<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 SEPTEMBER 30, 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:
                     COMMON STOCK, PAR VALUE $0.01 PER SHARE

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

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 November 12, 2004, there were 13,042,081 shares of common stock outstanding.



<PAGE>

                           ALLIS-CHALMERS ENERGY INC.

                                    FORM 10-Q

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

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


                                     PART I

ITEM                                                                       PAGE
----                                                                       ----
1.     Financial Statements

       Restated Consolidated Balance Sheets as of September 30, 2004 and
          December 31, 2003.................................................. 4

       Restated Consolidated Statements of Operations for the three months
       and nine months ended September 30, 2004 and 2003..................... 5

       Restated Consolidated Statements of Cash Flows for the nine months
       Ended September 30, 2004 and 2003..................................... 6

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

2.     Management's Discussion and Analysis of Financial Condition and
       Results of Operations................................................ 21

4.     Controls and Procedures.............................................. 31


                                     PART II

6.     Exhibits and Reports on Form 8-K..................................... 32


Signatures and Certifications............................................... 32


                                       2


<PAGE>

                                INTRODUCTORY NOTE

      Allis Chalmers Energy Inc. is filing this Amendment No. 1 ("Amendment
No. 1") to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 (the "Original Filing"), which was originally filed on
November 15, 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. Other Information

      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 EVENTS DESCRIBED IN OUR CURRENT REPORTS ON FORM 8-K SUBSEQUENT TO
THE ORIGINAL FILING DATE. FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ OUR
EXCHANGE ACT REPORTS FILED SINCE THE ORIGINAL FILING DATE.


                                       3


<PAGE>

<TABLE>
                                    PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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


                                                                      September 30,       December 31,
                                                                          2004               2003
                                                                      -------------      -------------
                                                                                 (Restated)
<S>                                                                   <C>                <C>
ASSETS

Cash and cash equivalents                                             $     12,992       $      1,299
Trade receivables, net                                                      10,419              8,823
Lease receivable, current                                                      180                180
Prepaids and other current assets                                            1,496                887
                                                                      -------------      -------------
   Total current assets                                                     25,087             11,189

Property and equipment, net                                                 33,309             31,128
Goodwill                                                                    10,331              7,661
Other intangible assets, net                                                 3,089              2,290
Debt issuance costs, net                                                       635                567
Lease receivable                                                               590                787
Other assets                                                                    79                 40
                                                                      -------------      -------------
      Total assets                                                    $     73,120       $     53,662
                                                                      =============      =============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current maturities of long-term debt                                  $      4,858       $      5,150
Trade accounts payable                                                       2,566              3,133
Accrued salaries, benefits and payroll taxes                                   481                591
Accrued interest                                                               283                152
Accrued expenses                                                             1,331              1,761
Accounts payable, related parties                                              406                787
                                                                      -------------      -------------
    Total current liabilities                                                9,925             11,574

Accrued postretirement benefit obligations                                     510                545
Long-term debt, net of current maturities                                   25,241             27,083
Other long-term liabilities                                                    129                270
Redeemable warrants                                                          1,500              1,500
Redeemable convertible preferred stock                                           -              4,171
                                                                      -------------      -------------
    Total liabilities                                                       37,305             45,143

Commitments and Contingencies

Minority interests                                                           2,274              3,978

COMMON SHAREHOLDERS' EQUITY
   Common stock, $.01 par value (20,000,000 shares authorized;
     13,042,081 and 3,926,668 issued and outstanding, respectively)            130                 39
   Capital in excess of par value                                           38,380             10,768
   Accumulated (deficit)                                                    (4,969)            (6,266)
                                                                      -------------      -------------
    Total shareholders' equity                                              33,541              4,541
                                                                      -------------      -------------
    Total liabilities and shareholders' equity                        $     73,120       $     53,662
                                                                      =============      =============


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

                                                  4
</TABLE>


<PAGE>

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


                                                         Three Months Ended                  Nine Months Ended
                                                            September 30,                       September 30,
                                                       2004              2003              2004              2003
                                                   -------------     -------------     -------------     -------------
                                                                               (Restated)
                                                                    (in thousands, except per share)
<S>                                                <C>               <C>               <C>               <C>
Revenues                                           $     11,888      $      8,089      $     32,989      $     22,428
Cost of sales                                             8,224             6,060            24,191            16,261
                                                   -------------     -------------     -------------     -------------

   Gross Profit                                           3,664             2,029             8,798             6,167

General and administrative expense                        2,425             1,351             5,381             3,759
                                                   -------------     -------------     -------------     -------------

   Income/ (loss) from operations                         1,239               678             3,417             2,408

Other Income (expense)
   Interest expense                                        (566)             (521)           (1,634)           (1,797)
   Minority interest                                        (34)               (4)             (248)             (315)
   Settlement of lawsuit                                     --             1,034                --             1,034
   Gain on sale of interest in AirComp                       --             2,433                --             2,433
   Other                                                     19                10               224              (164)
                                                   -------------     -------------     -------------     -------------

Net income/(loss) before income taxes                       658             3,630             1,759             3,599
                                                   -------------     -------------     -------------     -------------

   Provision for income taxes                              (139)              (93)             (359)             (343)
                                                   -------------     -------------     -------------     -------------

Net income/ (loss)                                          519             3,537             1,400             3,256
                                                   -------------     -------------     -------------     -------------

   Preferred stock dividend                                  --               (88)             (124)             (569)
                                                   -------------     -------------     -------------     -------------

Net income/ (loss) attributed to common shares     $        519      $      3,449      $      1,276      $      2,687
                                                   =============     =============     =============     =============

Net income/ (loss) per common share  basic         $       0.04      $       0.87      $       0.18      $       0.68
                                                   =============     =============     =============     =============

Net income/ (loss) per common share  diluted       $       0.04      $       0.60      $       0.13      $       0.46
                                                   =============     =============     =============     =============

Weighted average number of common shares
outstanding
     Basic                                               11,599             3,927             7,285             3,927
                                                   =============     =============     =============     =============

    Diluted                                              14,407             5,761             9,980             5,761
                                                   =============     =============     =============     =============


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

                                                          5
</TABLE>


<PAGE>

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


                                                                               Nine Months Ended
                                                                                 September 30,
                                                                                 -------------
                                                                              2004           2003
                                                                            ---------     ---------
                                                                                  (Restated)
<S>                                                                         <C>           <C>
Cash flows from operating activities:
Net income (loss)                                                           $  1,400      $  3,256
Adjustments to reconcile net (loss) to net cash provided by operating
       activities:
Depreciation and amortization expense                                          2,396         2,099
Fair value of warrant issued to consultant                                        14            --
(Gain) loss on settlement of lawsuit                                              --        (1,034)
(Gain) loss on sale of investment in AirComp                                      --        (2,433)
Amortization of discount on debt                                                 143           442
Minority interest in income of subsidiary                                        248           315
Changes in working capital:
     Decrease (increase) in accounts receivable                               (1,417)       (2,882)
     Decrease (increase) in other current assets                                (609)         (697)
     Decrease (increase) in other assets                                         (39)           35
     Decrease (increase) in lease deposit                                         --           525
     Decrease (increase) in lease receivable                                     197           106
     (Decrease) increase in accounts payable                                    (725)        2,738
     (Decrease) increase in accrued interest                                     131          (264)
     (Decrease) increase in accrued expenses                                    (471)         (323)
     (Decrease) increase in other long-term liabilities                         (141)           --
     (Decrease) increase in accrued employee benefits and payroll taxes         (557)           90
                                                                            ---------     ---------
Net cash provided by operating activities                                        570         1,973

Cash flows from investing activities:
    Acquisition of Safco, net of cash acquired                                  (959)           --
    Proceeds from sale of fixed assets                                            --           700
    Purchase of equipment                                                     (2,120)       (5,086)
                                                                            ---------     ---------

Net cash provided (used) by investing activities                              (3,079)       (4,386)

Cash flows from financing activities:
     Proceeds from issuance of common stock, net                              16,946            --
     Proceeds from issuance of long-term debt                                     --         9,616
     Repayments of long-term debt                                             (2,427)       (6,925)
     Debt issuance costs                                                        (317)         (304)
                                                                            ---------     ---------

Net cash provided (used) by financing activities                              14,202        (2,387)
                                                                            ---------     ---------

Net increase (decrease) in cash and cash equivalents                          11,693           (26)

Cash and cash equivalents at beginning of year                                 1,299           146
                                                                            ---------     ---------

Cash and cash equivalents at end of period                                  $ 12,992      $    120
                                                                            =========     =========

Supplemental information - interest paid                                    $  1,491      $  1,796
                                                                            =========     =========


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

                                                 6
</TABLE>


<PAGE>

                           ALLIS-CHALMERS CORPORATION

                     NOTES TO UNAUDITED FINANCIAL STATEMENTS
                            (UNAUDITED AND RESTATED)
            FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2004 AND 2003

PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT
EVENTS OCCURRING AFTER NOVEMBER 15, 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 September 30, 2004 (the "Original Filing"), includes restatements
related to our unaudited consolidated financial statements for the periods ended
September 30, 2004 and 2003. 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 elsewhere in this report.

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 consisted 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 including 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 2,000,000
shares of Allis-Chalmers' common stock.

For legal purposes, the Company 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 and intangible assets of Allis-Chalmers were increased
by $2,691,000.

On February 6, 2002, the Company 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 $7.2 million to AirComp.
Simultaneously, Aircomp acquired the compressed air drilling assets of M-I with
an appraised value $10.3 million 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.

On June 10, 2004, the Company affected a reverse stock split in order to
increase the share price of the Common Stock. As a result of the reverse stock
split, every five shares of the Company's common stock were combined into one
share of common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from 6,070 to approximately 2,140.

                                       7


<PAGE>

On September 23, 2004 the Company purchased, for $1.0 million, 100% of the
outstanding stock of Safco-Oil Field Products, Inc. ("Safco"). Safco leases
"hevi-wate" spiral drill pipe and provides related oilfield services to the oil
drilling industry.

On September 30, 2004, the Company acquired the remaining 19% of Jens in
exchange for 1,300,000 shares of its common stock.

UNAUDITED PERIODS

The financial information with respect to the nine months ended September 30,
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.

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 Safco and its joint venture,
AirComp. All significant inter-company transactions have been eliminated.

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 and royalties. The Company
provides rental equipment and drilling services to its customers on a day rate
or per job basis and recognizes the related revenue as 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. The Company's revenue recognition policy is in accordance
with generally accepted accounting principles and SAB No. 104.

CONCENTRATION OF CREDIT AND CUSTOMER RISK

SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of significant concentration of credit risk regardless
of the degree of such risk.

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. The Company transacts its business with several financial
institutions. However, the amount on deposit in three financial institutions
exceeded the $100,000 federally insured limit at September 30, 2004 by a total
of $12,592,025. Management believes that the financial institutions are
financially sound and the risk of loss is minimal.

The Company sells its services to major and independent domestic and
international oil and gas companies. The Company performs ongoing credit
valuations of its customers and provides allowance for probable credit losses
where necessary.

