<PAGE>

                 UNITED STATE SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

                                   (Mark One)

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________

                          COMMISSION FILE NUMBER 1-2199


                           ALLIS-CHALMERS ENERGY INC.
                           --------------------------
             (Exact name of registrant as specified in its charter)


            DELAWARE                                              39-0126090
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)


                5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
                -------------------------------------------------
               (Address of principal executive offices) (Zip code)

                                 (713) 369-0550
                                 --------------
               Registrant's telephone number, including area code

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     COMMON STOCK, PAR VALUE $0.15 PER SHARE

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 [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]


At May 17, 2004, there were 31,393,789 shares of common stock outstanding.




<PAGE>

                           ALLIS-CHALMERS ENERGY INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

                                TABLE OF CONTENTS
                                -----------------


                                     PART I

ITEM                                                                        PAGE
----                                                                        ----

1.   Financial Statements

     Restated Consolidated Balance Sheets as of March 31, 2004 and
       December 31, 2003....................................................  4

     Restated Consolidated Statements of Operations for the three months
       Ended March 31, 2004 and 2003........................................  5

     Restated Consolidated Statements of Cash Flows for the three months
        ended March 31, 2004 and 2003.......................................  6

     Notes to Restated Consolidated Financial Statements....................  7

2.   Management's Discussion and Analysis of Financial Condition and
        Results of Operations............................................... 17

4.   Controls and Procedures................................................ 22


                                     PART II

6.   Exhibits and Reports on Form 8-K....................................... 22

Signatures and Certifications............................................... 22


                                       2



<PAGE>

                                INTRODUCTORY NOTE

     Allis Chalmers Energy Inc. (formerly known as Allis-Chalmers Corporation)
is filing this Amendment No. 1 ("Amendment No. 1") to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004 (the "Original
Filing"), which was originally filed on May 17, 2004 (the "Original Filing
Date") to reflect the restatement of our financial results resulting from our
determination to change the manner in which we accounted for the formation of
our AirComp LLC subsidiary in July 2003. The restatement is discussed in more
detail in Note 2 to the accompanying consolidated financial statements. The
following items of the Original Filing are amended by this Amendment No. 1:


     PART I. FINANCIAL INFORMATION

     ITEM 1. FINANCIAL STATEMENTS

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
     RESULTS OF OPERATIONS

     ITEM 4. CONTROLS AND  PROCEDURES

     PART II

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Unaffected items have not been repeated in this Amendment No. 1.

     PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS AMENDMENT NO. 1,
INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT
EVENTS OCCURRING AFTER THE ORIGINAL FILING DATE. SUCH EVENTS INCLUDE, AMONG
OTHERS, THE ONE-TO-FIVE REVERSE STOCK SPLIT OF OUR COMMON STOCK EFFECTED JUNE
10, 2004, THE EVENTS DESCRIBED IN OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE
PERIODS ENDED JUNE 30, 2004 AND SEPTEMBER 30, 2004, OR THE EVENTS DESCRIBED IN
OUR CURRENT REPORTS ON FORM 8-K FILED AFTER THE ORIGINAL FILING DATE. FOR A
DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE
THE ORIGINAL FILING DATE.


                                       3



<PAGE>

                          PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

<TABLE>
                                     ALLIS-CHALMERS CORPORATION
                                     CONSOLIDATED BALANCE SHEETS
                                      (unaudited)(in thousands)
                                        See Explanatory Note

                                                                        March 31,     December 31,
                                                                          2004            2003
                                                                       ----------     ----------
                                                                              (Restated)
<S>                                                                    <C>            <C>
ASSETS

Cash and cash equivalents                                              $      491     $    1,299
Trade receivables, net                                                      8,347          8,823
Lease receivable, current                                                     180            180
Prepaids and other current assets                                             900            887
                                                                       ----------     ----------
   Total current assets                                                     9,918         11,189

Property and equipment, net                                                31,920         31,128
Goodwill                                                                    7,661          7,661
Other intangible assets, net                                                2,158          2,290
Debt issuance costs, net                                                      557            567
Lease receivable                                                              722            787
Other assets                                                                   79             40
                                                                       ----------     ----------
      Total assets                                                     $   53,015     $   53,662
                                                                       ==========     ==========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current maturities of long-term debt                                   $    4,888     $    3,992
Trade accounts payable                                                      3,483          3,133
Accrued salaries, benefits and payroll taxes                                  885            591
Accrued interest                                                              241            152
Accrued expenses                                                            1,166          1,761
Accounts payable, related parties                                             467            787
                                                                       ----------     ----------
    Total current liabilities                                              11,130         10,416

Accrued postretirement benefit obligations                                    545            545
Long-term debt, net of current maturities                                  26,476         28,241
Other long-term liabilities                                                   129            270
Redeemable warrants                                                         1,500          1,500
Redeemable convertible preferred stock                                      4,259          4,171
                                                                       ----------     ----------
    Total liabilities                                                      44,039         45,143

Commitments and Contingencies (Note 9 and Note 19)

Minority interests                                                          4,051          3,978

COMMON SHAREHOLDERS' EQUITY
   Common stock, $.15 par value (110,000,000 shares authorized;
     19,633,340 issued and outstanding)                                     2,945          2,945
   Capital in excess of par value                                           7,842          7,842
   Accumulated (deficit)                                                   (5,862)        (6,246)
                                                                       ----------     ----------
    Total shareholders' equity                                              4,925          4,541
                                                                       ----------     ----------
    Total liabilities and shareholders' equity                         $   53,015     $   53,662
                                                                       ==========     ==========

             The accompanying Notes are an integral part of the Financial Statements.


                                                  4
</TABLE>



<PAGE>

<TABLE>
                                ALLIS-CHALMERS CORPORATION
                           CONSOLIDATED STATEMENTS OF OPERATIONS
                        (unaudited)(in thousands, except per share)

                                                                  Three Months Ended
                                                            March 31, 2004   March 31, 2003
                                                            --------------   --------------
                                                              (Restated)
<S>                                                           <C>             <C>
Revenues                                                      $    9,661      $    6,999
Cost of revenues                                                   7,528           4,995
                                                              ----------      ----------
    Gross margin                                                   2,133           2,004

General and administrative expense                                 1,103             981
                                                              ----------      ----------
Income from operations                                             1,030           1,023

Other income (expense):
   Interest expense                                                 (569)           (637)
   Minority interests in income of subsidiaries                      (73)           (187)
   Other                                                             187              12
                                                              ----------      ----------
Total other income (expense)                                        (455)           (812)
                                                              ----------      ----------
Net income before income taxes                                       575             211

   Provision for foreign income tax                                 (103)           (158)
                                                              ----------      ----------
Net income                                                           472              53

         Preferred stock dividend                                    (88)           (394)
                                                              ----------      ----------
Net income/(loss) attributed to common shareholders           $      384      $     (341)
                                                              ==========      ==========

Income/(loss) per common share basic                          $     0.02      $    (0.02)
                                                              ==========      ==========

Income/(loss) per common share diluted                        $     0.01      $    (0.02)
                                                              ==========      ==========
Weighted average number of common shares outstanding:
                     Basic                                        19,633          19,633
                                                              ==========      ==========
                     Diluted                                      28,808          19,633
                                                              ==========      ==========

        The accompanying Notes are an integral part of the Financial Statements.


