real property during the term of the lease. The lease qualifies for treatment as an operating lease.

3.  Inventories

    Inventories consist of the following:

		July 31, 2001		July 31, 2000
Equipment (net of reserve allowances of $7,489 and $4,770 respectively):
	New equipment	$	28,163	$	40,148
	Used equipment		7,425		7,442
Parts (net of reserve allowance of $282 and $522 respectively)			9,279		10,707
		$	44,867	$	58,297

F–9

4.  Fixed Assets

    Fixed assets consist of the following:

	July 31, 2001			July 31, 2000
Property, plant, and equipment:
Land	$	500		$	500
Buildings		1,717			5,334
Machinery and equipment		3,997			4,030
Office furniture and fixtures		2,377			2,360
Computer hardware and software		1,453			1,869
Vehicles		1,964			1,428
Leasehold improvements		958			550
		12,966			16,071
Less: accumulated depreciation		(7,382	)		(6,621	)
Property, plant, and equipment (net)	$	5,584		$	9,450
Rental equipment fleet	$	28,889		$	32,493
Less: accumulated depreciation		(6,862	)		(6,417	)
Rental equipment (net)	$	22,027		$	26,076
Leased equipment fleet	$	—		$	5,481
Less: accumulated depreciation		—			(506	)
Leased equipment fleet	$	—		$	4,975

5.  Borrowings

    The Company has inventory floor plan financing arrangements with Case Credit Corporation, an affiliate of Case, for Case inventory and with other finance companies affiliated with other equipment manufacturers. The terms of these agreements generally include a one-month to six-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 Company has a $50,000 inventory flooring and operating line of credit through Deutsche Financial Services (DFS). The agreement was amended as of October 31, 2000 with terms maturing December 31, 2001 and with a floating rate based on prime with rates between 0.75% under prime to 2.25% over prime depending on the amount of total debt leverage of the Company. This amendment waived all prior defaults under the agreement and established revised financial covenants to be measured at the Company's second and fourth quarters. In addition, the amendment included several, periodic mandatory reductions in the credit limit. Amounts may be advanced against the Company's assets, including accounts receivable, parts, new equipment, rental fleet, and used equipment. Interest payments on the outstanding balance are due monthly.

F–10

    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 following table summarizes the inventory floor plan financing arrangements:

			July 31,
		Maturity Date
	Interest Rate		2001		2000
Case Credit Corporation	Prime + 2% (7.00%)	8 - 48 months	$	14,237	$	14,768
Deutsche Financial Services	Prime + 2.25% (7.25%)	12 - 36 months		53,384		67,671
			$	67,621	$	82,439

    At July 31, 2001 and July 31, 2000, the Company was in technical default of the leverage covenant and the minimum tangible net worth covenant in the Deutsche Financial Services Loan Agreement. There is no guarantee that Deutsche Financial Services will not call this debt at any time after July 31, 2001. If DFS does call the debt, it will become immediately due and payable in full and the Company would not be able to continue operations. In addition, if the Company is unable to renew the DFS credit facility after December 31, 2001 or replace it with an equivalent or better credit facility, there are no assurances that the Company will have adequate credit facilities to continue its business.

    In December 2000, the Company completed the sale of $182 principal amount of 10% convertible promissory notes due December 31, 2001. The notes are convertible, at the option of the holders, into common stock at a minimum conversion price of $1.50 per. The Company may, at its option, redeem the notes at the principal amount plus accrued interest any time prior to December 31, 2001.

6.  Income Taxes

    The provision (benefit) for income taxes is comprised of the following:

		Year Ended
		July 31, 2001		July 31, 2000		July 31, 1999
Current:
	Federal	$	278	$	180	$	(978	)
	State		27		26		(157	)
			305		206		(1,135	)
Deferred:
	Federal		-0-		500		29
	State		-0-		73		5
			-0-		573		34
Total provision (benefit) for income taxes		$	305	$	779	$	(1,101	)

F–11

    The principal reasons for the variation from the customary relationship between income taxes at the statutory federal rate and that shown in the statement of operations were as follows:

	Year Ended
	July 31, 2001		July 31, 2000		July 31, 1999
Statutory federal income tax rate	(34.0	)%	(34.0	)%	(34.0	)%
State income taxes, net of federal income tax benefit	(4.3	)%	(2.9	)%	(5.2	)%
Valuation allowance	38.3	%	46.1	%	0.0	%
Other	4.0	%	2.9	%	1.5	%
	4.0	%	12.1	%	(37.7	)%

    Temporary differences and carry forwards which give rise to a significant portion of deferred tax assets and liabilities were as follows:

		Year Ended
		July 31, 2001			July 31, 2000
Deferred assets:
	Inventory	$	2,734		$	1,739
	Accounts receivable		373			219
	Accrued vacation and bonuses		83			127
	NOL Carryforward		5,997			3,069
	Other accruals		75			75
	Current Deferred Tax Asset		9,262			5,229
	Less—Valuation Allowance		(6,721	)		(2,956	)
Net Current Deferred Tax Asset			2,541			2,273
Deferred liabilities:
	Fixed Assets		(2,385	)		(2,159	)
	Goodwill and intangibles		(156	)		(114	)
	Long-term Deferred Tax Liability		(2,541	)		(2,273	)
	Net Deferred Tax Asset	$	0		$	0

    The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of net operating losses and tax credit carryovers. The valuation allowance primarily related to federal and state net operating losses, which may not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. Based on the historical taxable income and projections for future taxable income over the periods that the deferred tax assets are deductible, the Company believes it is more likely than not that the Company will not realize the benefits of these deductible differences in the near future.

F–12

7.  Stockholders' Equity

Stock Option Plans

    Under the Company's 1995 Employee Stock Option Plan, key employees, officers, directors, and consultants of the Company can receive incentive stock options and non-qualified stock options to purchase up to an aggregate of 1,500,000 shares of the Company's common stock. The plan provides that the exercise price of incentive stock options be at least equal to 100 percent of the fair market value of the common stock on the date of grant. With respect to non-qualified stock options, the plan requires that the exercise price be at least 85 percent of fair value on the date such option is granted. Outstanding options expire no later than ten years after the date of grant.

    In December 1995, the Board of Directors adopted a stock option plan for non-employee directors under which each non-employee director is entitled to receive on August 1 of each year beginning August 1, 1996, options to purchase 2,500 shares of the Company's common stock at the fair market value of the stock at the date of grant. In January 1998, the Company's shareholders approved an amendment to this plan increasing the number of shares for which options are granted yearly to non-employee directors from 2,500 to 5,000. Outstanding options expire no later than ten years after the date of grant.

    During 2001 no options were exercised.

    During 1995, the Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock Based Compensation," which defines a fair value method of accounting for an employee stock option or similar equity instrument. That pronouncement encourages all entities to adopt that method of accounting for all compensation costs related to stock options issued to all employees under these plans, but permits companies to continue using the intrinsic value method of accounting prescribed by the Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in this statement has been applied.

    The Company has elected to account for its stock based compensation under APB 25; however, as required by SFAS 123, the Company has computed for pro forma disclosure purposes the value of options granted during fiscal years 2001, 2000, and 1999 using the Black-Scholes option pricing model. The weighted average assumptions used for stock option grants for fiscal years 2001, 2000, and 1999 were:

	FY00		FY99		FY99
Risk free interest rate	4.35	%	4.85-5.45	%	4.85-5.45	%
Expected dividend yield	0	%	0	%	0	%
Expected life	4 years		4 years		4 years
Expected volatility	116.21	%	93.31	%	62.56	%

    Adjustments for forfeitures are made as they occur. For the years ended July 31, 2001, 2000, and 1999, the total value of the options granted, for which no previous expense has been recognized, was computed as approximately $0, $0, and $72 respectively, which would be amortized over the vesting period of the options. The weighted average fair value per share of the options granted in fiscal years 2001, 2000, and 1999 are $0.53, $0, and $5.07, respectively.

F–13

    If the Company had accounted for these stock options issued to employees in accordance with SFAS 123, the Company's net loss and pro forma net loss and net loss per share and pro forma net loss per share would have been reported as follows.

	Year Ended July 31, 2001
	Net Loss			Basic E.P.S.			Diluted E.P.S.
As Reported	$	(7,841	)	$	(2.30	)	$	(2.30	)
Pro Forma	$	(8,162	)	$	(2.40	)	$	(2.40	)

	Year Ended July 31, 2000
	Net Loss			Basic E.P.S.			Diluted E.P.S.
As Reported	$	(7,198	)	$	(2.18	)	$	(2.18	)
Pro Forma	$	(7,206	)	$	(2.18	)	$	(2.18	)

	Year Ended July 31, 1999
	Net Loss			Basic E.P.S.			Diluted E.P.S.
As Reported	$	(1,815	)	$	(0.55	)	$	(0.55	)
Pro Forma	$	(2,174	)	$	(0.66	)	$	(0.66	)

    The effects of applying SFAS 123 for providing pro forma disclosure for fiscal years 2001, 2000 and 1999 are not likely to be representative of the effects on reported net income and earnings per share for future years since options vest over several years and additional awards are made each year.

    The following summarizes the stock option transactions under the Company's stock option plans:

	Shares (000)		Weighted Average Option Price
Options outstanding July 31, 1998:	1508		4.56
Exercised	—		—
Surrendered	(12	)	4.53
Granted	17		5.07
Options outstanding July 31, 1999:	1,513		4.56
Exercised	(50	)	5.13
Surrendered	(1,453	)	4.64
Granted	—		—
Options outstanding July 31, 2000:	10		4.56
Exercised	—		—
Surrendered	—		—
Granted	1,200		0.53
Options outstanding July 31, 2001	1,210		0.56

F–14

    In January 2001, the Company issued a total of 1,200,000 options to management, employees, and directors as follows:

Name	Position	# of Shares in Option	Exercise Price per Share		Term of Option (Years)
Dean McLain	President/CEO	500,000	$	0.531	10 years
Robert Rubin	Board of Directors	500,000	$	0.531	10 years
Allen Perres	Board of Directors	25,000	$	0.531	10 years
Seymour Kessler	Board of Directors	25,000	$	0.531	10 years
Mark J. Wright	VP Finance/CFO	100,000	$	0.531	10 years
employees		50,000	$	0.531	10 years

    The options issued to Robert Rubin, Allen Perres, and Seymour Kessler are subject to shareholder ratification which will be sought at the next annual meeting of shareholders.

    The following table sets forth the exercise prices, the number of options outstanding and exercisable, and the remaining contractual lives of the Company's stock options at July 31, 2001:

Exercise Price		Number of Options Outstanding	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining	Number of Options Exercisable	Weighted Average Exercise Price
$	4.375	10,000	$	4.375	6.00	10,000	$	4.375
$	0.531	1,200,000	$	0.531	9.50	1,200,000	$	0.531

8.  Commitments and Contingencies

    The Company leases certain facilities under noncancelable lease agreements. As more fully described in Note 3, the building portion of some of the Company's facility leases qualify under SFAS 13 as "capital leases" (i.e., an acquisition of an asset and the incurrence of a liability). The remaining 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 $2,280, $2,129, and $2,000 for the years ended July 31, 2001, 2000, and 1999, respectively.

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

    Assets recorded under capital leases are recorded in fixed assets and are as follows:

	July 31, 2001			July 31, 2000			July 31, 1999
Capitalized asset value	$	937		$	4,553		$	4,978
Less accumulated amortization		(262	)		(667	)		(550	)
	$	675		$	3,886		$	4,428

F–15

    Net capitalized assets values are included in Property, Plant and Equipment. Future minimum lease payments under all noncancelable leases as of July 31, 2001, are as follows:

Year ending July 31,	Capital leases		Operating leases
2002	$	128	$	1,692
2003		116		1,534
2004		108		1,356
2005		108		1,090
2006		124		900
Thereafter		1,204		1,921
Total annual lease payments	$	1,788	$	8,493
Less amount representing interest, with imputed interest rates ranging from 6% to 15%		850
Present value of minimum lease payments		938
Less current portion		18
Long-term portion	$	920

    The Company issues purchase orders to Case Corporation for equipment purchases. Upon acceptance by Case, these purchases become noncancelable by the Company. As of July 31, 2001, such purchase commitments totaled $7,116,979.

9.  Segment Information

    In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment. For the purpose of providing segment information, management believes that all of the Company's operations consist of one segment. However, the Company evaluates performance based on revenue and gross margin of three distinct business components. Revenue and gross margin by component are summarized as follows:

Business Component Net Revenues		Year Ended July 31, 2001			Year Ended July 31, 2000			Year Ended July 31, 1999
Equipment Sales		$	84,065		$	92,513		$	98,450
Equipment Rental			20,817			26,334			25,771
Product Support			35,020			36,790			39,429
	Totals	$	139,902		$	155,637		$	163,650
Business Component Gross Margins		Year Ended July 31, 2001			Year Ended July 31, 2000			Year Ended July 31, 1999
Equipment Sales		$	(641	)	$	(66	)	$	2,591
Equipment Rental			4,566			5,556			5,017
Product Support			5,895			6,048			6,986
	Totals	$	9,820		$	11,538		$	14,594

    There are no inter-segment revenues. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

F–16

10. Unaudited Quarterly Consolidated Financial Data

		Quarter
												Total Year
		First		Second		Third			Fourth
Fiscal 2001:
	Net sales	$	37,783	$	34,299	$	33,641		$	34,179		$	139,902
	Gross Profit		4,858		2,957		2,358			(353	)		9,820
	Net income (loss)		461		1,695		(5,119	)		(4,879	)		(7,842	)
	Basic income (loss) per share		0.14		0.51		(1.53	)		(1.46	)		(2.30	)
	Diluted income (loss) per share		0.14		0.51		(1.53	)		(1.46	)		(2.30	)

		Quarter
													Total Year
		First		Second			Third			Fourth
Fiscal 2000:
	Net sales	$	42,063	$	33,988		$	35,340		$	44,246		$	155,637
	Gross Profit		4,920		3,865			3,236			(483	)		11,538
	Net income		125		(284	)		(947	)		(6,092	)		(7,198	)
	Basic earnings per share		0.04		(0.09	)		(0.29	)		(1.84	)		(2.18	)
	Diluted earnings per share		0.04		(0.09	)		(0.29	)		(1.84	)		(2.18	)

F–17

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Western Power & Equipment Corp.

    In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Western Power & Equipment Corp. and its subsidiary at July 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

    The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses from operations and has a working capital deficit for the years ended July 31, 2001 and 2000. Further, as discussed in Note 5 to the financial statements, the Company is in technical default of its loan agreement and has not obtained a waiver or revisions to the agreement from the financial institution. Accordingly, the financial institution at any time may call the outstanding borrowings, which aggregated $53.4 million at July 31, 2001. Such factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP

Portland, Oregon
October 6, 2001

F–18

REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and
Stockholders of Western Power & Equipment Corp.

    Our audits of the consolidated financial statements referred to in our report dated October 6, 2001 appearing on page F-16 of this Annual Report on Form 10-K also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP

Portland, Oregon
October 6, 2001

F–19

SCHEDULE II

WESTERN POWER & EQUIPMENT CORP.

VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended July 31, 2001 and 2000

(Dollars in Thousands)

Description		Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions			Balance at End of Period
Accounts Receivable Reserve:
	Fiscal year ended July 31, 2001	$	563	$	544	$	—	$	(159	)	$	948
	Fiscal year ended July 31, 2000		724		690		—		(851	)		563
Inventory Reserve:
	Fiscal year ended July 31, 2001		5,052		4,106		—		(1,387	)		7,771
	Fiscal year ended July 31, 2000		2,513		2,547		—		(8	)		5,052

F–20

SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) 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.
By:	/s/ C. DEAN MCLAIN C. Dean McLain, President and Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ C. DEAN MCLAIN C. Dean McLain	President, Chief Executive Officer, and Chairman	November 13, 2001
/s/ MARK J. WRIGHT Mark J. Wright	Vice President of Finance, Chief Financial and Principal Accounting Officer, Treasurer and Secretary	November 13, 2001
/s/ ROBERT M. RUBIN Robert M. Rubin	Director	November 13, 2001
/s/ DR. SEYMOUR KESSLER Dr. Seymour Kessler	Director	November 13, 2001
/s/ ALLEN PERRES Allen Perres	Director	November 13, 2001
/s/ IRWIN PEARL Irwin Pearl	Director	November 13, 2001

F–21

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PART I

ITEM 1. BUSINESS

ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT(1)

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. PRINCIPAL STOCKHOLDERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
WESTERN POWER & EQUIPMENT CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Western Power & Equipment Corp.
Notes to Consolidated Financial Statements

SCHEDULE II

WESTERN POWER & EQUIPMENT CORP. VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Years Ended July 31, 2001 and 2000 (Dollars in Thousands)
SIGNATURES

EX-10.11

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Exhibit 10.11

EMPLOYMENT AGREEMENT

    This EMPLOYMENT AGREEMENT (this "Agreement") is made as of August 1, 2000, by and between WESTERN POWER & EQUIPMENT CORP., an Oregon corporation ("Employer"), and C. Dean McLain, an individual residing at             ("Executive").

RECITALS

    Executive is party to an Employment Agreement dated April 1, 1999 (the "Old Employment Agreement") with Employer. Employer has agreed in principle to merge with another company. In connection with such merger and the execution and delivery of this Agreement, the Old Employment Agreement is being terminated as of the date hereof.

    Employer desires to employ Executive, and Executive wishes to accept such employment, upon the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

    The parties, intending to be legally bound, agree as follows:

    1.  DEFINITIONS.  For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1.

"Agreement" shall have the meaning set forth in the preamble.

"Benefits" shall have the meaning set forth in Section 3.1(b).

"Board of Directors" shall mean the board of directors, or similar governing body, of Employer.

"Bonus Compensation" shall have the meaning set forth in Section 3.2.

"Disability" shall have the meaning set forth in Section 5.2.

"Effective Date" shall mean the date first above written.

"Employer" shall have the meaning set forth in the first paragraph of this Agreement.

"Executive" shall have the meaning set forth in the first paragraph of this Agreement.

"For Cause" shall have the meaning set forth in Section 5.3.

"Good Reason" shall have the meaning set forth in Section 5.3.

"Person" shall mean any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization or governmental body.

"Salary" shall have the meaning set forth in Section 3.1(a).

"Term" shall have the meaning set forth in Section 2.2.

    2.  EMPLOYMENT TERMS AND DUTIES.

    2.1  Employment.  Employer hereby employs Executive, and Executive hereby accepts employment by Employer, upon the terms and subject to the conditions set forth in this Agreement.

    2.2  Term.  The term of Executive's employment under this Agreement shall begin on the Effective Date and shall, unless earlier terminated in accordance with the provisions of Section 5, end on the seventh anniversary of the Effective Date (the "Term").

    2.3  Duties.  Executive shall initially serve as President, Chief Executive Officer and Chairman of Employer, shall be in charge of the day-to-day operations of Employer and shall report to, and perform such duties as are requested by, the Board of Directors.

    3.  COMPENSATION AND BENEFITS.

    3.1  Basic Compensation.

(a)  Salary.  Executive shall be paid an annual base salary of $390,000 through July 31, 2001, and on each August 1 thereafter during the term, Executive's annual base salary shall be increased by the average percentage increase in salary for all employees of Employer for the then current fiscal year over the previous fiscal year (the "Salary"). The Salary shall be payable in equal periodic installments according to Employer's customary payroll practices, but no less frequently than monthly.

    (b)  Benefits.  Executive shall, during the Term, be permitted to participate in such pension, insurance, hospitalization, major medical, disability and fringe and other employee benefit plans of Employer generally maintained for executive employees of Employer, to the extent Executive is eligible under the terms of such plans, provided that Employer shall also maintain for the benefit of Executive, a life insurance policy in the amount of $500,000 which death benefits shall be payable to Executive's designated beneficiary upon Executive's death. (collectively, the "Benefits"), and provided further that Executive's right to bonus compensation shall be governed by Section 3.2 below.

    (c)  Expenses.  Employer shall pay on behalf of Executive (or reimburse Executive for) reasonable expenses incurred by Executive at the request of, or on behalf of, Employer in the performance of Executive's duties pursuant to this Agreement, and in accordance with Employer's employment policies. Executive shall file expense reports with respect to such expenses in accordance with Employer's policies. Executive shall submit written requests for such reimbursement together with supporting documents in reasonable detail.

    (d)  Automobiles.  Employer shall provide Executive with no more than two vehicles of Executive's reasonable choice for use during the Term. Employer shall pay all costs associated with Executive's use of such vehicles, including all purchase, lease or other acquisition-related costs, gasoline, insurance, maintenance and repairs of such vehicles.

    3.2  Bonus Compensation.  As additional compensation for the services to be rendered by Executive pursuant to this Agreement, Employer shall pay Executive within three months of the end of each fiscal year during the Term an annual performance bonus (the "Bonus Compensation") equal to 3.0% of EBITDA. For purposes of this Agreement (other than Section 5.4), EBITDA shall mean, with respect to any fiscal year during the Term, consolidated earnings of Employer and its subsidiaries before interest, taxes, depreciation, amortization and after deduction of all operating expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied, and as reflected in Employer's most recently available audited consolidated financial statements for such fiscal year.

    4.  VACATIONS AND HOLIDAYS.

    4.1  Vacation.  Executive shall be entitled to six weeks of vacation per fiscal year during the Term. All vacation time shall be paid in accordance with the then current policy of Employer.

    4.2  Holidays.  Executive shall be entitled to the paid holidays for employees set forth in Employer's policies.

    5.  TERMINATION.

    5.1  Events of Termination.  The Term, Executive's Salary, Benefits and Bonus Compensation and any and all other rights of Executive under this Agreement or otherwise as an employee of Employer shall terminate (except as otherwise provided in this Section 5):

    (a) upon the death of Executive;

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    (b) upon the Disability of Executive (as defined in Section 5.2), immediately upon notice from either party to the other;

    (c) immediately upon notice from Employer to Executive that Employer is terminating Executive's employment For Cause (as defined in Section 5.3), or at such later time as such notice may specify; or

    (d) immediately upon notice from Executive to Employer that Executive is terminating Executive's employment due to a Change in Control or Ownership of Employer (as defined in Section 5.3), or at such later time as such notice may specify.

    5.2  Definition of "Disability".  For purposes of Sections 5.1 and 5.4, Executive shall be deemed to have a "Disability" if, for physical or mental reasons, Executive is unable to perform Executive's duties under this Agreement for 90 consecutive days, or 120 days during any twelve month period, as determined in accordance with this Section 5.2. The Disability of Executive shall be determined by the Board of Directors in consultation with a medical doctor selected by it. Executive shall submit to a reasonable number of examinations by the medical doctor making the determination of Disability under this Section 5.2, and Executive hereby authorizes the disclosure and release to Employer of such determination and all supporting medical records. If Executive is not legally competent, Executive's legal guardian or duly authorized attorney-in-fact shall act in Executive's stead under this Section 5.2 for the purposes of submitting Executive to the examinations, and providing the authorization of disclosure, required under this Section 5.2.

    5.3  Definition of "For Cause"; "Good Reason"; "Change in Control of Ownership".

    (a) For purposes of this Agreement, the phrase "For Cause" means: (i) Executive's willful and repeated failure to substantially perform his duties hereunder or to adhere to any written Employer policy if Executive has been given 20 days' prior written notice of such failure and does not cure such failure by the end of such 20-day period; (ii) the appropriation (or attempted appropriation) of a material business opportunity of Employer, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of Employer; (iii) Executive's breach of any of the covenants contained in Section 6 or 7; (iv) the misappropriation (or attempted misappropriation) of any of Employer's funds or property; (v) Executive's willful engagement in gross misconduct injurious to Employer, or (vi) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony.

    (b) For purposes of this Agreement, the phrase "Good Reason" shall mean (i) the failure of Employer to perform or observe any of the material terms or provisions of this Agreement, and the continued failure of Employer to cure such default within twenty (20) days after written notice of such default given to Employer by Executive, (ii) the assignment of duties inconsistent with Executive's position, duties, responsibilities and status with Employer without Executive's consent, and the failure of Employer to rescind such assignment within twenty (20) days after written notice of Executive's objection to such, which notice shall with respect to the assignment of duties describe specifically the nature of such inconsistency, (iii) moving Employer's headquarters more than 50 miles from Vancouver, Washington, or (iv) the decrease by the Board of Directors of Executive's monthly base salary by more than ten percent (10%).

