<PAGE>

                 UNITED STATE SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    FORM 10-Q

                                   (Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 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:

          Title of Security:                                Name of Exchange:
Common Stock, par value $0.01 per share                  American Stock Exchange

        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 May 3, 2005 there were  13,852,797xxxx shares of common stock outstanding.







<PAGE>


                           ALLIS-CHALMERS ENERGY INC.

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

                                TABLE OF CONTENTS

                                     PART I


     ITEM                                                                   PAGE
     ----                                                                   ----

     1.Financial Statements

       Consolidated Balance Sheets as of March 31, 2005 and
         December 31, 2004.................................................... 3

       Consolidated Income Statements for the three months
         Ended March 31, 2005 and 2004.......................................  4

       Consolidated Statements of Cash Flows for the three months
          ended March 31, 2005 and 2004......................................  5

       Notes to Consolidated Financial Statements............................  6

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

     3. Quantitative and Qualitative Disclosures about Market Risk..........  26

     4. Controls and Procedures.............................................. 26


                                     PART II

     1. Legal Proceedings.................................................... 26

     6. Exhibits and Reports on Form 8-K..................................... 27

     Signatures and Certifications........................................... 28



                                       2




<PAGE>

<TABLE>

                                PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ALLIS-CHALMERS ENERGY INC.                                       MARCH 31,      DECEMBER 31,
CONSOLIDATED BALANCE SHEETS                                        2005            2004
                                                                -----------     -----------
(in thousands, except for share amounts)                        (unaudited)
<S>                                                             <C>             <C>

ASSETS
Cash and cash equivalents                                       $     5,999     $     7,344
Trade receivables, net                                               16,402          12,986
Inventory                                                             2,464           2,373
Lease receivable, current                                               180             180
Prepaid expenses and other                                            1,976           1,495
                                                                -----------     -----------
         Total current assets                                        27,021          24,378
                                                                -----------     -----------

Property and equipment, net                                          39,493          37,679
Goodwill                                                             11,776          11,776
Other intangible assets, net                                          4,891           5,057
Debt issuance costs, net                                                635             685
Lease receivable, less current portion                                  485             558
Other assets                                                             75              59
                                                                -----------     -----------
         Total assets                                           $    84,376     $    80,192
                                                                ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current maturities of long-term debt                            $     4,109     $     5,541
Trade accounts payable                                                5,698           5,694
Accrued salaries, benefits and payroll taxes                            811             615
Accrued interest                                                        460             470
Accrued expenses                                                      2,300           1,852
Accounts payable, related parties                                       200             740
                                                                -----------     -----------
         Total current liabilities                                   13,578          14,912

Accrued postretirement benefit obligations                              676             687
Long-term debt, net of current maturities                            28,750          24,932
Other long-term liabilities                                             129             129
                                                                -----------     -----------
         Total liabilities                                           43,133          40,660

Commitments and Contingencies

Minority interests                                                    4,567           4,423

STOCKHOLDERS' EQUITY

Common stock, $0.01 par value (20,000,000 shares authorized;
    13,631,525 and 13,611,525 issued and outstanding at
    March 31, 2005 and December 31, 2004, respectively                  136             136
Capital in excess of par value                                       40,331          40,331
Accumulated deficit                                                  (3,791)         (5,358)
                                                                -----------     -----------

         Total stockholders' equity                                  36,676          35,109
                                                                -----------     -----------

         Total liabilities and stockholders' equity             $    84,376     $    80,192
                                                                ===========     ===========


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

                                             3




<PAGE>


                             ALLIS-CHALMERS Energy Inc.
                           CONSOLIDATED INCOME STATEMENTS
                          (in thousands, except per share)
                                     (unaudited)

                                                             Three Months Ended
                                                          March 31,        March 31,
                                                            2005             2004
                                                         -----------     -----------
                                                                         (Restated)

Revenues                                                 $    19,334     $     9,661

Cost of revenues                                              12,785           6,909
Depreciation expense                                             914             619
                                                         -----------     -----------
Total cost of revenues                                        13,699           7,528

    Gross margin                                               5,635           2,133

General and administrative expense                             2,994             884
Amortization expense                                             394             219
                                                         -----------     -----------
Total general and administrative costs                         3,388           1,103

Income from operations                                         2,247           1,030

Other income (expense):
   Interest expense                                             (521)           (569)
   Settlement on lawsuit                                         115              --
   Other                                                          33             187
                                                         -----------     -----------
Total other income (expense)                                    (373)           (382)
                                                         -----------     -----------
Net income before minority interest and income taxes           1,874             648