Two customers comprised 17.1% of the Company's domestic revenues for the nine
months ended September 30, 2004 as compared to 29.9% of the Company's domestic
revenues for the nine months ended September 30, 2003.


                                       8


<PAGE>

<TABLE>
                                               2004         % of total      2003     % of total
Customer                                      Revenue         revenue      Revenue     revenue
<S>                                            <C>               <C>       <C>           <C>
El Paso Production Oil and Gas                 $1,448            4.4       $3,038        13.6
Burlington Reserve Oil & Gas Co., L.P          $4,183           12.7       $3,646        16.3

One customer comprised 100% of the Company's international revenues for the
years ended September 30, 2004 and 2003.

                                               2004         % of total      2003     % of total
Customer                                      Revenue         revenue      Revenue     revenue

Materiales Y Equipo Petrolero                  $3,205            9.7       $2,457        11.0
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost less accumulated depreciation.
Maintenance and repairs are charged to operations when incurred. Maintenance and
repair costs were $282,000 and $287,000 for the nine months ended September 30,
2004 and September 30, 2003, respectively. Depreciation expense was $1,498,000
and $1,389,000 for the nine months ended September 30, 2004 and September 30,
2003, respectively.

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 September 30,
2004 and 2003, the Company operated in three segments organized by service line:
casing and tubing services, directional drilling services and compressed air
drilling services.

INCOME (LOSS) PER COMMON SHARE

The Company computes income (loss) per common share in accordance with the
provisions of SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
earnings per share. Basic earnings per share are computed on the basis of the
weighted average number of shares of common stock outstanding during the period.
Preferred dividends are deducted from net income (loss) and have been considered
in the calculation of income available to common stockholders in computing basic
earnings per share. Diluted earnings per share is similar to basic earnings per
share, but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible preferred stock, stock options, etc.) as if they had
been converted. Potential dilutive common shares that have an anti-dilutive
effect (e.g., those that increase income per share or decrease loss per share)
are excluded from diluted earnings per share.


                                       9


<PAGE>

The components of basic and diluted earnings per share are as follows:

<TABLE>
Nine months ended September 30,                                                      2004            2003
                                                                                    -------        -------
                                                                                (In thousands, except earnings
                                                                                          per share)
<S>                                                                                 <C>            <C>
Net income available for common shareholders (A)                                    $1,276         $2,667

Weighted average outstanding shares of common stock (B)                              7,285          3,927
Dilutive effect of assumed conversion of preferred shares
and employee stock options and awards                                                2,695          1,834
                                                                                    -------        -------

Common stock and common stock equivalents (C)                                        9,980          5,761

Earnings per share:
Basic (A/B)                                                                         $ 0.18         $ 0.68
                                                                                    =======        =======

Diluted (A/C)                                                                       $ 0.13         $ 0.46
                                                                                    =======        =======
</TABLE>

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 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.

REDUCTION IN NET INCOME. As a result of the increase in fixed assets during the
nine months ended September 30, 2004, depreciation expense related to the fixed
assets increased by $148,000, depreciation expense was increased by $150,000 as
a result of the reversal of amortization of negative goodwill, and minority
interest expense decreased by $67,000, resulting in reduction in net income
attributable to common stockholders of $231,000.

A restated consolidated balance sheet at September 30, 2004 and 3003, and a
restated consolidated statement of operations and a restated consolidated
statement of cash flows for the nine months ended September 30, 2004 and 2003,
reflecting the above adjustments, is presented below. The amounts are in
thousands, except for share amounts:


                                       10


<PAGE>

<TABLE>
                                                          At September 30, 2004
                                                          ---------------------
                                                     As       Restatement     As
                                                  Reported    Adjustments   Restated
                                                  --------    -----------   --------
<S>                                               <C>          <C>          <C>
ASSETS

Cash and cash equivalents                         $ 12,992                  $ 12,992
Trade receivables, net of allowance for
doubtful accounts                                   10,419                    10,419
Lease Receivable, current                              180                       180
Prepaid expenses and other                           1,496                     1,496
                                                  ---------                 ---------
Total current assets                                25,087                    25,087

Property and equipment, net of accumulated
depreciation                                        28,818        4,491       33,309
Goodwill                                            10,331                    10,331
Other intangible assets, net of accumulated
amortization                                         3,089                     3,089
Debt issuance costs, net of accumulated
amortization                                           635                       635
Lease receivable, less current portion                 590                       590
Other Assets                                            79                        79
                                                  ---------    ---------    ---------
Total Assets                                      $ 68,629     $  4,491     $ 73,120
                                                  =========    =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current maturities of long-term debt              $  4,858                  $  4,858
Trade accounts payable                               2,566                     2,566

Accrued salaries, benefits and payroll taxes           481                       481
Accrued interest                                       283                       283
Accrued expenses                                     1,331                     1,331
Accounts payable, related parties                      406                       406
                                                  ---------                 ---------
Total current liabilities                            9,925                     9,925

Accrued postretirement benefit obligations             510                       510
Long-term debt, net of current maturities           25,241                    25,241
Other long-term liabilities                            129                       129
Redeemable warrants                                  1,500                     1,500
Redeemable convertible preferred stock
including accrued dividends                             --                        --
                                                  ---------                 ---------
Total liabilities                                   37,305                    37,305

Commitments and Contingencies

Minority interests                                     886        1,388        2,274

COMMON STOCKHOLDERS' EQUITY

Common stock                                           130                       130
Capital in excess of par value                      37,425          955       38,380
Accumulated (deficit)                               (7,117)       2,148       (4,969)
                                                  ---------    ---------    ---------
Total stockholders' equity                          30,438        3,103       33,541
                                                  ---------    ---------    ---------
Total liabilities and stockholders' equity        $ 68,629     $  4,491     $ 73,120
                                                  =========    =========    =========


                                                             11
<PAGE>

                                                    Three Months September 30, 2004          Three Months September 30, 2003
                                                    ------------------------------           ------------------------------
                                                     As       Restatement       As            As       Restatement        As
                                                  Reported    Adjustments    Restated      Reported    Adjustments     Restated

Revenues                                         $ 11,888            --      $ 11,888      $  8,089            --      $  8,089
Cost of revenues                                    8,145            79         8,224         6,011            49         6,060
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Gross margin                                        3,743           (79)        3,664         2,078           (49)        2,209

General and administrative expense                  2,425            --         2,425         1,351            --         1,351
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Income/ (loss) from operations                      1,318           (79)        1,239           727           (49)          678

Other income (expense):
Interest income                                        --            --            --            --            --            --
Interest expense                                     (566)           --          (566)         (521)           --          (521)
Minority interests in income of subsidiaries          (56)           22           (34)          (26)           22            (4)
Settlement on lawsuit                                  --            --            --         1,034            --         1,034
Gain on sale of stock in a subsidiary                  --            --            --            --         2,433         2,433
Other                                                  19            --            19            10           --             10
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Total other income (expense)                         (603)           22          (581)         (497)        2,455         2,952
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Net income/ (loss) before income taxes                715           (57)          658         1,224         2,406         3,630

Provision for foreign income tax                     (139)           --          (139)          (93)           --           (93)
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Net income/ (loss)                                    576           (57)          519         1,131         2,406         3,537

Preferred stock dividend                               --           --             --          (88)           --            (88)
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Net income attributed to common stockholders     $    576      $    (57)     $    519      $  1,043      $  2,406      $  3,449
                                                 =========     =========     =========     =========     =========     =========

Income/ (loss) per common share - basic          $   0.05                    $   0.04      $   0.27                    $   0.88
                                                 =========                   =========     =========                   =========

Income/ (loss) per common share - diluted        $   0.04                    $   0.04      $   0.18                    $   0.60
                                                 =========                   =========     =========                   =========

Weighted average number of common shares
outstanding:
        Basic                                       7,285                       7,285         3,927                       3,927
                                                 =========                   =========     =========                   =========
        Diluted                                     9,980                       9,980         5,672                       5,672
                                                 =========                   =========     =========                   =========


                                                                             12
<PAGE>


                                                    Nine Months September 30, 2004           Nine Months September 30, 2003
                                                    ------------------------------           ------------------------------
                                                     As       Restatement       As            As       Restatement        As
                                                  Reported    Adjustments    Restated      Reported    Adjustments     Restated
                                                  --------    -----------    --------      --------    -----------     --------
Revenues                                         $ 32,989            --      $ 32,989      $ 22,428            --      $ 22,428
Cost of revenues                                   23,893           298        24,191        16,212            49        16,261
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Gross margin                                        9,096          (298)        8,798         6,216           (49)        6,167

General and administrative expense                  5,381            --         5,381         3,759            --         3,759
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Income/ (loss) from operations                      3,715          (298)        3,417         2,457           (49)        2,408

Other income (expense):
Interest income                                        --            --            --            --            --            --
Interest expense                                   (1,634)           --        (1,634)       (1,797)           --        (1,797)
Minority interests in income of subsidiaries         (315)           67          (248)         (337)           22          (315)
Settlement on lawsuit                                  --            --            --         1,034            --         1,034
Gain on sale of stock in a subsidiary                  --            --            --            --         2,433         2,433
Other                                                 224            --           224          (164)           --          (164)
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Total other income (expense)                       (1,725)           67        (1,658)       (1,264)        2,455         1,191
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Net income/ (loss) before income taxes              1,990          (231)        1,759         1,193         2,406         3,599

Provision for foreign income tax                     (359)           --          (359)         (343)           --          (343)
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Net income/ (loss)                                  1,631          (231)        1,400           850         2,406         3,256

Preferred stock dividend                             (124)           --          (124)         (569)           --          (569)
                                                 ---------     ---------     ---------     ---------     ---------     ---------
Net income attributed to common stockholders     $  1,507      $   (231)     $  1,276      $    281      $  2,406      $  2,687
                                                 =========     =========     =========     =========     =========     =========

Income/ (loss) per common share - basic          $   0.21                    $   0.18      $   0.07                    $   0.68
                                                 =========                   =========     =========                   =========

Income/ (loss) per common share - diluted        $   0.15                    $   0.13      $   0.05                    $   0.47
                                                 =========                   =========     =========                   =========

Weighted average number of common shares
outstanding:
        Basic                                       7,285                       7,285         3,927                       3,927
                                                 =========                   =========     =========                   =========
        Diluted                                     9,980                       9,980         5,761                       5,761
                                                 =========                   =========     =========                   =========