    (c) For purposes of this Agreement, the phrase "Change of Control or Ownership" shall mean a change in control or ownership of more than 25% of the outstanding stock of Employer or Employer's parent corporation.

    5.4  Termination Pay.  Effective upon the termination of Executive's employment under this Agreement, Employer shall be obligated to pay Executive (or, in the event of his death, his designated beneficiary) only such compensation as is provided in this Section 5.4, and in lieu of all other amounts

3

and in settlement and complete release of all claims Executive may have against Employer relating to his employment by Employer.

    (a)  Termination by Executive with Good Reason or by Employer other than For Cause.  If Employer terminates this Agreement (other than For Cause or by reason of Executive's Disability or death) or Executive terminates this Agreement with Good Reason, Employer shall pay Executive the Salary through the end of the Term, at the times such payments would otherwise have been made, and shall pay Executive on the date of such termination the Bonus Compensation for the full fiscal year during which such termination occurs calculated by annualizing EBITDA for the period of the fiscal year elapsed prior to the date of termination, determined in good faith by the Board of Directors based upon the Employer's books of account. In addition, Employer shall continue to provide medical coverage to Executive until the earlier of (x) the end of the Term and (y) the date Executive begins employment with a subsequent employer; provided that this obligation may be fulfilled by Employer's payment of the premiums for "continuation coverage" under the Consolidated Omnibus Budget Reconciliation Act of 1985. For purposes of this Section 5.4, EBITDA shall mean consolidated earnings of Employer and its subsidiaries before interest, taxes, depreciation, amortization and after deduction of all operating expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied.

    (b)  Termination by Employer For Cause or by Executive without Good Reason.  If Employer terminates this Agreement For Cause, or if Executive terminates his employment without Good Reason, Executive shall be entitled to receive his Salary only through the date such termination is effective, and shall not be entitled to any Bonus Compensation for the fiscal year during which such termination occurs or any subsequent fiscal year.

    (c)  Termination by Executive Due to Change in Control or Ownership.  If Executive terminates this Agreement due to a Change in Control or Ownership, Employer shall pay Executive on the date of such termination the Salary through the end of the Term, and shall pay Executive on the date of such termination Bonus Compensation for the full Term calculated by annualizing EBITDA for the period of the fiscal year elapsed prior to the date of termination, determined in good faith by the Board of Directors based upon the Employer's books of account and multiplying such annualized EBITDA amount by the number years left in the Term as of the date of termination. In addition, Employer shall continue to provide medical coverage to Executive until the earlier of (x) the end of the Term and (y) the date Executive begins employment with a subsequent employer; provided that this obligation may be fulfilled by Employer's payment of the premiums for "continuation coverage" under the Consolidated Omnibus Budget Reconciliation Act of 1985. For purposes of this Section 5.4, EBITDA shall mean consolidated earnings of Employer and its subsidiaries before interest, taxes, depreciation, amortization and after deduction of all operating expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied.

    (d)  Termination upon Death or Disability.  If this Agreement is terminated by either party as a result of Executive's Death or Executive's Disability, as determined under Section 5.2, Executive (or, in the event of his death, his designated beneficiary) shall be entitled to receive (i) his Salary for one year after such termination, at the times such payments would otherwise have been made, and (ii) on the date of such termination, the Bonus Compensation for the full fiscal year during which such termination occurs, calculated by annualizing EBITDA for the period of the fiscal year elapsed prior to the date of termination, determined in good faith by the Board of Directors based upon the Employer's books of account.

    (e)  Benefits.  Executive's accrual of, or participation in plans providing for, the Benefits shall cease at the effective date of the termination of this Agreement, and Executive shall be

4

entitled to accrued Benefits pursuant to such plans only as otherwise provided in this Section 5.4 or in such plans. Executive shall not receive, as part of his termination pay pursuant to this Section 5, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the date the notice of termination is given under this Agreement.

    6.  NON-DISCLOSURE COVENANT.

    6.1 During the Term and thereafter, Executive shall keep secret and retain in strictest confidence all confidential matters of Employer including Employer's know-how, trade secrets, client and supplier lists, details of client, supplier, subcontractor, and consultant contracts, pricing policies, operational methods, marketing plans and strategies, product development plans, acquisition or bidding techniques and plans, technical processes, inventions and research project, business acquisition plans, personnel acquisition plans, and other similar information unless (i) such information is generally available to the public without restriction; (ii) Executive is requested by the Board of Directors or a committee thereof to disclose such confidential information; (iii) such information is being provided to a customer, vendor, or consultant of Employer in the ordinary course of business; or (iv) Executive is compelled to disclose such confidential information by order, inquiry, or request by a court of law, governmental agency, or other source of authority and prompt notice of such order is given to Employer which may challenge such order.

    6.2 All lists, records, and other non-personal documents or papers (including all copies thereof), including such items stored in computer memories, on microfiche, or any other media made or compiled by or on behalf of Executive or made available to Executive relating to Employer are and shall be the property of Employer and shall be delivered to Employer upon termination of this agreement. All inventions, including any procedures, formulas, methods, processes, uses, apparatuses, patters, designs, drawings, devises, or configurations of any kind, and all improvements to them which are developed, discovered, made, or produced, trade secrets or information used by any or all of Employer shall be the exclusive property of Employer and shall be delivered to Employer upon termination of this Agreement.

    7.  NON-COMPETITION AND NON-INTERFERENCE.

    7.1 Until the latest to occur of (i) termination of Executive's employment with Employer; (ii) one year following the date of termination of this Agreement and; (iii) such period as Executive shall continue to receive the base salary under this agreement—Executive shall not, directly or indirectly, whether individually or as an employee, stockholder, partner, joint venturer, agent or other representative of any other person, firm, corporation, or other business entity engage in any business which is competitive with the business of Employer. As used herein, the term "business which is competitive with the businesses of Employer" shall only mean any person, firm, corporation, or other business entity doing business in the territories serviced by Employer under its dealership agreements with its suppliers if 10% or more of the net revenues of such business are derived from the sale, rental, parts, servicing, or other distribution of small, medium, or heavy construction equipment of the nature then being sold by Employer including, without limitation, any such equipment manufactured by Case Corporation or any other corporation manufacturing equipment in competition with the equipment then manufactured by Case Corporation.

    7.2 If Executive's employment is terminated for any reason other than with Good Reason, Executive shall not, directly or indirectly, solicit any employee or consultant of Employer, other than Executive's personal secretary, or encourage any such employee or consultant to leave employment with Employer.

    8.  GENERAL PROVISIONS.

8.1Binding Effect; Delegation of Duties Prohibited.  This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs and

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legal representatives. The duties and covenants of Executive under this Agreement, being personal, may not be delegated. This Agreement shall become effective on the Effective Date provided it has been executed by both parties.

8.2Notices.  All notices, consents, waivers and other communications under this Agreement shall be made in writing and shall be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt) or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

If to Employer:

Western Power & Equipment Corp.
4601 N.E. 77th Avenue
Vancouver, WA 98662
Attention: Board of Directors
Telecopy: (360) 892-7927

with a copy to:

Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, NY 10022
Attention: Rory A. Greiss
Telecopy: (212) 836-8689

If to Executive:

To the address set forth in the Preamble.

8.3Entire Agreement; Amendments.  This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof, including without limitation, the Old Employment Agreement, which is hereby terminated. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto.

8.4Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Washington without regard to conflicts of laws principles.

8.5Jurisdiction.  Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Washington, County of Clark or, if it has or can acquire jurisdiction, in the United States District Court for the Western District of Washington, and each of the parties hereto hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding, and waives any objection to venue laid therein.

8.6Section Headings, Construction.  The headings of Sections in this Agreement are provided for convenience only and shall not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement shall be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms.

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8.7Severability.  If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree shall remain in full force and effect to the extent not held invalid or unenforceable.

8.8Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original copy of this Agreement and all of which, when taken together, shall be deemed to constitute one and the same agreement.

    IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written.

WESTERN POWER & EQUIPMENT CORP.
By:
	Name: Title:	C. Dean McLain

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Exhibit 10.11

EMPLOYMENT AGREEMENT
RECITALS
AGREEMENT

EX-10.12

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Exhibit 10.12

CONSULTING AGREEMENT

    This CONSULTING AGREEMENT (this "Agreement") is made as of August 1, 2000, by and between WESTERN POWER & EQUIPMENT CORP., an Oregon corporation (the "Company"), and Robert M. Rubin, an individual residing at ("Consultant").

RECITALS

    Consultant is party to a Consulting Agreement dated August 1, 1998 (the "Old Consulting Agreement") with Western Power & Equipment Corp. The Old consulting Agreement expires by its terms on July 31, 2000. The Company desires to retain Consultant as a consultant, and Consultant wishes to serve as a consultant to the Company, upon the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

    The parties, intending to be legally bound, agree as follows:

    1.  DEFINITIONS.

For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1.

"Agreement" shall have the meaning set forth in the preamble.

"Board of Directors" shall mean the board of directors, or similar governing body, of the Company.

"Bonus Compensation" shall have the meaning set forth in Section 3.2.

"Company" shall have the meaning set forth in the first paragraph of this Agreement.

"Consultant" shall have the meaning set forth in the first paragraph of this Agreement.

"Consulting Payment" shall have the meaning set forth in Section 3.1(a).

"Disability" shall have the meaning set forth in Section 4.2.

"Effective Date" shall mean the date first above written.

"For Cause" shall have the meaning set forth in Section 4.3.

"Good Reason" shall have the meaning set forth in Section 4.3.

"Person" shall mean any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization or governmental body.

"Term" shall have the meaning set forth in Section 2.2.

    2.  CONSULTING TERMS AND DUTIES.

2.1Consulting Services.  The Company hereby retains Consultant, and Consultant hereby agrees to provide consulting services to the Company, upon the terms and subject to the conditions set forth in this Agreement.

2.2Term.  The term of this Agreement shall begin on the Effective Date and shall, unless earlier terminated in accordance with the provisions of Section 4, end on the seventh anniversary of the Effective Date (the "Term").

2.3Duties.  Consultant shall assist the Company in acquiring other companies, raising capital and securing financing, and shall report to, and perform such duties as are requested by, the Chief Executive Officer of the Company.

    3.  COMPENSATION.

3.1Basic Compensation.

        (a)  Consulting Payment.  Consultant shall be paid an annual consulting payment of $200,000 through July 31, 2001, and on each August 1 thereafter during the term, Consultant's consulting payment shall be increased by three percent (3%) (the "Consulting Payment"). The Consulting Payment shall be payable in equal periodic installments, but no less frequently than monthly.

        (b)  Expenses.  The Company shall pay on behalf of Consultant (or reimburse Consultant for) reasonable expenses incurred by Consultant at the request of, or on behalf of, the Company in the performance of Consultant's duties pursuant to this Agreement, and in accordance with the Company's policies. Consultant shall file expense reports with respect to such expenses in accordance with the Company's policies. Consultant shall submit written requests for such reimbursement together with supporting documents in reasonable detail.

3.2Bonus Compensation.  As additional compensation for the services to be rendered by Consultant pursuant to this Agreement, the Company shall pay Consultant within three months of the end of each fiscal year during the Term an annual performance bonus (the "Bonus Compensation") equal to 1.5% of EBITDA. For purposes of this Agreement (other than Section 5.4), EBITDA shall mean, with respect to any fiscal year during the Term, consolidated earnings of the Company and its subsidiaries before interest, taxes, depreciation, amortization and after deduction of all operating expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied, and as reflected in the Company's most recently available audited consolidated financial statements for such fiscal year.

    4.  TERMINATION.

4.1Events of Termination.  The Term, Consultant's Consulting Payment and Bonus Compensation and any and all other rights of Consultant under this Agreement or otherwise as a consultant to the Company shall terminate (except as otherwise provided in this Section 4):

    (a) upon the death of Consultant;

    (b) upon the Disability of Consultant (as defined in Section 4.2), immediately upon notice from either party to the other;

    (c) immediately upon notice from the Company to Consultant that the Company is terminating Consultant's consulting services For Cause (as defined in Section 4.3), or at such later time as such notice may specify; or

    (d) immediately upon notice from Consultant to Company that Consultant is terminating Consultant's contract with company due to a Change in Control or Ownership of Company (as defined in Section 5.3), or at such later time as such notice may specify.

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4.2Definition of "Disability".  For purposes of Sections 4.1 and 4.4, Consultant shall be deemed to have a "Disability" if, for physical or mental reasons, Consultant is unable to perform Consultant's duties under this Agreement for 90 consecutive days, or 120 days during any twelve month period, as determined in accordance with this Section 4.2. The Disability of Consultant shall be determined by the Board of Directors in consultation with a medical doctor selected by it. Consultant shall submit to a reasonable number of examinations by the medical doctor making the determination of Disability under this Section 4.2, and Consultant hereby authorizes the disclosure and release to the Company of such determination and all supporting medical records. If Consultant is not legally competent, Consultant's legal guardian or duly authorized attorney-in-fact shall act in Consultant's stead under this Section 4.2 for the purposes of submitting Consultant to the examinations, and providing the authorization of disclosure, required under this Section 4.2.

4.3Definitions of "For Cause"; "Good Reason"; "Change of Control of Ownership".

    (a) For purposes of this Agreement, the phrase "For Cause" means: (a) Consultant's willful and repeated failure to substantially perform his duties hereunder or to adhere to any written Company policy if Consultant has been given 20 days' prior written notice of such failure and does not cure such failure by the end of such 20-day period; (b) the appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (c) Consultant's breach of any of the covenants contained in Section 5 or 6; (d) the misappropriation (or attempted misappropriation) of any of the Company's funds or property; (e) Consultant's willful engagement in gross misconduct injurious to the Company, or (f) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony.

    (b) For purposes of this Agreement, the phrase "Good Reason" shall mean (i) the failure of the Company to perform or observe any of the material terms or provisions of this Agreement, and the continued failure of the Company to cure such default within twenty (20) days after written notice of such default given to the Company by Consultant, (ii) the assignment of duties inconsistent with Consultant's position, duties, responsibilities and status with the Company without Consultant's consent, and the failure of the Company to rescind such assignment within twenty (20) days after written notice of Consultant's objection to such, which notice shall with respect to the assignment of duties describe specifically the nature of such inconsistency or (iii) the decrease by the Board of Directors of Consultant's Consulting Payment by more than ten percent (10%).

    (c) For purposes of this Agreement, the phrase "Change of Control or Ownership" shall mean a change in control or ownership of more than 25% of the outstanding stock of Company or Company's parent corporation.

4.4Termination Pay.  Effective upon the termination of Consultant under this Agreement, the Company shall be obligated to pay Consultant (or, in the event of his death, his designated beneficiary) only such compensation as is provided in this Section 4.4, and in lieu of all other amounts and in settlement and complete release of all claims Consultant may have against the Company relating to his provision of consulting services to the Company.

    (a) Termination by the Company other than For Cause or by Consultant with Good Reason. If the Company terminates this Agreement (other than For Cause or by reason of Consultant's Disability or death) or Consultant terminates this Agreement with Good Reason, the Company shall pay Consultant the Consulting Payment through the end of the Term, at the times such payments would otherwise have been made, and shall pay Consultant on the date of such termination the Bonus Compensation for the full fiscal year during which such termination occurs calculated by annualizing EBITDA for the period of the fiscal year elapsed

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prior to the date of termination, determined in good faith by the Board of Directors based upon the Company's books of account. In addition, the Company shall continue to provide medical coverage to Consultant until the earlier of (x) the end of the Term and (y) the date Consultant begins employment with or consulting for a subsequent company which provides medical coverage; provided that this obligation may be fulfilled by the Company's payment of the premiums for "continuation coverage" under the Consolidated Omnibus Budget Reconciliation Act of 1985. For purposes of this Section 4.4, EBITDA shall mean consolidated earnings of the Company and its subsidiaries before interest, taxes, depreciation, amortization and after deduction of all operating expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied.

    (b) Termination by the Company For Cause or by Consultant without Good Reason. If the Company terminates this Agreement For Cause, or if Consultant terminates his consulting services without Good Reason, Consultant shall be entitled to receive his Consulting Payment only through the date such termination is effective, and shall not be entitled to any Bonus Compensation for the fiscal year during which such termination occurs or any subsequent fiscal year.

    (c) Termination by Consultant Due to Change in Control or Ownership. If Consultant terminates this Agreement due to a Change in Control or Ownership, Company shall pay Consultant on the date of such termination the Compensation through the end of the Term, and shall pay Consultant on the date of such termination Bonus Compensation for the full Term calculated by annualizing EBITDA for the period of the fiscal year elapsed prior to the date of termination, determined in good faith by the Board of Directors based upon the Company's books of account and multiplying such annualized EBITDA amount by the number years left in the Term as of the date of termination. In addition, Company shall continue to provide medical coverage to Consultant until the earlier of (x) the end of the Term and (y) the date Consultant begins employment with a subsequent employer; provided that this obligation may be fulfilled by Employer's payment of the premiums for "continuation coverage" under the Consolidated Omnibus Budget Reconciliation Act of 1985. For purposes of this Section 5.4, EBITDA shall mean consolidated earnings of Employer and its subsidiaries before interest, taxes, depreciation, amortization and after deduction of all operating expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied.

    (d) Termination upon Death or Disability. If this Agreement is terminated by either party as a result of Consultant's Death or Consultant's Disability, as determined under Section 4.2, Consultant (or, in the event of his death, his designated beneficiary) shall be entitled to receive (i) his Consulting Payment for one year after such termination, at the times such payments would otherwise have been made, and (ii) on the date of such termination, the Bonus Compensation for the full fiscal year during which such termination occurs, calculated by annualizing EBITDA for the period of the fiscal year elapsed prior to the date of termination, determined in good faith by the Board of Directors based upon the Company's books of account.

    5.  NON-DISCLOSURE COVENANT.

    5.1 During the Term and thereafter, Consultant shall keep secret and retain in strictest confidence all confidential matters of the Company including the Company's know-how, trade secrets, client and supplier lists, details of client, supplier, subcontractor, and consultant contracts, pricing policies, operational methods, marketing plans and strategies, product development plans, acquisition or bidding techniques and plans, technical processes, inventions and research project, business acquisition plans, personnel acquisition plans, and other similar information unless (i) such information is generally available to the public without restriction; (ii) Consultant is

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requested by the Board of Directors or a committee thereof to disclose such confidential information; (iii) such information is being provided to a customer, vendor, or consultant of the Company in the ordinary course of business; or (iv) Consultant is compelled to disclose such confidential information by order, inquiry, or request by a court of law, governmental agency, or other source of authority and prompt notice of such order is given to the Company which may challenge such order.

    5.2 All lists, records, and other non-personal documents or papers (including all copies thereof), including such items stored in computer memories, on microfiche, or any other media made or compiled by or on behalf of Consultant or made available to Consultant relating to the Company are and shall be the property of the Company and shall be delivered to the Company upon termination of this agreement. All inventions, including any procedures, formulas, methods, processes, uses, apparatuses, patters, designs, drawings, devises, or configurations of any kind, and all improvements to them which are developed, discovered, made, or produced, trade secrets or information used by any or all of the Company shall be the exclusive property of the Company and shall be delivered to the Company upon termination of this Agreement.

    6.  NON-COMPETITION AND NON-INTERFERENCE.

    6.1 Until the latest to occur of (i) termination of Consultant; (ii) one year following the date of termination of this Agreement and; (iii) such period as Consultant shall continue to receive the Consulting Payment under this agreement—Consultant shall not, directly or indirectly, whether individually or as an employee, stockholder, partner, joint venturer, agent or other representative of any other person, firm, corporation, or other business entity engage in any business which is competitive with the business of the Company. As used herein, the term "business which is competitive with the businesses of the Company" shall only mean any person, firm, corporation, or other business entity doing business in the territories serviced by the Company under its dealership agreements with its suppliers if 10% or more of the net revenues of such business are derived from the sale, rental, parts, servicing, or other distribution of small, medium, or heavy construction equipment of the nature then being sold by the Company including, without limitation, any such equipment manufactured by Case Corporation or any other corporation manufacturing equipment in competition with the equipment then manufactured by Case Corporation.

    6.2 If Consultant is terminated for any reason other than with Good Reason, Consultant shall not, directly or indirectly, solicit any employee or consultant of the Company, or encourage any such employee or consultant to leave employment with the Company.

    7.  GENERAL PROVISIONS.

7.1Binding Effect; Delegation of Duties Prohibited.  This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs and legal representatives. The duties and covenants of Consultant under this Agreement, being personal, may not be delegated. This Agreement shall become effective on the Effective Date provided it has been executed by both parties.

7.2Notices.  All notices, consents, waivers and other communications under this Agreement shall be made in writing and shall be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt) or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth

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below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):

    If to the Company:

Western Power & Equipment Corp.
4601 N.E. 77th Avenue
Vancouver, WA 98662
Attention: Board of Directors
Telecopy: (360) 892-7927

with a copy to:

Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, NY 10022
Attention: Rory A. Greiss
Telecopy: (212) 836-8689

If to Consultant:

To the address set forth in the Preamble.

7.3Entire Agreement; Amendments.  This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof, including without limitation, the Old Consulting Agreement, which is hereby terminated. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto.

7.4Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Washington without regard to conflicts of laws principles.

7.5Jurisdiction.  Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Washington, County of Clark or, if it has or can acquire jurisdiction, in the United States District Court for the Western district of Washington, and each of the parties hereto hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding, and waives any objection to venue laid therein.

7.6Section Headings, Construction.  The headings of Sections in this Agreement are provided for convenience only and shall not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement shall be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms.

7.7Severability.  If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree shall remain in full force and effect to the extent not held invalid or unenforceable.

7.8Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original copy of this Agreement and all of which, when taken together, shall be deemed to constitute one and the same agreement.

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    IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written.

WESTERN POWER & EQUIPMENT CORP.
By:
	Name: Title:	Robert M. Rubin

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Exhibit 10.12

CONSULTING AGREEMENT
RECITALS
AGREEMENT

EX-10.13

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Exhibit 10.13

COMMERCIAL LEASE

Dated:	as of October 1, 2000
Between:	McLAIN-RUBIN REALTY COMPANY III, L.L.C., a Delaware limited liability company	("Landlord")
	38207 Northeast Gerber Road Yacolt, WA 98675
And:	WESTERN POWER & EQUIPMENT CORP., an Oregon corporation	("Western Power" or "Tenant")
	4601 N.E. 77th Avenue Vancouver, Washington 98662

RECITALS

    A. Landlord and Tenant have previously entered into that certain Commercial Lease dated December 11, 1997 (the "Prior Lease"), under which Tenant leased from Landlord the real property described on Exhibit A hereto (which by this reference is made a part hereof), together with all improvements now and hereafter situated on said land (said land, together with such improvements, being hereinafter referred to as the "Premises"). The Premises are located at 3199 E. Onstott Road, Yuba City, California.

    B. Landlord and Tenant have mutually agreed to terminate the Prior Lease as of the date of this Lease.

    C. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises all under the terms and conditions of this Lease.

AGREEMENT

    Section 1.  Occupancy

1.1  Termination.  The Prior Lease is terminated in its entirety as of the date hereof and neither party shall have any continuing obligations under the Prior Lease as of the date hereof.

1.1  Term.  The term of this Lease (hereinafter referred to as the "Term") shall commence on the date (the "Commencement Date") on which Landlord acquires fee title to the Premises, and continue through, and expire on, September 30, 2007 (the "Expiration Date"), unless sooner terminated as hereinafter provided.

1.2  Possession.  Tenant's right to possession of the Premises, and its obligations under this Lease, shall commence on the Commencement Date. If the Commencement Date does not fall on the first day of the month, Rent (as hereinafter defined) for the first month under this Lease shall be prorated accordingly, and shall be due on the Commencement Date.