                                             5
</TABLE>



<PAGE>

<TABLE>
                                ALLIS-CHALMERS CORPORATION
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (unaudited)(In thousands)

                                                                        Three Months Ended
                                                                             March 31,
                                                                        2004           2003
                                                                      ---------     ---------
                                                                     (Restated)
<S>                                                                   <C>           <C>
Cash flows from operating activities:
     Net income/(loss)                                                $     472     $      53
     Adjustments to reconcile net income/(loss) to net
           cash provided by operating activities:
     Depreciation expense                                                   619           464
     Amortization expense                                                   217           234
     Amortization of discount on debt                                        75           183
     Minority interest in income of subsidiaries                             73           187
     Changes in working capital:
          Decrease (increase) in accounts receivable                        476        (1,476)
          Decrease (increase) in other current assets                        13          (538)
          Decrease (increase) lease deposit                                   -           101
          (Decrease) increase in accounts payable                           350         1,580
          (Decrease) increase in accrued interest                            89           274
          (Decrease) increase in accrued expenses                          (595)         (203)
          (Decrease) increase in accrued salaries,
              benefits and payroll taxes                                    (26)           30
          (Decrease) increase in other long-term liabilities               (141)            -
                                                                      ---------     ---------
     Net cash provided by operating activities                            1,622           889

Cash flows from investing activities:
         Purchase of equipment                                           (1,411)         (196)
                                                                      ---------     ---------
     Net cash (used) by investing activities                             (1,411)         (196)

Cash flows from financing activities:
         Repayments on long-term debt                                      (944)         (582)
         Debt issuance costs                                                (75)            -
                                                                      ---------     ---------
    Net cash provided (used) by financing activities                     (1,019)         (582)
                                                                      ---------     ---------
    Net increase (decrease) in cash and cash equivalents                   (808)          111

Cash and cash equivalents at beginning of year                            1,299           146
                                                                      ---------     ---------
Cash and cash equivalents at end of period                            $     491     $     257
                                                                      =========     =========

Supplemental information - interest paid                              $     480     $     454
                                                                      =========     =========

           The accompanying Notes are an integral part of the Financial Statements.


                                             6
</TABLE>



<PAGE>

                           ALLIS-CHALMERS CORPORATION

                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
                            (UNAUDITED AND RESTATED)
            FOR THE INTERIM PERIODS ENDED MARCH 31, 2004 AND 2003

PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT
EVENTS OCCURRING AFTER MAY 17, 2004. FOR A DESCRIPTION OF THESE EVENTS, PLEASE
READ OUR EXCHANGE ACT REPORTS FILED SINCE THE DATE OF THE ORIGINAL FILING.

EXPLANATORY NOTE

This Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 (the "Original Filing"), includes restatements
related to our unaudited consolidated financial statements for the period ended
March 31, 2004. The restatement is discussed in Note 2.

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included in Allis-Chalmers Corporation's ("Allis-Chalmers" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 2003
(the "Form 10-K").

All normal and recurring adjustments considered necessary for a fair
presentation of the results of operations have been included in the unaudited
financial statements. In addition, all non-recurring adjustments necessary to
prevent the financial statements from being misleading have been included in the
unaudited financial statements. The results of operations for any interim period
are not necessarily indicative of the Company's operating results for a full
year.

ORGANIZATION OF BUSINESS

OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.

On February 6, 2001, OilQuip, through its subsidiary, Mountain Compressed Air
Inc. ("Mountain Air"), a Texas corporation, acquired certain assets of Mountain
Air Drilling Service Co., Inc. ("MADSCO"), whose business consists of providing
equipment and trained personnel in the four corner areas of the southwestern
United States. Mountain Air primarily provides compressed air equipment and
related products and services and trained operators to companies in the business
of drilling for natural gas.

On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
merger, all of OilQuip's outstanding common stock was converted into 10,000,000
shares of Allis-Chalmers' common stock.

For legal purposes, we acquired OilQuip, the parent company of Mountain Air.
However, for accounting purposes, OilQuip was treated as the acquiring company
in a reverse acquisition of Allis-Chalmers. The financial statements prior to
the merger reflect the operations of OilQuip. As a result of the merger, the
fixed assets, goodwill and other intangibles of Allis-Chalmers were increased by
$2,691,000.

On February 6, 2002, we acquired 81% of the outstanding stock of Jens' Oilfield
Service, Inc. ("Jens'"), which supplies highly specialized equipment and
operations to install casing and production tubing required to drill and
complete oil and gas wells. The Company also purchased substantially all the
outstanding common stock and preferred stock of Strata Directional Technology,
Inc. ("Strata"), which provides high-end directional and horizontal drilling
services for specific targeted reservoirs that cannot be reached vertically.

In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form a Texas limited liability company named AirComp L.L.C. ("AirComp"). We
contributed substantially all of our compressed air drilling assets with an
estimated net book value of approximately $6,300,000 million to AirComp.
Simultaneously, Aircomp acquired the compressed air drilling assets of M-I with
an appraised value $10,269,000 as determined by a third party appraisal. We own
55% and M-I L.L.C. owns 45% of AirComp. We consolidated AirComp into our
financial statements since the quarter ended September 30, 2003.

UNAUDITED PERIODS

The financial information with respect to the three months ended March 31, 2004
and 2003 is unaudited. In the opinion of management, such information contains
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the results for such periods. The results for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.


                                       7



<PAGE>

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 the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be predicted
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts, recoverability of long-lived assets and intangibles, useful
lives used in depreciation and amortization, income taxes and related valuation
allowances. The accounting estimates used in the preparation of the consolidated
financial statements may change as new events occur, as more experience is
acquired, as additional information is obtained and as the Company's operating
environment changes.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries Mountain Air, Jens', Strata and AirComp.
All significant inter-company transactions have been eliminated.


                                       8



<PAGE>

REVENUE RECOGNITION

The Company's revenue recognition policy is significant because revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions. The Company follows
specific and detailed guidelines in measuring revenue. Revenues are recognized
by the Company and its subsidiaries as services are rendered, provided that
pricing is fixed or determinable and collection is reasonably assured. The
Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin ("SAB")
No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 104"), provides
guidance on the SEC staff's views on application of generally accepted
accounting principles to selected revenue recognition issues. The Company's
revenue recognition policy is in accordance with generally accepted accounting
principles and SAB No. 104.