   Minority interest  in income of subsidiaries                 (144)            (73)
   Provision for foreign taxes                                  (163)           (103)
                                                         -----------     -----------
Net income                                                     1,567             472

         Preferred stock dividend                                 --             (88)
                                                         -----------     -----------
Net income attributed to common shareholders             $     1,567     $       384
                                                         ===========     ===========

Income per common share basic                            $       .12     $      0.10
                                                         ===========     ===========

Income per common share diluted                          $       .09     $      0.05
                                                         ===========     ===========
Weighted average number of common shares outstanding:
                     Basic                                    13,632           3,927
                                                         ===========     ===========
                     Diluted                                  17,789           5,762
                                                         ===========     ===========


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

                                         4





<PAGE>

                                 ALLIS-CHALMERS ENERGY INC.
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       (In thousands)
                                        (unaudited)

                                                                     Three Months Ended
                                                                          March 31,
                                                                    2005            2004
                                                                -----------     -----------
                                                                                 (Restated)
Cash flows from operating activities:
     Net income                                                 $     1,567     $       472
     Adjustments to reconcile net income to net
           cash provided by operating activities:
     Depreciation expense                                               914             619
     Amortization expense                                               394             217
     Amortization of discount on debt                                     3              75
     Minority interest in income of subsidiaries                        144              73
     Changes in working capital:
          Decrease (increase) in accounts receivable                 (3,416)            476
          Decrease (increase) in other current assets                  (499)             13
          Decrease (increase) other assets                              (16)             --
          (Decrease) increase in accounts payable                         4             350
          (Decrease) increase in accrued interest                       (10)             89
          (Decrease) increase in accrued expenses                       (92)           (595)
          (Decrease) increase in accrued salaries,
              benefits and payroll taxes                                185             (26)
          (Decrease) increase in other long-term liabilities             --            (141)
                                                                -----------     -----------
     Net cash (used in) /provided by operating activities              (822)          1,622

Cash flows from investing activities:
         Purchase of equipment                                       (2,728)         (1,411)
                                                                -----------     -----------
     Net cash used in investing activities                           (2,728)         (1,411)

Cash flows from financing activities:
         Proceeds/(repayments)on long-term debt, net                  2,383            (944)
         Debt issuance costs                                           (178)            (75)
                                                                -----------     -----------
    Net cash provided by (used in) financing activities               2,205          (1,019)
                                                                -----------     -----------
    Net increase (decrease) in cash and cash equivalents             (1,345)           (808)

Cash and cash equivalents at beginning of year                        7,344           1,299
                                                                -----------     -----------
Cash and cash equivalents at end of period                      $     5,999     $       491
                                                                ===========     ===========
Supplemental information:
Interest paid                                                   $       437     $       480
                                                                ===========     ===========
Foreign taxes paid                                              $       163     $       103
                                                                ===========     ===========

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


                                             5
</TABLE>





<PAGE>


                           ALLIS-CHALMERS ENERGY INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE INTERIM PERIODS ENDED MARCH 31, 2005 AND MARCH 31, 2004

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

NATURE OF OPERATIONS

Allis-Chalmers Energy Inc provides a variety of products and services to the oil
and natural gas industry. Through its subsidiaries, Allis-Chalmers is engaged in
providing specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells, directional and
horizontal drilling services, the rental of "hevi-wate" spiral drill pipe and
related oilfield services, services to enhance production through the
installation of small diameter coiled tubing and chemicals into producing oil
and gas wells and air drilling services to natural gas exploration and
development operators.


BASIS OF PRESENTATION

Our unaudited consolidated condensed financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. We believe that the
presentations and disclosures herein are adequate to make the information not
misleading. The unaudited consolidated condensed financial statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the interim periods. These unaudited consolidated condensed
financial statements should be read in conjunction with our audited consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2004. The results of operations for the interim periods are
not necessarily indicative of the results of operations to be expected for the
full year.

In the notes to the unaudited consolidated condensed financial statements, all
dollar and share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.

Certain reclassifications have been made to the prior year's consolidated
condensed financial statements to conform with the current period presentation.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be perceived
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 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.

In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS - an Amendment
of ARB No. 43, Chapter 4, which amends the guidance in ARB No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 requires that these items be recognized
as current period charges. In addition, SFAS No. 151 requires the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We are currently evaluating
the provisions of SFAS No. 151 and will adopt SFAS No. 151 on January 1, 2006.