    Section 2.  Rent

2.1  Base Rent.  Tenant covenants and agrees to pay to Landlord an annual base rent of $66,000.00 (the "Base Rent"), in equal monthly installments of $5,500.00, in advance, without demand, deduction or set off, at such place as may be designated by Landlord, on the first day of each month throughout the Term of this Lease.

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2.2  Additional Rent.  All taxes, insurance costs, utility charges, maintenance costs, repair charges and other sums that Tenant is required to pay pursuant to this Lease to Landlord or third parties, shall be "additional rent." For the purposes of this Lease, Base Rent and additional rent are sometimes collectively referred to as "Rent."

    Section 3.  Use of the Premises

3.1  Permitted Use.  The Premises shall be used for retail sales, service, storage and repair of agricultural, utility or industrial equipment, machinery and parts, and incidental office use, and for any other lawful purpose, subject to the applicable provisions of this Lease.

3.2  Restrictions on Use.  In connection with the use of the Premises, Tenant shall:

(a) Comply with all applicable laws and regulations of any public authority having jurisdiction over the Premises and the use thereof, and correct, at Tenant's own expense, any failure of compliance created through Tenant's fault or by reason of Tenant's use;

(b) Refrain from any activity that would make it impossible to insure the Premises against casualty, would permanently increase the insurance rate, or would prevent Landlord from taking advantage of any ruling allowing Landlord to obtain reduced premium rates for long-term fire insurance policies, unless Tenant pays the additional cost of the insurance;

(c) Refrain from any use that would be reasonably offensive to other tenants or owners or users of neighboring premises or that would tend to create a nuisance or damage the reputation of the Premises;

(d) Refrain from loading the electrical system or floors beyond the point considered safe by a competent engineer or architect reasonably selected by Landlord; and

(e) Subject to Section 3.3, refrain from making any marks on or attaching any additional sign, insignia, antenna, aerial, satellite dish or other device to the exterior or interior walls, windows, or roof of the Premises without the written consent of Landlord, which shall not be unreasonably withheld or delayed.

3.3  Signage.  Tenant will be responsible for providing its own signage. Tenant will obtain Landlord's prior approval of the design, size, color, materials, and other details of the sign face, which approval shall not be unreasonably withheld or delayed. Landlord acknowledges that Tenant already has signage on the Premises and hereby consents to such signage.

3.4  Hazardous Substances.

(a)Definitions. For purposes of this Section, the term "Hazardous Substance" means any substance, material or waste, including oil or petroleum products or their derivatives, solvents, PCB's, explosive substances, asbestos, radioactive materials or waste, and any other toxic, ignitable, reactive, corrosive, contaminating or pollution materials which are now or in the future subject to any governmental regulation; the term Hazardous Substance Laws" means all federal, state and local laws, ordinances, regulations and standards relating to the use, analysis, production, storage, sale, release, discharge, disposal or transportation of any Hazardous Substance.

(b)Tenant Compliance With Hazardous Substance Laws. Neither Tenant or its officers, employees, agents, invitees, sublessees or assigns shall cause or permit any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under the Premises, or cause any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under any property adjacent to the Premises. Tenant may use or otherwise handle on the Premises only those Hazardous Substances (hereinafter referred to as "Ordinary Hazardous Substances") typically used or sold in the prudent and safe operation of the business specified in Section 3.1. Tenant may store such Hazardous

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Substances on the Premises only in quantities necessary to satisfy Tenant's reasonably anticipated needs. Tenant shall comply with all Hazardous Substance Laws and exercise care in the use, handling, storage and transportation of Hazardous Substances and shall take all possible measures consistent with the practicable operation of its business to minimize the quantity and toxicity of Hazardous Substances used, handled, transported or stored on the Premises. Upon the expiration or termination of this Lease, Tenant shall remove from the Premises all Hazardous Substances stored there by Tenant or its sublessees or assigns.

(c)Indemnification by Tenant. Except as provided in Section 3.4(d), Tenant shall indemnify, defend, and hold Landlord and Landlord's members, managers, employees, agents, and assigns harmless from and against any and all claims, liabilities, losses, material diminution of value, demands, fines, damages (including incidental and special damages), obligations, costs, and expenses (including attorney fees, investigatory expenses, remediation costs, and related expenses), arising out of or in any way related to contamination of the Premises by an Hazardous Substance or the failure of compliance of the Premises with any applicable Hazardous Substance Laws both with respect to matters existing at the time of this lease and with respect to such matters which occur during the Lease. The parties acknowledge a Phase I Environmental Site Assessment prepared for Tenant by K & S Environmental, Inc., dated December 11, 1998 (Environmental Report). In addition to the foregoing indemnification, Tenant agrees to perform all recommendations contained in the Environmental Report and as disclosed in the Phase I report referred to in Section 3.4(g) below prior to or immediately upon the expiration or earlier termination of this Lease, and shall indemnify, defend and hold harmless Landlord and Landlord's members, managers, employees, agents, and assigns therefrom.

(d)Limitation of Indemnification. Tenant's indemnification obligations under this section shall not extend to contamination of the Premises by any Hazardous Substance which has migrated to the Premises from other property through no fault of Tenant or any agent, employee, contractor, licensee, or invitee of Tenant, and shall not extend to spills by any person or entity other than Tenant, or any agent, employee, contractor, licensee, or invitee of Tenant, and with respect to which Tenant could not take reasonable steps to prevent.

(e)Notification. Each party shall give written notice to the other within three (3) business days after the date on which the party learns or first has reason to believe that:

    (1) there has or will come to be located on or about the Premises any Hazardous Substance (other than Ordinary Hazardous Substances);

    (2) a release, discharge or emission of a Hazardous Substance has occurred on or about the Premises;

    (3) an enforcement, cleanup, removal or other governmental or regulatory action has been threatened or commenced against the party or with respect to the Premises pursuant to any Hazardous Substance Laws;

    (4) a claim has been made or threatened by any person or entity against the party or the Premises on account of an alleged loss or bodily injury claimed to result from the alleged presence or release on the Premises of a Hazardous Substance; or

    (5) a report, notice, or complaint has been made to or filed with a governmental agency concerning the presence, use or disposal of any Hazardous Substance on the Premises. Any such notice shall be accompanied by copies of any such claim, report, complaint, notice, warning or other communication that is in the possession of or is reasonably available to the party.

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(f)Cleanup Activity.

    (1) If during the Term any remedial action is necessary to clean up any environmental contamination of the Premises (the "Cleanup Activity") to which Tenant's indemnification of Landlord in Section 3.4(c) applies, Tenant shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If after written notice from Landlord, Tenant fails to proceed with reasonable diligence to complete the Cleanup Activity, Landlord shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Tenant. The rights and obligations of the parties set forth in this Section shall be in addition to those rights and obligations set forth elsewhere in this Lease.

    (2) Except as set forth in Section 3.4(f)(1), if any other Cleanup Activity is necessary, Landlord shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If Landlord fails to proceed with reasonable diligence to complete the Cleanup Activity, Tenant shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Landlord as a set off against payment of rent under this Lease. The rights and obligations of the parties set forth in this Section shall be in addition to those rights and obligations set forth elsewhere in this Lease.

(g)Phase I Report. Within thirty (30) days prior to the expiration or sooner termination of the Term, Tenant, at its expense, shall cause a so-called "Phase I" environmental inspection to be performed and a report in respect thereof to be prepared and delivered to both Landlord and Tenant to determine whether any Cleanup Activity is required, Landlord and Tenant agreeing that the responsibility for the Cleanup Activity shall be determined by the preceding provisions of this Section.

(h)Survival. The parties' obligations under this Section 3.4 shall survive the expiration or earlier termination of this Lease.

    Section 4.  Repairs and Maintenance

4.1  Tenant's Obligations.  Tenant shall repair and maintain the entire Premises to the extent necessary to preserve the Premises in good working order and condition, including but not limited to providing regularly scheduled maintenance and replacement (if necessary) of the heating and air conditioning system, and making structural repairs. Tenant's repair obligation shall include, but not be limited to, the repair of any damage to exterior building siding and internal walls of the Premises caused by moving furniture, fixtures and equipment in and out of the Premises.

4.2  Repairs to Comply with Laws.  All repairs, alterations, and other improvements on or to the Premises that are required by any governmental authority having jurisdiction over the Premises or the use thereof shall be performed by Tenant at its sole cost and expense.

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4.3  Reimbursement for Repairs Assumed.  If Tenant fails or refuses to make the repairs that are required by this Section in a timely manner, Landlord may (but shall not be obligated to) make the repairs and charge the actual costs of repairs to Tenant. Such expenditures by Landlord shall be charged to Tenant as additional rent and shall be reimbursed by Tenant within ten (10) days after Landlord's demand therefor. Except in an emergency creating an immediate risk of personal injury or property damage, Landlord may not perform repairs which are the obligation of Tenant and charge Tenant for the resulting expense, unless at least ten (10) days before work is commenced Tenant is given notice in writing outlining with reasonable particularity the repairs required, and Tenant fails within that time to initiate such repairs in good faith.

4.4  Inspection of Premises.  Landlord shall have the right to inspect the Premises at any reasonable time or times, and upon reasonable prior (written or oral) notice, to determine the necessity of repair.

Section 5. Alterations

5.1  Alterations Prohibited.  Tenant shall make no improvements or alterations to the Premises without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld or delayed. All alterations shall be made according to architectural designs and plans, construction drawings and specifications approved by Landlord, which approval shall not be unreasonably withheld or delayed, and in a good and workmanlike manner, and in compliance with applicable laws and building codes. As used herein, "alterations" includes the exterior installation of transmitters and receivers (e.g., satellite dishes) and related wiring, cables, and conduit. All approved improvements and alterations shall be made at Tenant's sole expense and Tenant shall keep the Premises free from any lien arising out of work performed pursuant to this Section. In the event any such lien is filed against the Premises by any person claiming by, through or under Tenant, Tenant shall, within fifteen (15) days after Landlord's demand therefor, at Tenant's expense, either cause such lien to be removed from the record or furnish a bond in form and amount and issued by a surety reasonably satisfactory to Landlord, indemnifying the Landlord against all liability relating to such lien. Provided that such bond has been furnished to Landlord, Tenant, at its sole cost and expense may contest, by appropriate proceedings conducted in good faith and with due diligence, any lien, encumbrance or charge against the Premises arising from work done or materials provided to and for Tenant, providing that such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

5.2  Ownership and Removal of Alterations.  All approved improvements and alterations made to the Premises by Tenant during the Term, other than Tenant's trade fixtures, shall be the property of Landlord when installed unless the applicable Landlord's consent provides otherwise. Upon expiration of the Term or earlier termination under this Lease, Tenant's trade fixtures shall be removed by Tenant and the Premises restored to its condition prior to installation if the applicable consent so requires.

    Section 6.  Insurance; Indemnification; Subrogation

6.1  Liability Insurance.  Tenant shall procure, and thereafter maintain during the Term, the following insurance at Tenant's cost: commercial general liability policy (occurrence version) in a responsible company with coverage for bodily injury and property damage liability with a general aggregate limit of not less than $1,000,000 for injury to one person, $3,000,000 for injury to two or more persons in one occurrence. Such insurance shall cover all risks arising directly or indirectly out of Tenant's activities on, or any condition of, the Premises. Such insurance shall protect Tenant against the claims of Landlord on account of the obligations assumed by Tenant under Section 6.3, and shall name Landlord as an additional insured. Certificates evidencing such insurance and

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bearing endorsements requiring 10 days' written notice to Landlord prior to any change or cancellation shall be furnished to Landlord prior to Tenant's occupancy of the Premises.

6.2  Property Insurance.  Tenant shall, at Tenant's expense, keep the Premises insured against loss or damage resulting from perils covered by what is commonly referred to as "all risk" coverage insurance, including earthquake and flood, for the full insurable replacement cost (guaranteed replacement). Such casualty insurance shall include an endorsement for increased costs of construction and then-current building code requirements. All premiums on said policy(s) shall be paid by Tenant. The policy(s) or a certificate thereof signed by the insurer shall be delivered to Landlord within five (5) days after the issuance and/or renewal of the policy(s) to the Tenant. Each policy shall name Landlord as an additional insured, and shall provide that such policy(s) may not be amended or canceled without thirty (30) days' prior written notice to Landlord. If Tenant fails to obtain the above required insurance, Landlord may, but shall not be required to procure such insurance and charge the cost to Tenant as additional rent, payable on demand. Tenant shall carry similar insurance insuring the property of Tenant on the property against such risks.

6.3  Indemnification.  Except as set forth in Section 3.4(d), Tenant shall indemnify and hold Landlord harmless from and against any and all third-party claims, loss or liability for accident, injury or damage to persons or property arising from or in connection with, Tenant's possession, operation, use, or occupation of the Premises. In case any action or proceeding is brought against Landlord and such claim is a claim from which Tenant is obligated to indemnify Landlord pursuant to this Section, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). Landlord and Landlord's agents shall have no liability to Tenant for any injury, loss, or damage caused by third parties or by any condition of the Premises, except to the extent caused by Landlord's negligence or breach of any of Landlord's covenants contained in this Lease.

6.4  Waiver of Subrogation.  Neither party, nor its officers, directors, employees, agents or invitees, nor, in the case of Tenant, subtenants, shall be liable to the other party or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, when such loss is caused by any of the perils which are or could be insured against under a standard policy of full replacement cost insurance for fire, theft and all risk coverage, or losses under workers' compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees (Landlord and Tenant agreeing that the preceding clause shall not apply, however, to any damages caused by intentionally wrongful actions or omissions of such party); provided, however, that if, by reason of the foregoing waiver, either party shall be unable to obtain any such insurance, such waiver shall be deemed not to have been made by such party and, provided further, that if either party shall be unable to obtain any such insurance without the payment of an additional premium therefor, then, unless the party claiming the benefit of such waiver shall agree to pay such party for the cost of such additional premium within thirty (30) days after notice setting forth such requirement and the amount of the additional premium, such waiver shall be of no force and effect between such party and such claiming party. Each party shall use reasonable efforts to obtain such insurance from a company that does not charge an additional premium or, if that is not possible, one that charges the lowest additional premium. Each party shall give the other party notice at any time when it is unable to obtain insurance with such a waiver of subrogation without the payment of an additional premium and the foregoing waiver shall be effective until thirty (30) days after notice is given. Notwithstanding anything contained herein, Landlord is not obligated under this Lease to insure the Premises.

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    Section 7.  Taxes; Utilities

7.1  Property Taxes.  Tenant shall pay as due all taxes on its personal property located on the Premises. Tenant shall pay as due all real property taxes levied against the Premises. As used herein, real property taxes includes any fee or charge relating to the ownership, use, or rental of the Premises, other than taxes on the net income of Landlord or Tenant.

7.2  Special Assessments.  If an assessment for a public improvement is made against the Premises, Tenant shall pay such assessment. Landlord shall take all appropriate action to cause such assessment to be paid in the maximum number of installments permitted by law, statute or ordinance (if such option for installment payments is available to Landlord), in which case all installments coming due during the Lease term shall be treated the same as general property taxes pursuant to section 7.1.

7.3  Contest of Taxes.  Tenant shall be permitted to contest the amount of any tax or assessment as long as such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

7.4  Proration of Taxes.  Tenant's share of real property taxes for the years in which this Lease commences or terminates shall be prorated based on the portion of the tax year that this Lease is in effect.

7.5  New Charges or Fees.  If a new charge or fee relating to the ownership or use of the Premises or the receipt of rental therefrom or in lieu of property taxes is assessed or imposed, then, to the extent permitted by law, Tenant shall pay such charge or fee. Tenant, however, shall have no obligation to pay any income, profits, or franchise tax levied on the net income derived by Landlord from this Lease.

7.6  Payment of Utilities Charges.  Tenant shall pay when due all charges for services and utilities incurred in connection with the use, occupancy, operation, and maintenance of the Premises, including, but not limited to, charges for fuel, water, gas, electricity, sewage disposal, power, refrigeration, air conditioning, telephone, and janitorial services.

    Section 8.  Damage and Destruction

8.1  Damaged Premises.  Tenant shall give immediate notice to Landlord in the event of any damage or destruction affecting the Premises. Subject to the provisions of this Section, Tenant shall immediately proceed to restore the Premises using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Restoration shall be performed according to architectural designs, plans, and construction drawings and specifications approved in advance by Landlord, which approval shall not be unreasonably withheld or delayed, and shall restore the Premises to substantially the same condition prior to the damage, including then-current building code requirements. Tenant shall be responsible for any portion of a loss that is required to be covered in accordance with Section 6.2 but with respect to which the Tenant failed to obtain coverage.

8.2  Damage or Destruction Late in Term.  If within two years before the end of the lease term the Premises are destroyed or damaged such that the cost of repair exceeds 50% of the value of the structure before the destruction or damage, Tenant may elect to terminate this Lease as of the date of the damage or destruction by giving notice to Landlord in writing not more than 45 days following the date of destruction or damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and attributable to what would have otherwise been the unexpired Term. Tenant shall surrender possession of the Premises within a reasonable time after such written notice is given, and assign any insurance proceeds paid on account of such damage to Landlord. If Tenant does not elect to terminate, Tenant shall proceed to restore the Premises to

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substantially the same form as prior to the damage or destruction using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Tenant shall be responsible for any portion of a loss that is required to be covered in accordance with Section 6.2 but with respect to which the Tenant failed to obtain coverage. Work shall be commenced as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and other matters beyond Tenant's reasonable control.

8.3  Rent Abatement.  To the extent that the Premises are rendered untenantable as a result of a fire or other casualty, the Rent shall not be abated or reduced in any way.

8.4  Personal Property.  All personal property in said Premises shall be at the risk of Tenant. Except to the extent caused by the negligent or intentional acts of Landlord, Landlord or Landlord's agents shall not be liable for any damage either to person or property, sustained by Tenant or others, caused by any defects now in said Premises or hereafter occurring therein, or any part or appurtenance thereof, caused by being out of repair, or caused by the bursting or leaking of water, gas, sewer or steam pipes.

    Section 9.  Eminent Domain

9.1  Partial Taking.  If a portion of the Premises is condemned and Section 9.2 does not apply, this Lease shall continue on the following terms:

(a) The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises. Tenant's right to participate in the condemnation proceeds shall be limited to the value of its leasehold interest and the depreciated value of any improvements and alterations constructed on the Premises at the Tenant's sole expense subsequent to the Commencement Date.

(b) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Premises as are necessary to restore the remaining Premises to a condition as comparable as reasonably practicable to that existing at the time of the condemnation.

(c) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Premises in anticipation of taking, the Base Rent shall be reduced in proportion to the reduction in value of the Premises as an economic unit on account of the partial taking. If the parties are unable to agree on the amount of the reduction of Base Rent, the amount shall be determined by arbitration in the manner provided in Section 17.

9.2  Total Taking.  If a condemning authority takes all of the Premises or a portion which Landlord and Tenant agree is sufficient to render the remaining Premises reasonably unsuitable for the use that Tenant was then making of the Premises, this Lease shall terminate as of the date the title vests in the condemning authorities. The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises.

9.3  Sale in Lieu of Condemnation.  Sale of all or part of the Premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this Section 9 as a taking by condemnation.

    Section 10.  Liens

10.1  Except with respect to activities for which Landlord is responsible, Tenant shall pay as due all claims for work done on and for services rendered or material furnished to the Premises, and shall keep the Premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the Interest Rate (as hereinafter defined) from the date expended by

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Landlord and shall be payable on demand. Such action by Landlord shall not constitute a waiver of any right or remedy which Landlord may have on account of Tenant's default. For the purposes of this Lease "Interest Rate" shall mean three (3%) percent per annum over the then prime rate of interest established by Citibank, N.A. (or any successor thereto), adjusted daily, but in no event in excess of the maximum lawful rate of interest permitted by applicable law.

10.2  Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord's interest in the Premises will not be foreclosed for nonpayment. If a lien is filed as a result of nonpayment, Tenant shall, within ten (10) days after knowledge of the filing, secure the discharge of the lien or deposit with Landlord cash or sufficient corporate surety bond or other surety satisfactory to Landlord in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could reasonably accrue as a result of a foreclosure or sale under the lien.

    Section 11.  Quiet Enjoyment; Mortgage Priority

11.1  Landlord's Warranty.  Landlord warrants that it is the owner of the Premises and has the right to lease them free of all encumbrances, except for the encumbrances (the "Permitted Encumbrances") set forth on Exhibit B hereto (which by this reference is made a part hereof) and except as expressly set forth in Section 11.2 below. Landlord will defend Tenant's right to quiet enjoyment of the Premises from the lawful claims of all persons during the Term. Tenant hereby acknowledges and agrees that this Lease, and the leasehold estate created hereby, are subject and subordinate to all of the Permitted Encumbrances.

11.2  Mortgage Priority.  Tenant acknowledges and agrees that this Lease and Tenant's interest in this Lease shall be subordinate to the lien of any mortgage or deed of trust (Mortgage) which encumbers the Premises as of the Commencement Date or at any date thereafter while this Lease remains in effect. Tenants agrees to execute a subordination and attornment agreement, in form and substance reasonably acceptable to Landlord's lender, or any future lender, on the condition that such lender agree in writing with Tenant that as long as Tenant performs its obligations under this Lease, no foreclosure, deed in lieu of foreclosure, or sale pursuant to the terms of such Mortgage, or other steps or procedures taken under such Mortgage shall affect Tenant's rights under this Lease. If the Premises are sold as a result of foreclosure of any Mortgage, or otherwise transferred by Landlord to any successor, Tenant shall attorn to the purchaser or other transferee.

11.3  Estoppel Certificate.  Either party will, within 20 days after notice from the other, execute and deliver to the other party a certificate stating whether or not this Lease has been modified and is in full force and effect and specifying any modifications or alleged breaches by the other party. The certificate shall also state the amount of monthly Base Rent, the dates to which Base Rent and any other Rent payments have been paid in advance, and the amount of any security deposit or prepaid Rent. Failure to deliver the certificate within the specified time shall be conclusive upon the party from whom the certificate was requested that this Lease is in full force and effect and has not been modified except as represented in the notice requesting the certificate.

    Section 12.  Assignment and Subletting.

12.1  Landlord hereby agrees that Tenant may assign this Lease or sublease all or a portion of the Premises in writing to any other party, with the prior written consent of Landlord, provided that:

    (1) Landlord shall have the right to pre-approve each and every proposed subtenant and assignee, which approval shall not be unreasonably withheld or delayed.

    (2) Any attempt by Tenant to assign, transfer, or sublet without Landlord's prior written consent shall be void and shall constitute a material default by Tenant.

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    (3) Regardless of Landlord's consent to an assignment or sublease, Tenant shall not be released from any of its obligations and liabilities under this Lease, except as may be set forth in Landlord's written consent.

    (4) Landlord's acceptance of Rent from any other person or entity pending a determination of whether to consent to an assignment or sublease shall not constitute a waiver of Landlord's right to approve or disapprove such assignment or sublease.

    (5) A default by an assignee, sublessee, or transferee shall constitute a default by Tenant and in the event of such default, Landlord may proceed directly against Tenant.

    (6) Tenant shall grant to Landlord a security interest in all of its right, title and interest in all rents and income from an assignment or sublease to secure the payment of Rent owed under this Lease.

    (7) Tenant shall pay all reasonable costs and fees incurred by Landlord in connection with evaluating whether to give its consent and/or in giving its consent to a proposed assignment or sublease, including attorneys', architects', engineers' and consultants' fees, not to exceed $2500.

12.2 Notwithstanding any provision to the contrary, Tenant may assign this Lease or sublet all or part of the Premises, without Landlord's approval, to a parent corporation, any subsidiary, any affiliate, any partnership, limited liability company or other business entity where Tenant or any affiliate of Tenant is the managing or general partner, manager or the equivalent, as the case may be, or in connection with a merger, acquisition, reorganization or consolidation of Tenant, or in connection with the sale or transfer of all or substantially all of Tenant's (or its parent's or affiliates') stock or assets. The term "affiliate" as used herein shall mean any entity in which Tenant or its parent corporation holds fifty percent (50%) or more of the ownership interests. Notwithstanding a transfer pursuant to this Section 12.2, Tenant shall not be released from liability under this Lease upon the assignment or subletting of all or part of the Premises to such parent corporation, subsidiary, affiliate, partnership, limited liability company or other business entity.