                                                               13

<PAGE>

                                                       Nine Months September 30, 2004           Nine Months September 30, 2003
                                                       ------------------------------           ------------------------------
                                                       As         Restatement      As            As      Restatement         As
                                                    Reported      Adjustment    Restated      Reported    Adjustment      Restated
                                                    --------      ----------    --------      --------    ----------      --------
Cash flows from operating activities:
Net income/ (loss)                                  $  1,631      $   (231)     $  1,400      $    850      $  2,406      $  3,256
Adjustments to reconcile net income/ (loss) to
net cash provided by operating activities:
Depreciation and amortization  expense                 2,098           298         2,396         2,050            49         2,099
Fair value of warrant issued to consultant                14            --            14            --            --            --
(Gain) / loss on settlement of lawsuit                    --            --            --        (1,034)           --        (1,034)
(Gain) / loss on sales on interest in AirComp             --            --            --            --        (2,433)       (2,433)
Amortization of discount on debt                         143            --           143           442            --           442
Minority interest in income of subsidiaries              315           (67)          248           337           (22)          315
Changes in working capital:
Decrease (increase) in accounts receivable            (1,417)           --        (1,417)       (2,882)           --        (2,882)
Decrease (increase) in other current assets             (609)           --          (609)         (697)           --          (697)
Decrease (increase) in other assets                      (39)           --           (39)           35            --            35
Decrease (increase) in lease deposit                      --            --            --           525            --           525
Decrease (increase) in lease receivable                  197            --           197           106            --           106
Increase (decrease) in accounts payable                 (725)           --          (725)        2,738            --         2,738
Increase (decrease) in accrued interest                  131            --           131          (264)           --          (264)
Increase (decrease) in accrued expenses                 (471)           --          (471)         (323)           --          (323)
Increase (decrease) in other long-term liabilities      (141)           --          (141)           --            --            --
Increase (decrease) in accrued employee benefits
and payroll taxes                                       (557)           --          (557)           90            --            90
                                                    ---------     ---------     ---------     ---------     ---------     ---------

Net cash provided by operating activities                570            --           570         1,973            --         1,973

Cash flows from investing activities:
Acquisition of Safco, net of cash acquired              (959)                       (959)           --                          --
Purchase of equipment                                 (2,120)                     (2,120)       (5,086)                     (5,086)
Proceeds from sale of equipment                           --                          --           700                         700
                                                    ---------                   ---------     ---------                   ---------

Net cash (used) by investing activities               (3,079)                     (3,079)       (4,386)                     (4,386)

Cash flows from financing activities:
Proceeds from issuance of common stock, net           16,946                      16,946            --                          --
Proceeds from issuance of long-term debt                  --                          --         9,616                       9,616
Repayments of long-term debt                          (2,427)                     (2,427)       (6,925)                     (6,925)
Debt issuance costs                                     (317)                       (317)         (304)                       (304)
                                                    ---------                   ---------     ---------                   ---------

Net cash provided (used) by financing activities      14,202                      14,202         2,387                       2,387
                                                    ---------                   ---------     ---------                   ---------

Net increase (decrease) in cash and cash
equivalents                                           11,693                      11,693           (26)                        (26)

Cash and cash equivalents:

Beginning of the year                                  1,299                       1,299           146                         146
                                                    ---------                   ---------     ---------                   ---------

End of the year                                     $ 12,992                    $ 12,992      $    120                    $    120
                                                    =========                   =========     =========                   =========

Supplemental information:

Interest paid                                       $  1,491                    $  1,491      $  1,796                    $  1,796
                                                    =========                   =========     =========                   =========


                                                               14
</TABLE>

<PAGE>

In addition, the accompanying 2004 financial statements have been restated from
the previously filed interim financial statements included in Form 10-Q for the
first, and second quarters of 2004. As discussed above, an adjustment was
recorded in the third quarter of 2003 to reflect a change in the accounting for
the formation of AirComp. The effect of the significant third quarter adjustment
on the individual quarterly financial statements is as follows:

                                           Three Months       Six Months
                                           Ended              Ended
                                           March 31, 2004     June 30, 2004
                                           --------------     --------------

Net income (loss) attributed to
    common stockholders
Previously reported                        $         501      $         935
Adjustment - depreciation expense                   (139)              (218)
Adjustment - minority interest expense                22                 44
                                           --------------     --------------
Restated                                   $         384      $         761

Net income (loss) per share, basic
    and diluted
Previously reported                        $        0.13      $        0.18
Total adjustments                                  (0.03)             (0.03)
                                           --------------     --------------
Restated                                   $        0.10      $        0.15

NOTE 3 - ACQUISITIONS

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"). 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 $7.2 million to AirComp.
Simultaneously, Aircomp acquired the compressed air drilling assets of M-I with
an appraised value $10.3 million 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 L.L.C. owns 45% of AirComp. The Company
consolidated AirComp into its financial statements for the quarter ended
September 30, 2003.

On September 23, 2004 we purchased, for $1.0 million, 100% of the outstanding
stock of Safco-Oil Field Products, Inc. ("Safco"). Safco leases "hevi-wate"
spiral drill pipe and provides related oilfield services to the oil drilling
industry.

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 September 30, 2003, based on the historical statements of
operations, as if the transaction had occurred as of the beginning of the period
presented.

                                                            Nine Months Ended
                                                              September 30,
                                                                   2003
                                                                   ----
                                                                (Restated)
                                                               (Unaudited)
                                                          (in thousands, except
                                                           earnings per share)

Revenues                                                      $     24,150

Operating income (loss)                                       $      2,785

Net income (loss)                                             $      3,488

Net income (loss) per common share                            $      2,879

       Basic                                                  $       0.73
       Diluted                                                $       0.68


                                       15


<PAGE>

NOTE 4 - DEBT

Debt at September 30, 2004 was as follows (in thousands):

Debt of Mountain Air
Note payable - Equipment leasing                                        $   211
Note payable to Seller of Mountain Air Drilling Service Company           1,577

Debt of Jens'
Line of Credit with Wells Fargo                                             209
Note payable - Term Note                                                  3,091
Note payable - Real Estate Note                                              73
Subordinated Note payable to Seller of Jens'                              4,000
Note payable to Seller of Jens' for non-compete agreement                   576
Note payable - Term Note                                                    315

Debt of Strata
Line of Credit                                                            2,681
Vendor financing                                                          1,746
Note payable to Sellers of Safco for non-compete agreement                  150

Debt of Allis-Chalmers
Notes payable to certain former directors                                   398
Note payable - Subordinated debt                                          2,268

Debt of AirComp
Line of Credit                                                              925
Note payable - Term Note                                                  6,571
Note payable - Delayed Draw                                                 490
Subordinated Note Payable to M-I LL C                                     4,818

Total Debt                                                              $30,099
                                                                        --------

Less: short term debt and current maturities                              4,858

Long-term debt obligations                                              $25,241
                                                                        ========

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

Maturities of debt obligations at September 30, 2004 are as follows:

                                                           Maturities of Debt
                                                             (in thousands)

Year Ended:
September 30, 2005                                              $ 4,858
September 30, 2006                                                7,804
September 30, 2007                                                7,360
September 30, 2008                                                5,259
September 30, 2009 and thereafter                                 4,818
                                                                --------

Total                                                           $30,099
                                                                ========


                                       16


<PAGE>

The debt agreements are summarized as follows:

MOUNTAIN AIR

A term loan in the original amount of $267,000 at an interest rates of 5%,
interest payable monthly, with monthly principal payments of $5,039 due on the
last day of the month. The maturity date of the loan is June 30, 2008. The
balance at September 30, 2004 was $211,000.

A note to the sellers of Mountain Air Drilling Service Company assets in the
original amount of $2,200,000 at 5.75% simple interest was reduced to $1,469,151
as a result of the settlement of a legal action against the sellers. The
principal and accrued interest is due on September 30, 2007 in the amount of
$1,863,195. The balance at September 30, 2004 was $1,577,000. As discussed in
Note 8, the holders of the note have brought a legal action seeking to
Accelerate payment of all amounts due under the note.

JENS'

A term loan in the original amount of $4,042,396 was amended in October 2003 to
$5,100,000 at a floating interest rate (6.75% at September 30, 2004) with
monthly principal payments of $85,000 plus 25% of Jens' receipt of payments from
Matyep. The maturity date of the loan was January 31, 2005 but in April 2004 was
extended to January 31, 2006. The balance at September 30, 2004 was $3,091,000.

A real estate loan in the amount of $532,000 at floating interest rate (6.75% at
September 30, 2004) with monthly principal payments of $14,778 plus accrued
interest. The principal is due on January 31, 2005. The balance at September 30,
2004 was $73,000.

At September 30, 2004, Jens had a $1,000,000 line of credit at Wells Fargo
Credit, Inc., of which $209,000 was outstanding at September 30, 2004. The
Maturity date was extended in April 2004 to January 31, 2006. Interest accrues
at a floating rate plus a margin (6.75% at September 30, 2004). Additionally,
Jens' pays a 0.5% per annum fee on the undrawn portion.

A subordinated seller's note in the original amount of $4,000,000 at 7.5% simple
interest. At September 30, 2004, $406,000 of interest was accrued and was
included in accounts payable, related parties. The principal and interest are
due on January 31, 2006. The note is subordinated to the Company's bank lenders.

In conjunction with the purchase of Jens', the Company agreed to cause Jens' to
pay a total of $1,234,560 payable to Jens Mortensen, our President, in exchange
for a non-compete agreement. Jens' is to make monthly payments of $20,576
through the period ended January 31, 2007. As of September 30, 2004 the balance
was approximately $576,000 including $247,000 classified as short-term.

A term loan in the original amount of $397,080 at a floating interest rate
(6.75% at September 30, 2004) with monthly principal payments of $11,000 plus
interest. The maturity date of the loan is September 17, 2006. As of September
30, 2004, the outstanding balance was $256,000.

A term loan in the original amount of $74,673 at a floating interest rate (6.75%
at September 30, 2004) with monthly principal payments of $1,946 plus interest.
The maturity date of the loan is January 12, 2007. As of September 30, 2004 the
outstanding balance was $59,000.

STRATA

In December 2003, Strata entered into a short-term vendor financing agreement in
the original amount of $1,746,000 with a major supplier of drilling motors for
drilling motor rentals, motor lease costs and motor repair costs. The agreement
provides for repayment of all amounts due no later than December 30, 2005.
Payment of the interest on the note is due monthly and three principal payments
are due in October 2004, April 2005 and December 2005. The vendor financing
incurs interest at a rate of 8.0%. As of September 30, 2004, the outstanding
balance was $1,746,000.

Strata has a $4,000,000 line of credit at Wells Fargo Credit, Inc., of which
$2,681,000 was outstanding at September 30, 2004. The committed line of credit
was extended in April 2004 to January 31, 2006. Interest accrues at a floating
interest rate plus a margin (7.75% at September 30, 2004). Additionally, Strata
pays a 0.5% per annum fee on the undrawn portion.

In conjunction with the purchase of Safco, the Company agreed to cause Safco to
pay a total of $150,000 to the Sellers of Safco in exchange for a
non-competition agreement. Safco is to make yearly payments of $50,000 through
the period ended September 30, 2007. As of September 30, 2004, the balance was
$150,000 including $50,000 classified as short-term.