                                       6




<PAGE>

In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT (SFAS
123R). SFAS 123R revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and focuses on accounting for share-based payments for services by employer to
employee. The statement requires companies to expense the fair value of employee
stock options and other equity-based compensation at the grant date. The
statement does not require a certain type of valuation model and either a
binomial or Black-Scholes model may be used. The provisions of SFAS 123R are
effective for financial statements for annual or interim periods beginning after
December 15, 2005. We are currently evaluating the provisions of SFAS No. 123R
and will adopt SFAS No. 123R on January 1, 2006. Our future cash flows will not
be impacted by the adoption of this standard.

In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP 109-1"),
Application of FASB Statement No. 109, "ACCOUNTING FOR INCOME TAXES" ("SFAS No.
109") to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, which provides guidance on the recently
enacted American Jobs Creation Act of 2004 (the "Act"). The Act provides a tax
deduction for income from qualified domestic production activities. FSP 109-1
provides for the treatment of the deduction as a special deduction as described
in SFAS No. 109. As such, the deduction will have no effect on existing deferred
tax assets and liabilities. The impact of the deduction is to be reported in the
period in which the deduction is claimed on our U.S. tax return. We do not
expect that this deduction will have a material impact on our effective tax rate
in future years. FSP 109-1 is effective prospectively as of January 1, 2005.

NOTE 2 - STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation using Accounting Principle
Board Opinion No. 25 ("APB No. 25"). Under APB 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 SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). The Company also adopted the disclosure-only
provisions of SFAS No. 123 for the stock options granted to the employees and
directors of the Company. Accordingly, no compensation cost has been recognized
under APB No. 25. Had compensation expense for the options granted been recorded
based on the fair value at the grant date for the options, consistent with the
provisions of SFAS 123, the Company's net income/(loss) and net income/(loss)
per share for the quarters ended March 31, 2005, and 2004 would have been
decreased to the pro forma amounts indicated below.

<TABLE>
                                                                   FOR THE QUARTER ENDED MARCH 31,
                                                                   (IN THOUSANDS, EXCEPT PER SHARE)
                                                                     2005                     2004
                                                                  ----------              ----------
                                                                                          (RESTATED)
<S>                                                               <C>

Net income:                                 As reported           $    1,567              $      384

Less total stock based employee
   compensation expense determined
   under fair value based method
   for all awards net of tax
   related effects                                                    (2,902)                     --
                                                                  ----------              ----------
Pro-forma net income to
   common stockholders'                                           $   (1,335)             $      384

Net income per share:
   Basic                                    As reported           $     0.10              $     0.10
                                                                  ==========              ==========

   Diluted                                  As reported           $     0.08              $     0.05
                                                                  ==========              ==========
</TABLE>

                                       7




<PAGE>

Options were granted in 2005. The following assumptions were applied in
determining the pro forma compensation costs:

                                                           FOR THE QUARTER ENDED
                                                                MARCH 31,
                                                                  2005
                                                           ---------------------
Expected dividend yield                                              --
Expected price volatility                                         89.76%
Risk-free interest rate                                             7.0%
Expected life of options                                         7 years
Weighted average fair value of options
    granted at market value                                      $  3.86

NOTE 3 - INCOME PER COMMON SHARE

The Company computes income 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 is computed on the basis of the weighted
average number of shares of common stock outstanding during the period. For
periods through April 12, 2004, preferred dividends are deducted from net income
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) are excluded from diluted earnings per share.

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

<TABLE>
                                                       March 31,           March 31,
                                                         2005                2004

                                                  (in thousands, except earnings per share)
<S>                                                  <C>
Numerator:
Net income available for common stockholders         $    1,567           $      384

Plus income impact of assumed conversions:
     Preferred stock dividends                               --                   88
                                                     ----------           ----------

Net income applicable to common stockholders
     Plus assumed conversions                        $    1,567           $      472

Denominator:
     Denominator for basic earnings per share -
       weighted average shares outstanding               13,632                3,927

     Effect of potentially dilutive common shares:
       Convertible preferred stock and employee
          and director stock options                      4,157                1,835
                                                     ----------           ----------

Denominator for diluted earnings per share -
  weighted average shares outstanding and
  assumed conversions                                   17,789                 5,762

Basic earnings per share                             $     0.12           $     0.10
                                                     ==========           ==========
Diluted earning per share                            $     0.09           $     0.05
                                                     ==========           ==========
</TABLE>

                                       8




<PAGE>

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

In accordance with SFAS 142, "Goodwill and Other Intangible Assets," goodwill
and indefinite-lived intangible assets are not permitted. To be amortized.
Goodwill and indefinite-lived intangible assets remain on the balance sheet and
are tested for impairment on an annual basis, or when there is reason to suspect
that their values may have been diminished or impaired. Goodwill and
indefinite-lived intangible assets listed on the balance sheet totaled $11.8
million at March 31, 2005 and December 31, 2004. Based on impairment testing
performed during 2004, pursuant to the requirements of SFAS 142, these assets do
not appear to be impaired.