    Section 13.  Default

    The following shall be events of default:

13.1  Default in Rent.  Failure of Tenant to pay any installment of Rent within ten (10) days after written notice by Landlord, provided Landlord shall not be required to give written notice of nonpayment more than twice during any calendar year. After Landlord has twice given notice of nonpayment during a calendar year, Tenant shall be in default upon failure to pay any installment of Rent within ten (10) days after the due date for such installment, without the requirement of notice and opportunity to cure.

13.2  Default in Other Covenants.  Failure of Tenant to comply with any other term or condition or fulfill any other obligation of this Lease within 20 days after written notice by Landlord specifying the nature of the default with reasonable particularity. If the default is of such a nature that it cannot be completely remedied within the 20-day period, an event of default shall not have occurred if Tenant begins correction of the default within the 20-day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable.

13.3  Insolvency.  Insolvency of Tenant; an assignment by Tenant for the benefit of creditors; the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a receiver of the properties of Tenant; or the filing of any involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within 90 days after filing shall constitute a default. If Tenant consists of two or more individuals or business

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entities, the events of default specified in this Section 13.3 shall apply to each individual unless within ten (10) days after an event of default occurs, the remaining individuals produce evidence satisfactory to Landlord that they have unconditionally acquired the interest of the one causing the default. If this Lease has been assigned, the events of default so specified shall apply only with respect to Tenant and to the one then exercising the rights of Tenant under this Lease.

13.4  Abandonment.  Failure of Tenant for thirty (30) days or more to occupy the Premises for one or more of the purposes permitted under this Lease, unless such failure is excused under other provisions of this Lease.

    Section 14.  Remedies on Default

14.1  Termination.  In the event of a default, the Lease may be terminated at the option of Landlord by written notice to Tenant. Whether or not the Lease is terminated by the election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant for the default, and Landlord may reenter, take possession of the Premises, and remove any persons or property by legal action and without having accepted a surrender.

14.2  Reletting.  Following reentry or abandonment, Landlord may relet the Premises and in that connection may make any suitable alterations or refurbish the Premises, or both, or change the character or use of the Premises, but Landlord shall not be required to relet for any use or purpose other than that specified in this Lease or which Landlord may reasonably consider injurious to the Premises, or to any tenant that Landlord may reasonably consider objectionable. Landlord may relet all or part of the Premises, alone or in conjunction with other properties, for a term longer or shorter than the term of this Lease, upon any reasonable terms and conditions, including the granting of reasonable rent-free occupancy or other rent concession.

14.3  Remedies.  In the event of material breach or default under the terms of this Lease, either party shall have all rights and remedies available to them under law or equity.

14.4  Landlord's Right to Cure Defaults.  If Tenant fails to perform any obligation under this Lease, Landlord shall have the option to do so after 30 days' written notice to Tenant. All of Landlords expenditures to correct the default shall be reimbursed by Tenant on demand with interest at the Interest Rate from the date of expenditure by Landlord. Such action by Landlord shall not waive any other remedies available to Landlord because of the default.

14.5  Remedies Cumulative.  The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law.

    Section 15.  Surrender at Expiration

15.1  Condition of Premises.  Subject to the provisions of Section 8 herein, upon expiration of the Term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and surrender the Premises in first class condition and broom clean, reasonable wear and tear excepted. Improvements and alterations constructed by Tenant with permission from Landlord shall not be removed, or the Premises restored to the original condition, unless the terms of permission for the improvement or alteration so require.

15.2  Fixtures

(a) All fixtures placed upon the Premises during the Term, other than Tenant's trade fixtures, shall, at Landlord's option, become the property of Landlord. Tenant's trade fixtures include, without limitation, air compressors in shop area (but excluding air lines that are attached to the walls and overhead bridge cranes and hoists attached to the shop ceiling or otherwise attached to the walls or floors of the shop area), and those additional trade fixtures placed on the Premises during the Term. If Landlord's applicable consent referenced in Section 5 so requires, Tenant shall remove any or all fixtures placed upon the Premises by the Tenant that would otherwise remain the property of Landlord, and shall repair any physical

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damage resulting from the removal. If Tenant fails to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest at the Interest Rate from the date of expenditure.

(b) Prior to expiration or other termination of the Term, Tenant shall remove all furnishings, furniture, and trade fixtures that remain its property and repair any damage to the Premises caused by such removal. If Tenant fails to do so, this shall be an abandonment of the property, and Landlord may retain the property and all rights of Tenant with respect to it shall cease or, by notice in writing given to Tenant within 20 days after removal was required, Landlord may elect to hold Tenant to its obligation of removal. If Landlord elects to require Tenant to remove, Landlord may effect a removal and place the property in public storage for Tenant's account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest at the Interest Rate on all such expenses from the date of expenditure by Landlord.

15.3  Holdover

(a) If Tenant does not vacate the Premises at the time required, Landlord shall have the option to treat Tenant as a tenant from month-to-month, subject to all of the provisions of this Lease except the provisions for term and renewal and at a rental rate equal to $35,000.00 per month, or to eject Tenant from the Premises and recover damages caused by wrongful holdover. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures that Tenant is required to remove under this Lease shall constitute a failure to vacate to which this Section shall apply if the property not removed will substantially interfere with occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(b) If a month-to-month tenancy results from a holdover by Tenant under this Section 15.3, the tenancy shall be terminable at the end of any monthly rental period on written notice from Landlord given not less than ten (10) days prior to the termination date which shall be specified in the notice. Tenant waives any notice that would otherwise be provided by law with respect to a month-to-month tenancy.

    Section 16.  Miscellaneous

16.1  Nonwaiver.  Waiver by either party of strict performance of any provision of this Lease shall not be a waiver of or prejudice to the party's right to require strict performance of the same provision in the future or of any other provision.

16.2  Attorney Fees.  If suit or action is instituted in connection with any controversy arising out of this Lease, the prevailing party shall be entitled to recover in addition to costs such sum as the court may adjudge reasonable as attorney fees at trial, on petition for review, and on appeal.

16.3  Notices.  Except as otherwise expressly permitted in this Lease, all notices, demands, approvals, consents, requests and other communications which under the terms of this Lease, or under any statute, must or may be given or made by the parties hereto, must be in writing, and must be made either (i) by depositing such notice in registered or certified mail of the United States of America, return receipt requested, or (ii) by delivering such notice by a commercial courier, which courier provides for delivery with receipt guaranteed, addressed to each party at the addresses set forth on the first page of this Lease. All notices, demands, approvals, consents, requests and other communications shall be deemed to have been delivered (i) if mailed as provided for in this Paragraph, on the date which is three (3) business days after mailing or (ii) if sent by commercial courier, on the date which is one (1) business day after dispatching. Either party may designate by notice in writing given in the manner herein specified a new or other address to which such notice, demand, approval, consent, request and other communication shall

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thereafter be so given or made. Notwithstanding the foregoing all Rent statements, bills and invoices may be given by regular mail.

16.4  Exculpation.  Tenant shall look solely to the estate and property of Landlord in the Premises (including Landlord's rights to the rents, profits, insurance proceeds and condemnation awards related thereto), for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of Landlord (or of any direct or indirect, disclosed or undisclosed, partner, member, shareholder, officer, director, employee or principal in or of Landlord) shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises.

16.5  Succession.  Subject to the above-stated limitations on transfer of Tenant's interest, this Lease shall be binding on and inure to the benefit of the parties and their respective successors and assigns, heirs, executors and administrators.

16.6  Recordation.  Landlord shall execute and acknowledge a memorandum of this lease in a form suitable for recording, and Tenant may record the memorandum.

16.7  Entry for Inspection.  Landlord shall have the right to enter upon the Premises upon reasonable advance notice to determine Tenant's compliance with this Lease, to make repairs to the Premises which it expressly has the right to make under this Lease, or to show the Premises to any prospective tenant or purchaser, and in addition shall have the right, at any time during the last two (2) months of the term of this Lease, to place and maintain upon the Premises notices for leasing or selling of the Premises.

16.8  Interest on Rent and other Charges.  Any rent or other payment required of Tenant by this Lease shall, if not paid within ten (10) days after it is due, bear interest at the Interest Rate from the due date until paid. In addition, if Tenant fails to make any rent or other payment required by this Lease to be paid to Landlord within ten (10) days after it is due, Landlord shall impose a late charge of five cents ($.05) per dollar of the overdue payment to reimburse Landlord for the costs of collecting the overdue payment. Tenant shall pay the late charge upon demand by Landlord. Landlord may levy and collect a late charge in addition to all other remedies available for Tenant's default, and collection of a late charge shall not waive the breach caused by the late payment.

16.9  Proration of Rent.  In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all pre paid Rent shall be refunded to Tenant or paid on its account.

16.10  Time of Essence.  Time is of the essence of the performance of each of Tenant's and Landlord's obligations under this Lease.

16.11  Governing Law.  This agreement shall be governed and interpreted according to Nevada law without reference to the conflict of laws provisions thereof.

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IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the day and year first herein written.

Landlord:	McLAIN-RUBIN REALTY COMPANY III, L.L.C., a Delaware limited liability company
	By:
	Its:
Tenant:	WESTERN POWER & EQUIPMENT CORP., an Oregon corporation
	By:
	Its:
STATE OF	)
	) ss.
County of	)

    I certify that I know or have satisfactory evidence that                        is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the Manager of McLain-Rubin Realty Company III, L.L.C., a Delaware limited liability company, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of          , 2000.

(Signature of Notary)

(Legibly print or Stamp Name of Notary)

Notary Public in and for the state of             ,

My Appointment Expires

    I certify that I know or have satisfactory evidence that      is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the      of Western Power & Equipment Corp., an Oregon corporation, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of          , 2000.

	(Signature of Notary)
	(Legibly print or Stamp Name of Notary)
	Notary Public in and for the state of             ,
	My Appointment Expires
STATE OF	)
	) ss.
County of	)

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EXHIBIT A
Description of Real Property

     Commonly known as 1455 Glendale Avenue, Sparks, Nevada.

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EXHIBIT B
Permitted Encumbrances

1.

Easements of record.

16

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Exhibit 10.13

COMMERCIAL LEASE
RECITALS
AGREEMENT
EXHIBIT A Description of Real Property
EXHIBIT B Permitted Encumbrances

EX-10.14

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Exhibit 10.14

COMMERCIAL LEASE

Dated:	as of October 1, 2000
Between:	McLAIN-RUBIN REALTY COMPANY III, L.L.C., a Delaware limited liability company	("Landlord")
	38207 Northeast Gerber Road Yacolt, WA 98675
And:	WESTERN POWER & EQUIPMENT CORP., an Oregon corporation	("Western Power" or "Tenant")
	4601 N.E. 77th Avenue Vancouver, Washington 98662

RECITALS

    A. Landlord and Tenant have previously entered into that certain Commercial Lease dated December 11, 1997 (the "Prior Lease"), under which Tenant leased from Landlord the real property described on Exhibit A hereto (which by this reference is made a part hereof), together with all improvements now and hereafter situated on said land (said land, together with such improvements, being hereinafter referred to as the "Premises"). The Premises are located at 3199 E. Onstott Road, Yuba City, California.

    B. Landlord and Tenant have mutually agreed to terminate the Prior Lease as of the date of this Lease.

    C. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises all under the terms and conditions of this Lease.

AGREEMENT

    Section 1.  Occupancy

1.1  Termination.  The Prior Lease is terminated in its entirety as of the date hereof and neither party shall have any continuing obligations under the Prior Lease as of the date hereof.

1.1  Term.  The term of this Lease (hereinafter referred to as the "Term") shall commence on the date (the "Commencement Date") on which Landlord acquires fee title to the Premises, and continue through, and expire on, September 30, 2007 (the "Expiration Date"), unless sooner terminated as hereinafter provided.

1.2  Possession.  Tenant's right to possession of the Premises, and its obligations under this Lease, shall commence on the Commencement Date. If the Commencement Date does not fall on the first day of the month, Rent (as hereinafter defined) for the first month under this Lease shall be prorated accordingly, and shall be due on the Commencement Date.

    Section 2.  Rent

2.1  Base Rent.  Tenant covenants and agrees to pay to Landlord an annual base rent of $66,000.00 (the "Base Rent"), in equal monthly installments of $5,500.00, in advance, without demand, deduction or set off, at such place as may be designated by Landlord, on the first day of each month throughout the Term of this Lease.

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2.2  Additional Rent.  All taxes, insurance costs, utility charges, maintenance costs, repair charges and other sums that Tenant is required to pay pursuant to this Lease to Landlord or third parties, shall be "additional rent." For the purposes of this Lease, Base Rent and additional rent are sometimes collectively referred to as "Rent."

    Section 3.  Use of the Premises

3.1  Permitted Use.  The Premises shall be used for retail sales, service, storage and repair of agricultural, utility or industrial equipment, machinery and parts, and incidental office use, and for any other lawful purpose, subject to the applicable provisions of this Lease.

3.2  Restrictions on Use.  In connection with the use of the Premises, Tenant shall:

(a) Comply with all applicable laws and regulations of any public authority having jurisdiction over the Premises and the use thereof, and correct, at Tenant's own expense, any failure of compliance created through Tenant's fault or by reason of Tenant's use;

(b) Refrain from any activity that would make it impossible to insure the Premises against casualty, would permanently increase the insurance rate, or would prevent Landlord from taking advantage of any ruling allowing Landlord to obtain reduced premium rates for long-term fire insurance policies, unless Tenant pays the additional cost of the insurance;

(c) Refrain from any use that would be reasonably offensive to other tenants or owners or users of neighboring premises or that would tend to create a nuisance or damage the reputation of the Premises;

(d) Refrain from loading the electrical system or floors beyond the point considered safe by a competent engineer or architect reasonably selected by Landlord; and

(e) Subject to Section 3.3, refrain from making any marks on or attaching any additional sign, insignia, antenna, aerial, satellite dish or other device to the exterior or interior walls, windows, or roof of the Premises without the written consent of Landlord, which shall not be unreasonably withheld or delayed.

3.3  Signage.  Tenant will be responsible for providing its own signage. Tenant will obtain Landlord's prior approval of the design, size, color, materials, and other details of the sign face, which approval shall not be unreasonably withheld or delayed. Landlord acknowledges that Tenant already has signage on the Premises and hereby consents to such signage.

3.4  Hazardous Substances.

(a)Definitions. For purposes of this Section, the term "Hazardous Substance" means any substance, material or waste, including oil or petroleum products or their derivatives, solvents, PCB's, explosive substances, asbestos, radioactive materials or waste, and any other toxic, ignitable, reactive, corrosive, contaminating or pollution materials which are now or in the future subject to any governmental regulation; the term Hazardous Substance Laws" means all federal, state and local laws, ordinances, regulations and standards relating to the use, analysis, production, storage, sale, release, discharge, disposal or transportation of any Hazardous Substance.

(b)Tenant Compliance With Hazardous Substance Laws. Neither Tenant or its officers, employees, agents, invitees, sublessees or assigns shall cause or permit any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under the Premises, or cause any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under any property adjacent to the Premises. Tenant may use or otherwise handle on the Premises only those Hazardous Substances (hereinafter referred to as "Ordinary Hazardous Substances") typically used or sold in the prudent and safe operation of the business specified in Section 3.1. Tenant may store such Hazardous

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Substances on the Premises only in quantities necessary to satisfy Tenant's reasonably anticipated needs. Tenant shall comply with all Hazardous Substance Laws and exercise care in the use, handling, storage and transportation of Hazardous Substances and shall take all possible measures consistent with the practicable operation of its business to minimize the quantity and toxicity of Hazardous Substances used, handled, transported or stored on the Premises. Upon the expiration or termination of this Lease, Tenant shall remove from the Premises all Hazardous Substances stored there by Tenant or its sublessees or assigns.

(c)Indemnification by Tenant. Except as provided in Section 3.4(d), Tenant shall indemnify, defend, and hold Landlord and Landlord's members, managers, employees, agents, and assigns harmless from and against any and all claims, liabilities, losses, material diminution of value, demands, fines, damages (including incidental and special damages), obligations, costs, and expenses (including attorney fees, investigatory expenses, remediation costs, and related expenses), arising out of or in any way related to contamination of the Premises by an Hazardous Substance or the failure of compliance of the Premises with any applicable Hazardous Substance Laws both with respect to matters existing at the time of this lease and with respect to such matters which occur during the Lease. The parties acknowledge a Phase I Environmental Site Assessment prepared for Tenant by K & S Environmental, Inc., dated December 11, 1998 (Environmental Report). In addition to the foregoing indemnification, Tenant agrees to perform all recommendations contained in the Environmental Report and as disclosed in the Phase I report referred to in Section 3.4(g) below prior to or immediately upon the expiration or earlier termination of this Lease, and shall indemnify, defend and hold harmless Landlord and Landlord's members, managers, employees, agents, and assigns therefrom.

(d)Limitation of Indemnification. Tenant's indemnification obligations under this section shall not extend to contamination of the Premises by any Hazardous Substance which has migrated to the Premises from other property through no fault of Tenant or any agent, employee, contractor, licensee, or invitee of Tenant, and shall not extend to spills by any person or entity other than Tenant, or any agent, employee, contractor, licensee, or invitee of Tenant, and with respect to which Tenant could not take reasonable steps to prevent.

(e)Notification. Each party shall give written notice to the other within three (3) business days after the date on which the party learns or first has reason to believe that:

    (1) there has or will come to be located on or about the Premises any Hazardous Substance (other than Ordinary Hazardous Substances);

    (2) a release, discharge or emission of a Hazardous Substance has occurred on or about the Premises;

    (3) an enforcement, cleanup, removal or other governmental or regulatory action has been threatened or commenced against the party or with respect to the Premises pursuant to any Hazardous Substance Laws;

    (4) a claim has been made or threatened by any person or entity against the party or the Premises on account of an alleged loss or bodily injury claimed to result from the alleged presence or release on the Premises of a Hazardous Substance; or

    (5) a report, notice, or complaint has been made to or filed with a governmental agency concerning the presence, use or disposal of any Hazardous Substance on the Premises. Any such notice shall be accompanied by copies of any such claim, report, complaint, notice, warning or other communication that is in the possession of or is reasonably available to the party.

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(f)Cleanup Activity.

    (1) If during the Term any remedial action is necessary to clean up any environmental contamination of the Premises (the "Cleanup Activity") to which Tenant's indemnification of Landlord in Section 3.4(c) applies, Tenant shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If after written notice from Landlord, Tenant fails to proceed with reasonable diligence to complete the Cleanup Activity, Landlord shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Tenant. The rights and obligations of the parties set forth in this Section shall be in addition to those rights and obligations set forth elsewhere in this Lease.

    (2) Except as set forth in Section 3.4(f)(1), if any other Cleanup Activity is necessary, Landlord shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If Landlord fails to proceed with reasonable diligence to complete the Cleanup Activity, Tenant shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Landlord as a set off against payment of rent under this Lease. The rights and obligations of the parties set forth in this Section shall be in addition to those rights and obligations set forth elsewhere in this Lease.

(g)Phase I Report. Within thirty (30) days prior to the expiration or sooner termination of the Term, Tenant, at its expense, shall cause a so-called "Phase I" environmental inspection to be performed and a report in respect thereof to be prepared and delivered to both Landlord and Tenant to determine whether any Cleanup Activity is required, Landlord and Tenant agreeing that the responsibility for the Cleanup Activity shall be determined by the preceding provisions of this Section.

(h)Survival. The parties' obligations under this Section 3.4 shall survive the expiration or earlier termination of this Lease.

    Section 4.  Repairs and Maintenance

4.1  Tenant's Obligations.  Tenant shall repair and maintain the entire Premises to the extent necessary to preserve the Premises in good working order and condition, including but not limited to providing regularly scheduled maintenance and replacement (if necessary) of the heating and air conditioning system, and making structural repairs. Tenant's repair obligation shall include, but not be limited to, the repair of any damage to exterior building siding and internal walls of the Premises caused by moving furniture, fixtures and equipment in and out of the Premises.

4.2  Repairs to Comply with Laws.  All repairs, alterations, and other improvements on or to the Premises that are required by any governmental authority having jurisdiction over the Premises or the use thereof shall be performed by Tenant at its sole cost and expense.

4.3  Reimbursement for Repairs Assumed.  If Tenant fails or refuses to make the repairs that are required by this Section in a timely manner, Landlord may (but shall not be obligated to) make the repairs and charge the actual costs of repairs to Tenant. Such expenditures by Landlord shall be charged to Tenant as additional rent and shall be reimbursed by Tenant within ten (10) days after Landlord's demand therefor. Except in an emergency creating an immediate risk of personal injury or property damage, Landlord may not perform repairs which are the obligation of Tenant and charge Tenant for the resulting expense, unless at least ten (10) days before work is commenced Tenant is given notice in writing outlining with reasonable particularity the repairs required, and Tenant fails within that time to initiate such repairs in good faith.

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4.4  Inspection of Premises.  Landlord shall have the right to inspect the Premises at any reasonable time or times, and upon reasonable prior (written or oral) notice, to determine the necessity of repair.

    Section 5.  Alterations

5.1  Alterations Prohibited.  Tenant shall make no improvements or alterations to the Premises without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld or delayed. All alterations shall be made according to architectural designs and plans, construction drawings and specifications approved by Landlord, which approval shall not be unreasonably withheld or delayed, and in a good and workmanlike manner, and in compliance with applicable laws and building codes. As used herein, "alterations" includes the exterior installation of transmitters and receivers (e.g., satellite dishes) and related wiring, cables, and conduit. All approved improvements and alterations shall be made at Tenant's sole expense and Tenant shall keep the Premises free from any lien arising out of work performed pursuant to this Section. In the event any such lien is filed against the Premises by any person claiming by, through or under Tenant, Tenant shall, within fifteen (15) days after Landlord's demand therefor, at Tenant's expense, either cause such lien to be removed from the record or furnish a bond in form and amount and issued by a surety reasonably satisfactory to Landlord, indemnifying the Landlord against all liability relating to such lien. Provided that such bond has been furnished to Landlord, Tenant, at its sole cost and expense may contest, by appropriate proceedings conducted in good faith and with due diligence, any lien, encumbrance or charge against the Premises arising from work done or materials provided to and for Tenant, providing that such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

5.2  Ownership and Removal of Alterations.  All approved improvements and alterations made to the Premises by Tenant during the Term, other than Tenant's trade fixtures, shall be the property of Landlord when installed unless the applicable Landlord's consent provides otherwise. Upon expiration of the Term or earlier termination under this Lease, Tenant's trade fixtures shall be removed by Tenant and the Premises restored to its condition prior to installation if the applicable consent so requires.

    Section 6.  Insurance; Indemnification; Subrogation

6.1  Liability Insurance.  Tenant shall procure, and thereafter maintain during the Term, the following insurance at Tenant's cost: commercial general liability policy (occurrence version) in a responsible company with coverage for bodily injury and property damage liability with a general aggregate limit of not less than $1,000,000 for injury to one person, $3,000,000 for injury to two or more persons in one occurrence. Such insurance shall cover all risks arising directly or indirectly out of Tenant's activities on, or any condition of, the Premises. Such insurance shall protect Tenant against the claims of Landlord on account of the obligations assumed by Tenant under Section 6.3, and shall name Landlord as an additional insured. Certificates evidencing such insurance and bearing endorsements requiring 10 days' written notice to Landlord prior to any change or cancellation shall be furnished to Landlord prior to Tenant's occupancy of the Premises.

6.2  Property Insurance.  Tenant shall, at Tenant's expense, keep the Premises insured against loss or damage resulting from perils covered by what is commonly referred to as "all risk" coverage insurance, including earthquake and flood, for the full insurable replacement cost (guaranteed replacement). Such casualty insurance shall include an endorsement for increased costs of construction and then-current building code requirements. All premiums on said policy(s) shall be paid by Tenant. The policy(s) or a certificate thereof signed by the insurer shall be delivered to Landlord within five (5) days after the issuance and/or renewal of the policy(s) to the Tenant. Each policy shall name Landlord as an additional insured, and shall provide that such policy(s) may not be amended or canceled without thirty (30) days' prior written notice to

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Landlord. If Tenant fails to obtain the above required insurance, Landlord may, but shall not be required to procure such insurance and charge the cost to Tenant as additional rent, payable on demand. Tenant shall carry similar insurance insuring the property of Tenant on the property against such risks.