                                       17


<PAGE>

ALLIS-CHALMERS

Subordinated Debt and amortization of Redeemable Warrant - Secured subordinated
debt issued to partially finance the acquisitions of Jens' and Strata in the
original amount of $3,000,000 at 12% interest payable monthly. Of this amount
$2,309,000 was outstanding at September 30, 2004. The maturity date was extended
in April 2004 to February 1, 2006. In connection with incurring the debt, the
Company issued redeemable warrants valued at $900,000, which have been recorded
as a discount to the subordinated debt and as a liability (see Redeemable
Warrants below). The discount was amortizable over three years beginning
February 6, 2002 but in April 2004 was extended to 5 years as additional
interest expense of which $190,000 has been recognized for the nine months ended
September 30, 2004. The debt is recorded at $2,268,000 at September 30, 2004,
net of the unamortized portion of the put obligation.

The Allis-Chalmers Board established an arrangement to compensate former and
continuing Board members who had served from 1989 to March 31, 1999 without
compensation. Pursuant to the arrangement in 1999, Allis-Chalmers issued
promissory notes totaling $325,000 to current or former directors and officers.
The notes bear interest at the rate of 5.0%, compounded quarterly, and are due
March 28, 2005. At September 30, 2004 the notes were recorded at $398,000,
including accrued interest.

REDEEMABLE WARRANTS - The Company issued redeemable warrants that are
exercisable for up to 233,000 shares of the Company's common stock at an
exercise price of $0.75 per share and non-redeemable warrants that are
exercisable for a maximum of 67,000 shares of the Company's common stock at
$5.00 per share. The warrants were issued in connection with the issuance of a
subordinated debt instrument for Mountain Air in 2001, subsequently repaid in
connection with the formation of AirComp in July 2003 and the related issuance
of the $3 million subordinated debt discussed above (collectively, the
"Subordinated Debt"). The warrants exerciseable for $0.75 per share are subject
to cash redemption provisions ("puts") in the amount of $1,500,000, at the
discretion of the warrant holders beginning at the earlier of the final maturity
date of the Subordinated Debt or three years from the closing of the
Subordinated Debt (January 31, 2005). In April 2004 the maturity date of the
debt was extended to February 1, 2006. The Company has recorded a liability of
$600,000 at Mountain Air and $900,000 at Allis-Chalmers for a total of
$1,500,000 and is amortizing the effects of the puts to interest expense over
the life of the Subordinated Debt.

The Company guarantees many of its subsidiaries' obligations. In addition, the
Company's Chief Executive Officer and Chairman, Munawar H. Hidayatallah, and his
wife, guarantee substantially all of the Company's obligations.

AIRCOMP LLC

A $1,000,000 line of credit at Wells Fargo bank, of which $925,000 was
outstanding at September 30, 2004. Interest accrues at a floating interest rate
plus a margin (6.75% at September 30, 2004) and is payable quarterly starting in
September 2003. Additionally, AirComp pays a 0.5% per annum fee on the undrawn
portion. The line of credit matures on June 27, 2007.

A term loan - A term loan in the original amount of $8,000,000 at variable
interest rates related to the Prime or LIBOR rates (5.50% at September 30,
2004), interest payable quarterly, with quarterly principal payments of $286,000
due on the last day of the quarter beginning in July 2003. The maturity date of
the loan is June 27, 2007. The balance at September 30, 2004 was $6,571,000.

A delayed draw term loan in the amount of $1,000,000 with interest at a rate
equal to the LIBOR rate plus a margin with quarterly payments of interest and
quarterly payments of principal equal to 5.0% of the outstanding balance
commencing in the first quarter of 2005. The maturity date of the loan is June
27, 2007. The balance at September 30, 2004 was $490,000.

A subordinated debt in the amount of $4,818,000 bearing an annual interest rate
of 5.0% in conjunction with the joint venture. The note is due and payable when
M-I sells its interest or a termination of AirComp occurs. At September 30,
2004, $212,000 of interest was accrued and included in accrued interest.

NOTE 5 - SHAREHOLDERS' EQUITY

On March 3, 2004, the Company entered into an agreement with Morgan Joseph
whereby Morgan Joseph would provide underwriting and fundraising activities on
behalf of the Company. In exchange for their services, Morgan Joseph received a
stock purchase warrant to purchase 340,000 shares of common stock at an exercise
price of $2.50 per share. For purposes of calculating fair value under SFAS No.
123, the fair value of the warrant grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield; expected volatility rate of 170.69% risk-free
interest rate of 6.25%; and average life of 5 years. The resulting fair value of
$2,650,000 assigned to the warrant issuance was offset against the proceeds
collected from the Company's private placements of common stock.


                                       18
<PAGE>

On April 2, 2004, the Company completed the following transactions:

         o        In exchange for an investment of $2,000,000, the Company
                  issued 620,000 shares of common stock for a purchase price
                  equal to $2.50 per share, and issued warrants to purchase
                  800,000 shares of common stock at an exercise price of $2.50
                  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 1,718,090 shares of common stock. The
                  conversion of the preferred stock will have an impact on the
                  earnings per share in future periods since the Company will
                  not record any dividends.

         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 affected 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.

On August 10, 2004, the Company completed the private placement of 3,504,667
shares of the Company's common stock at a price of $3.00 per share. Net proceeds
to the Company, after selling commissions and expenses, were approximately $9.6
million. The Company issued shares pursuant to an exemption from the Securities
Act of 1933, and agreed to subsequently register the common stock under the
Securities Act of 1933 to allow investors to resell the common stock in public
markets.

On September 30, 2004, the Company completed the private placement of 1,956,668
shares of the Company's common stock at a price of $3.00 per share. Net proceeds
to the Company, after selling commission and expenses, were approximately $5.5
million. The Company issued shares pursuant to an exemption from the Securities
Act of 1933, and agreed to subsequently register the common stock under the
Securities Act of 1933 to allow investors to resell the common stock in public
markets.

On September 30, 2004, the Company acquired Jens Mortensen's 19% minority
interest in Jens' Oilfield Service, Inc. in exchange for 1,300,000 shares of the
Company's common stock.

In connection with the formation of AirComp in July 2003, the Company recorded
$955,000, as the effect of the consolidation of the AirComp venture in which the
Company realized a benefit by elimination of its negative investment in the cost
basis of the venture. The business combination was accounted for as a purchase.
As a result, the Company recognized the benefit of $955,000 as an increase in
its stockholders equity rather than period income.

NOTE 5 - REVERSE STOCK SPLIT

The Company affected a reverse stock split on September 10, 2004 in order to
increase the share price of the common stock. As a result of the reverse stock
split, every five shares of the Company's common stock were combined into one
share of common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from 6,070 to approximately 2,140. On
September 13, 2004, the Company's common stock began trading on the American
Stock Exchange. All share and related amounts presented have been retroactively
adjusted for the stock split.

NOTE 6 - 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 General Corporate function are reported below for the quarters
and the nine months ended September 30, 2004 and 2003:


                                       19


<PAGE>

<TABLE>
                                                     Three Months Ended                 Nine Months Ended
                                                        September 30,                     September 30,
                                                    2004             2003             2004             2003
                                                ------------     ------------     ------------     ------------
                                                                          (Restated)
                                                                        (in thousands)
<S>                                             <C>              <C>              <C>              <C>
REVENUES:
Casing services                                 $     2,831      $     2,559      $     7,218      $     7,712
Directional drilling services                         6,677            3,353           18,352           10,336
Compressed air drilling services                      2,380            2,177            7,419            4,380
                                                ------------     ------------     ------------     ------------

Total revenues                                  $    11,888      $     8,089      $    32,989      $    22,428
                                                ============     ============     ============     ============

OPERATING INCOME (LOSS):
Casing services                                 $       949      $       913      $     2,174      $     3,069
Directional drilling services                         1,048              120            2,435              613
Compressed air drilling services                        130              122              723                3
General corporate                                      (888)            (477)          (1,915)          (1,277)
                                                ------------     ------------     ------------     ------------

Total income/(loss) from operations             $     1,239      $       678      $     3,417      $     2,408
                                                ============     ============     ============     ============

DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services                                 $       359      $       345      $     1,075      $     1,035
Directional drilling services                           117               56              331              175
Compressed air drilling services                        287              291              914              811
General corporate                                        25               18               76               78
                                                ------------     ------------     ------------     ------------

Total depreciation and amortization expense     $       788      $       710      $     2,396      $     2,099
                                                ============     ============     ============     ============

INTEREST EXPENSE:
Casing services                                 $       173      $       146      $       494      $       469
Directional drilling services                            69               42              210              166
Compressed air drilling services                        170              164              487              655
General corporate                                       154              169              443              507
                                                ------------     ------------     ------------     ------------


Total interest expense                          $       566      $       521      $     1,634      $     1,797
                                                ============     ============     ============     ============

CAPITAL EXPENDITURES
Casing services                                 $        32      $       973      $       457      $     1,215
Directional drilling services                            94              850              882              893
Compressed air drilling services                        107            1,765              771            2,259
General corporate                                         8                3               10               19
                                                ------------     ------------     ------------     ------------

Total capital expenditures                      $       241      $     3,591      $     2,120      $     4,386
                                                ============     ============     ============     ============

ASSETS:
Casing services                                 $    21,273      $    17,360      $    21,273      $    17,360
Directional drilling services                        14,225            9,122           14,225            9,122
Compressed air drilling services                     23,021           24,515           23,021           24,515
General corporate                                    14,601            1,169           14,601            1,169
                                                ------------     ------------     ------------     ------------

Total assets                                    $    73,120      $    52,166      $    73,120      $    52,166
                                                ============     ============     ============     ============

REVENUES:
United States                                   $    10,493      $     7,070      $    29,402      $    19,748
Mexico                                                1,395            1,019            3,587            2,680
                                                ------------     ------------     ------------     ------------

Total                                           $    11,888      $     8,089      $    32,989      $    22,428
                                                ============     ============     ============     ============


                                                      20
</TABLE>


<PAGE>

NOTE 7 - SUPPLEMENTAL CASH FLOWS INFORMATION

Non-cash investing and financing transactions in connection with the acquisition
of Safco Oil Field Products, Inc. for the nine months ended September 30, 2004:

Fair value of net assets                                           $  (842)
Goodwill and other intangibles                                        (150)
Fair value of common stock exchanged                                    33
                                                                   --------

Net cash paid to acquire subsidiary                                $  (959)
                                                                   ========

NOTE 8 - LEGAL MATTERS

The Company is a defendant in an action (the "Action") brought in April 2004
(No. 04CV308) in the District Court of Mesa County Colorado by the former owner
of Mountain Air Drilling Service Company, Inc. nka Pattongill & Murphy, Inc.,
from whom the Company's Mountain Compressed Air, Inc. ("MCA") acquired assets in
2001. The plaintiff seeks to accelerate payment of a note (the "Note") issued in
connection with the acquisition and is seeking $1,863,000 in damages
(representing principal and interest due under the Note), on the basis that MCA
has failed to provide financial statements required by the Note. The Company
believes the claim is without merit because the holder has failed to comply with
the terms and conditions of the Note, MCA no longer maintains separate financial
statements and the Company provides plaintiff with the Company's publicly
available financial statements. The financial statements disclose as a separate
segment the operations of AirComp, which conducts business using the assets
acquired from plaintiff. The Company has asserted defenses based on these facts
and based upon substantial performance and impossibility of performance.
Finally, the Company has claims in the amount of $12,000 for legal fees and
other expenses that the plaintiff agreed to pay the Company in connection with
the settlement of an earlier lawsuit involving the acquisition of assets from
plaintiff.