AIRCOMP AND SALE OF INTEREST IN VENTURE

The Company has adopted SEC Staff Accounting Bulletin (SAB) No.51, Accounting
for Sales of Stock by a Subsidiary, to account for its investment in AirComp.
AirComp operates in a manner similar to a joint venture but has been accounted
for and consolidated as a subsidiary under SFAS No. 141, BUSINESS COMBINATIONS.
Pursuant to SAB No. 51, the Company has recorded its own contribution of assets
and liabilities at its historical cost basis. Since liabilities exceeded assets,
the Company's basis in AirComp was a negative amount. The Company has accounted
for the assets contributed from M-I at a fair market value as determined by an
outside appraiser. The Company gave M-I a 45% interest in AirComp in exchange
for the assets contributed. As a result of the formation of the venture and its
retention of 55% interest in the venture, the Company realized an immediate gain
to the extent of its negative basis and its 55% interest in the combined assets
and liabilities of the venture. In accordance with SAB No. 51, the Company has
recorded its negative basis investment in AirComp as an addition to equity and
its share of the combined assets and liabilities realized from M-I assets as
non-operating income.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

The Company discloses the results of its segments in accordance with SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
No. 131"). The Company designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. At March 31, 2004
and 2003, the Company operated in three segments organized by service line:
casing services, directional drilling services and compressed air drilling
services.

NOTE 2 - RESTATEMENT

In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. We originally accounted for the formation of AirComp
as a joint venture, but in February 2005 determined that the transaction should
have been accounted for using purchase accounting pursuant to SFAS No. 141,
BUSINESS COMBINATIONS and accounting for the sale of an interest in a subsidiary
In accordance with SAB No. 51. Consequently, we have restated our financial
statements for the quarter ended September 30, 2003, for the year ended December
31, 2003 and for the three quarters ended September 30, 2004, to reflect the
following adjustments:

Increase In Book Value Of Fixed Assets. Under joint venture accounting, we
originally recorded the value of the assets contributed by M-I to AirComp at
M-I's historical cost of $6,932,000. Under purchase accounting, we increased the
recorded value of the assets contributed by M-I by approximately $3,337,000 to
$10,269,000 to reflect their fair market value as determined by a third party
appraisal. In addition, under joint venture accounting, we established negative
goodwill which reduced fixed assets in the amount of $1,550,000. The negative
goodwill was amortized by us over the lives of the related fixed assets. Under
purchase accounting, we increased fixed assets by $1,550,000 to reverse the
negative goodwill previously recorded and reversed amortization expenses
recorded in 2004. Therefore, fixed assets were increased by a total of
$4,887,000.

Increase In Net Income. As a result of the increase in fixed assets during the
three months ended March 31, 2004, depreciation expense related to the fixed
assets increased by $49,000, depreciation expense was increased by $90,000 as a
result of the reversal of amortization of negative goodwill, and minority
interest expense decreased by $22,000, resulting in reduction in net income
attributable to common stockholders of $117,000.

A restated consolidated balance sheet at March 31, 2004, and a restated
consolidated statement of operations and a restated consolidated statement of
cash flows for the three months ended March 31, 2004, reflecting the above
adjustments, is presented below. The amounts are in thousands, except for share
amounts:


                                       9



<PAGE>

<TABLE>
                                                             At March 31, 2004
                                                             -----------------
                                                       As        Restatement       As
                                                    Reported     Adjustments   Restated
                                                    --------     -----------   --------
<S>                                                 <C>           <C>          <C>
ASSETS

Cash and cash equivalents                           $     491                  $     491
Trade receivables, net of allowance for
doubtful accounts                                       8,347                      8,347
Lease Receivable, current                                 180                        180
Prepaid expenses and other                                900                        900
                                                    ---------                  ---------
Total current assets                                    9,918                      9,918

Property and equipment, net of accumulated
depreciation                                           27,270         4,650       31,920
Goodwill                                                7,661                      7,661
Other intangible assets, net of accumulated
amortization                                            2,158                      2,158
Debt issuance costs, net of accumulated
amortization                                              557                        557
Lease receivable, less current portion                    722                        722
Other Assets                                               79                         79
                                                    ---------     ---------    ---------
Total Assets                                        $  48,365     $   4,650    $  53,015
                                                    =========     =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current maturities of long-term debt                $   4,888                  $   4,888
Trade accounts payable                                  3,483                      3,483

Accrued salaries, benefits and payroll taxes              885                        885
Accrued interest                                          241                        241
Accrued expenses                                        1,166                      1,166
Accounts payable, related parties                         467                        467
                                                    ---------                  ---------
Total current liabilities                              11,130                     11,130

Accrued postretirement benefit obligations                545                        545
Long-term debt, net of current maturities              26,476                     26,476
Other long-term liabilities                               129                        129
Redeemable warrants                                     1,500                      1,500
Redeemable convertible preferred stock
including accrued dividends                             4,259                      4,259
                                                    ---------                  ---------
Total liabilities                                      44,039                     44,039

Commitments and Contingencies

Minority interests                                      2,618         1,433        4,051

COMMON STOCKHOLDERS' EQUITY

Common stock                                            2,945                      2,945
Capital in excess of par value                          6,887           955        7,842
Accumulated (deficit)                                  (8,124)        2,262       (5,826)
                                                    ---------     ---------    ---------
Total stockholders' equity                              1,708         3,217        4,925
                                                    ---------     ---------    ---------
Total liabilities and stockholders' equity          $  48,365     $   4,650    $  53,015
                                                    =========     =========    =========
</TABLE>


                                       10



<PAGE>

<TABLE>
                                                         Three Months March 31, 2004
                                                         ---------------------------
                                                       As        Restatement        As
                                                    Reported     Adjustments     Restated
                                                    --------     -----------     --------
<S>                                                 <C>           <C>           <C>
Revenues                                            $   9,661            --     $   9,661
Cost of revenues                                        7,389           139         7,528
                                                    ---------     ---------     ---------
Gross margin                                            2,272          (139)        2,133

General and administrative expense                      1,103            --         1,103
                                                    ---------     ---------     ---------
Income/ (loss) from operations                          1,169          (139)        1,030

Other income (expense):
Interest income                                            --            --            --
Interest expense                                         (569)           --          (569)
Minority interests in income of subsidiaries              (95)           22           (73)
Other                                                     187            --           187
                                                    ---------     ---------     ---------
Total other income (expense)                             (477)           22          (455)
                                                    ---------     ---------     ---------
Net income/ (loss) before income taxes                    692          (117)          575

Provision for foreign income tax                         (103)           --          (103)
                                                    ---------     ---------     ---------
Net income/ (loss)                                        589          (117)          472

Preferred stock dividend                                  (88)           --           (88)
                                                    ---------     ---------     ---------
Net income attributed to common stockholders        $     501     $    (117)    $     384
                                                    =========     =========     =========