6.3  Indemnification.  Except as set forth in Section 3.4(d), Tenant shall indemnify and hold Landlord harmless from and against any and all third-party claims, loss or liability for accident, injury or damage to persons or property arising from or in connection with, Tenant's possession, operation, use, or occupation of the Premises. In case any action or proceeding is brought against Landlord and such claim is a claim from which Tenant is obligated to indemnify Landlord pursuant to this Section, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). Landlord and Landlord's agents shall have no liability to Tenant for any injury, loss, or damage caused by third parties or by any condition of the Premises, except to the extent caused by Landlord's negligence or breach of any of Landlord's covenants contained in this Lease.

6.4  Waiver of Subrogation.  Neither party, nor its officers, directors, employees, agents or invitees, nor, in the case of Tenant, subtenants, shall be liable to the other party or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, when such loss is caused by any of the perils which are or could be insured against under a standard policy of full replacement cost insurance for fire, theft and all risk coverage, or losses under workers' compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees (Landlord and Tenant agreeing that the preceding clause shall not apply, however, to any damages caused by intentionally wrongful actions or omissions of such party); provided, however, that if, by reason of the foregoing waiver, either party shall be unable to obtain any such insurance, such waiver shall be deemed not to have been made by such party and, provided further, that if either party shall be unable to obtain any such insurance without the payment of an additional premium therefor, then, unless the party claiming the benefit of such waiver shall agree to pay such party for the cost of such additional premium within thirty (30) days after notice setting forth such requirement and the amount of the additional premium, such waiver shall be of no force and effect between such party and such claiming party. Each party shall use reasonable efforts to obtain such insurance from a company that does not charge an additional premium or, if that is not possible, one that charges the lowest additional premium. Each party shall give the other party notice at any time when it is unable to obtain insurance with such a waiver of subrogation without the payment of an additional premium and the foregoing waiver shall be effective until thirty (30) days after notice is given. Notwithstanding anything contained herein, Landlord is not obligated under this Lease to insure the Premises.

    Section 7.  Taxes; Utilities

7.1  Property Taxes.  Tenant shall pay as due all taxes on its personal property located on the Premises. Tenant shall pay as due all real property taxes levied against the Premises. As used herein, real property taxes includes any fee or charge relating to the ownership, use, or rental of the Premises, other than taxes on the net income of Landlord or Tenant.

7.2  Special Assessments.  If an assessment for a public improvement is made against the Premises, Tenant shall pay such assessment. Landlord shall take all appropriate action to cause such assessment to be paid in the maximum number of installments permitted by law, statute or ordinance (if such option for installment payments is available to Landlord), in which case all installments coming due during the Lease term shall be treated the same as general property taxes pursuant to section 7.1.

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7.3  Contest of Taxes.  Tenant shall be permitted to contest the amount of any tax or assessment as long as such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

7.4  Proration of Taxes.  Tenant's share of real property taxes for the years in which this Lease commences or terminates shall be prorated based on the portion of the tax year that this Lease is in effect.

7.5  New Charges or Fees.  If a new charge or fee relating to the ownership or use of the Premises or the receipt of rental therefrom or in lieu of property taxes is assessed or imposed, then, to the extent permitted by law, Tenant shall pay such charge or fee. Tenant, however, shall have no obligation to pay any income, profits, or franchise tax levied on the net income derived by Landlord from this Lease.

7.6  Payment of Utilities Charges.  Tenant shall pay when due all charges for services and utilities incurred in connection with the use, occupancy, operation, and maintenance of the Premises, including, but not limited to, charges for fuel, water, gas, electricity, sewage disposal, power, refrigeration, air conditioning, telephone, and janitorial services.

    Section 8.  Damage and Destruction

8.1  Damaged Premises.  Tenant shall give immediate notice to Landlord in the event of any damage or destruction affecting the Premises. Subject to the provisions of this Section, Tenant shall immediately proceed to restore the Premises using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Restoration shall be performed according to architectural designs, plans, and construction drawings and specifications approved in advance by Landlord, which approval shall not be unreasonably withheld or delayed, and shall restore the Premises to substantially the same condition prior to the damage, including then-current building code requirements. Tenant shall be responsible for any portion of a loss that is required to be covered in accordance with Section 6.2 but with respect to which the Tenant failed to obtain coverage.

8.2  Damage or Destruction Late in Term.  If within two years before the end of the lease term the Premises are destroyed or damaged such that the cost of repair exceeds 50% of the value of the structure before the destruction or damage, Tenant may elect to terminate this Lease as of the date of the damage or destruction by giving notice to Landlord in writing not more than 45 days following the date of destruction or damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and attributable to what would have otherwise been the unexpired Term. Tenant shall surrender possession of the Premises within a reasonable time after such written notice is given, and assign any insurance proceeds paid on account of such damage to Landlord. If Tenant does not elect to terminate, Tenant shall proceed to restore the Premises to substantially the same form as prior to the damage or destruction using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Tenant shall be responsible for any portion of a loss that is required to be covered in accordance with Section 6.2 but with respect to which the Tenant failed to obtain coverage. Work shall be commenced as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and other matters beyond Tenant's reasonable control.

8.3  Rent Abatement.  To the extent that the Premises are rendered untenantable as a result of a fire or other casualty, the Rent shall not be abated or reduced in any way.

8.4  Personal Property.  All personal property in said Premises shall be at the risk of Tenant. Except to the extent caused by the negligent or intentional acts of Landlord, Landlord or

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Landlord's agents shall not be liable for any damage either to person or property, sustained by Tenant or others, caused by any defects now in said Premises or hereafter occurring therein, or any part or appurtenance thereof, caused by being out of repair, or caused by the bursting or leaking of water, gas, sewer or steam pipes.

    Section 9.  Eminent Domain

9.1  Partial Taking.  If a portion of the Premises is condemned and Section 9.2 does not apply, this Lease shall continue on the following terms:

(a) The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises. Tenant's right to participate in the condemnation proceeds shall be limited to the value of its leasehold interest and the depreciated value of any improvements and alterations constructed on the Premises at the Tenant's sole expense subsequent to the Commencement Date.

(b) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Premises as are necessary to restore the remaining Premises to a condition as comparable as reasonably practicable to that existing at the time of the condemnation.

(c) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Premises in anticipation of taking, the Base Rent shall be reduced in proportion to the reduction in value of the Premises as an economic unit on account of the partial taking. If the parties are unable to agree on the amount of the reduction of Base Rent, the amount shall be determined by arbitration in the manner provided in Section 17.

9.2  Total Taking.  If a condemning authority takes all of the Premises or a portion which Landlord and Tenant agree is sufficient to render the remaining Premises reasonably unsuitable for the use that Tenant was then making of the Premises, this Lease shall terminate as of the date the title vests in the condemning authorities. The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises.

9.3  Sale in Lieu of Condemnation.  Sale of all or part of the Premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this Section 9 as a taking by condemnation.

    Section 10.  Liens

10.1  Except with respect to activities for which Landlord is responsible, Tenant shall pay as due all claims for work done on and for services rendered or material furnished to the Premises, and shall keep the Premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the Interest Rate (as hereinafter defined) from the date expended by Landlord and shall be payable on demand. Such action by Landlord shall not constitute a waiver of any right or remedy which Landlord may have on account of Tenant's default. For the purposes of this Lease "Interest Rate" shall mean three (3%) percent per annum over the then prime rate of interest established by Citibank, N.A. (or any successor thereto), adjusted daily, but in no event in excess of the maximum lawful rate of interest permitted by applicable law.

10.2  Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord's interest in the Premises will not be foreclosed for nonpayment. If a lien is filed as a result of nonpayment, Tenant shall, within ten (10) days after knowledge of the filing, secure the discharge of the lien or deposit with Landlord cash or sufficient corporate surety bond or other surety satisfactory to Landlord in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could reasonably accrue as a result of a foreclosure or sale under the lien.

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    Section 11.  Quiet Enjoyment; Mortgage Priority

11.1  Landlord's Warranty.  Landlord warrants that it is the owner of the Premises and has the right to lease them free of all encumbrances, except for the encumbrances (the "Permitted Encumbrances") set forth on Exhibit B hereto (which by this reference is made a part hereof) and except as expressly set forth in Section 11.2 below. Landlord will defend Tenant's right to quiet enjoyment of the Premises from the lawful claims of all persons during the Term. Tenant hereby acknowledges and agrees that this Lease, and the leasehold estate created hereby, are subject and subordinate to all of the Permitted Encumbrances.

11.2  Mortgage Priority.  Tenant acknowledges and agrees that this Lease and Tenant's interest in this Lease shall be subordinate to the lien of any mortgage or deed of trust (Mortgage) which encumbers the Premises as of the Commencement Date or at any date thereafter while this Lease remains in effect. Tenants agrees to execute a subordination and attornment agreement, in form and substance reasonably acceptable to Landlord's lender, or any future lender, on the condition that such lender agree in writing with Tenant that as long as Tenant performs its obligations under this Lease, no foreclosure, deed in lieu of foreclosure, or sale pursuant to the terms of such Mortgage, or other steps or procedures taken under such Mortgage shall affect Tenant's rights under this Lease. If the Premises are sold as a result of foreclosure of any Mortgage, or otherwise transferred by Landlord to any successor, Tenant shall attorn to the purchaser or other transferee.

11.3  Estoppel Certificate.  Either party will, within 20 days after notice from the other, execute and deliver to the other party a certificate stating whether or not this Lease has been modified and is in full force and effect and specifying any modifications or alleged breaches by the other party. The certificate shall also state the amount of monthly Base Rent, the dates to which Base Rent and any other Rent payments have been paid in advance, and the amount of any security deposit or prepaid Rent. Failure to deliver the certificate within the specified time shall be conclusive upon the party from whom the certificate was requested that this Lease is in full force and effect and has not been modified except as represented in the notice requesting the certificate.

    Section 12.  Assignment and Subletting.

12.1  Landlord hereby agrees that Tenant may assign this Lease or sublease all or a portion of the Premises in writing to any other party, with the prior written consent of Landlord, provided that:

    (1) Landlord shall have the right to pre-approve each and every proposed subtenant and assignee, which approval shall not be unreasonably withheld or delayed.

    (2) Any attempt by Tenant to assign, transfer, or sublet without Landlord's prior written consent shall be void and shall constitute a material default by Tenant.

    (3) Regardless of Landlord's consent to an assignment or sublease, Tenant shall not be released from any of its obligations and liabilities under this Lease, except as may be set forth in Landlord's written consent.

    (4) Landlord's acceptance of Rent from any other person or entity pending a determination of whether to consent to an assignment or sublease shall not constitute a waiver of Landlord's right to approve or disapprove such assignment or sublease.

    (5) A default by an assignee, sublessee, or transferee shall constitute a default by Tenant and in the event of such default, Landlord may proceed directly against Tenant.

    (6) Tenant shall grant to Landlord a security interest in all of its right, title and interest in all rents and income from an assignment or sublease to secure the payment of Rent owed under this Lease.

    (7) Tenant shall pay all reasonable costs and fees incurred by Landlord in connection with evaluating whether to give its consent and/or in giving its consent to a proposed assignment or sublease, including attorneys', architects', engineers' and consultants' fees, not to exceed $2500.

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12.2 Notwithstanding any provision to the contrary, Tenant may assign this Lease or sublet all or part of the Premises, without Landlord's approval, to a parent corporation, any subsidiary, any affiliate, any partnership, limited liability company or other business entity where Tenant or any affiliate of Tenant is the managing or general partner, manager or the equivalent, as the case may be, or in connection with a merger, acquisition, reorganization or consolidation of Tenant, or in connection with the sale or transfer of all or substantially all of Tenant's (or its parent's or affiliates') stock or assets. The term "affiliate" as used herein shall mean any entity in which Tenant or its parent corporation holds fifty percent (50%) or more of the ownership interests. Notwithstanding a transfer pursuant to this Section 12.2, Tenant shall not be released from liability under this Lease upon the assignment or subletting of all or part of the Premises to such parent corporation, subsidiary, affiliate, partnership, limited liability company or other business entity.

    Section 13.  Default  The following shall be events of default:

13.1  Default in Rent.  Failure of Tenant to pay any installment of Rent within ten (10) days after written notice by Landlord, provided Landlord shall not be required to give written notice of nonpayment more than twice during any calendar year. After Landlord has twice given notice of nonpayment during a calendar year, Tenant shall be in default upon failure to pay any installment of Rent within ten (10) days after the due date for such installment, without the requirement of notice and opportunity to cure.

13.2  Default in Other Covenants.  Failure of Tenant to comply with any other term or condition or fulfill any other obligation of this Lease within 20 days after written notice by Landlord specifying the nature of the default with reasonable particularity. If the default is of such a nature that it cannot be completely remedied within the 20-day period, an event of default shall not have occurred if Tenant begins correction of the default within the 20-day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable.

13.3  Insolvency.  Insolvency of Tenant; an assignment by Tenant for the benefit of creditors; the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a receiver of the properties of Tenant; or the filing of any involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within 90 days after filing shall constitute a default. If Tenant consists of two or more individuals or business entities, the events of default specified in this Section 13.3 shall apply to each individual unless within ten (10) days after an event of default occurs, the remaining individuals produce evidence satisfactory to Landlord that they have unconditionally acquired the interest of the one causing the default. If this Lease has been assigned, the events of default so specified shall apply only with respect to Tenant and to the one then exercising the rights of Tenant under this Lease.

13.4  Abandonment.  Failure of Tenant for thirty (30) days or more to occupy the Premises for one or more of the purposes permitted under this Lease, unless such failure is excused under other provisions of this Lease.

    Section 14.  Remedies on Default

14.1  Termination.  In the event of a default, the Lease may be terminated at the option of Landlord by written notice to Tenant. Whether or not the Lease is terminated by the election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant for the default, and Landlord may reenter, take possession of the Premises, and remove any persons or property by legal action and without having accepted a surrender.

14.2  Reletting.  Following reentry or abandonment, Landlord may relet the Premises and in that connection may make any suitable alterations or refurbish the Premises, or both, or change the character or use of the Premises, but Landlord shall not be required to relet for any use or

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purpose other than that specified in this Lease or which Landlord may reasonably consider injurious to the Premises, or to any tenant that Landlord may reasonably consider objectionable. Landlord may relet all or part of the Premises, alone or in conjunction with other properties, for a term longer or shorter than the term of this Lease, upon any reasonable terms and conditions, including the granting of reasonable rent-free occupancy or other rent concession.

14.3  Remedies.  In the event of material breach or default under the terms of this Lease, either party shall have all rights and remedies available to them under law or equity.

14.4  Landlord's Right to Cure Defaults.  If Tenant fails to perform any obligation under this Lease, Landlord shall have the option to do so after 30 days' written notice to Tenant. All of Landlords expenditures to correct the default shall be reimbursed by Tenant on demand with interest at the Interest Rate from the date of expenditure by Landlord. Such action by Landlord shall not waive any other remedies available to Landlord because of the default.

14.5  Remedies Cumulative.  The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law.

    Section 15.  Surrender at Expiration

15.1  Condition of Premises.  Subject to the provisions of Section 8 herein, upon expiration of the Term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and surrender the Premises in first class condition and broom clean, reasonable wear and tear excepted. Improvements and alterations constructed by Tenant with permission from Landlord shall not be removed, or the Premises restored to the original condition, unless the terms of permission for the improvement or alteration so require.

15.2  Fixtures

(a) All fixtures placed upon the Premises during the Term, other than Tenant's trade fixtures, shall, at Landlord's option, become the property of Landlord. Tenant's trade fixtures include, without limitation, air compressors in shop area (but excluding air lines that are attached to the walls and overhead bridge cranes and hoists attached to the shop ceiling or otherwise attached to the walls or floors of the shop area), and those additional trade fixtures placed on the Premises during the Term. If Landlord's applicable consent referenced in Section 5 so requires, Tenant shall remove any or all fixtures placed upon the Premises by the Tenant that would otherwise remain the property of Landlord, and shall repair any physical damage resulting from the removal. If Tenant fails to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest at the Interest Rate from the date of expenditure.

(b) Prior to expiration or other termination of the Term, Tenant shall remove all furnishings, furniture, and trade fixtures that remain its property and repair any damage to the Premises caused by such removal. If Tenant fails to do so, this shall be an abandonment of the property, and Landlord may retain the property and all rights of Tenant with respect to it shall cease or, by notice in writing given to Tenant within 20 days after removal was required, Landlord may elect to hold Tenant to its obligation of removal. If Landlord elects to require Tenant to remove, Landlord may effect a removal and place the property in public storage for Tenant's account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest at the Interest Rate on all such expenses from the date of expenditure by Landlord.

15.3  Holdover

(a) If Tenant does not vacate the Premises at the time required, Landlord shall have the option to treat Tenant as a tenant from month-to-month, subject to all of the provisions of this Lease except the provisions for term and renewal and at a rental rate equal to $35,000.00

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per month, or to eject Tenant from the Premises and recover damages caused by wrongful holdover. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures that Tenant is required to remove under this Lease shall constitute a failure to vacate to which this Section shall apply if the property not removed will substantially interfere with occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(b) If a month-to-month tenancy results from a holdover by Tenant under this Section 15.3, the tenancy shall be terminable at the end of any monthly rental period on written notice from Landlord given not less than ten (10) days prior to the termination date which shall be specified in the notice. Tenant waives any notice that would otherwise be provided by law with respect to a month-to-month tenancy.

    Section 16.  Miscellaneous

16.1  Nonwaiver.  Waiver by either party of strict performance of any provision of this Lease shall not be a waiver of or prejudice to the party's right to require strict performance of the same provision in the future or of any other provision.

16.2  Attorney Fees.  If suit or action is instituted in connection with any controversy arising out of this Lease, the prevailing party shall be entitled to recover in addition to costs such sum as the court may adjudge reasonable as attorney fees at trial, on petition for review, and on appeal.

16.3  Notices.  Except as otherwise expressly permitted in this Lease, all notices, demands, approvals, consents, requests and other communications which under the terms of this Lease, or under any statute, must or may be given or made by the parties hereto, must be in writing, and must be made either (i) by depositing such notice in registered or certified mail of the United States of America, return receipt requested, or (ii) by delivering such notice by a commercial courier, which courier provides for delivery with receipt guaranteed, addressed to each party at the addresses set forth on the first page of this Lease. All notices, demands, approvals, consents, requests and other communications shall be deemed to have been delivered (i) if mailed as provided for in this Paragraph, on the date which is three (3) business days after mailing or (ii) if sent by commercial courier, on the date which is one (1) business day after dispatching. Either party may designate by notice in writing given in the manner herein specified a new or other address to which such notice, demand, approval, consent, request and other communication shall thereafter be so given or made. Notwithstanding the foregoing all Rent statements, bills and invoices may be given by regular mail.

16.4  Exculpation.  Tenant shall look solely to the estate and property of Landlord in the Premises (including Landlord's rights to the rents, profits, insurance proceeds and condemnation awards related thereto), for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of Landlord (or of any direct or indirect, disclosed or undisclosed, partner, member, shareholder, officer, director, employee or principal in or of Landlord) shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises.

16.5  Succession.  Subject to the above-stated limitations on transfer of Tenant's interest, this Lease shall be binding on and inure to the benefit of the parties and their respective successors and assigns, heirs, executors and administrators.

16.6  Recordation.  Landlord shall execute and acknowledge a memorandum of this lease in a form suitable for recording, and Tenant may record the memorandum.

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16.7  Entry for Inspection.  Landlord shall have the right to enter upon the Premises upon reasonable advance notice to determine Tenant's compliance with this Lease, to make repairs to the Premises which it expressly has the right to make under this Lease, or to show the Premises to any prospective tenant or purchaser, and in addition shall have the right, at any time during the last two (2) months of the term of this Lease, to place and maintain upon the Premises notices for leasing or selling of the Premises.

16.8  Interest on Rent and other Charges.  Any rent or other payment required of Tenant by this Lease shall, if not paid within ten (10) days after it is due, bear interest at the Interest Rate from the due date until paid. In addition, if Tenant fails to make any rent or other payment required by this Lease to be paid to Landlord within ten (10) days after it is due, Landlord shall impose a late charge of five cents ($.05) per dollar of the overdue payment to reimburse Landlord for the costs of collecting the overdue payment. Tenant shall pay the late charge upon demand by Landlord. Landlord may levy and collect a late charge in addition to all other remedies available for Tenant's default, and collection of a late charge shall not waive the breach caused by the late payment.

16.9  Proration of Rent.  In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all pre paid Rent shall be refunded to Tenant or paid on its account.

16.10  Time of Essence.  Time is of the essence of the performance of each of Tenant's and Landlord's obligations under this Lease.

16.11  Governing Law.  This agreement shall be governed and interpreted according to Nevada law without reference to the conflict of laws provisions thereof.

IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the day and year first herein written.

Landlord:	McLAIN-RUBIN REALTY COMPANY III, L.L.C., a Delaware limited liability company
	By:
	Its:
Tenant:	WESTERN POWER & EQUIPMENT CORP., an Oregon corporation
	By:
	Its:
STATE OF	)
	) ss.
County of	)

    I certify that I know or have satisfactory evidence that                        is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the Manager of McLain-Rubin Realty Company III, L.L.C., a Delaware limited liability company, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

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    Dated this      day of          , 2000.

	(Signature of Notary)
	(Legibly print or Stamp Name of Notary)
	Notary Public in and for the state of             ,
	My Appointment Expires
STATE OF	)
	) ss.
County of	)

    I certify that I know or have satisfactory evidence that      is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the      of Western Power & Equipment Corp., an Oregon corporation, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of          , 2000.

	(Signature of Notary)
	(Legibly print or Stamp Name of Notary)
	Notary Public in and for the state of             ,
	My Appointment Expires
STATE OF	)
	) ss.
County of	)

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EXHIBIT A
Description of Real Property

     Commonly known as 1455 Glendale Avenue, Sparks, Nevada.

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EXHIBIT B
Permitted Encumbrances

1.

Easements of record.

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Exhibit 10.14

COMMERCIAL LEASE
RECITALS
AGREEMENT
EXHIBIT A Description of Real Property
EXHIBIT B Permitted Encumbrances

EX-10.15

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Exhibit 10.15

COMMERCIAL LEASE

Dated:	as of October 1, 2000
Between:	McLAIN-RUBIN REALTY COMPANY III, L.L.C., a Delaware limited liability company	("Landlord")
	38207 Northeast Gerber Road Yacolt, WA 98675
And:	WESTERN POWER & EQUIPMENT CORP., an Oregon corporation	("Western Power" or "Tenant")
	4601 N.E. 77th Avenue Vancouver, Washington 98662

RECITALS

    A. Landlord and Tenant have previously entered into that certain Commercial Lease dated December 11, 1997 (the "Prior Lease"), under which Tenant leased from Landlord the real property described on Exhibit A hereto (which by this reference is made a part hereof), together with all improvements now and hereafter situated on said land (said land, together with such improvements, being hereinafter referred to as the "Premises"). The Premises are located at 3199 E. Onstott Road, Yuba City, California.

    B. Landlord and Tenant have mutually agreed to terminate the Prior Lease as of the date of this Lease.

    C. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises all under the terms and conditions of this Lease.

AGREEMENT

    Section 1.  Occupancy

1.1  Termination.  The Prior Lease is terminated in its entirety as of the date hereof and neither party shall have any continuing obligations under the Prior Lease as of the date hereof.

1.1  Term.  The term of this Lease (hereinafter referred to as the "Term") shall commence on the date (the "Commencement Date") on which Landlord acquires fee title to the Premises, and continue through, and expire on, September 30, 2007 (the "Expiration Date"), unless sooner terminated as hereinafter provided.

1.2  Possession.  Tenant's right to possession of the Premises, and its obligations under this Lease, shall commence on the Commencement Date. If the Commencement Date does not fall on the first day of the month, Rent (as hereinafter defined) for the first month under this Lease shall be prorated accordingly, and shall be due on the Commencement Date.