The Company is involved in various other legal proceedings arising 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 either cannot be reasonably
estimated at this time or are deemed to be only remotely probable of occurring.

NOTE 9 - SUBSEQUENT EVENTS

On November 10, 2004 AirComp completed the acquisition of Diamond Air Drilling
Services, Inc. and its affiliated company, Marquis Bit Co., LLC for $4.6 million
in cash. Diamond Air and Marquis Bit (collectively referred to as "Diamond Air")
provide air drilling technology and products to the oil and gas industry in West
Texas, New Mexico and Oklahoma. Diamond Air is a leading provider of air hammers
and hammer bit products. The acquisition was funded through capital
contributions from Allis-Chalmers and M-I in the amount of $2.5 million and $2.1
million, respectively.

In connection with the Diamond Air acquisition described above, on November 15,
2004 we executed an agreement with the current bank lender to AirComp to amend
and increase the existing credit facilities. Under the amendment, a $1.0 million
revolving line of credit was increased to $3.5 million, and a $6.6 million term
loan was increased to $7.1 million by adding the $490,000 amount outstanding
under the existing delayed draw facility to the term loan. Repayment of the $7.1
million term loan remained unchanged at $286,000 per quarter. Finally, the $1.0
million delayed draw term loan facility was increased to $1.5 million and its
availability period was extended to December 31, 2005


                                       21


<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.

OVERVIEW

We provide services and equipment to the oil and gas drilling industry. Our
customers are principally small independent and major oil and gas producers
engaged in the exploration and development of oil and gas. Our operations are
conducted principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, and the Rocky Mountain regions of New Mexico and
Colorado. We also operate in Mexico through a Mexican partner.

We provide casing and tubing handling services and drilling services, which
includes our directional drilling services segment and compressed air drilling
services segment. Our casing and tubing services segment supplies specialized
equipment and trained operators to install casing and tubing, change out drill
pipe and retrieve production tubing for both onshore and offshore drilling and
workover operations. Our directional drilling operations provide directional,
horizontal and "measure while drilling" services to oil and gas companies
operating both onshore and offshore in Texas and Louisiana. Our compressed air
drilling segment provides compressed air and related products and services for
the air drilling, workover, completion, and transmission segments of the oil,
gas and geothermal industries. We plan to broaden the geographic regions in
which we operate and to expand the types of services and equipment we provide to
the oil and gas drilling industry.

We derive operating revenues from rates per day and rates per job that we charge
for the labor and equipment required to provide a service. The rates vary widely
from project to project depending upon the scope of services we are asked to
provide. The price we charge for our services depends upon several factors,
including the level of oil and gas drilling activity in the particular
geographic regions in which we operate and the competitive environment.
Contracts are awarded based on price, quality of service and equipment, and
general reputation and depth of operations and management personnel. The demand
for drilling services has historically been volatile and is affected by the
capital expenditures of oil and gas exploration and development companies, which
in turn are impacted by the prices of oil and natural gas, or the expectation
for the prices of oil and natural gas.

The number of working drilling rigs is an important indicator of activity levels
in the oil and gas industry, typically referred to as the "rig count". The rig
count in the U.S. increased from 862 as of December 31, 2002 to 1,126 on
December 31, 2003, according to the Baker Hughes rig count. According to the
Baker Hughes rig count, the directional and horizontal rig counts increased from
283 as of December 31, 2002 to 381 on December 31, 2003, which accounted for
32.8% and 33.8% of the total U.S. rig count, respectively. As of October 29,
2004, this trend has continued, with directional and horizontal rigs climbing to
464, which was 37.1% of the 1,251 total U.S. rig count on such date.

In July 2003, through Mountain Compressed Air, we entered into a limited
liability company operating agreement with M-I L.L.C., a joint venture between
Smith International and Schlumberger N.V. to form a Texas limited liability
company named AirComp LLC. We own 55% and M-I owns 45% of AirComp. We have
consolidated AirComp into our financial statements beginning with the quarter
ended September 30, 2003.

We effected a reverse stock split on June 10, 2004 in order to increase the
share price of the common stock. As a result of the reverse stock split, every
five shares of our common stock were combined into one share of common stock.
The reverse stock split reduced the number of shares of outstanding common stock
from 31,393,789 to approximately 6,276,015 and reduced the number of
stockholders from 6,070 to 2,140. On September 13, 2004, our common stock began
trading on the American Stock Exchange.

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,
2004.


                                       22


<PAGE>

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2004 and 2003
----------------------------------------------------------------

Our revenues for the three months ended September 30, 2004 were $11.9 million,
an increase of 47.0% compared to $8.1 million for the three months ended
September 30, 2003. We increased revenues in all our business segments due to an
increase in demand for our services resulting from the general increase in oil
and gas drilling activity. The increase in revenues was experienced principally
by our directional drilling services segment due to the addition of operations
and sales personnel which increased our capacity and market presence.

Our gross profit for the third quarter of 2004 increased by 43.9% to $3.7
million, or 30.8% of revenues, compared to $2.2 million, or 25.1 % of revenues
for the third quarter of 2003, due primarily to the increase in revenues and
increased gross margins in our directional drilling segment as a result of the
increase in oil and gas drilling activity. The increase in revenues more than
offset increases in operating expenses due to the addition of personnel and
increases in wages and benefits. Our cost of revenues consists principally of
our labor costs and benefits, equipment rentals, maintenance and repairs of our
equipment, insurance, fuel and depreciation.

General and administrative expense was $2.4 million in the third quarter of 2004
compared to $1.4 million in the comparable period of 2003. General and
administrative expense increased in 2004 due to the hiring of additional sales
and administrative personnel at each of the our subsidiaries due to increased
activity levels, increased professional fees and other expenses related to our
financing activities, including the listing of our common stock on the American
Stock Exchange, and increased corporate accounting and administrative staff. As
a percentage of revenues, general and administrative expenses were 20.4% in the
2004 quarter and 16.7% in the 2003 quarter.

Depreciation and amortization was $788,793 in the third quarter of 2004 compared
to $709,325 for the third quarter of 2003.

Income from operations consists of our revenues less cost of sales, general and
administrative expenses, and depreciation and amortization. Income from
operations for the three months ended September 30, 2004 totaled $1.2 million,
an 82.7% increase over the $678,000 in income from operations for the comparable
period in 2003, reflecting the increased revenues from all of our business
segments and the increase in our gross profit which was partially offset by the
increase in general and administrative expenses.

Our interest expense increased to $566,000 for the third quarter of 2004,
compared to $521,000 for the comparable 2003 period due to higher average debt
outstanding and higher interest rates.

Minority interest in income of subsidiaries for the third quarter of 2004 was
$34,000 compared to $4,000 in the third quarter of 2003 due to the increase in
the net income of our casing and tubing services subsidiary, which was owned 19%
by Jens Mortensen until September 30, 2004, and due to the increase in the net
income of AirComp, our compressed air drilling services segment.

We had net income attributed to common shareholders of $519,000 for the third
quarter of 2004 compared with net income attributed to common shareholders of
$3.5 million for the third quarter of 2003. The 2003 third quarter included a
$1.0 million gain from the settlement of a lawsuit. In addition, we also
recorded a one-time non-operating gain on the sale of an interest in a
subsidiary of $2.4 million in connection with the formation of AirComp. We have
adopted a policy that any gain or loss in the future incurred on the sale in the
stock of a subsidiary would be recognized as such in the income statement.


The following table compares revenues and income from operations for each of our
business segments for the third quarter ended September 30, 2004 and 2003.
Income from operations consists of our revenues less cost of revenues, general
and administrative expenses, and depreciation and amortization:

<TABLE>
                                                             Revenues                     Income (Loss) from Operations
                                              --------------------------------------  -------------------------------------
                                                  2004          2003       Change        2004          2003         Change
                                              ------------  -----------  -----------  -----------  ------------  -----------
                                                             (Restated)                            (Restated)
                                                                              (in thousands)
<S>                                           <C>           <C>          <C>          <C>          <C>           <C>
Casing services                               $     2,831   $    2,559   $      272   $      949   $       913   $       36
Directional drilling services                       6,677        3,353        3,324        1,048           120          928
Compressed air drilling services                    2,380        2,177          203          130           122            8
General corporate                                      --           --           --         (888)         (477)        (410)
                                              ------------  -----------  -----------  -----------  ------------  -----------

Total                                         $    11,888   $    8,089   $    3,779   $    1,239   $       678   $      561
                                              ===========   ===========  ===========  ===========  ============  ===========
</TABLE>

                                       23


<PAGE>

CASING AND TUBING SERVICES SEGMENT

Revenues for the three months ended September 30, 2004 for the casing and tubing
services segment were $2.8 million, an increase of 10.6% from the $2.6 million
in revenues for the comparable 2003 period. Revenues from domestic operations
decreased from $1.5 million in the third quarter of 2003 to $1.4 million in the
third quarter of 2004 as a result of increased competition in South Texas,
resulting in fewer contracts awarded to us and lower pricing for our services.
Revenues from Mexican operations, however, increased from $1.0 million in the
third quarter of 2003 to $1.4 million in the third quarter of 2004 as a result
of increased drilling activity in Mexico and the addition of equipment that
increased our capacity. Income from operations increased 3.9% to $949,000 for
the third quarter of 2004, from $913,000 for the same period in 2003. Income
from operations did not increase as much as the increase in revenues due to
decreased revenues from domestic operations and an increase in wages and
benefits domestically, which was partially offset by increased revenues from
Mexico.

DIRECTIONAL DRILLING SERVICES SEGMENT

Revenues for the three months ended September 30, 2004 for our directional
drilling services segment were $6.7 million, an increase of 97.1% from $3.4
million for the comparable 2003 period. Income from operations increased by
773.3% to $1.0 million for the three-month period of 2004 from $120,000 for the
same period in 2003. The improved results for this segment are due to an
increase in drilling activity in the Texas and Gulf Coast areas and the addition
of operations and sales personnel which increased our capacity and market
presence. Increased operating expenses as a result of the addition of personnel
were more than offset by the growth in revenues and cost savings as a result of
purchases, in late 2003 and in 2004, of most of the down-hole motors used in
directional drilling. Previously we leased these motors.

COMPRESSED AIR DRILLING SERVICES SEGMENT

Our compressed air drilling revenues were $2.4 million for the third quarter of
2004, an increase of 9.3% compared to $2.2 million in revenues for the
comparable 2003 period. Income from operations was $130,000 for the 2004 period
compared to $122,000 for the comparable period of 2003. Increased revenues for
compressed air drilling services in West Texas and the Rocky Mountain areas was
partially offset by a decrease in activity in California.