Income/ (loss) per common share - basic             $    0.03                   $    0.02
                                                    =========                   =========
Income/ (loss) per common share - diluted           $    0.02                   $    0.01
                                                    =========                   =========

Weighted average number of common shares
outstanding:
        Basic                                          19,633                      19,633
                                                    =========                   =========
        Diluted                                        28,808                      28,808
                                                    =========                   =========
</TABLE>


                                       11



<PAGE>

<TABLE>
                                                            Three Months Ended March 31, 2004
                                                            ---------------------------------
                                                             As        Restatement        As
                                                          Reported     Adjustment      Restated
                                                          --------     ----------      --------
<S>                                                       <C>           <C>           <C>
Cash flows from operating activities:
Net income/ (loss)                                        $     589     $    (117)    $     472
Adjustments to reconcile net income/ (loss) to
net cash provided by operating activities:
Depreciation and amortization  expense                          697           139           836
Amortization of discount on debt                                 75            --            75
Minority interest in income of subsidiaries                      95           (22)           73
Changes in working capital:
Decrease (increase) in accounts receivable                      476            --           476
Decrease (increase) in other current assets                      13            --            13
Increase (decrease) in accounts payable                         350            --           350
Increase (decrease) in accrued interest                          89            --            89
Increase (decrease) in accrued expenses                        (595)           --          (595)
Increase (decrease) in other long-term liabilities             (141)           --          (141)
Increase (decrease) in accrued employee benefits
and payroll taxes                                               (26)           --           (26)
                                                          ---------     ---------     ---------

Net cash provided by operating activities                     1,622            --         1,622
                                                          ---------                   ---------
Cash flows from investing activities:
Purchase of equipment                                        (1,411)                     (1,411)
                                                          ---------                   ---------

Net cash (used) by investing activities                      (1,411)                     (1,411)

Cash flows from financing activities:
Repayments of long-term debt                                   (944)                       (944)
Debt issuance costs                                             (75)                        (75)
                                                          ---------                   ---------

Net cash provided (used) by financing activities             (1,019)                     (1,019)
                                                          ---------                   ---------

Net increase (decrease) in cash and cash
equivalents                                                    (808)                       (808)

Cash and cash equivalents:

Beginning of the year                                         1,299                       1,299
                                                          ---------                   ---------
End of period                                             $     481                   $     481
                                                          =========                   =========

Supplemental information:

Interest paid                                             $     480                   $     480
                                                          =========                   =========
</TABLE>

Certain prior period balances have been reclassified to conform to current year
presentation.

The accompanying 2003 financial statements have been restated from the
previously filed interim financial statements included in Form 10-Q for the
first, second and third quarters of 2003. As discussed in Note 7 in the
financial statements included in the Form 10-K, an adjustment was recorded in
the fourth quarter of 2003 to reflect a change in estimate of the recoverability
of foreign taxes paid in 2003. The effect of the significant fourth quarter
adjustment on the individual quarterly financial statements is as follows:

                                                              Three Months
                                                                  Ended
                                                             March 31, 2003
                                                             --------------
Net income (loss) attributed to common shareholders:
Previously reported                                           $       (183)
Adjustment                                                            (158)
Restated                                                      $       (341)
                                                              =============

Net income (loss) per share, basic and diluted:
Previously reported                                           $      (0.01)
Adjustment                                                           (0.01)
                                                              -------------
Restated                                                      $      (0.02)
                                                              =============


                                       12



<PAGE>

NOTE 3 - ACQUISITIONS

In July 2003, through its subsidiary Mountain Air, the Company entered into a
limited liability company operating agreement with a division of M-I L.L.C., a
joint venture between Smith International and Schlumberger N.V. (Schlumberger
Limited) to form a Texas limited liability company named AirComp L.L.C.
("AirComp"). The formation of AirComp has created the second largest provider of
compressed air and related products and services for the drilling, workover,
completion, and transmission segments of the oil, gas and geothermal industries.

The Company contributed substantially all of its compressed air drilling assets
with an estimated net book value of approximately $6,300,000 million to AirComp.
Simultaneously, Aircomp acquired the compressed air drilling assets of M-I with
an appraised value $10,269,000 as determined by a third party appraisal. In
addition, AirComp issued a subordinated note to M-I in the amount of $4.8
million. The Company owns 55% and M-I owns 45% of AirComp. The Company
consolidated AirComp into its financial statements for the quarter ended
September 30, 2003.

The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations as of March 31, 2003, based on the historical statements of
operations, as if the transaction had occurred as of the beginning of the period
presented.



                                       13



<PAGE>

                                            THREE MONTHS ENDED MARCH 31,
                                            ----------------------------
                                                     (UNAUDITED)
                                          (in thousands, except per share)

                                                        2003
                                                        ----

          Revenues                                   $  7,880

          Operating income (loss)                    $  1,047

          Net income (loss)                          $   (287)

          Net income (loss) per common share

                 Basic                               $   (.01)
                 Diluted                             $   (.01)

NOTE 4 - DEBT

Debt is as follows at March 31:
<TABLE>
                                                                                     2004
                                                                                  ----------
                                                                                (in thousands)
<S>                                                                               <C>
Note payable to Wells Fargo - Equipment leasing - Mountain Air                    $     235
Note payable to Seller of Mountain Air Drilling Service Company - Mountain Air        1,533
Note payable to Wells Fargo -Term Note - Jens'                                        4,127
Note payable to Wells Fargo -Real Estate Note - Jens'                                   163
Line of Credit with Wells Fargo - Jens'                                                 281
Subordinated Note payable to Seller of Jens - Jens'                                   4,000
Note payable to Seller of Jens' for non-compete agreement - Jens'                       700
Note payable to Texas State Bank - Term Note - Jens'                                    390
Vendor financing - Strata                                                             1,746
Line of Credit with Wells Fargo - Strata                                              2,294
Notes payable to certain former Directors - Allis-Chalmers                              390
Note payable to Wells Fargo - Subordinated Debt - Allis-Chalmers, net                 2,750
Line of Credit to Wells Fargo - AirComp                                                 445
Note payable to Wells Fargo - Term Note-AirComp                                       7,143
Note payable to Wells Fargo - Delayed Draw Term Note-AirComp                            349
Subordinated Note payable to M-I L.L.C - AirComp                                      4,818
                                                                                  ---------
Total debt                                                                           31,364
Less short-term debt and current maturities                                           4,888
                                                                                  ---------
Long-term debt obligations                                                        $  26,476
                                                                                  =========
</TABLE>

Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements.