    Section 2.  Rent

2.1  Base Rent.  Tenant covenants and agrees to pay to Landlord an annual base rent of $66,000.00 (the "Base Rent"), in equal monthly installments of $5,500.00, in advance, without demand, deduction or set off, at such place as may be designated by Landlord, on the first day of each month throughout the Term of this Lease.

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2.2  Additional Rent.  All taxes, insurance costs, utility charges, maintenance costs, repair charges and other sums that Tenant is required to pay pursuant to this Lease to Landlord or third parties, shall be "additional rent." For the purposes of this Lease, Base Rent and additional rent are sometimes collectively referred to as "Rent."

    Section 3.  Use of the Premises

3.1  Permitted Use.  The Premises shall be used for retail sales, service, storage and repair of agricultural, utility or industrial equipment, machinery and parts, and incidental office use, and for any other lawful purpose, subject to the applicable provisions of this Lease.

3.2  Restrictions on Use.  In connection with the use of the Premises, Tenant shall:

(a) Comply with all applicable laws and regulations of any public authority having jurisdiction over the Premises and the use thereof, and correct, at Tenant's own expense, any failure of compliance created through Tenant's fault or by reason of Tenant's use;

(b) Refrain from any activity that would make it impossible to insure the Premises against casualty, would permanently increase the insurance rate, or would prevent Landlord from taking advantage of any ruling allowing Landlord to obtain reduced premium rates for long-term fire insurance policies, unless Tenant pays the additional cost of the insurance;

(c) Refrain from any use that would be reasonably offensive to other tenants or owners or users of neighboring premises or that would tend to create a nuisance or damage the reputation of the Premises;

(d) Refrain from loading the electrical system or floors beyond the point considered safe by a competent engineer or architect reasonably selected by Landlord; and

(e) Subject to Section 3.3, refrain from making any marks on or attaching any additional sign, insignia, antenna, aerial, satellite dish or other device to the exterior or interior walls, windows, or roof of the Premises without the written consent of Landlord, which shall not be unreasonably withheld or delayed.

3.3  Signage.  Tenant will be responsible for providing its own signage. Tenant will obtain Landlord's prior approval of the design, size, color, materials, and other details of the sign face, which approval shall not be unreasonably withheld or delayed. Landlord acknowledges that Tenant already has signage on the Premises and hereby consents to such signage.

3.4  Hazardous Substances.

(a)Definitions. For purposes of this Section, the term "Hazardous Substance" means any substance, material or waste, including oil or petroleum products or their derivatives, solvents, PCB's, explosive substances, asbestos, radioactive materials or waste, and any other toxic, ignitable, reactive, corrosive, contaminating or pollution materials which are now or in the future subject to any governmental regulation; the term Hazardous Substance Laws" means all federal, state and local laws, ordinances, regulations and standards relating to the use, analysis, production, storage, sale, release, discharge, disposal or transportation of any Hazardous Substance.

(b)Tenant Compliance With Hazardous Substance Laws. Neither Tenant or its officers, employees, agents, invitees, sublessees or assigns shall cause or permit any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under the Premises, or cause any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under any property adjacent to the Premises. Tenant may use or otherwise handle on the Premises only those Hazardous Substances (hereinafter referred to as "Ordinary Hazardous Substances") typically used or sold in the prudent and safe operation of the business specified in Section 3.1. Tenant may store such Hazardous

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Substances on the Premises only in quantities necessary to satisfy Tenant's reasonably anticipated needs. Tenant shall comply with all Hazardous Substance Laws and exercise care in the use, handling, storage and transportation of Hazardous Substances and shall take all possible measures consistent with the practicable operation of its business to minimize the quantity and toxicity of Hazardous Substances used, handled, transported or stored on the Premises. Upon the expiration or termination of this Lease, Tenant shall remove from the Premises all Hazardous Substances stored there by Tenant or its sublessees or assigns.

(c)Indemnification by Tenant. Except as provided in Section 3.4(d), Tenant shall indemnify, defend, and hold Landlord and Landlord's members, managers, employees, agents, and assigns harmless from and against any and all claims, liabilities, losses, material diminution of value, demands, fines, damages (including incidental and special damages), obligations, costs, and expenses (including attorney fees, investigatory expenses, remediation costs, and related expenses), arising out of or in any way related to contamination of the Premises by an Hazardous Substance or the failure of compliance of the Premises with any applicable Hazardous Substance Laws both with respect to matters existing at the time of this lease and with respect to such matters which occur during the Lease. The parties acknowledge a Phase I Environmental Site Assessment prepared for Tenant by K & S Environmental, Inc., dated December 11, 1998 (Environmental Report). In addition to the foregoing indemnification, Tenant agrees to perform all recommendations contained in the Environmental Report and as disclosed in the Phase I report referred to in Section 3.4(g) below prior to or immediately upon the expiration or earlier termination of this Lease, and shall indemnify, defend and hold harmless Landlord and Landlord's members, managers, employees, agents, and assigns therefrom.

(d)Limitation of Indemnification. Tenant's indemnification obligations under this section shall not extend to contamination of the Premises by any Hazardous Substance which has migrated to the Premises from other property through no fault of Tenant or any agent, employee, contractor, licensee, or invitee of Tenant, and shall not extend to spills by any person or entity other than Tenant, or any agent, employee, contractor, licensee, or invitee of Tenant, and with respect to which Tenant could not take reasonable steps to prevent.

(e)Notification. Each party shall give written notice to the other within three (3) business days after the date on which the party learns or first has reason to believe that:

    (1) there has or will come to be located on or about the Premises any Hazardous Substance (other than Ordinary Hazardous Substances);

    (2) a release, discharge or emission of a Hazardous Substance has occurred on or about the Premises;

    (3) an enforcement, cleanup, removal or other governmental or regulatory action has been threatened or commenced against the party or with respect to the Premises pursuant to any Hazardous Substance Laws;

    (4) a claim has been made or threatened by any person or entity against the party or the Premises on account of an alleged loss or bodily injury claimed to result from the alleged presence or release on the Premises of a Hazardous Substance; or

    (5) a report, notice, or complaint has been made to or filed with a governmental agency concerning the presence, use or disposal of any Hazardous Substance on the Premises. Any such notice shall be accompanied by copies of any such claim, report, complaint, notice, warning or other communication that is in the possession of or is reasonably available to the party.

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(f)Cleanup Activity.

    (1) If during the Term any remedial action is necessary to clean up any environmental contamination of the Premises (the "Cleanup Activity") to which Tenant's indemnification of Landlord in Section 3.4(c) applies, Tenant shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If after written notice from Landlord, Tenant fails to proceed with reasonable diligence to complete the Cleanup Activity, Landlord shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Tenant. The rights and obligations of the parties set forth in this Section shall be in addition to those rights and obligations set forth elsewhere in this Lease.

    (2) Except as set forth in Section 3.4(f)(1), if any other Cleanup Activity is necessary, Landlord shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If Landlord fails to proceed with reasonable diligence to complete the Cleanup Activity, Tenant shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Landlord as a set off against payment of rent under this Lease. The rights and obligations of the parties set forth in this Section shall be in addition to those rights and obligations set forth elsewhere in this Lease.

(g)Phase I Report. Within thirty (30) days prior to the expiration or sooner termination of the Term, Tenant, at its expense, shall cause a so-called "Phase I" environmental inspection to be performed and a report in respect thereof to be prepared and delivered to both Landlord and Tenant to determine whether any Cleanup Activity is required, Landlord and Tenant agreeing that the responsibility for the Cleanup Activity shall be determined by the preceding provisions of this Section.

(h)Survival. The parties' obligations under this Section 3.4 shall survive the expiration or earlier termination of this Lease.

    Section 4.  Repairs and Maintenance

4.1  Tenant's Obligations.  Tenant shall repair and maintain the entire Premises to the extent necessary to preserve the Premises in good working order and condition, including but not limited to providing regularly scheduled maintenance and replacement (if necessary) of the heating and air conditioning system, and making structural repairs. Tenant's repair obligation shall include, but not be limited to, the repair of any damage to exterior building siding and internal walls of the Premises caused by moving furniture, fixtures and equipment in and out of the Premises.

4.2  Repairs to Comply with Laws.  All repairs, alterations, and other improvements on or to the Premises that are required by any governmental authority having jurisdiction over the Premises or the use thereof shall be performed by Tenant at its sole cost and expense.

4.3  Reimbursement for Repairs Assumed.  If Tenant fails or refuses to make the repairs that are required by this Section in a timely manner, Landlord may (but shall not be obligated to) make the repairs and charge the actual costs of repairs to Tenant. Such expenditures by Landlord shall be charged to Tenant as additional rent and shall be reimbursed by Tenant within ten (10) days after Landlord's demand therefor. Except in an emergency creating an immediate risk of personal injury or property damage, Landlord may not perform repairs which are the obligation of Tenant and charge Tenant for the resulting expense, unless at least ten (10) days before work is commenced Tenant is given notice in writing outlining with reasonable particularity the repairs required, and Tenant fails within that time to initiate such repairs in good faith.

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4.4  Inspection of Premises.  Landlord shall have the right to inspect the Premises at any reasonable time or times, and upon reasonable prior (written or oral) notice, to determine the necessity of repair.

    Section 5.  Alterations

5.1  Alterations Prohibited.  Tenant shall make no improvements or alterations to the Premises without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld or delayed. All alterations shall be made according to architectural designs and plans, construction drawings and specifications approved by Landlord, which approval shall not be unreasonably withheld or delayed, and in a good and workmanlike manner, and in compliance with applicable laws and building codes. As used herein, "alterations" includes the exterior installation of transmitters and receivers (e.g., satellite dishes) and related wiring, cables, and conduit. All approved improvements and alterations shall be made at Tenant's sole expense and Tenant shall keep the Premises free from any lien arising out of work performed pursuant to this Section. In the event any such lien is filed against the Premises by any person claiming by, through or under Tenant, Tenant shall, within fifteen (15) days after Landlord's demand therefor, at Tenant's expense, either cause such lien to be removed from the record or furnish a bond in form and amount and issued by a surety reasonably satisfactory to Landlord, indemnifying the Landlord against all liability relating to such lien. Provided that such bond has been furnished to Landlord, Tenant, at its sole cost and expense may contest, by appropriate proceedings conducted in good faith and with due diligence, any lien, encumbrance or charge against the Premises arising from work done or materials provided to and for Tenant, providing that such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

5.2  Ownership and Removal of Alterations.  All approved improvements and alterations made to the Premises by Tenant during the Term, other than Tenant's trade fixtures, shall be the property of Landlord when installed unless the applicable Landlord's consent provides otherwise. Upon expiration of the Term or earlier termination under this Lease, Tenant's trade fixtures shall be removed by Tenant and the Premises restored to its condition prior to installation if the applicable consent so requires.

    Section 6.  Insurance; Indemnification; Subrogation

6.1  Liability Insurance.  Tenant shall procure, and thereafter maintain during the Term, the following insurance at Tenant's cost: commercial general liability policy (occurrence version) in a responsible company with coverage for bodily injury and property damage liability with a general aggregate limit of not less than $1,000,000 for injury to one person, $3,000,000 for injury to two or more persons in one occurrence. Such insurance shall cover all risks arising directly or indirectly out of Tenant's activities on, or any condition of, the Premises. Such insurance shall protect Tenant against the claims of Landlord on account of the obligations assumed by Tenant under Section 6.3, and shall name Landlord as an additional insured. Certificates evidencing such insurance and bearing endorsements requiring 10 days' written notice to Landlord prior to any change or cancellation shall be furnished to Landlord prior to Tenant's occupancy of the Premises.

6.2  Property Insurance.  Tenant shall, at Tenant's expense, keep the Premises insured against loss or damage resulting from perils covered by what is commonly referred to as "all risk" coverage insurance, including earthquake and flood, for the full insurable replacement cost (guaranteed replacement). Such casualty insurance shall include an endorsement for increased costs of construction and then-current building code requirements. All premiums on said policy(s) shall be paid by Tenant. The policy(s) or a certificate thereof signed by the insurer shall be delivered to Landlord within five (5) days after the issuance and/or renewal of the policy(s) to the Tenant. Each policy shall name Landlord as an additional insured, and shall provide that such policy(s) may not be amended or canceled without thirty (30) days' prior written notice to

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Landlord. If Tenant fails to obtain the above required insurance, Landlord may, but shall not be required to procure such insurance and charge the cost to Tenant as additional rent, payable on demand. Tenant shall carry similar insurance insuring the property of Tenant on the property against such risks.

6.3  Indemnification.  Except as set forth in Section 3.4(d), Tenant shall indemnify and hold Landlord harmless from and against any and all third-party claims, loss or liability for accident, injury or damage to persons or property arising from or in connection with, Tenant's possession, operation, use, or occupation of the Premises. In case any action or proceeding is brought against Landlord and such claim is a claim from which Tenant is obligated to indemnify Landlord pursuant to this Section, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). Landlord and Landlord's agents shall have no liability to Tenant for any injury, loss, or damage caused by third parties or by any condition of the Premises, except to the extent caused by Landlord's negligence or breach of any of Landlord's covenants contained in this Lease.

6.4  Waiver of Subrogation.  Neither party, nor its officers, directors, employees, agents or invitees, nor, in the case of Tenant, subtenants, shall be liable to the other party or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, when such loss is caused by any of the perils which are or could be insured against under a standard policy of full replacement cost insurance for fire, theft and all risk coverage, or losses under workers' compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees (Landlord and Tenant agreeing that the preceding clause shall not apply, however, to any damages caused by intentionally wrongful actions or omissions of such party); provided, however, that if, by reason of the foregoing waiver, either party shall be unable to obtain any such insurance, such waiver shall be deemed not to have been made by such party and, provided further, that if either party shall be unable to obtain any such insurance without the payment of an additional premium therefor, then, unless the party claiming the benefit of such waiver shall agree to pay such party for the cost of such additional premium within thirty (30) days after notice setting forth such requirement and the amount of the additional premium, such waiver shall be of no force and effect between such party and such claiming party. Each party shall use reasonable efforts to obtain such insurance from a company that does not charge an additional premium or, if that is not possible, one that charges the lowest additional premium. Each party shall give the other party notice at any time when it is unable to obtain insurance with such a waiver of subrogation without the payment of an additional premium and the foregoing waiver shall be effective until thirty (30) days after notice is given. Notwithstanding anything contained herein, Landlord is not obligated under this Lease to insure the Premises.

    Section 7.  Taxes; Utilities

7.1  Property Taxes.  Tenant shall pay as due all taxes on its personal property located on the Premises. Tenant shall pay as due all real property taxes levied against the Premises. As used herein, real property taxes includes any fee or charge relating to the ownership, use, or rental of the Premises, other than taxes on the net income of Landlord or Tenant.

7.2  Special Assessments.  If an assessment for a public improvement is made against the Premises, Tenant shall pay such assessment. Landlord shall take all appropriate action to cause such assessment to be paid in the maximum number of installments permitted by law, statute or ordinance (if such option for installment payments is available to Landlord), in which case all installments coming due during the Lease term shall be treated the same as general property taxes pursuant to section 7.1.

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7.3  Contest of Taxes.  Tenant shall be permitted to contest the amount of any tax or assessment as long as such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

7.4  Proration of Taxes.  Tenant's share of real property taxes for the years in which this Lease commences or terminates shall be prorated based on the portion of the tax year that this Lease is in effect.

7.5  New Charges or Fees.  If a new charge or fee relating to the ownership or use of the Premises or the receipt of rental therefrom or in lieu of property taxes is assessed or imposed, then, to the extent permitted by law, Tenant shall pay such charge or fee. Tenant, however, shall have no obligation to pay any income, profits, or franchise tax levied on the net income derived by Landlord from this Lease.

7.6  Payment of Utilities Charges.  Tenant shall pay when due all charges for services and utilities incurred in connection with the use, occupancy, operation, and maintenance of the Premises, including, but not limited to, charges for fuel, water, gas, electricity, sewage disposal, power, refrigeration, air conditioning, telephone, and janitorial services.

    Section 8.  Damage and Destruction

8.1  Damaged Premises.  Tenant shall give immediate notice to Landlord in the event of any damage or destruction affecting the Premises. Subject to the provisions of this Section, Tenant shall immediately proceed to restore the Premises using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Restoration shall be performed according to architectural designs, plans, and construction drawings and specifications approved in advance by Landlord, which approval shall not be unreasonably withheld or delayed, and shall restore the Premises to substantially the same condition prior to the damage, including then-current building code requirements. Tenant shall be responsible for any portion of a loss that is required to be covered in accordance with Section 6.2 but with respect to which the Tenant failed to obtain coverage.

8.2  Damage or Destruction Late in Term.  If within two years before the end of the lease term the Premises are destroyed or damaged such that the cost of repair exceeds 50% of the value of the structure before the destruction or damage, Tenant may elect to terminate this Lease as of the date of the damage or destruction by giving notice to Landlord in writing not more than 45 days following the date of destruction or damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and attributable to what would have otherwise been the unexpired Term. Tenant shall surrender possession of the Premises within a reasonable time after such written notice is given, and assign any insurance proceeds paid on account of such damage to Landlord. If Tenant does not elect to terminate, Tenant shall proceed to restore the Premises to substantially the same form as prior to the damage or destruction using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Tenant shall be responsible for any portion of a loss that is required to be covered in accordance with Section 6.2 but with respect to which the Tenant failed to obtain coverage. Work shall be commenced as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and other matters beyond Tenant's reasonable control.

8.3  Rent Abatement.  To the extent that the Premises are rendered untenantable as a result of a fire or other casualty, the Rent shall not be abated or reduced in any way.

8.4  Personal Property.  All personal property in said Premises shall be at the risk of Tenant. Except to the extent caused by the negligent or intentional acts of Landlord, Landlord or

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Landlord's agents shall not be liable for any damage either to person or property, sustained by Tenant or others, caused by any defects now in said Premises or hereafter occurring therein, or any part or appurtenance thereof, caused by being out of repair, or caused by the bursting or leaking of water, gas, sewer or steam pipes.

    Section 9.  Eminent Domain

9.1  Partial Taking.  If a portion of the Premises is condemned and Section 9.2 does not apply, this Lease shall continue on the following terms:

(a) The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises. Tenant's right to participate in the condemnation proceeds shall be limited to the value of its leasehold interest and the depreciated value of any improvements and alterations constructed on the Premises at the Tenant's sole expense subsequent to the Commencement Date.

(b) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Premises as are necessary to restore the remaining Premises to a condition as comparable as reasonably practicable to that existing at the time of the condemnation.

(c) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Premises in anticipation of taking, the Base Rent shall be reduced in proportion to the reduction in value of the Premises as an economic unit on account of the partial taking. If the parties are unable to agree on the amount of the reduction of Base Rent, the amount shall be determined by arbitration in the manner provided in Section 17.

9.2  Total Taking.  If a condemning authority takes all of the Premises or a portion which Landlord and Tenant agree is sufficient to render the remaining Premises reasonably unsuitable for the use that Tenant was then making of the Premises, this Lease shall terminate as of the date the title vests in the condemning authorities. The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises.

9.3  Sale in Lieu of Condemnation.  Sale of all or part of the Premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this Section 9 as a taking by condemnation.

    Section 10.  Liens

10.1  Except with respect to activities for which Landlord is responsible, Tenant shall pay as due all claims for work done on and for services rendered or material furnished to the Premises, and shall keep the Premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the Interest Rate (as hereinafter defined) from the date expended by Landlord and shall be payable on demand. Such action by Landlord shall not constitute a waiver of any right or remedy which Landlord may have on account of Tenant's default. For the purposes of this Lease "Interest Rate" shall mean three (3%) percent per annum over the then prime rate of interest established by Citibank, N.A. (or any successor thereto), adjusted daily, but in no event in excess of the maximum lawful rate of interest permitted by applicable law.

10.2  Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord's interest in the Premises will not be foreclosed for nonpayment. If a lien is filed as a result of nonpayment, Tenant shall, within ten (10) days after knowledge of the filing, secure the discharge of the lien or deposit with Landlord cash or sufficient corporate surety bond or other surety satisfactory to Landlord in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could reasonably accrue as a result of a foreclosure or sale under the lien.

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    Section 11.  Quiet Enjoyment; Mortgage Priority

11.1  Landlord's Warranty.  Landlord warrants that it is the owner of the Premises and has the right to lease them free of all encumbrances, except for the encumbrances (the "Permitted Encumbrances") set forth on Exhibit B hereto (which by this reference is made a part hereof) and except as expressly set forth in Section 11.2 below. Landlord will defend Tenant's right to quiet enjoyment of the Premises from the lawful claims of all persons during the Term. Tenant hereby acknowledges and agrees that this Lease, and the leasehold estate created hereby, are subject and subordinate to all of the Permitted Encumbrances.

11.2  Mortgage Priority.  Tenant acknowledges and agrees that this Lease and Tenant's interest in this Lease shall be subordinate to the lien of any mortgage or deed of trust (Mortgage) which encumbers the Premises as of the Commencement Date or at any date thereafter while this Lease remains in effect. Tenants agrees to execute a subordination and attornment agreement, in form and substance reasonably acceptable to Landlord's lender, or any future lender, on the condition that such lender agree in writing with Tenant that as long as Tenant performs its obligations under this Lease, no foreclosure, deed in lieu of foreclosure, or sale pursuant to the terms of such Mortgage, or other steps or procedures taken under such Mortgage shall affect Tenant's rights under this Lease. If the Premises are sold as a result of foreclosure of any Mortgage, or otherwise transferred by Landlord to any successor, Tenant shall attorn to the purchaser or other transferee.

11.3  Estoppel Certificate.  Either party will, within 20 days after notice from the other, execute and deliver to the other party a certificate stating whether or not this Lease has been modified and is in full force and effect and specifying any modifications or alleged breaches by the other party. The certificate shall also state the amount of monthly Base Rent, the dates to which Base Rent and any other Rent payments have been paid in advance, and the amount of any security deposit or prepaid Rent. Failure to deliver the certificate within the specified time shall be conclusive upon the party from whom the certificate was requested that this Lease is in full force and effect and has not been modified except as represented in the notice requesting the certificate.

    Section 12.  Assignment and Subletting.

12.1  Landlord hereby agrees that Tenant may assign this Lease or sublease all or a portion of the Premises in writing to any other party, with the prior written consent of Landlord, provided that:

    (1) Landlord shall have the right to pre-approve each and every proposed subtenant and assignee, which approval shall not be unreasonably withheld or delayed.

    (2) Any attempt by Tenant to assign, transfer, or sublet without Landlord's prior written consent shall be void and shall constitute a material default by Tenant.

    (3) Regardless of Landlord's consent to an assignment or sublease, Tenant shall not be released from any of its obligations and liabilities under this Lease, except as may be set forth in Landlord's written consent.

    (4) Landlord's acceptance of Rent from any other person or entity pending a determination of whether to consent to an assignment or sublease shall not constitute a waiver of Landlord's right to approve or disapprove such assignment or sublease.

    (5) A default by an assignee, sublessee, or transferee shall constitute a default by Tenant and in the event of such default, Landlord may proceed directly against Tenant.

    (6) Tenant shall grant to Landlord a security interest in all of its right, title and interest in all rents and income from an assignment or sublease to secure the payment of Rent owed under this Lease.

    (7) Tenant shall pay all reasonable costs and fees incurred by Landlord in connection with evaluating whether to give its consent and/or in giving its consent to a proposed assignment or sublease, including attorneys', architects', engineers' and consultants' fees, not to exceed $2500.

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12.2  Notwithstanding any provision to the contrary, Tenant may assign this Lease or sublet all or part of the Premises, without Landlord's approval, to a parent corporation, any subsidiary, any affiliate, any partnership, limited liability company or other business entity where Tenant or any affiliate of Tenant is the managing or general partner, manager or the equivalent, as the case may be, or in connection with a merger, acquisition, reorganization or consolidation of Tenant, or in connection with the sale or transfer of all or substantially all of Tenant's (or its parent's or affiliates') stock or assets. The term "affiliate" as used herein shall mean any entity in which Tenant or its parent corporation holds fifty percent (50%) or more of the ownership interests. Notwithstanding a transfer pursuant to this Section 12.2, Tenant shall not be released from liability under this Lease upon the assignment or subletting of all or part of the Premises to such parent corporation, subsidiary, affiliate, partnership, limited liability company or other business entity.