Comparison of Nine Months Ended September 30, 2004 and 2003
-----------------------------------------------------------

Our revenues for the nine months ended September 30, 2004 were $33.0 million, an
increase of 47.0% compared to $22.4 million for the first nine months of 2003.
Revenues increased due to increased demand due to the general increase in oil
and gas drilling activity. Revenues increased most significantly at our
directional drilling services segment due to the addition of operations and
sales personnel, which increased our capacity and market presence. Additionally,
our compressed air drilling services revenues for the first nine months of 2004
increased compared to the first nine months of 2003 due to the inclusion, for a
full nine months in the 2004 period, of the business contributed by M-I in
connection with the formation of AirComp in July 2003. We have consolidated
AirComp into our financial statements beginning with the quarter ended September
30, 2003. The increase in revenues in our directional drilling and compressed
air drilling services was partially offset by a decrease in revenues in our
casing and tubing services segment due to increased competition for casing and
tubing services in South Texas. Our gross profit for the first nine months of
2004 increased 42.5% to $8.8 million, or 26.6% of revenues, compared to $6.2
million, or 27.5 % of revenues for the first nine months of 2003, due to the
increase in revenues and pricing in the directional drilling services segment
and the compressed air drilling services segment, which was partially offset by
lower revenues and higher costs in our casing and tubing segment. Our cost of
revenues consists principally of our labor costs and benefits, equipment
rentals, maintenance and repairs of our equipment, insurance and fuel. Because
many of our costs are fixed, our gross profit as a percentage of revenues is
generally affected by our level of revenues. Gross profit as a percentage of
revenues declined primarily because of lower revenues and higher costs in our
casing and tubing segment, which was offset by higher revenues and higher
margins in our other segments.

General and administrative expense was $5.4 million in the 2004 nine-month
period compared to $3.8 million for the comparable period of 2003. General and
administrative expense increased in 2004 due to additional expenses associated
with the inclusion of AirComp for a full nine months, the hiring of additional
sales and administrative personnel at each of our subsidiaries, increased
professional fees and other expenses related to our financing activities,
including the listing of our common stock on the American Stock Exchange, and
increased corporate accounting and administrative staff. As a percentage of
revenues, general and administrative expenses were 16.3% in the 2004 nine-month
period and 16.8% in the 2003 nine-month period.

Depreciation and amortization was $2.4 million for the nine months ended
September 30, 2004 compared to $2.1 million for the nine months ended September
30, 2003.

Income from operations for the nine months ended September 30, 2004 totaled $3.4
million, a 41.9% increase over the $2.4 million in income from operations for
the comparable period in 2003, reflecting the increased revenues from
directional drilling services and the inclusion of revenues and operating income
of AirComp for a full nine months in the 2004 period, offset in part by a
decrease in revenues and income from operations from our casing and tubing
services segment due to increased competition and increases in wages and
benefits in South Texas, and an increase in general and administrative expenses.


                                       24

<PAGE>

Our interest expense decreased to $1.6 million for the first nine months of
2004, compared to $1.8 million for the first nine months of the prior year due
to the acceleration in 2003 of the amortization of a put obligation related to
subordinated debt at Mountain Compressed Air. Interest expense for 2003 includes
$216,000 of amortization expense for the put obligation. The subordinated debt
and accrued interest was paid off with the formation of AirComp.

Minority interest in income of subsidiaries for the first nine months of 2004
was $248,000 compared to $315,000 for the first nine months of 2003 due to the
decrease in net income from our casing and tubing services segment which was 19%
owned by director and officer Jens Mortensen until September 30, 2004.

We had net income attributed to common stockholders of $1.3 million for the nine
months ended September 30, 2004 compared with net income attributed to common
stockholders of $2.7 million for the nine months ended September 30, 2003. The
decrease in net income attributed to common stockholders for the nine months
ended September 30, 2004 is due to recognition of a non-operating gain on sale
of an interest in a subsidiary in the amount of $2.4 million recorded in the
third quarter of 2003 in connection with the formation of AirComp and the
issuance of a 45% interest in AirComp to M-I.

The following table compares revenues and income from operations for each of our
business segments for the nine months ended September 30, 2004 and 2003. Income
from operations consists of our revenues less cost of revenues, general and
administrative expenses, and depreciation and amortization:

<TABLE>
                                                    Revenues                     Income (Loss) from Operations
                                     -----------------------------------     -------------------------------------
                                        2004         2003        Change         2004         2003          Change
                                     ---------    ---------    ---------     ---------     ---------     ---------
                                                  (Restated)                               (Restated)
                                                                    (in thousands)
<S>                                  <C>          <C>          <C>           <C>           <C>           <C>
Casing services                      $  7,218     $  7,712     $   (494)     $  2,174      $  3,070      $   (896)
Directional drilling services          18,352       10,336        8,016         2,435           613         1,822
Compressed air drilling services        7,419        4,380        3,039           723             3           720
General corporate                          --           --           --        (1,915)       (1,278)         (637)
                                     ---------    ---------    ---------     ---------     ---------     ---------

Total                                $ 32,989     $ 22,428     $ 10,561      $  3,417      $  2,408      $  1,009
                                     =========    =========    =========     =========     =========     =========
</TABLE>

CASING AND TUBING SERVICES SEGMENT

Revenues for the nine months ended September 30, 2004 for the casing and tubing
services segment were $7.2 million, a decrease of 6.4% from the $7.7 million in
revenues for the comparable 2003 period. Revenues from domestic operations
decreased from $5.0 million in the first nine months of 2003 to $3.6 million in
the first nine months of 2004 as a result of increased competition in South
Texas, resulting in fewer contracts awarded to us and lower pricing for our
services. Revenues from Mexican operations, however, increased from $2.7 million
in the first nine months of 2003 to $3.6 million in the comparable 2004 period
as a result of increased drilling activity in Mexico and the addition of
equipment that increased our capacity. Income from operations decreased by 29.2%
to $2.2 million for the nine-month period of 2004 compared to $3.1 million for
the same period in 2003. The decrease in this segment's revenues and operating
income is due to the decrease in revenues from domestic operations due to
increased competition in this segment and increases in wages and benefits
domestically, which was partially offset by increased revenues from Mexico.

DIRECTIONAL DRILLING SERVICES SEGMENT

Revenues for the nine months ended September 30, 2004 for our directional
drilling services segment were $18.4 million, an increase of 77.6% from the
$10.3 million in revenues for the comparable 2003 period. Income from operations
increased by 350.0% to $2.4 million for the nine-month period of 2004 compared
to $613,000 for the same period in 2003. The improved results for this segment
are due to the increase in drilling activity in the Texas and Gulf Coast areas
and the addition of operations and sales personnel which increased our capacity
and market presence. Increased operating expenses as a result of the addition of
personnel were more than offset by the growth in revenues and cost savings as a
result of purchases, in late 2003 and in 2004, of most of the down-hole motors
used in directional drilling. Previously we had leased these motors.


                                       25


<PAGE>

COMPRESSED AIR DRILLING SERVICES SEGMENT

Our compressed air drilling revenues were $7.4 million for the first nine months
of 2004, an increase of 69.4% compared to $4.4 million in revenues in the 2003
period. Income from operations increased to $723,000 for the nine-month period
of 2004 compared to an income from operations of $3,000 for the same period in
2003. Our compressed air drilling revenues and operating income for the first
nine months of 2004 increased compared to the first nine months of 2003 due to
the inclusion, for a full nine months in the 2004 period, of the business
contributed by M-I, in connection with the formation of AirComp in July 2003.
Through this venture we have been able to expand the geographical areas in which
our compressed air drilling segment operates to include natural gas drilling in
the Rocky Mountains and West Texas areas.

Pro Forma Comparison of Nine Months Ended September 30, 2004 and 2003
---------------------------------------------------------------------

The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on our 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
nine months ended September 30, 2004 and 2003.

Pro forma revenues for the first nine months of 2004 totaled $33.0 million,
compared to pro forma revenues for the first nine months of 2003 of $24.2
million, an increase of approximately 36.3%. The increase in revenues is
principally due to increased revenues at our directional drilling services
segment due to the general increase in oil and gas drilling activity. The
increase in revenues in our directional drilling services segment was partially
offset by a decrease in revenues in our casing and tubing services segment due
to increased competition for casing and tubing services in South Texas. Pro
forma revenues for the first nine months of 2004 for AirComp totaled $7.4
million, compared to pro forma revenues in the first nine months of 2003 of $6.1
million. The $1.3 million increase in pro forma revenues in 2004 for AirComp is
due to increased drilling activity in West Texas and a slight increase in
activity in the Rocky Mountains over the same period in 2003.

Pro forma gross profit for the first nine months of 2004 was $8.8 million, or
26.7% of revenues, compared to $6.3 million, or 25.8% of revenues for the first
nine months of 2003, as increased gross margins in our directional drilling
segment was offset by increased competition and weaker pricing and increases in
wages and benefits in our casing and tubing services segment. Our cost of
revenues consists principally of our labor costs and benefits, equipment
rentals, maintenance and repairs of our equipment, insurance and fuel.

Pro forma depreciation and amortization was $2.4 million for the first nine
months of 2004 compared to $2.2 million for the first nine months of 2003.

Pro forma general and administrative expense was $5.4 million in for the first
nine months of 2004 compared to $3.4 million for the 2003 period. Pro forma
general and administrative expense increased in 2004 due to the hiring of
additional sales and administrative personnel at each of the our subsidiaries,
increased professional fees and other expenses related to our financing
activities, including the listing of our common stock on the American Stock
Exchange, and increased corporate accounting and administrative staff.

We had pro forma income from operations for the first nine months of 2004 of
$3.4 million an increase of 25.9 % as compared to pro forma income from
operations of $2.8 million in the first nine months of 2003. The increase in pro
forma income from operations for the 2004 period was primarily due to higher
revenues resulting from the general improvement in oil and gas drilling
activity. The increase in income from operations primarily reflects the
increased revenues from directional drilling services, offset in part by a
decrease in revenues and income from operations from our casing and tubing
services segment due to increased competition, weaker pricing and increases in
wages and benefits in South Texas, and an increase in general and administrative
expenses.

Our pro-forma interest expense decreased to $1.6 million for the first nine
months of 2004, compared to $1.8 million for the first nine months of the prior
year due to the acceleration of the amortization of the put obligation related
to subordinated debt at Mountain Compressed Air. Interest expense for 2003
includes of $216,000 of amortization expense for the put obligation. The
subordinated debt and accrued interest was paid off with the formation of
AirComp.

Pro forma minority interest in income of subsidiaries for the first nine months
of 2004 was $248,000 compared $169,000 in the first nine months of 2003 due to
the decrease in the net income of our casing and tubing services subsidiary,
which was owned 19% by Jens Mortensen until September 30, 2004.

We recorded pro forma net income attributed to common shareholders of $1.3
million for the nine months ended September 30, 2004 compared with a pro forma
net income of $2.9 million for the nine months ended September 30 2003, which
included a one-time $1.0 million gain resulting from the settlement of a lawsuit
and a $2.4 million gain on sale of interest in AirComp.