NOTE 5 - SEGMENT INFORMATION

The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(AirComp). All of the segments provide services to the petroleum exploration and
production industry. The revenues, operating income (loss), depreciation and
amortization, interest, capital expenditures and assets of each of the reporting
segments plus the Corporate function are reported below for the quarters ended
March 31, 2004 and 2003:


                                       14



<PAGE>

                                                   Three Months Ended March 31,
                                                        2004          2003
                                                     (Restated)
                                                         (in thousands)

REVENUES:
Casing services                                      $   1,939     $   2,509
Directional drilling services                            5,253         3,480
Compressed air drilling services                         2,469         1,010
                                                     ---------     ---------

Total revenues                                       $   9,661     $   6,999
                                                     =========     =========

OPERATING INCOME (LOSS):
Casing services                                      $     442     $   1,239
Directional drilling services                              662           256
Compressed air drilling services                           255          (107)
General corporate                                         (329)         (365)
                                                     ---------     ---------

Total income/(loss) from operations                  $   1,030     $   1,023
                                                     =========     =========

DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services                                      $     361     $     345
Directional drilling services                              101            62
Compressed air drilling services                           349           261
General corporate                                           25            30
                                                     ---------     ---------

Total depreciation and amortization expense          $     836     $     698
                                                     =========     =========

INTEREST EXPENSE:
Casing services                                      $     165     $     163
Directional drilling services                               75            63
Compressed air drilling services                           159           243
General corporate                                          170           168
                                                     ---------     ---------

Total interest expense                               $     569     $     637
                                                     =========     =========

CAPITAL EXPENDITURES
Casing services                                      $     379     $      62
Directional drilling services                              705             8
Compressed air drilling services                           326           115
General corporate                                            1            11
                                                     ---------     ---------

Total capital expenditures                           $   1,411     $     196
                                                     =========     =========

ASSETS:
Casing services                                      $  17,159     $  16,160
Directional drilling services                           11,459         9,975
Compressed air drilling services                        23,046         9,190
General corporate                                        1,351         1,149
                                                     ---------     ---------

Total assets                                         $  53,015     $  36,474
                                                     =========     =========

NOTE 6 - LEGAL MATTERS

The Company is involved in various legal proceedings that arose in the ordinary
course of business. The legal proceedings are at different stages. In the
opinion of management and their legal counsel, the ultimate gain or loss, if
any, to the Company from all such proceedings cannot be reasonably estimated at
this time.


                                       15



<PAGE>

NOTE 7 - SUBSEQUENT EVENTS

On March 15, 2004, the Company filed an application to list the common stock on
the American Stock Exchange. However, approval of listing of the common stock is
subject to numerous conditions, including that the Company effect a reverse
stock split resulting in an increase in the per share price to at least $3.00
per share, and meet certain other quantitative and qualitative standards. While
the stockholders and board of directors have approved a future reverse stock
split, there can be no assurance that the Company will meet the listing
requirements of the American Stock Exchange or any other exchange.

On April 2, 2004, the Company entered into the following transactions:

     o    In exchange for an investment of $2 million, the Company issued
          3,100,000 shares of common stock for a purchase price equal to $0.50
          per share, and warrants to purchase 4,000,000 shares of common stock
          at an exercise price of $0.50 per share, expiring on April 1, 2006, to
          an investor group (the "Investor Group") consisting of entities
          affiliated with Donald and Christopher Engel and directors Robert
          Nederlander and Leonard Toboroff. The aggregate purchase price for the
          common stock was $1,550,000, and the aggregate purchase price for the
          warrants was $450,000.

     o    Energy Spectrum converted its 3,500,000 shares of Series A 10%
          Cumulative Convertible Preferred Stock, including accrued dividend
          rights, into 8,590,449 shares of common stock.

     o    The Company, the Investor Group, Energy Spectrum, and director Saeed
          Sheikh, and officers and directors Munawar H. Hidayatallah and Jens H.
          Mortensen entered into a stockholders agreement pursuant to which the
          parties have agreed to vote for the election to the board of directors
          of the Company three persons nominated by Energy Spectrum, two persons
          nominated by the Investor Group and one person nominated by Messrs.
          Hidayatallah, Mortensen and Sheikh. In addition, the parties and the
          Company agreed that in the event the Company has not effected a public
          offering of its shares prior to September 30, 2005, then, at the
          request of Energy Spectrum, the Company will retain an investment
          banking firm to identify candidates for a transaction involving the
          sale of the Company or its assets.

     o    Wells Fargo Credit, Inc. and Wells Fargo Energy Capital, Inc. extended
          the maturity dates for certain obligations (which at March 31, 2004,
          aggregated approximately $9,452,000) from January and February of 2005
          to January and February of 2006. As a condition of the extension, the
          Company made a $400,000 initial payment and agreed to make 24 monthly
          principal payments in the amount of $25,000 each to Wells Fargo Energy
          Capital, Inc. As part of the extension, the lenders waived certain
          defaults including defaults relating to the failure of Jens' and
          Strata to comply with certain covenants relating to the amount of
          their capital expenditures, and amended certain covenants set forth in
          the loan agreements. In addition, Wells Fargo Credit, Inc. increased
          Strata's line of credit from $2.5 million to $4.0 million.

This document contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such
differences include, but are not limited to, the general condition of the oil
and natural gas drilling industry, demand for our oil and natural gas service
and rental products, and competition. Other factors are identified in our
Securities and Exchange Commission filings in our Form 10-K under the heading
"Risk Factors" located at the end of "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations."


                                       16



<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The information in this Item 2 contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of risks and uncertainties, including, but not limited
to, those discussed herein , and in other reports filed with the Securities and
Exchange Commission, and in particular those discussed under "Risk Factors" in
our Annual Report on Form 10-K. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
are under no obligation to revise or update any forward-looking statements.

BACKGROUND
----------

Prior to May 2001, we operated primarily through Houston Dynamic Services, Inc
("HDS"). In May 2001, as part of a strategy to acquire and develop businesses in
the natural gas and oil services industry, we consummated a merger (the "OilQuip
Merger") in which we acquired 100% of the capital stock of OilQuip Rentals, Inc.
("OilQuip"), which owned 100% of the capital stock of Mountain Air. In December
2001, we disposed of HDS, and in February 2002, we acquired substantially all of
the capital stock of Strata and approximately 81% of the capital stock of Jens'.
On July 2, 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form a Texas limited liability company named AirComp L.L.C. ("AirComp"). We
contributed substantially all of our compressed air drilling assets with an
estimated net book value of approximately $6,300,000 million to AirComp.
Simultaneously, Aircomp acquired the compressed air drilling assets of M-I with
an appraised value $10,269,000 as determined by a third party appraisal. We own
55% and M-I L.L.C. owns 45% of AirComp. We consolidated AirComp into our
financial statements for the quarter ended September 30, 2003.