    Section 13.  Default

    The following shall be events of default:

13.1  Default in Rent.  Failure of Tenant to pay any installment of Rent within ten (10) days after written notice by Landlord, provided Landlord shall not be required to give written notice of nonpayment more than twice during any calendar year. After Landlord has twice given notice of nonpayment during a calendar year, Tenant shall be in default upon failure to pay any installment of Rent within ten (10) days after the due date for such installment, without the requirement of notice and opportunity to cure.

13.2  Default in Other Covenants.  Failure of Tenant to comply with any other term or condition or fulfill any other obligation of this Lease within 20 days after written notice by Landlord specifying the nature of the default with reasonable particularity. If the default is of such a nature that it cannot be completely remedied within the 20-day period, an event of default shall not have occurred if Tenant begins correction of the default within the 20-day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable.

13.3  Insolvency.  Insolvency of Tenant; an assignment by Tenant for the benefit of creditors; the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a receiver of the properties of Tenant; or the filing of any involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within 90 days after filing shall constitute a default. If Tenant consists of two or more individuals or business entities, the events of default specified in this Section 13.3 shall apply to each individual unless within ten (10) days after an event of default occurs, the remaining individuals produce evidence satisfactory to Landlord that they have unconditionally acquired the interest of the one causing the default. If this Lease has been assigned, the events of default so specified shall apply only with respect to Tenant and to the one then exercising the rights of Tenant under this Lease.

13.4  Abandonment.  Failure of Tenant for thirty (30) days or more to occupy the Premises for one or more of the purposes permitted under this Lease, unless such failure is excused under other provisions of this Lease.

    Section 14.  Remedies on Default

14.1  Termination.  In the event of a default, the Lease may be terminated at the option of Landlord by written notice to Tenant. Whether or not the Lease is terminated by the election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant for the default, and Landlord may reenter, take possession of the Premises, and remove any persons or property by legal action and without having accepted a surrender.

14.2  Reletting.  Following reentry or abandonment, Landlord may relet the Premises and in that connection may make any suitable alterations or refurbish the Premises, or both, or change

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the character or use of the Premises, but Landlord shall not be required to relet for any use or purpose other than that specified in this Lease or which Landlord may reasonably consider injurious to the Premises, or to any tenant that Landlord may reasonably consider objectionable. Landlord may relet all or part of the Premises, alone or in conjunction with other properties, for a term longer or shorter than the term of this Lease, upon any reasonable terms and conditions, including the granting of reasonable rent-free occupancy or other rent concession.

14.3  Remedies.  In the event of material breach or default under the terms of this Lease, either party shall have all rights and remedies available to them under law or equity.

14.4  Landlord's Right to Cure Defaults.  If Tenant fails to perform any obligation under this Lease, Landlord shall have the option to do so after 30 days' written notice to Tenant. All of Landlords expenditures to correct the default shall be reimbursed by Tenant on demand with interest at the Interest Rate from the date of expenditure by Landlord. Such action by Landlord shall not waive any other remedies available to Landlord because of the default.

14.5  Remedies Cumulative.  The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law.

    Section 15.  Surrender at Expiration

15.1  Condition of Premises.  Subject to the provisions of Section 8 herein, upon expiration of the Term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and surrender the Premises in first class condition and broom clean, reasonable wear and tear excepted. Improvements and alterations constructed by Tenant with permission from Landlord shall not be removed, or the Premises restored to the original condition, unless the terms of permission for the improvement or alteration so require.

15.2  Fixtures

(a) All fixtures placed upon the Premises during the Term, other than Tenant's trade fixtures, shall, at Landlord's option, become the property of Landlord. Tenant's trade fixtures include, without limitation, air compressors in shop area (but excluding air lines that are attached to the walls and overhead bridge cranes and hoists attached to the shop ceiling or otherwise attached to the walls or floors of the shop area), and those additional trade fixtures placed on the Premises during the Term. If Landlord's applicable consent referenced in Section 5 so requires, Tenant shall remove any or all fixtures placed upon the Premises by the Tenant that would otherwise remain the property of Landlord, and shall repair any physical damage resulting from the removal. If Tenant fails to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest at the Interest Rate from the date of expenditure.

(b) Prior to expiration or other termination of the Term, Tenant shall remove all furnishings, furniture, and trade fixtures that remain its property and repair any damage to the Premises caused by such removal. If Tenant fails to do so, this shall be an abandonment of the property, and Landlord may retain the property and all rights of Tenant with respect to it shall cease or, by notice in writing given to Tenant within 20 days after removal was required, Landlord may elect to hold Tenant to its obligation of removal. If Landlord elects to require Tenant to remove, Landlord may effect a removal and place the property in public storage for Tenant's account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest at the Interest Rate on all such expenses from the date of expenditure by Landlord.

15.3  Holdover

(a) If Tenant does not vacate the Premises at the time required, Landlord shall have the option to treat Tenant as a tenant from month-to-month, subject to all of the provisions of

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this Lease except the provisions for term and renewal and at a rental rate equal to $35,000.00 per month, or to eject Tenant from the Premises and recover damages caused by wrongful holdover. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures that Tenant is required to remove under this Lease shall constitute a failure to vacate to which this Section shall apply if the property not removed will substantially interfere with occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(b) If a month-to-month tenancy results from a holdover by Tenant under this Section 15.3, the tenancy shall be terminable at the end of any monthly rental period on written notice from Landlord given not less than ten (10) days prior to the termination date which shall be specified in the notice. Tenant waives any notice that would otherwise be provided by law with respect to a month-to-month tenancy.

    Section 16.  Miscellaneous

16.1  Nonwaiver.  Waiver by either party of strict performance of any provision of this Lease shall not be a waiver of or prejudice to the party's right to require strict performance of the same provision in the future or of any other provision.

16.2  Attorney Fees.  If suit or action is instituted in connection with any controversy arising out of this Lease, the prevailing party shall be entitled to recover in addition to costs such sum as the court may adjudge reasonable as attorney fees at trial, on petition for review, and on appeal.

16.3  Notices.  Except as otherwise expressly permitted in this Lease, all notices, demands, approvals, consents, requests and other communications which under the terms of this Lease, or under any statute, must or may be given or made by the parties hereto, must be in writing, and must be made either (i) by depositing such notice in registered or certified mail of the United States of America, return receipt requested, or (ii) by delivering such notice by a commercial courier, which courier provides for delivery with receipt guaranteed, addressed to each party at the addresses set forth on the first page of this Lease. All notices, demands, approvals, consents, requests and other communications shall be deemed to have been delivered (i) if mailed as provided for in this Paragraph, on the date which is three (3) business days after mailing or (ii) if sent by commercial courier, on the date which is one (1) business day after dispatching. Either party may designate by notice in writing given in the manner herein specified a new or other address to which such notice, demand, approval, consent, request and other communication shall thereafter be so given or made. Notwithstanding the foregoing all Rent statements, bills and invoices may be given by regular mail.

16.4  Exculpation.  Tenant shall look solely to the estate and property of Landlord in the Premises (including Landlord's rights to the rents, profits, insurance proceeds and condemnation awards related thereto), for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of Landlord (or of any direct or indirect, disclosed or undisclosed, partner, member, shareholder, officer, director, employee or principal in or of Landlord) shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises.

16.5  Succession.  Subject to the above-stated limitations on transfer of Tenant's interest, this Lease shall be binding on and inure to the benefit of the parties and their respective successors and assigns, heirs, executors and administrators.

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16.6  Recordation.  Landlord shall execute and acknowledge a memorandum of this lease in a form suitable for recording, and Tenant may record the memorandum.

16.7  Entry for Inspection.  Landlord shall have the right to enter upon the Premises upon reasonable advance notice to determine Tenant's compliance with this Lease, to make repairs to the Premises which it expressly has the right to make under this Lease, or to show the Premises to any prospective tenant or purchaser, and in addition shall have the right, at any time during the last two (2) months of the term of this Lease, to place and maintain upon the Premises notices for leasing or selling of the Premises.

16.8  Interest on Rent and other Charges.  Any rent or other payment required of Tenant by this Lease shall, if not paid within ten (10) days after it is due, bear interest at the Interest Rate from the due date until paid. In addition, if Tenant fails to make any rent or other payment required by this Lease to be paid to Landlord within ten (10) days after it is due, Landlord shall impose a late charge of five cents ($.05) per dollar of the overdue payment to reimburse Landlord for the costs of collecting the overdue payment. Tenant shall pay the late charge upon demand by Landlord. Landlord may levy and collect a late charge in addition to all other remedies available for Tenant's default, and collection of a late charge shall not waive the breach caused by the late payment.

16.9  Proration of Rent.  In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all pre paid Rent shall be refunded to Tenant or paid on its account.

16.10  Time of Essence.  Time is of the essence of the performance of each of Tenant's and Landlord's obligations under this Lease.

16.11  Governing Law.  This agreement shall be governed and interpreted according to Nevada law without reference to the conflict of laws provisions thereof.

IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the day and year first herein written.

	Landlord:		McLAIN-RUBIN REALTY COMPANY, L.L.C.,
				a Delaware limited liability company
			By:
			Its:
	Tenant:		WESTERN POWER & EQUIPMENT CORP.,
				an Oregon corporation
			By:
			Its:
STATE OF		)
		) ss.
County of		)

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    I certify that I know or have satisfactory evidence that                  is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the Manager of McLain-Rubin Realty Company, L.L.C., a Delaware limited liability company, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of      , 2000.

(Signature of Notary)

(Legibly print or Stamp Name of Notary)

Notary Public in and for the state of      ,

My Appointment Expires

STATE OF	)
	) ss.
County of	)

    I certify that I know or have satisfactory evidence that      is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the      of Western Power & Equipment Corp., an Oregon corporation, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of      , 2000.

(Signature of Notary)

(Legibly print or Stamp Name of Notary)

Notary Public in and for the state of      ,

My Appointment Expires

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EXHIBIT A
Description of Real Property

    Commonly known as 1455 Glendale Avenue, Sparks, Nevada.

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EXHIBIT B
Permitted Encumbrances

1.

Easements of record.

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Exhibit 10.15

COMMERCIAL LEASE
RECITALS
AGREEMENT
EXHIBIT A Description of Real Property
EXHIBIT B Permitted Encumbrances

EX-10.16

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Exhibit 10.16

COMMERCIAL LEASE

Date:	as of April 1, 2001
Between:	McLAIN-RUBIN REALTY COMPANY II, L.L.C.,
	a Delaware limited liability company	("Landlord")
	38207 Northeast Gerber Road
	Yacolt, WA 98675
And:	WESTERN POWER & EQUIPMENT CORP.,
	an Oregon corporation	("Western Power" or "Tenant")
	6407-B N.E. 117th Avenue
	Vancouver, Washington 98662

    Subject to the terms and conditions of this Lease, Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the real property described on Exhibit A hereto (which by this reference is made a part hereof), together with all improvements now and hereafter situated on said land (said land, together with such improvements, being hereinafter referred to as the "Premises"). The Premises are located at 6407-B N.E. 117^th Avenue, Vancouver, Washington.

    The parties hereto, for themselves, their heirs, administrators, executors, successors and assigns, hereby covenant and agree as follows:

    Section 1.  Occupancy

1.1  Term.  The term of this Lease (hereinafter referred to as the "Term") shall commence on the date (the "Commencement Date") on which Landlord acquires fee title to the Premises, and continue through, and expire on, March 31, 2006 (the "Expiration Date"), unless sooner terminated as hereinafter provided.

1.2  Possession.  Tenant's right to possession of the Premises, and its obligations under this Lease, shall commence on the Commencement Date. If the Commencement Date does not fall on the first day of the month, Rent (as hereinafter defined) for the first month under this Lease shall be prorated accordingly, and shall be due on the Commencement Date.

    Section 2.  Rent

2.1  Base Rent.  Tenant covenants and agrees to pay to Landlord an annual base rent (the "Base Rent"), in equal monthly installments, in advance, without demand, deduction or set off, at such place as may be designated by Landlord, on the first day of each month throughout the Term of this Lease, $98,400 per year ($8,200 per month).

2.2  Additional Rent.  All taxes, insurance costs, utility charges, maintenance costs, repair charges and other sums that Tenant is required to pay pursuant to this Lease to Landlord or third parties, shall be "additional rent." For the purposes of this Lease, Base Rent and additional rent are sometimes collectively referred to as "Rent."

    Section 3.  Use of the Premises

3.1  Permitted Use.  The Premises shall be used for general office use, and for any other lawful purpose, subject to the applicable provisions of this Lease.

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3.2  Restrictions on Use.  In connection with the use of the Premises, Tenant shall:

(a) Comply with all applicable laws and regulations of any public authority having jurisdiction over the Premises and the use thereof, and correct, at Tenant's own expense, any failure of compliance created through Tenant's fault or by reason of Tenant's use;

(b) Refrain from any activity that would make it impossible to insure the Premises against casualty, would permanently increase the insurance rate, or would prevent Landlord from taking advantage of any ruling allowing Landlord to obtain reduced premium rates for long-term fire insurance policies, unless Tenant pays the additional cost of the insurance;

(c) Refrain from any use that would be reasonably offensive to other tenants or owners or users of neighboring premises or that would tend to create a nuisance or damage the reputation of the Premises;

(d) Refrain from loading the electrical system or floors beyond the point considered safe by a competent engineer or architect reasonably selected by Landlord; and

(e) Subject to Section 3.3, refrain from making any marks on or attaching any additional sign, insignia, antenna, aerial, satellite dish or other device to the exterior or interior walls, windows, or roof of the Premises without the written consent of Landlord, which shall not be unreasonably withheld or delayed.

3.3  Signage.  Tenant will be responsible for providing its own signage. Tenant will obtain Landlord's prior approval of the design, size, color, materials, and other details of the sign face, which approval shall not be unreasonably withheld or delayed. Landlord acknowledges that Tenant already has signage on the Premises and hereby consents to such signage.

3.4  Hazardous Substances.

(a) Definitions. For purposes of this Section, the term "Hazardous Substance" means any substance, material or waste, including oil or petroleum products or their derivatives, solvents, PCB's, explosive substances, asbestos, radioactive materials or waste, and any other toxic, ignitable, reactive, corrosive, contaminating or pollution materials which are now or in the future subject to any governmental regulation; the term Hazardous Substance Laws" means all federal, state and local laws, ordinances, regulations and standards relating to the use, analysis, production, storage, sale, release, discharge, disposal or transportation of any Hazardous Substance.

(b) Tenant Compliance With Hazardous Substance Laws. Neither Tenant or its officers, employees, agents, invitees, sublessees or assigns shall cause or permit any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under the Premises, or cause any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released or discharged on or under any property adjacent to the Premises. Tenant may use or otherwise handle on the Premises only those Hazardous Substances (hereinafter referred to as "Ordinary Hazardous Substances") typically used or sold in the prudent and safe operation of the business specified in Section 3.1. Tenant may store such Hazardous Substances on the Premises only in quantities necessary to satisfy Tenant's reasonably anticipated needs. Tenant shall comply with all Hazardous Substance Laws and exercise care in the use, handling, storage and transportation of Hazardous Substances and shall take all possible measures consistent with the practicable operation of its business to minimize the quantity and toxicity of Hazardous Substances used, handled, transported or stored on the Premises. Upon the expiration or termination of this Lease, Tenant shall remove from the Premises all Hazardous Substances stored there by Tenant or its sublessees or assigns.

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(c) Indemnification by Tenant. Tenant shall indemnify, defend, and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses which arise during or after the Term as a result of contamination by Hazardous Substances as a result of Tenant's use or activities or the use or activities of Tenant's officers, employees, agents, invitees, sublessees or assigns. This indemnification of Landlord by Tenant shall include, without limitation, all costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Substances present in the soil and ground water on or under the Premises.

(d) Indemnification by Landlord. Landlord shall indemnify, defend, and hold Tenant harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses which arise during or after the Term as a result of contamination by Hazardous Substances that exist on or before the date of this Lease or as a result of Landlord's use or activities on the Premises or the use or activities of Landlord's officers, employees, agents, invitees, or assignees on the Premises. This indemnification of Tenant by Landlord shall include, without limitation, all costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Substances present in the soil and ground water on or under the Premises.

(e) Notification. Each party shall give written notice to the other within three (3) business days after the date on which the party learns or first has reason to believe that:

    (1) there has or will come to be located on or about the Premises any Hazardous Substance (other than Ordinary Hazardous Substances);

    (2) a release, discharge or emission of a Hazardous Substance has occurred on or about the Premises;

    (3) an enforcement, cleanup, removal or other governmental or regulatory action has been threatened or commenced against the party or with respect to the Premises pursuant to any Hazardous Substance Laws;

    (4) a claim has been made or threatened by any person or entity against the party or the Premises on account of an alleged loss or bodily injury claimed to result from the alleged presence or release on the Premises of a Hazardous Substance; or

    (5) a report, notice, or complaint has been made to or filed with a governmental agency concerning the presence, use or disposal of any Hazardous Substance on the Premises. Any such notice shall be accompanied by copies of any such claim, report, complaint, notice, warning or other communication that is in the possession of or is reasonably available to the party.

(f)  Cleanup Activity.

    (1) If during the Term any remedial action is necessary to clean up any environmental contamination of the Premises (the "Cleanup Activity") to which Tenant's indemnification of Landlord in Section 3.4(c) applies, Tenant shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If after written notice from Landlord, Tenant fails to proceed with reasonable diligence to complete the Cleanup Activity, Landlord shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Tenant. The rights and obligations of the parties set forth in this Section 3.4(f) shall be in addition to those rights and obligations set forth elsewhere in this Lease.

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    (2) Except as set forth in Section 3.4(f)(1), if any other Cleanup Activity is necessary, Landlord shall proceed with reasonable diligence to complete the Cleanup Activity as promptly as possible in compliance with all Hazardous Substance Laws. If Landlord fails to proceed with reasonable diligence to complete the Cleanup Activity, Tenant shall have the right, but not the obligation, to carry out the Cleanup Activity, and to recover all of the costs and expenses thereof from Landlord as a set off against payment of rent under this Lease. The rights and obligations of the parties set forth in this Section 3.4(f) shall be in addition to those rights and obligations set forth elsewhere in this Lease.

(g) Phase I Report. Within thirty (30) days prior to after the expiration or sooner termination of the Term, Tenant, at its expense, shall cause a so-called "Phase I" environmental inspection to be performed and a report in respect thereof to be prepared and delivered to both Landlord and Tenant to determine whether any Cleanup Activity is required, Landlord and Tenant agreeing that the responsibility for the Cleanup Activity shall be determined by the preceding provisions of this Section.

(h) Survival. The parties obligations under this Section 3.4 shall survive the expiration or earlier termination of this Lease.

    Section 4.  Repairs and Maintenance

4.1  Tenant's Obligations.  Tenant shall repair and maintain the entire Premises to the extent necessary to preserve the Premises in good working order and condition, including but not limited to providing regularly scheduled maintenance and replacement (if necessary) of the heating and air conditioning system, and making structural repairs. Tenant's repair obligation shall include, but not be limited to, the repair of any damage to exterior building siding and internal walls of the Premises caused by moving furniture, fixtures and equipment in and out of the Premises. Tenant shall have the roof maintained yearly by a qualified roof contractor.

4.2  Repairs to Comply with Laws.  All repairs, alterations and other improvements on or to the Premises that are required by any governmental authority having jurisdiction over the Premises or the use thereof shall be performed by Tenant at its sole cost and expense.

4.3  Reimbursement for Repairs Assumed.  If Tenant fails or refuses to make the repairs that are required by this Section in a timely manner, Landlord may (but shall not be obligated to) make the repairs and charge the actual costs of repairs to Tenant. Such expenditures by Landlord shall be charged to Tenant as additional rent and shall be reimbursed by Tenant within ten (10) days after Landlord's demand therefor. Except in an emergency creating an immediate risk of personal injury or property damage, Landlord may not perform repairs which are the obligation of Tenant and charge Tenant for the resulting expense, unless at least ten (10) days before work is commenced Tenant is given notice in writing outlining with reasonable particularity the repairs required, and Tenant fails within that time to initiate such repairs in good faith.

4.4  Inspection of Premises.  Landlord shall have the right to inspect the Premises at any reasonable time or times, and upon reasonable prior (written or oral) notice, to determine the necessity of repair.

4.5  Landlord's Obligations.  Landlord shall be responsible for the structural integrity of the Premises including floors, ceilings, roof, exterior walls, and foundation. However, Tenant shall be responsible for all maintenance and repairs to roof, walls, and foundations including maintenance and repairs for normal wear and tear and conditions caused by or attributable to Tenant's activities on the Premises.

    Section 5.  Alterations

5.1  Alterations Prohibited.  Tenant shall make no improvements or alterations to the Premises without first obtaining Landlord's written consent, which consent shall not be

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unreasonably withheld or delayed. All alterations shall be made according to architectural designs and plans, construction drawings and specifications approved by Landlord, which approval shall not be unreasonably withheld or delayed, and in a good and workmanlike manner, and in compliance with applicable laws and building codes. As used herein, "alterations" includes the exterior installation of transmitters and receivers (e.g., satellite dishes) and related wiring, cables, and conduit. All approved improvements and alterations shall be made at Tenant's sole expense and Tenant shall keep the Premises free from any lien arising out of work performed pursuant to this Section. In the event any such lien is filed against the Premises by any person claiming by, through or under Tenant, Tenant shall, within fifteen (15) days after Landlord's demand therefor, at Tenant's expense, either cause such lien to be removed from the record or furnish a bond in form and amount and issued by a surety reasonably satisfactory to Landlord, indemnifying the Landlord against all liability relating to such lien. Provided that such bond has been furnished to Landlord, Tenant, at its sole cost and expense may contest, by appropriate proceedings conducted in good faith and with due diligence, any lien, encumbrance or charge against the Premises arising from work done or materials provided to and for Tenant, providing that such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

5.2  Ownership and Removal of Alterations.  All approved improvements and alterations made to the Premises by Tenant during the Term, other than Tenant's trade fixtures, shall be the property of Landlord when installed unless the applicable Landlord's consent provides otherwise. Upon expiration of the Term or earlier termination under this Lease, Tenant's trade fixtures shall be removed by Tenant and the Premises restored to its condition prior to installation if the applicable consent so requires.

    Section 6.  Insurance; Indemnification; Subrogation

6.1  Liability Insurance.  Tenant shall procure, and thereafter maintain during the Term, the following insurance at Tenant's cost: commercial general liability policy (occurrence version) in a responsible company with coverage for bodily injury and property damage liability with a general aggregate limit of not less than $1,000,000 for injury to one person, $3,000,000 for injury to two or more persons in one occurrence. Such insurance shall cover all risks arising directly or indirectly out of Tenant's activities on, or any condition of, the Premises. Such insurance shall protect Tenant against the claims of Landlord on account of the obligations assumed by Tenant under Section 6.3, and shall name Landlord as an additional insured. Certificates evidencing such insurance and bearing endorsements requiring 10 days' written notice to Landlord prior to any change or cancellation shall be furnished to Landlord prior to Tenant's occupancy of the Premises.

6.2  Property Insurance.  Tenant shall, at Tenant's expense, keep the Premises insured against loss or damage resulting from perils covered by what is commonly referred to as "all risk" coverage insurance (but excluding earthquake and flood) for the full insurable replacement cost (guaranteed replacement). All premiums on said policy(s) shall be paid by Tenant. The policy(s) or a certificate thereof signed by the insurer shall be delivered to Landlord within five (5) days after the issuance and/or renewal of the policy(s) to the Tenant. Each policy shall name Landlord as an additional insured, and shall provide that such policy(s) may not be amended or canceled without thirty (30) days' prior written notice to Landlord. If Tenant fails to obtain the above required insurance, Landlord may, but shall not be required to procure such insurance and charge the cost to Tenant as additional rent, payable on demand. Tenant shall carry similar insurance insuring the property of Tenant on the property against such risks. Tenant shall also carry earthquake insurance on the Premises at Tenant's sole expense.