                                       26


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Our on-going capital requirements arise primarily from our need to service our
debt and retire redeemable securities, to acquire and maintain equipment, for
working capital and for acquisitions. Our primary sources of liquidity are
borrowings under our revolving lines of credit, proceeds from the issuance of
equity securities and cash flows from operations. We had cash and cash
equivalents of $13.0 million at September 30, 2004 compared to $1.3 million at
December 31, 2003.

OPERATING ACTIVITIES

In the nine months ended September 30, 2004, we generated $570,000 in cash from
operating activities compared to $2.0 million in cash from operating activities
for the same period in 2003. Net income before preferred stock dividend for the
first nine months of 2004 decreased to $1.4 million, compared to $3.2 million in
the comparable 2003 period. Net income in 2003 includes a $1.0 million gain from
the settlement of a lawsuit and a $2.4 million gain on sale of interest in
AirComp. Non-cash additions to net income totaled $2.8 million in the 2004
period compared to a negative ($591,000) in the 2003 period, consisting
principally of depreciation and amortization expense, amortization ofdiscount of
debt and minority interest in the income of a subsidiary, offset in the 2003
period, by the non-cash gain totaling 3.4 million.

During the first nine months of 2004, changes in working capital used $3.6
million in cash compared to a use of $672,000 in cash in the 2003 period,
principally due, in the 2004 period, to a decrease in accrued expenses of $1.0
million, an increase in accounts receivables and other current assets of $1.9
million and a decrease of $725,000 in accounts payable. The decrease in accrued
expenses was the result of a decrease in accrued expenses of $471,000 due to
lower motor costs resulting from the purchase of motors which we previously
leased, a decrease in long-term equipment deposits of $141,000, and a decrease
in accrued employee benefits and payroll taxes of $557,000 primarily due to the
payroll cycle ending at September 30, 2004. These decreases were offset by an
increase of $131,000 in accrued interest resulting from increased interest
expense on debt with variable interest rates. Accounts receivable increased $1.4
million during the first nine months of 2004 due increased revenues in our
directional drilling segment and our compressed air drilling segment, offset by
lower revenues in our casing and tubing segment. Current assets increased
$609,000 due primarily to an increase in prepaid insurance premiums, an increase
of $39,000 in other assets due to acquisition costs, and a decrease in lease
receivable of $197,000 due to payments received from lessee. Accounts payable
decreased by $725,000 in the 2004 period due to the use of the proceeds received
from the issuance of common stock to reduce payables.

During the first nine months of 2003, accrued expenses decreased $497,000,
accounts receivable and other current assets increased $2.9 million, and
accounts payable increased $2.7 million. The decrease in accrued expenses is due
to a decrease in accrued interest of $264,000 due to the retirement of
subordinated debt carrying an interest rate of 12% and lower interest rates on
other debt with variable interest rates, a decrease in accrued expenses of
$323,000 primarily due to lower motor costs resulting from the purchase of
motors which we previously leased, and an increase in accrued employee benefits
and payroll taxes of $90,000 due to the payroll cycle ending at September 30,
2003. Accounts receivable increased by $2.9 million during the first nine months
of 2003 due to an increase in revenues in our directional drilling services
segment, in our compressed air drilling segment due to the inclusion of the
business contributed by M-I to AirComp in July 2003, and in our casing and
tubing services segment. Current assets increased $30,000 primarily as a result
of a $697,000 increase in prepaid insurance premiums, which was offset by a
decrease of $35,000 in other assets due to the write-off of acquisition costs, a
decrease of $525,000 in lease deposits related to leased equipment paid off in
June 2003, and a decrease in lease receivables of $106,000 due to payments
received from lessee. Accounts payable increased by $2.7 million in the 2003
period due to the increase in cost of revenues and other expenses, and the
inclusion of the business contributed by M-I to AirComp in July 2003.

INVESTING ACTIVITIES

During the first nine months of 2004, we used $3.1 million in investing
activities, consisting of capital expenditures of approximately $882,000 to
purchase equipment for our directional drilling services segment, approximately
$457,000 to purchase casing equipment and approximately $781,000 to make capital
repairs to existing equipment in our compressed air drilling services segment.
On September 23, 2004 we also completed, for $1.0 million, the acquisition of
100% of the outstanding stock of Safco Oil Field Products, Inc. ("Safco). Safco
leases "hevi-wate" spiral drill pipe and provides related oilfield services to
the oil drilling industry. This compares to net cash used in investing
activities of $4.4 million in the comparable 2003 period primarily for the
purchase of equipment.

FINANCING ACTIVITIES

During the first nine months of 2004, financing activities provided a net of
$14.2 million in cash. We received $16.9 million in net proceeds from the
issuance of common stock which was offset in part by the repayment of $2.4
million of long-term debt and $317,000 in debt issuance costs. This compares to
the first nine months of 2003 when we received $9.6 million in proceeds from the
issuance of long-term debt offset by $6.9 million in the repayment of long-term
debt and $304,000 in debt issuance costs.


                                       27


<PAGE>

In April 2004, Energy Spectrum, the holder of our preferred stock, converted its
3,500,000 shares of Series A 10% Cumulative Convertible Preferred Stock,
including accrued dividend rights, into 1,718,090 shares of common stock.

On August 10, 2004, we completed the private placement of 3,504,667 shares of
our common stock at a price of $3.00 per share. Net proceeds to us, after
selling commissions and expenses, was approximately $9.6 million. On September
30, 2004, we completed the private placement of 1,956,634 shares of our common
stock at a price of $3.00 per share. Net proceeds to us, after selling
commissions and expenses, was approximately $5,389,000. We agreed to file a
registration statement to allow investors in the August 2004 private placement
and the September 2004 private placement to resell the common stock in public
markets. We will use the net proceeds of the private placement offerings to
reduce debt, for acquisitions, and for general corporate purposes.

On September 30, 2004, we issued 1,300,000 shares of our common stock to Jens
Mortensen, a director and the President of Jens', in exchange for his 19%
interest in Jens' Oilfield Service, Inc. As a result of this transaction, we now
own 100% of Jens' Oilfield Service, Inc. The total value of the consideration
paid to Jens was $6,435,000, which was equal to the number of shares of common
stock issued to Mr. Mortensen (1,300,000) multiplied by the last sale price
($4.95) of the common stock as reported on the American Stock Exchange on the
date of issuance. This amount was treated as a contribution to stockholders
equity.

On our balance sheet, we eliminated the amount recorded as the value of the
Jens' minority interest, $1,951,870. The balance of the contribution
($4,483,130) was allocated as follows:

In June 2004, we obtained an appraisal of the fixed assets at Jens' in
conjunction with obtaining a bank loan, which valued the fixed assets at
$20,081,304. The book value of the fixed assets was $15,799,666, and the excess
of appraised value over book value was $4,281,638. We increased the value of
Jens' fixed assets by 19% of this amount, or $813,511. The remaining balance of
$3,669,619 was allocated to goodwill.

We have several bank credit facilities and other debt instruments at
Allis-Chalmers and at our three operating subsidiaries. Allis-Chalmers
guarantees the loans owed by Jens' and Strata, and Mountain Compressed Air, a
wholly-owned subsidiary, guarantees AirComp's bank debt. All three of our
subsidiaries are consolidated on our financial statements. At September 30,
2004, we had $30.1 million in outstanding indebtedness, of which $25.2 million
was long-term debt and $4.9 million was the current portion of long-term debt.
Through Jens', our casing and tubing services subsidiary, at September 30, 2004,
we had two principal bank facilities. We had a term loan in the original amount
of $4.0 million that was increased, in October 2003, to $5.1 million. We were
required to make monthly principal payments of $85,000 plus 25% of our
collections from our operations in Mexico. Interest accrued at a floating rate
plus a margin. The interest rate on the term loan was 6.75% at September 30,
2004 and the outstanding amount was $3.0 million. We also had a $1.0 million
bank line of credit of which $209,000 was outstanding at September 30, 2004.
Interest accrued at a floating rate plus a margin. The interest rate on the line
of credit was 6.75% at September 30, 2004. We paid a 0.5% per annum fee on the
undrawn portion of the line of credit.

Our Jens' subsidiary also has a note payable to Jens Mortensen, who sold Jens'
to us and is a director and the President of Jens'. The note is in the original
amount of $4.0 million at 7.5% simple interest with quarterly interest payments.
At September 30, 2004, $406,000 of interest was accrued and was included in
accounts payable to related parties. The principal and interest are due on
January 31, 2006. In connection with the purchase of Jens', we also agreed to
pay a total of $1.2 million to Mr. Mortensen in exchange for a non-compete
agreement. We are required to make monthly payments of $20,576 through January
31, 2007. As of September 30, 2004, the balance due is approximately $576,000,
including $247,000 classified as short-term.

Jens' also had outstanding three term loans at September 30, 2004. One was a
real estate bank loan in the amount of $532,000 at a floating interest rate with
monthly principal payments of $14,778 plus interest. The interest rate was 6.75%
at September 30, 2004 and the outstanding amount due was $73,000. The second
loan is a bank loan in the original amount of $397,080 at a floating interest
rate with monthly principal payments of $11,000 plus interest. At September 30,
2004, the interest was 6.75% and the balance due was $256,000. The final
maturity date of the loan is September 17, 2006. The third term loan is a bank
term loan in the original amount of $74,673 at a floating interest rate with
monthly principal payments of $1,946 plus interest. At September 30, 2004, the
interest was 6.75% and the balance due was $59,000. The final maturity date of
the loan is January 12, 2007.

Through Strata, our directional drilling services operating subsidiary, we had a
$4.0 million bank line of credit of which $2.7 million was outstanding at
September 30, 2004. The interest rate was 7.75% at September 30, 2004 and we
paid a 0.5% per annum fee on the undrawn portion of the line of credit.


                                       28


<PAGE>

In December 2003, Strata entered into a short-term vendor financing agreement in
the original amount of $1.7 million with a major supplier for drilling motor
rentals, motor lease costs and motor repair costs. The agreement provides for
repayment of all amounts not later than December 30, 2005. Payment of interest
is due monthly and principal payments of $582,000 are due in each of October
2004, April 2005, and December 2005. The interest rate is fixed at 8.0%. As of
September 30, 2004, the outstanding balance was $1.7 million.

In connection with the purchase of Safco, we also agreed to pay a total of
$150,000 to the sellers in exchange for a non-compete agreement. We are required
to make yearly payments of $50,000 through September 30, 2007. As of September
30, 2004, the balance due is $150,000.

AirComp had the following facilities at September 30, 2004:

* A $1.0 million bank line of credit of which $925,000 was outstanding at
September 30, 2004. Interest accrues at a floating rate plus a margin and was
6.75% at September 30, 2004. We paid a 0.5% per annum fee on the undrawn
portion. Borrowings under the line of credit were subject to a borrowing base
consisting of eligible accounts receivable.