CRITICAL ACCOUNTING POLICIES
----------------------------

We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in our Form 10-K. Note that our preparation of this Quarterly Report
on Form 10-Q requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of our financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. In order to estimate the collectibility of
amounts due from our customers, we make judgments regarding future events and
trends, based upon customer payment history and current credit worthiness , as
well as consideration of the overall business climate in which our customers
operate. Inherently, we are required to make frequent judgments and estimates
regarding our customers' ability to pay amounts due us in order to determine the
appropriate amount of valuation allowances required for doubtful accounts.
Provisions for doubtful accounts are recorded when it becomes evident that the
customers will not be able to make the required payments at either contractual
due dates or in the future. Over the past two years, reserves for doubtful
accounts, as a percentage of total accounts receivable before reserves, have
ranged from 1% to 2%. We believe that our reserve for doubtful accounts is
adequate to cover anticipated losses under current conditions; however, there
can be no assurance of such fact.

REVENUE RECOGNITION. Our revenue recognition policy is significant because
revenue is a key component of the results of operations. In addition, revenue
recognition determines the timing of certain expenses, such as commissions and
royalties. We provide rental equipment and drilling services to our customers at
per day and per job contractual rates and recognize the drilling related revenue
as the work progresses and when collectibility is reasonably assured. The
Securities and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) No.
104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 104"), provides
guidance on the SEC staff's views on application of generally accepted
accounting principles to selected revenue recognition issues. Our revenue
recognition policy is in accordance with generally accepted accounting
principles and SAB No. 104.

IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, which include property,
plant and equipment, goodwill and other intangibles, comprise a significant
amount of the Company's total assets. The Company makes judgments and estimates
as to the value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the book
values of these assets are reviewed for impairment on an annual basis or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Changes to these assumptions could require a
provision for impairment in a future period.


                                       17



<PAGE>

GOODWILL AND OTHER INTANGIBLES. The Company has recorded approximately
$7,661,000 of goodwill and $2,158,000 of other identifiable intangible assets.
The Company allocates purchase price to intangible assets when it makes a
business combination. The excess of the purchase price after allocation of fair
values to tangible assets is allocated to identifiable intangibles and
thereafter to goodwill. Purchase price allocations have been made to intangible
assets and goodwill in connection with the acquisition of the Mountain Air,
Strata and Jens' operating segments, as well as the reverse merger between the
Company and OilQuip. Subsequently, the Company has performed its initial
impairment tests and annual impairment tests in accordance with Financial
Accounting Standards Board No. 141, BUSINESS COMBINATIONS, and Financial
Accounting Standards Board No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The
initial valuations of intangibles related to the Mountain Air, Strata and Jens'
operating segments required the use of third-party valuation experts who in turn
developed assumptions to value the carrying amount of the individual reporting
units. Changes to these assumptions could require a provision for impairment in
future periods.

AIRCOMP AND SALE OF INTEREST IN VENTURE. The Company has adopted SEC Staff
Accounting Bulletin (SAB) No.51, Accounting for Sales of Stock by a Subsidiary,
to account for its investment in AirComp. AirComp operates in a manner similar
to a joint venture but has been accounted for and consolidated as a subsidiary
under SFAS No. 141, BUSINESS COMBINATIONS. Pursuant to SAB No. 51, the Company
has recorded its own contribution of assets and liabilities at its historical
cost basis. Since liabilities exceeded assets, the Company's basis in AirComp
was a negative amount. The Company has accounted for the assets contributed from
M-I at a fair market value as determined by an outside appraiser. The Company
gave M-I a 45% interest in AirComp in exchange for the assets contributed. As a
result of the formation of the venture and its retention of 55% interest in the
venture, the Company realized an immediate gain to the extent of its negative
basis and its 55% interest in the combined assets and liabilities of the
venture. In accordance with SAB No. 51, the Company has recorded its negative
basis investment in AirComp as an addition to equity and its share of the
combined assets and liabilities realized from M-I assets as non-operating
income.

STOCK BASED COMPENSATION. The Company accounts for its stock-based compensation
using Accounting Principles Board's Opinion No. 25 ("APB No. 25"). Under APB No.
25, compensation expense is recognized for stock options with an exercise price
that is less than the market price on the grant date of the option. For stock
options with exercise prices at or above the market value of the stock on the
grant date, the Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
("SFAS 123"). The Company has adopted the disclosure-only provisions of SFAS 123
for the stock options granted to the employees and directors of the Company.
Accordingly, no compensation expense has been recognized for these options. Many
equity instrument transactions are valued based on pricing models such as
Black-Scholes, which require judgments by management. Values for such
transactions can vary widely and are often material to the financial statements.

RESTATEMENT

In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. We originally accounted for the formation of AirComp
as a joint venture, but in February 2005 determined that the transaction should
have been accounted for using purchase accounting pursuant to Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SEC
Staff Accounting Bulletin ("SAB") No. 51 "Accounting for Sales of Stock by a
Subsidiary". Consequently, we have restated our financial statements for the
year ended December 31, 2003 and for the three quarters ended September 30, 2003
and 2004.


RESULTS OF OPERATIONS
---------------------

Results of operations for 2004 and 2003 reflect the business operations of
Allis-Chalmers and its subsidiaries Jens' Oilfield Service, Inc., which supplies
highly specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells ("Casing Services"), and
Strata Directional Technology, Inc., which provides high-end directional and
horizontal drilling services for specific targeted reservoirs that cannot be
reached vertically ("Directional Drilling Services"). On July 2, 2003, through
our subsidiary Mountain Air, we entered into a limited liability company
operating agreement with a division of M-I L.L.C., a joint venture between Smith
International and Schlumberger N.V. (Schlumberger Limited) to form a Texas
limited liability company named AirComp L.L.C. ("AirComp"). We contributed
substantially all of our compressed air drilling assets with an estimated net
book value of approximately $6,300,000 million to AirComp. Simultaneously,
Aircomp acquired the compressed air drilling assets of M-I with an appraised
value $10,269,000 as determined by a third party appraisal. We own 55% and M-I
L.L.C. owns 45% of AirComp. We consolidated AirComp into our financial
statements beginning with the quarter ended September 30, 2003. The business of
Mountain Air and AirComp is referred to below as "Compressed Air Drilling
Services."


                                       18


<PAGE>

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO MARCH 31, 2003:
-------------------------------------------------------------

Sales for the three months ended March 31, 2004 totaled $9,661,000, which
included the revenue of AirComp, a joint venture between the Company and M-I
consummated in July, 2003. In the comparable period of 2003, revenues were
$6,999,000 reflecting the revenue of Jens', Strata, and Mountain Air. Revenues
for the quarter ended March 31, 2004 for the Casing Services, Directional
Drilling Services, and Compressed Air Drilling Services segments were
$1,939,000, $5,253,000 and $2,469,000, respectively. Revenues for the quarter
ended March 31, 2003 for the Casing Services, Directional Drilling Services, and
Compressed Air Drilling Services segments were $2,509,000, $3,480,000 and
$1,010,000, respectively. Revenues for the Casing Services segment decreased
$570,000 due to increased competition in the South Texas market and slower than
projected drilling in Mexico by PEMEX due to bad weather. Revenues for the
Compressed Air Drilling Services segment increased $1,459,000 for the quarter
ended March 31, 2004 primarily due to joint venture between the Company and M-I.
The Company through AirComp was able to expand the geographical areas in which
it operates to include geothermal drilling in California and natural gas
drilling in West Texas. Directional Drilling Services revenues increased
$753,000 due to increased market share in the Gulf Coast.