6.3  Indemnification.  Except as set forth in Section 3.4(d), Tenant shall indemnify and hold Landlord harmless from and against any and all third-party claims, loss or liability for accident, injury or damage to persons or property arising from or in connection with, Tenant's possession, operation, use, or occupation of the Premises. In case any action or proceeding is brought against Landlord and such claim is a claim from which Tenant is obligated to indemnify Landlord pursuant to this Section, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord). Landlord and Landlord's agents shall have no liability to Tenant for any injury, loss, or damage caused by third parties or by any condition of the Premises, except to the extent caused by Landlord's negligence or breach of any of Landlord's covenants contained in this Lease.

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6.4  Waiver of Subrogation.  Neither party, nor its officers, directors, employees, agents or invitees, nor, in the case of Tenant, subtenants, shall be liable to the other party or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, when such loss is caused by any of the perils which are or could be insured against under a standard policy of full replacement cost insurance for fire, theft and all risk coverage, or losses under workers' compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees (Landlord and Tenant agreeing that the preceding clause shall not apply, however, to any damages causes by intentionally wrongful actions or omissions of such party); provided, however, that if, by reason of the foregoing waiver, either party shall be unable to obtain any such insurance, such waiver shall be deemed not to have been made by such party and, provided further, that if either party shall be unable to obtain any such insurance without the payment of an additional premium therefor, then, unless the party claiming the benefit of such waiver shall agree to pay such party for the cost of such additional premium within thirty (30) days after notice setting forth such requirement and the amount of the additional premium, such waiver shall be of no force and effect between such party and such claiming party. Each party shall use reasonable efforts to obtain such insurance from a company that does not charge an additional premium or, if that is not possible, one that charges the lowest additional premium. Each party shall give the other party notice at any time when it is unable to obtain insurance with such a waiver of subrogation without the payment of an additional premium and the foregoing waiver shall be effective until thirty (30) days after notice is given. Notwithstanding anything contained herein, Landlord is not obligated under this Lease to insure the Premises.

    Section 7.  Taxes; Utilities

7.1  Property Taxes.  Tenant shall pay as due all taxes on its personal property located on the Premises. Tenant shall pay as due all real property taxes levied against the Premises. As used herein, real property taxes includes any fee or charge relating to the ownership, use, or rental of the Premises, other than taxes on the net income of Landlord or Tenant.

7.2  Special Assessments.  If an assessment for a public improvement is made against the Premises, Tenant shall pay such assessment. Landlord shall take all appropriate action to cause such assessment to be paid in the maximum number of installments permitted by law, statute or ordinance (if such option for installment payments is available to Landlord), in which case all installments coming due during the Lease term shall be treated the same as general property taxes pursuant to section 7.1.

7.3  Contest of Taxes.  Tenant shall be permitted to contest the amount of any tax or assessment as long as such contest is conducted in a manner that does not cause any risk that Landlord's interest in the Premises will be foreclosed for nonpayment.

7.4  Proration of Taxes.  Tenant's share of real property taxes for the years in which this Lease commences or terminates shall be prorated based on the portion of the tax year that this Lease is in effect.

7.5  New Charges or Fees.  If a new charge or fee relating to the ownership or use of the Premises or the receipt of rental therefrom or in lieu of property taxes is assessed or imposed, then, to the extent permitted by law, Tenant shall pay such charge or fee. Tenant, however, shall have no obligation to pay any income, profits, or franchise tax levied on the net income derived by Landlord from this Lease.

7.6  Payment of Utilities Charges.  Tenant shall pay when due all charges for services and utilities incurred in connection with the use, occupancy, operation, and maintenance of the Premises, including, but not limited to, charges for fuel, water, gas, electricity, sewage disposal, power, refrigeration, air conditioning, telephone, and janitorial services.

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    Section 8.  Damage and Destruction

8.1  Damaged Premises.  Tenant shall give immediate notice to Landlord in the event of any damage or destruction affecting the Premises. Subject to the provisions of this Section, Tenant shall immediately proceed to restore the Premises using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Restoration shall be performed according to architectural designs, plans and construction drawings and specifications approved in advance by Landlord, which approval shall not be unreasonably withheld or delayed.

8.2  Damage or Destruction Late in Term.  If within one year before the end of the lease term the Premises are destroyed or damaged such that the cost of repair exceeds 50% of the value of the structure before the destruction or damage, Tenant may elect to terminate this Lease as of the date of the damage or destruction by giving notice to Landlord in writing not more than 45 days following the date of destruction or damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to the reimbursement of any prepaid amounts paid by Tenant and attributable to what would have otherwise been the unexpired Term. Tenant shall surrender possession of the Premises within a reasonable time after such written notice is given, and assign any insurance proceeds paid on account of such damage to Landlord. If Tenant does not elect to terminate, Tenant shall proceed to restore the Premises to substantially the same form as prior to the damage or destruction using the proceeds of insurance carried pursuant to Section 6 of this Lease and any insurance proceeds available from Landlord's insurance. Work shall be commenced as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and other matters beyond Tenant's reasonable control.

8.3  Rent Abatement.  To the extent that the Premises are rendered untenantable as a result of a fire or other casualty, the Rent shall not be abated or reduced in any way.

8.4  Personal Property.  All personal property in said Premises shall be at the risk of Tenant. Except to the extent caused by the negligent or intentional acts of Landlord, Landlord or Landlord's agents shall not be liable for any damage either to person or property, sustained by Tenant or others, caused by any defects now in said Premises or hereafter occurring therein, or any part or appurtenance thereof, caused by being out of repair, or caused by the bursting or leaking of water, gas, sewer or steam pipes.

    Section 9.  Eminent Domain

9.1  Partial Taking.  If a portion of the Premises is condemned and Section 9.2 does not apply, this Lease shall continue on the following terms:

(a) The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises. Tenant's right to participate in the condemnation proceeds shall be limited to the value of its leasehold interest and the depreciated value of any improvements and alterations constructed on the Premises at the Tenant's sole expense subsequent to the Commencement Date.

(b) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Premises as are necessary to restore the remaining Premises to a condition as comparable as reasonably practicable to that existing at the time of the condemnation.

(c) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Premises in anticipation of taking, the Base Rent shall be reduced in proportion to the reduction in value of the Premises as an economic unit on account of the partial taking. If the

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parties are unable to agree on the amount of the reduction of Base Rent, the amount shall be determined by arbitration in the manner provided in Section 17.

9.2  Total Taking.  If a condemning authority takes all of the Premises or a portion which Landlord and Tenant agree is sufficient to render the remaining Premises reasonably unsuitable for the use that Tenant was then making of the Premises, this Lease shall terminate as of the date the title vests in the condemning authorities. The parties shall be entitled to share in the condemnation proceeds in proportion to the values of their respective interests in the Premises.

9.3  Sale in Lieu of Condemnation.  Sale of all or part of the Premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this Section 9 as a taking by condemnation.

    Section 10.  Liens

10.1  Except with respect to activities for which Landlord is responsible, Tenant shall pay as due all claims for work done on and for services rendered or material furnished to the Premises, and shall keep the Premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the Interest Rate (as hereinafter defined) from the date expended by Landlord and shall be payable on demand. Such action by Landlord shall not constitute a waiver of any right or remedy which Landlord may have on account of Tenant's default. For the purposes of this Lease "Interest Rate" shall mean three (3%) percent per annum over the then prime rate of interest established by Citibank, N.A. (or any successor thereto), adjusted daily, but in no event in excess of the maximum lawful rate of interest permitted by applicable law.

10.2  Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord's interest in the Premises will not be foreclosed for nonpayment. If a lien is filed as a result of nonpayment, Tenant shall, within ten (10) days after knowledge of the filing, secure the discharge of the lien or deposit with Landlord cash or sufficient corporate surety bond or other surety satisfactory to Landlord in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could reasonably accrue as a result of a foreclosure or sale under the lien.

    Section 11.  Quiet Enjoyment; Mortgage Priority

11.1  Landlord's Warranty.  Landlord warrants that it is the owner of the Premises and has the right to lease them free of all encumbrances, except for the encumbrances (the "Permitted Encumbrances") set forth on Exhibit B hereto (which by this reference is made a part hereof) and except as expressly set forth in Section 11.2 below. Landlord will defend Tenant's right to quiet enjoyment of the Premises from the lawful claims of all persons during the Term. Tenant hereby acknowledges and agrees that this Lease, and the leasehold estate created hereby, are subject and subordinate to all of the Permitted Encumbrances.

11.2  Mortgage Priority.  This lease is and shall be prior to all mortgages or deeds of trust (collectively, "Fee Mortgages") recorded after the date of this lease and affecting Landlord's interest in the Premises. However, if any lender holding a Fee Mortgage requires that this Lease be subordinate to the Fee Mortgage in question, then Tenant agrees that this Lease shall be subordinate to such Fee Mortgage if the holder thereof agrees in writing with Tenant that as long as Tenant performs its obligations under this Lease no foreclosure, deed given in lieu of foreclosure, or sale pursuant to the terms of such Fee Mortgage, or other steps or procedures taken under such Fee Mortgage shall affect Tenant's rights under this Lease. If the foregoing condition is met, Tenant shall execute the written agreement and any other documents required by the holder of such Fee Mortgage to accomplish the purposes of this paragraph. If the Premises are sold as a result of foreclosure of any Fee Mortgage thereon, or otherwise transferred by Landlord or any successor, Tenant shall attorn to the purchaser or transferee.

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11.3  Estoppel Certificate.  Either party will, within 20 days after notice from the other, execute and deliver to the other party a certificate stating whether or not this Lease has been modified and is in full force and effect and specifying any modifications or alleged breaches by the other party. The certificate shall also state the amount of monthly Base Rent, the dates to which Base Rent and any other Rent payments have been paid in advance, and the amount of any security deposit or prepaid Rent. Failure to deliver the certificate within the specified time shall be conclusive upon the party from whom the certificate was requested that this Lease is in full force and effect and has not been modified except as represented in the notice requesting the certificate.

    Section 12.  Assignment and Subletting.

12.1  Landlord hereby agrees that Tenant may assign this Lease or sublease all or a portion of the Premises in writing to any other party, with the prior written consent of Landlord, provided that:

    (1) Landlord shall have the right to pre-approve each and every proposed subtenant and assignee, which approval shall not be unreasonably withheld or delayed.

    (2) Any attempt by Tenant to assign, transfer, or sublet without Landlord's prior written consent shall be void and shall constitute a material default by Tenant.

    (3) Regardless of Landlord's consent to an assignment or sublease, Tenant shall not be released from any of its obligations and liabilities under this Lease, except as may be set forth in Landlord's written consent.

    (4) Landlord's acceptance of Rent from any other person or entity pending a determination of whether to consent to an assignment or sublease shall not constitute a waiver of Landlord's right to approve or disapprove such assignment or sublease.

    (5) A default by an assignee, sublessee, or transferee shall constitute a default by Tenant and in the event of such default, Landlord may proceed directly against Tenant.

    (6) Tenant shall grant to Landlord a security interest in all of its right, title and interest in all rents and income from an assignment or sublease to secure the payment of Rent owed under this Lease.

    (7) Tenant shall pay all reasonable costs and fees incurred by Landlord in connection with evaluating whether to give its consent and/or in giving its consent to a proposed assignment or sublease, including attorneys', architects', engineers' and consultants' fees, not to exceed $2500.

12.2  Notwithstanding any provision to the contrary, Tenant may assign this Lease or sublet all or part of the Premises, without Landlord's approval, to a parent corporation, any subsidiary, any affiliate, any partnership, limited liability company or other business entity where Tenant or any affiliate of Tenant is the managing or general partner, manager or the equivalent, as the case may be, or in connection with a merger, acquisition, reorganization or consolidation of Tenant, or in connection with the sale or transfer of all or substantially all of Tenant's (or its parent's or affiliates') stock or assets. The term "affiliate" as used herein shall mean any entity in which Tenant or its parent corporation holds fifty percent (50%) or more of the ownership interests. Notwithstanding a transfer pursuant to this Section 12.2, Tenant shall not be released from liability under this Lease upon the assignment or subletting of all or part of the Premises to such parent corporation, subsidiary, affiliate, partnership, limited liability company or other business entity.

    Section 13.  Default

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    The following shall be events of default:

13.1  Default in Rent.  Failure of Tenant to pay any installment of Rent within ten (10) days after written notice by Landlord specifying the nature of the default with reasonable particularity.

13.2  Default in other covenants.  Failure of Tenant to comply with any other term or condition or fulfill any other obligation of this Lease within 20 days after written notice by Landlord specifying the nature of the default with reasonable particularity. If the default is of such a nature that it cannot be completely remedied within the 20-day period, an event of default shall not have occurred if Tenant begins correction of the default within the 20-day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable.

13.3  Insolvency.  Insolvency of Tenant; an assignment by Tenant for the benefit of creditors; the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a receiver of the properties of Tenant; or the filing of any involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within 90 days after filing shall constitute a default. If Tenant consists of two or more individuals or business entities, the events of default specified in this Section 13.3 shall apply to each individual unless within ten (10) days after an event of default occurs, the remaining individuals produce evidence satisfactory to Landlord that they have unconditionally acquired the interest of the one causing the default. If this Lease has been assigned, the events of default so specified shall apply only with respect to Tenant and to the one then exercising the rights of Tenant under this Lease.

13.4  Abandonment.  Failure of Tenant for thirty (30) days or more to occupy the Premises for one or more of the purposes permitted under this Lease, unless such failure is excused under other provisions of this Lease.

    Section 14.  Remedies on Default

14.1  Termination.  In the event of a default, the Lease may be terminated at the option of Landlord by written notice to Tenant. Whether or not the Lease is terminated by the election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant for the default, and Landlord may reenter, take possession of the Premises, and remove any persons or property by legal action and without having accepted a surrender.

14.2  Reletting.  Following reentry or abandonment, Landlord may relet the Premises and in that connection may make any suitable alterations or refurbish the Premises, or both, or change the character or use of the Premises, but Landlord shall not be required to relet for any use or purpose other than that specified in this Lease or which Landlord may reasonably consider injurious to the Premises, or to any tenant that Landlord may reasonably consider objectionable. Landlord may relet all or part of the Premises, alone or in conjunction with other properties, for a term longer or shorter than the term of this Lease, upon any reasonable terms and conditions, including the granting of reasonable rent-free occupancy or other rent concession.

14.3  Remedies.  In the event of material breach or default under the terms of this Lease, either party shall have all rights and remedies available to them under law or equity in the State of Washington and/or City of Kent.

14.4  Landlord's Right to Cure Defaults.  If Tenant fails to perform any obligation under this Lease, Landlord shall have the option to do so after 30 days' written notice to Tenant. All of Landlords expenditures to correct the default shall be reimbursed by Tenant on demand with interest at the Interest Rate from the date of expenditure by Landlord. Such action by Landlord shall not waive any other remedies available to Landlord because of the default.

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14.5  Remedies Cumulative.  The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law.

    Section 15.  Surrender at Expiration

15.1  Condition of Premises.  Subject to the provisions of Section 8 herein, upon expiration of the Term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and surrender the Premises in first class condition, reasonable wear and tear excepted. Tenant shall clean and replace as necessary carpets and flooring. Tenant shall also clean and paint interior and exterior of building. Improvements and alterations constructed by Tenant with permission from Landlord shall not be removed, or the Premises restored to the original condition, unless the terms of permission for the improvement or alteration so require.

15.2  Fixtures

(a) All fixtures placed upon the Premises during the Term, other than Tenant's trade fixtures, shall, at Landlord's option, become the property of Landlord. Tenant's trade fixtures include, without limitation, air compressors in shop area (but excluding air lines that are attached to the walls and overhead bridge cranes and hoists attached to the shop ceiling or otherwise attached to the walls or floors of the shop area), and those additional trade fixtures placed on the Premises during the Term. If Landlord's applicable consent referenced in Section 5 so requires, Tenant shall remove any or all fixtures placed upon the Premises by the Tenant that would otherwise remain the property of Landlord, and shall repair any physical damage resulting from the removal. If Tenant fails to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest at the Interest Rate from the date of expenditure.

(b) Prior to expiration or other termination of the Term, Tenant shall remove all furnishings, furniture, and trade fixtures that remain its property and repair any damage to the Premises caused by such removal. If Tenant fails to do so, this shall be an abandonment of the property, and Landlord may retain the property and all rights of Tenant with respect to it shall cease or, by notice in writing given to Tenant within 20 days after removal was required, Landlord may elect to hold Tenant to its obligation of removal. If Landlord elects to require Tenant to remove, Landlord may effect a removal and place the property in public storage for Tenant's account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest at the Interest Rate on all such expenses from the date of expenditure by Landlord.

15.3  Holdover

(a) If Tenant does not vacate the Premises at the time required, Landlord shall have the option to treat Tenant as a tenant from month-to-month, subject to all of the provisions of this Lease except the provisions for term and renewal and at a rental rate equal to $30,000.00 per month, or to eject Tenant from the Premises and recover damages caused by wrongful holdover. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures that Tenant is required to remove under this Lease shall constitute a failure to vacate to which this Section shall apply if the property not removed will substantially interfere with occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(b) If a month-to-month tenancy results from a holdover by Tenant under this Section 15.3, the tenancy shall be terminable at the end of any monthly rental period on written notice from Landlord given not less than ten (10) days prior to the termination date which shall be specified in the notice. Tenant waives any notice that would otherwise be provided by law with respect to a month-to-month tenancy.

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    Section 16.  Miscellaneous

16.1  Nonwaiver.  Waiver by either party of strict performance of any provision of this Lease shall not be a waiver of or prejudice to the party's right to require strict performance of the same provision in the future or of any other provision.

16.2  Attorney Fees.  If suit or action is instituted in connection with any controversy arising out of this Lease, the prevailing party shall be entitled to recover in addition to costs such sum as the court may adjudge reasonable as attorney fees at trial, on petition for review, and on appeal.

16.3  Notices.  Except as otherwise expressly permitted in this Lease, all notices, demands, approvals, consents, requests and other communications which under the terms of this Lease, or under any statute, must or may be given or made by the parties hereto, must be in writing, and must be made either (i) by depositing such notice in registered or certified mail of the United States of America, return receipt requested, or (ii) by delivering such notice by a commercial courier, which courier provides for delivery with receipt guaranteed, addressed to each party at the addresses set forth on the first page of this Lease. All notices, demands, approvals, consents, requests and other communications shall be deemed to have been delivered (i) if mailed as provided for in this Paragraph, on the date which is three (3) business days after mailing or (ii) if sent by commercial courier, on the date which is one (1) business day after dispatching. Either party may designate by notice in writing given in the manner herein specified a new or other address to which such notice, demand, approval, consent, request and other communication shall thereafter be so given or made. Notwithstanding the foregoing all Rent statements, bills and invoices may be given by regular mail.

16.4  Exculpation.  Tenant shall look solely to the estate and property of Landlord in the Premises (including Landlord's rights to the rents, profits, insurance proceeds and condemnation awards related thereto), for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord, and no other property or assets of Landlord (or of any direct or indirect, disclosed or undisclosed, partner, member, shareholder, officer, director, employee or principal in or of Landlord) shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises.

16.5  Succession.  Subject to the above-stated limitations on transfer of Tenant's interest, this Lease shall be binding on and inure to the benefit of the parties and their respective successors and assigns, heirs, executors and administrators.

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16.6  Recordation.  Landlord shall execute and acknowledge a memorandum of this lease in a form suitable for recording, and Tenant may record the memorandum.

16.7  Entry for Inspection.  Landlord shall have the right to enter upon the Premises upon reasonable advance notice to determine Tenant's compliance with this Lease, to make repairs to the Premises which it expressly has the right to make under this Lease, or to show the Premises to any prospective tenant or purchaser, and in addition shall have the right, at any time during the last six (6) months of the term of this Lease, to place and maintain upon the Premises notices for leasing or selling of the Premises.

16.8  Interest on Rent and other Charges.  Any rent or other payment required of Tenant by this Lease shall, if not paid within ten (10) days after it is due, bear interest at the Interest Rate from the due date until paid. In addition, if Tenant fails to make any rent or other payment required by this Lease to be paid to Landlord within ten (10) days after it is due, Landlord shall impose a late charge of five cents ($.05) per dollar of the overdue payment to reimburse Landlord for the costs of collecting the overdue payment. Tenant shall pay the late charge upon demand by Landlord. Landlord may levy and collect a late charge in addition to all other remedies available for Tenant's default, and collection of a late charge shall not waive the breach caused by the late payment.

16.9  Proration of Rent.  In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all pre paid Rent shall be refunded to Tenant or paid on its account.

16.10  Time of Essence.  Time is of the essence of the performance of each of Tenant's and Landlord's obligations under this Lease.

    Section 17.  Arbitration

17.1  Any dispute arising out of or relating to this Lease that cannot be resolved by good faith negotiations between the parties shall be submitted to the American Arbitration Association in Portland, Oregon ("AAA") for final and binding arbitration pursuant to AAA's rules and procedures. The substantive and procedural law of the State of Washington shall govern this Lease and the mediation and arbitration proceedings. All statutes of limitation which would otherwise be applicable will apply to the arbitration proceedings. There will be one arbitrator agreed upon by the parties or, if not agreed, selected by the AAA. The arbitrator shall conduct an arbitration hearing within ninety (90) days after the arbitration demand is received by the AAA. The arbitrator shall issue a written award within fourteen (14) days after the hearing.

17.2  The arbitrator may award damages, injunctive relief and/or any other relief available in law or equity under Washington law. The prevailing party in the arbitration shall be entitled to an award of costs and reasonable attorneys' fees in addition to any other award or relief granted. The arbitration award shall be final and may be reduced in judgment in any court of competent jurisdiction.

17.3  Absent fraud, collusion or willful misconduct by the arbitrator, the award will be final, and judgment may be entered in any court having jurisdiction thereof. The arbitrator may award injunctive relief or any other remedy available from a judge, including the joinder of parties or consolidation of this arbitration with any other involving common issues of law or fact or which may promote judicial economy, and may award attorneys' fees and costs to the prevailing party but will not have the power to award punitive or exemplary damages.

17.4  If AAA is no longer in existence at the time of any dispute subject to this Section 17, the parties agree to use an alternative arbitration service using substantially similar rules and procedures.

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IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the day and year first herein written.

	Landlord:		McLAIN-RUBIN REALTY COMPANY II, L.L.C.,
				a Delaware limited liability company
			By:
			Its:
	Tenant:		WESTERN POWER & EQUIPMENT CORP.,
				an Oregon corporation
			By:
			Its:
STATE OF WASHINGTON		)
		) ss.
County of		)

    I certify that I know or have satisfactory evidence that                  is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the Manager of McLain-Rubin Realty Company II, L.L.C., a Delaware limited liability company, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of April, 2001.

(Signature of Notary)

(Legibly print or Stamp Name of Notary)

Notary Public in and for the state of Washington, residing at

My Appointment Expires

STATE OF WASHINGTON	)
	) ss.
County of	)

    I certify that I know or have satisfactory evidence that                  is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument, and acknowledged it as the                  

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of Western Power & Equipment Corp., an Oregon corporation, to be the free and voluntary act of such company for the uses and purposes mentioned in the instrument.

    Dated this      day of April, 2001.

(Signature of Notary)

(Legibly print or Stamp Name of Notary)

Notary Public in and for the state of Washington,

residing at

My Appointment Expires

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EXHIBIT A
Description of Real Property

    Commonly known as 6407-B N.E. 117^th Avenue, Vancouver, WA 98662.

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EXHIBIT B
Permitted Encumbrances

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Exhibit 10.16

COMMERCIAL LEASE
EXHIBIT A Description of Real Property
EXHIBIT B Permitted Encumbrances

EX-21

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EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

1.

Western Power & Equipment Corp., an Oregon corporation (100% owned by the Company).

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EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

EX-23

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EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

    We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 of Western Power & Equipment Corp. of our report dated October 6, 2001 relating to the financial statements and the financial schedules which appear in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP

Portland, Oregon
November 12, 2001

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EXHIBIT 23