* A term loan in the original amount of $8.0 million with a floating interest
rate based on either prime or the London interbank offered rate ("LIBOR") plus a
margin. The interest rate averaged 5.50% at September 30, 2004. Principal
payments of $286,000 were due quarterly, plus interest, with a final maturity
date of June 27, 2007. The remaining balance at September 30, 2004 was $6.6
million.

* A "delayed draw" term loan facility in the amount of $1.0 million to be used
for capital expenditures. Interest accrues at a rate equal to LIBOR plus a
margin. Quarterly principal payments commence on March 31, 2005 in an amount
equal to 5.0% of the outstanding balance as of December 31, 2004. The
outstanding balance of this facility at September 30, 2004 was $490,000.

The AirComp credit facilities are secured by liens on substantially all of
AirComp's assets. The agreement governing these credit facilities contains
customary events of default and requires that AirComp satisfy various financial
covenants. It also limits AirComp's ability to incur additional indebtedness,
make capital expenditures, pay dividends or make other distributions, create
liens, and sell assets. Mountain Compressed Air guaranteed the obligations of
AirComp under these facilities.

On November 10, 2004, AirComp completed the acquisition of Diamond Air Drilling
Services, Inc. and its affiliated company, Marquis Bit Co., LLC for $4.6 million
in cash. Diamond Air and Marquis Bit provide air drilling technology and
products to the oil and gas industry in West Texas, New Mexico and Oklahoma.
Diamond is a leading provider of air hammers and hammer bit products. The
acquisition was funded through capital contributions from Allis-Chalmers and M-I
in the amount of $2.5 million and $2.1 million, respectively.

In connection with the Diamond Air acquisition described above, on November 15,
2004, the AirComp credit facility was amended as follows:

* The $1.0 million revolving line of credit was increased to $3.5 million.

* The $6.6 million term loan was increased to $7.1 million by adding the
$490,000 amount outstanding under the existing delayed draw facility to the term
loan. Repayment of the $7.1 million term loan remained unchanged at $286,000 per
quarter.

* The $1.0 million delayed draw term loan facility was increased to $1.5 million
and its availability period was extended to December 31, 2005 from December 31,
2004. Repayment of this facility will be in equal quarterly principal payments
equal to 5.0% of amounts outstanding as of December 31, 2005, beginning March
31, 2006, with a final maturity of June 27, 2007.

AirComp also has a subordinated note payable to M-I in the amount of $4.8
million bearing interest at an annual rate of 5.0%. In 2007 each party has the
right to cause AirComp to sell its assets (or the other party may buy out such
party's interest), and in such event this note (including accrued interest) is
due and payable. The note is also due and payable if M-I sells its interest in
AirComp or upon a termination of AirComp. At September 30, 2004, $283,000 of
interest was included in accrued interest. Neither the Company nor Mountain
Compressed Air is liable for the obligations of AirComp under this note.

The Company had a subordinated note in the original amount of $3.0 million with
a fixed interest rate of 12.0%. The outstanding balance was $2.3 million at
September 30, 2004. In connection with this note, we issued redeemable warrants,
which were recorded as a liability of $900,000 and as a discount to the face
amount of the debt. This amount was amortized as additional interest expense
over the term of the note. The debt was recorded at $2.3 million net of
unamortized portion of the put obligation.


                                       29


<PAGE>

In connection with the issuance of the $3.0 million subordinated note, we issued
redeemable warrants that are exercisable for up to 233,000 shares of our common
stock at an exercise price of $0.75 per share and non-redeemable warrants that
are exercisable for a maximum of 67,000 shares of our common stock at $5.00 per
share. The warrants were exercisable for $0.75 per share are subject to cash
redemption provisions in the amount of $900,000 at the discretion of the warrant
holders at any time after January 31, 2005. We recorded a liability of $900,000
in respect of the warrant redemption rights, and amortized the effects of the
puts to interest expense over the life of the $3.0 million subordinated debt.

In 1999 we compensated directors who served on the board of directors from 1989
to March 31, 1999 without compensation by issuing promissory notes totaling
$325,000. The notes bear interest at the rate of 5.0% and are due on March 28,
2005. At September 30, 2004, the principal and accrued interest on these notes
totaled approximately $398,000.

As part of the acquisition of Mountain Air in 2001, we issued a note to the
sellers of Mountain Air in the original amount of $2.2 million at 5.75% simple
interest which was reduced to $1.5 million as a result of the settlement of a
legal action against the sellers. At September 30, 2004 the outstanding amount
due, including accrued interest, was $1.6 million. The principal and accrued
interest is due on September 30, 2007. As discussed in "Business - Legal
Proceedings," the holder of this note has brought legal action seeking to
accelerate its payment.

Mountain Air has a term loan in the original amount of $267,000 at an interest
rate of 5.0%, with principal and interest payments of $5,039 due on the last day
of each month. At September 30, 2004, the outstanding amount due was $211,000
and the final maturity date is June 30, 2008.

In connection with incurring subordinated debt that was subsequently
extinguished in connection with the formation of AirComp, Mountain Air issued
redeemable warrants, which have been recorded as a liability of $600,000.

The following table summarizes our obligations and commitments to make future
payments under our notes payable, operating leases, employment contracts and
consulting agreements for the periods specified as of September 30, 2004.

<TABLE>
                                                                   PAYMENTS BY PERIOD
                                                                   ------------------
                                                                     (IN THOUSANDS)
                                                         LESS THAN                                      MORE THAN
                                           TOTAL          1 YEAR         1-3 YEARS      3-5 YEARS        5 YEARS
                                       ------------    ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>             <C>
CONTRACTUAL OBLIGATIONS

Notes Payable                          $    30,099     $     4,858     $    15,164     $    10,077     $        --
Interest Payments on notes payable           2,032             328           1,024             680              --
Operating Lease                              1,298             275             539             398              86
Employment Contracts                         2,425           1,006           1,419              --              --
                                       ------------    ------------    ------------    ------------    ------------

Total Contractual Cash Obligations     $    35,854     $     6,467     $    18,146     $    11,155     $        86
                                       ============    ============    ============    ============    ============
</TABLE>

We have no off balance sheet arrangements that have or are likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues, expenses, results of operations, liquidity, capital
expenditures or capital resources. We do not guarantee obligations of any
unconsolidated entities.

We believe that our current cash generated from operations, cash available under
our credit facilities and net proceeds from prior equity private placements will
provide sufficient funds for our identified projects.

We intend to implement a growth strategy of increasing the scope of services
through both internal growth and acquisitions. We are regularly involved in
discussions with a number of potential acquisition candidates. We expect to make
capital expenditures to acquire and to maintain our existing equipment. Our
performance and cash flow from operations will be determined by the demand for
our services which in turn are affected by our customers' expenditures for oil
and gas exploration and development and industry perceptions and expectations of
future oil and gas prices in the areas where we operate. We will need to
refinance our existing debt facilities as they become due and provide funds for
capital expenditures and acquisitions. To effect our expansion plans, we will
require additional equity or debt financing in excess of our current working
capital and amounts available under credit facilities. There can be no assurance
that we will be successful in raising the additional debt or equity capital or
that we can do so on terms that will be acceptable to us.


                                       30

<PAGE>

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 Item 1 of Part I under Financial Statements. Our preparation of
this report requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, 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. The determination of the collectibility of
amounts due from our customers requires us to use estimates and make judgments
regarding future events and trends, including monitoring our customer payment
history and current credit worthiness to determine that collectibility is
reasonably assured, as well as consideration of the overall business climate in
which our customers operate. Those uncertainties require us 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%. At December 31, 2003 and
2002, reserves for doubtful accounts totaled $168,000, or 2%, and $32,000, or 1%
of total accounts receivable before reserves, respectively. We believe that our
reserve for doubtful accounts is adequate to cover anticipated losses under
current conditions; however, changes in the financial condition of our
customers, could impact the amount of provisions for doubtful accounts.

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
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are reviewed for impairment 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. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period.

GOODWILL AND OTHER INTANGIBLES. The Company has recorded approximately
$10,331,000 of goodwill and $3,089,000 of other identifiable intangible assets.
The Company performs purchase price allocations to intangible assets when it
makes a business combination. Business combinations and purchase price
allocations have been consummated for purchase of the Mountain Air, Strata and
Jens' operating segments. The excess of the purchase price after allocation of
fair values to tangible assets is allocated to identifiable intangibles and
thereafter to goodwill. 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. These
initial valuations required the use of third-party valuation experts who in turn
developed assumptions to value the carrying amount of the individual reporting
units. Significant and unanticipated 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.


                                       31


<PAGE>

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 cost 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.

Quantitative and Qualitative Disclosure About Market Risk.
----------------------------------------------------------

We are exposed to market risk primarily from changes in interest rates and
foreign currency exchange risks.

         INTEREST RATE RISK.

Fluctuations in the general level of interest rates on our current and future
fixed and variable rate debt obligations expose us to market risk. We are
vulnerable to significant fluctuations in interest rates on our variable rate
debt and on any future repricing or refinancing of our fixed rate debt and on
future debt.

At September 30, 2004, we were exposed to interest rate fluctuations on
approximately $14.0 million of notes payable and bank credit facility borrowings
carrying variable interest rates. A hypothetical one hundred basis point
increase in interest rates for these notes payable would increase our annual
interest expense by approximately $140,000. Due to the uncertainty of
fluctuations in interest rates and the specific actions that might be taken by
us to mitigate the impact of such fluctuations and their possible effects, the
foregoing sensitivity analysis assumes no changes in our financial structure.

We have also been subject to interest rate market risk for short-term invested
cash and cash equivalents. The principal of such invested funds would not be
subject to fluctuating value because of their highly liquid short-term nature.
As of September 30, 2004, we had $13.0 million invested in short-term maturing
investments.

         FOREIGN CURRENCY EXCHANGE RATE RISK.

We conduct business in Mexico through our Mexican partner, Matyep. This business
exposes us to foreign exchange risk. To control this risk, we provide for
payment in U.S. dollars. However, we have historically provided our partner a
discount upon payment equal to 50% of any loss suffered by our partner as a
result of devaluation of the Mexican peso between the date of invoicing and the
date of payment. During 2003 and 2002 the discounts have not exceeded $10,000
per year.

         FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS COULD HAVE A MATERIAL
         ADVERSE EFFECT ON OUR OPERATIONS.

We are in the process of documenting and testing our internal control procedures
in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our Independent
Auditors addressing these assessments. During the course of our testing we may
identify deficiencies which we may not be able to remediate in time to meet the
deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements
of Section 404. In addition, if we fail to achieve and maintain the adequacy of
our internal controls, as such standards are modified, supplemented or amended
from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective
internal controls are necessary for us to produce reliable financial reports and
are important to helping prevent financial fraud. If we cannot provide reliable
financial reports or prevent fraud, our business and operating results could be
harmed, investors could lose confidence in our reported financial information,
and the trading price of our stock could drop significantly.


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.


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<PAGE>

                                     PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits listed on the Exhibit Index located at Page 33 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 CORPORATION
                                            --------------------------
                                                     (REGISTRANT)

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


                                       33


<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.


                                       34