Gross margin ratio, as a percentage of sales, was 22.10% for the quarter ended
March 31, 2004 compared with 28.6% for the quarter ended March 31, 2003. The
gross margin ratio decreased as a result of relatively fixed direct costs and
decreased service pricing in the Casing Services and Compressed Air Drilling
Services segments. Because we have made significant investments in equipment and
have a constant number of operations personnel, many of our costs of revenues
are relatively fixed, and as a result, our gross profit margins are
significantly impacted by either increases or decreases in pricing structures or
revenues.

General and administrative expense was $1,103,000 in 2004 compared with $981,000
in 2003. General and administrative expense increased in 2004 compared to 2003
due to the overhead costs associated with AirComp and the hiring of additional
sales force and administrative personnel at each of the Company's subsidiaries
to meet increased demand in the market.

Operating income for the first quarter ended March 31, 2004 totaled $1,030,000
compared to operating income of $1,023,000 for the comparable period of 2003.
Operating income (loss) for the quarter ended March 31, 2004 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $442,000, $662,000, $255,000 and ($329,000),
respectively. Operating income (loss) for the quarter ended March 31, 2003 for
the Casing Services, Directional Drilling Services, Compressed Air Drilling
Services and General Corporate segments were $1,239,000, $256,000, ($107,000)
and ($365,000), respectively. Operating income for the Casing Services decreased
approximately $797,000 due to increased competition in the South Texas market
and slower than projected drilling in Mexico by PEMEX due to bad weather.
Directional Drilling Services increased approximately $406,000 due to increased
market share in the Gulf Coast. Compressed Air Drilling Services increased
approximately $362,000 due the expanded geographical areas in which AirComp
operates. General Corporate segments decreased approximately $36,000 due to
lower corporate expenses.

We had a net income attributed to common shareholders of $384,000 or $0.02 per
common share, for the quarter ended March 31, 2004 compared with a net loss of
($341,000), or ($0.02) per common share, for the quarter end March 31, 2003.

PRO FORMA RESULTS

The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations, based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented. Pro forma
results of operations set forth below includes results of operations for the
quarter ended March 31, 2004 and 2003.

Pro forma sales for the first quarter of 2004 totaled $9,661,000, compared to
pro forma sales in the first quarter of 2003 of $7,880,000, an increase of
approximately 22%. The increase in 2004 compared to 2003 was primarily due to
higher revenues resulting from the overall upturn in the petroleum industry. Pro
forma sales for the first quarter of 2004 for AirComp totaled $2,469,000,
compared to pro forma sales in the first quarter of 2003 of $1,891,000. The pro
forma sales in 2004 for AirComp increased $578,000 due to increased drilling
activity in West Texas and a slight increase in activity in the San Juan basin
over the same period in 2003.

Pro forma gross margin, as a percentage of sales, was 22.1% for the quarter
ended March 31, 2004 compared with a pro forma gross margin of 26.4 % for the
quarter ended March 31, 2003. The gross margin ratio decreased as a result of
relatively fixed direct costs and decreased service pricing in the Casing
Services and Compressed Air Drilling Services segments. Because we have made
significant investments in equipment and have a constant number of operations
personnel, many of our costs of revenues are relatively fixed, and as a result,
our gross profit margins are significantly impacted by either increases or
decreases in revenues.


                                       19



<PAGE>

Pro forma general and administrative expense was $1,103,000 in 2004 compared
with $981,000 in 2003. The pro forma general and administrative expense
increased in 2004 due to the overhead costs associated with AirComp and the
hiring of additional sales force and administrative personnel at each of the
Company's subsidiaries to meet increased demand in the market.

The Company had pro forma operating income for the first quarter of 2004 of
$1,030,000, an increase of 7.6% as compared to pro forma operating income of
$957,000 in the first quarter of 2003. The increase in pro forma operating
income for 2004 was primarily due to higher revenues resulting from the overall
upturn in the petroleum industry.

The Company incurred a pro forma net income of $384,000, or $0.02 per common
share, for the quarter ended March 31, 2004 compared with a pro forma net loss
of ($287,000), or ($0.01) per common share, for the quarter ended March 31 2003.

SCHEDULE OF CONTRACTUAL OBLIGATIONS

The following table summarizes the Company's obligations and commitments to make
future payments under its notes payable, operating leases, employment contracts
and consulting agreements for the periods specified as of March 31, 2004.

<TABLE>
                                           PAYMENTS DUE BY PERIOD
                                           ------------------------------------------------------------------
                                                                                                      AFTER 5
CONTRACTUAL OBLIGATIONS                         TOTAL         1 YEAR        2-3 YEARS     4-5 YEARS    YEARS
-----------------------                         -----         ------        ---------     ---------   -------
<S>                                        <C>            <C>             <C>           <C>           <C>
Notes payable                               $  31,364,000  $   6,806,000  $ 14,071,000  $ 10,487,000  $     -
Interest Payments on notes payable              1,978,000        431,000       973,000       574,000        -
Operating Lease                                   730,000        318,000       323,000        89,000        -
Employment Contracts                              750,000        750,000             -             -        -
                                           -------------- --------------  ------------  ------------  -------
Total Contractual Cash Obligations         $   34,822,000 $    8,305,000  $ 15,367,000  $ 11,150,000  $     -
                                           ============== ==============  ============  ============  =======
</TABLE>

FINANCIAL CONDITION AND LIQUIDITY
---------------------------------

Cash and cash equivalents totaled $491,000 at March 31, 2004 as compared to
$1,299,000 at December 31, 2003. The decrease in cash and cash equivalents was
due to the decrease in long-term debt resulting from scheduled principal
repayments as well as an accelerated payment on Strata's vendor financed note of
approximately $637,000 and the decrease in other current liabilities.

Net trade receivables at March 31, 2004 were $8,347,000 as compared to
$8,823,000 at December 31, 2003, due to increased collection efforts in
collecting past due accounts.

Net property, plant and equipment were $31,920,000 at March 31, 2004 as compared
to $31,128,000 at December 31, 2003. The increase in net property, plant and
equipment was due to the addition of approximately $750,000 of downhole motors
and other assets used in the operations at Strata, the addition of casing
equipment of approximately $334,000 at Jens', and capital repairs to the
existing equipment of approximately $327,000 at AirComp. Capital expenditures
for the quarter 2004 were $1,411,000. Capital expenditures for the quarter 2003
were $196,000. Capital expenditures for 2004 are projected to be approximately
$4,100,000. These expenditures are expected to be funded from operating cash
flows and lines of credit already in place available for capital projects.

Trade accounts payable at March 31, 2004 were $3,483,000 as compared to
$3,133,000 at December 31, 2003. The increase was primarily due to increased
operational expenses.

At March 31, 2004, other current liabilities, excluding the current portion of
long-term debt and trade accounts payable, were $2,795,000 consisting of
interest in the amount of $241,000, accrued salary and benefits in the amount of
$885,000, income taxes payable of $45,000, accrued restructuring costs of
$129,000, related party payables of $467,000, accrued operating expenses of
$967,000, and legal and professional expenses in the amount of $25,000. Included
in accrued restructuring costs was compensation in the amount of $129,000 due to
former employees of the Company. At December 31, 2003, other current
liabilities, excluding the current portion of long-term debt and trade accounts
payable, were $3,291,000 consisting of interest in the amount of $152,000,
accrued salary and benefits in the amount of $591,000, income taxes payable of
$45,000, accrued restructuring costs of $296,000, related party payables of
$787,000, accrued operating expenses of $1,358,000, and legal and professional
expenses in the amount of $62,000. Included in accrued restructuring costs was
compensation in the amount of $166,000 due to former employees of the Company.
All of these balance sheet accounts decreased significantly from December 31,
2003 balances due to increased cash flow from operations.

Long-term debt including current maturities was $31,364,000 at March 31, 2004 as
compared to $32,233,000 at December 31, 2003. The decrease in long-term debt
resulted from scheduled principal repayments as well as an accelerated payment
on Strata's vendor financed note of approximately $637,000.


                                       20


<PAGE>

CAPITAL REQUIREMENTS

Our long-term capital needs are to repay and/or refinance our existing debt,
provide funds for existing operations, and to secure funds for acquisitions in
the oil and gas equipment rental and services industry. In order to pay our
debts as they become due, including the amounts due to the bank lenders
described above, we will require additional financing, which may include the
issuance of equity or debt securities, as well as secured and unsecured loans.
See "Recent Developments" below for a discussion of capital transactions
completed subsequent to March 31, 2004. In March 2004 the Company entered into
an agreement with Morgan Joseph & Co. Inc. to assist the Company in
restructuring its outstanding debt and to consummate an offering of its common
stock. However, there can be no assurance that the Company will be successful in
such efforts. Any new issuance of equity securities may further dilute existing
shareholders.

RECENT DEVELOPMENTS

On March 15, 2004, the Company filed an application to list the common stock on
the American Stock Exchange. However, approval of listing of the common stock is
subject to numerous conditions, including that the Company effect a reverse
stock split resulting in an increase in the per share price to at least $3.00
per share, and meet certain other quantitative and qualitative standards. While
the stockholders and board of directors have approved a future reverse stock
split, there can be no assurance that the Company will meet the listing
requirements of the American Stock Exchange or any other exchange.

On April 2, 2004, the Company entered into the following transactions:

     o    In exchange for a cash investment of $2 million, the Company issued
          3,100,000 shares of common stock for a purchase price equal to $0.50
          per share, and warrants to purchase 4,000,000 shares of common stock
          at an exercise price of $0.50 per share, expiring on April 1, 2006, to
          an investor group (the "Investor Group") consisting of entities
          affiliated with Donald and Christopher Engel and directors Robert
          Nederlander and Leonard Toboroff. The aggregate purchase price for the
          common stock was $1,550,000, and the aggregate purchase price for the
          warrants was $450,000.

     o    Energy Spectrum converted its 3,500,000 shares of Series A 10%
          Cumulative Convertible Preferred Stock, including accrued dividend
          rights, into 8,590,449 shares of common stock.

     o    The Company, the Investor Group, Energy Spectrum, and director Saeed
          Sheikh, and officers and directors Munawar H. Hidayatallah and Jens H.
          Mortensen entered into a stockholders agreement pursuant to which the
          parties have agreed to vote for the election to the board of directors
          of the Company three persons nominated by Energy Spectrum, two persons
          nominated by the Investor Group and one person nominated by Messrs.
          Hidayatallah, Mortensen and Sheikh. In addition, the parties and the
          Company agreed that in the event the Company has not effected a public
          offering of its shares prior to September 30, 2005, then, at the
          request of Energy Spectrum, the Company will retain an investment
          banking firm to identify candidates for a transaction involving the
          sale of the Company or its assets.

     o    Wells Fargo Credit, Inc. and Wells Fargo Energy Capital, Inc. extended
          the maturity dates for certain obligations (which at March 31, 2004,
          aggregated approximately $9,452,000) from January and February of 2005
          to January and February of 2006. As a condition of the extension, the
          Company made a $400,000 initial payment and agreed to make 24 monthly
          principal payments in the amount of $25,000 each to Wells Fargo Energy
          Capital, Inc. As part of the extension, the lenders waived certain
          defaults including defaults relating to the failure of Jens' and
          Strata to comply with certain covenants relating to the amount of
          their capital expenditures, and amended certain covenants set forth in
          the loan agreements. In addition, Wells Fargo Credit, Inc. increased
          Strata's line of credit from $2.5 million to $4.0 million.

As a result of the foregoing transactions, the parties to the above stockholders
agreement own 86.4% of the outstanding common stock of the Company, calculated
in accordance with Rule 13d-3 of the Securities and Exchange Commission. The
proceeds of the sale of the common stock and warrants will be used by the
Company to reduce debt, to fund potential acquisitions and for general corporate
purposes.


                                       21



<PAGE>

ITEM 4. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive officer
and our chief accounting officer have evaluated the effectiveness of the
Company's "disclosure controls and procedures" (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report (the
"Evaluation Date"), and have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in enabling us to record,
process, summarize, and report information required to be included in our SEC
filings within the required time period, and to ensure that such information is
accumulated and communicated to our management, including our chief executive
officer and chief accounting officer, to allow timely decisions regarding
required disclosure. Since the Evaluation Date, there have not been any
significant changes in our internal controls, or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.

It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events.

                                     PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits. The exhibits listed on the Exhibit Index located at Page
23 of this Quarterly Report are filed as part of this Form 10-Q.

(b) Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 7, 2005.

                                                ALLIS-CHALMERS ENERGY INC.
                                                --------------------------
                                                       (REGISTRANT)

                                               /S/ MUNAWAR H. HIDAYATALLAH
                                               ---------------------------
                                               MUNAWAR H. HIDAYATALLAH
                                               CHIEF EXECUTIVE OFFICER
                                               AND CHAIRMAN




                                       22



<PAGE>

                                  EXHIBIT INDEX

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

31.2    Certification of Chief Accounting Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

32.1    Certification of the Chief Executive Officer and Chief Accounting
        Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
        of the Sarbanes-Oxley Act of 2002.



                                       23