Intangible assets with definite lives continue to be amortized over their
estimated useful lives. Definite-lived intangible assets that continue to be
amortized under SFAS 142 relate to our purchase of customer-related and
marketing-related intangibles. These intangibles have useful lives ranging from
five to 10 years. Amortization of intangible assets was $166,000 for the first
three months of 2005, compared to $132,000 for the same period last year. At
March 31, 2005, net intangible assets totaled $4.9 million, net of $2.2 million
of accumulated amortization.

NOTE 5 - 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 recorded the sale of an interest in a subsidiary, in
accordance with SAB No. 51. Consequently, we restated our financial statements
for the quarter ended September 30, 2003, for the year ended December 31, 2003
and for the three quarters ended September 30, 2004, to reflect the following
adjustments:

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

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

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

                                       9




<PAGE>

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

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

Commitments and Contingencies

Minority interests                                   2,618         1,433       4,051

COMMON STOCKHOLDERS' EQUITY

Common stock                                            39                        39
Capital in excess of par value                       9,793           955      10,748
Accumulated (deficit)                               (8,124)        2,262      (5,862)
                                                  ---------     ---------    --------
Total stockholders' equity                           1,708         3,217       4,925
                                                  ---------     ---------    --------
Total liabilities and stockholders' equity        $ 48,365      $  4,650     $53,015
                                                  =========     =========    ========


                                       10




<PAGE>

                                                    Three Months March 31, 2004
                                                    ------------------------------
                                                     As       Restatement        As
                                                  Reported    Adjustments     Restated

Revenues                                         $  9,661            --     $   9,661
Cost of revenues                                    7,389           139         7,528
                                                 --------     ---------     ---------
Gross margin                                        2,272          (139)        2,133

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

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

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

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

Income per common share - basic                  $   0.15                   $    0.10
                                                 ========                   =========
Income per common share - diluted                $   0.10                   $    0.05
                                                 ========                   =========

Weighted average number of common shares outstanding:
        Basic                                       3,927                       3,927
                                                 ========                   =========
        Diluted                                     5,762                       5,762
                                                =========                   =========


                                       11




<PAGE>

                                                     Three Months Ended March 31, 2004
                                                       ------------------------------
                                                       As      Restatement         As
                                                    Reported    Adjustment      Restated
                                                    --------    ----------      --------
Cash flows from operating activities:
Net income                                          $    589      $   (117)      $   472
Adjustments to reconcile net income to
  net cash provided by operating activities:
Depreciation and amortization  expense                   697           139           836
Amortization of discount on debt                          75            --            75
Minority interest in income of subsidiaries               95           (22)           73
Changes in working capital:
Decrease (increase) in accounts receivable               476            --           476
Decrease (increase) in other current assets               13            --            13
Increase (decrease) in accounts payable                  350            --           350
Increase (decrease) in accrued interest                   89            --            89
Increase (decrease) in accrued expenses                 (595)           --          (595)
Increase (decrease) in other long-term liabilities      (141)           --          (141)
Increase (decrease) in accrued employee benefits
  and payroll taxes                                      (26)           --           (26)
                                                     ---------     --------      ---------
Net cash provided by operating activities              1,622            --         1,622

Cash flows from investing activities:
Purchase of equipment                                 (1,411)                     (1,411)
                                                     ---------                   ---------
Net cash use) in investing activities                 (1,411)                     (1,411)

Cash flows from financing activities:
Repayments of long-term debt                            (944)                       (944)
Debt issuance costs                                      (75)                        (75)
                                                     ---------                   ---------
Net cash used in financing activities                 (1,019)                     (1,019)
                                                     ---------                   ---------

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

Cash and cash equivalents:

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

Supplemental information:

Interest paid                                       $   480                    $    480
                                                    =========                   =========

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

NOTE 6 - INVENTORIES

     Inventories are comprised of the following at March 31:

                                                                     2005                  2004
Hammer bit inventory
Finished goods                                                      $ 547                 $  --
Work in process                                                       291                    --
Raw materials                                                         391                    --
                                                                   ------                 -----

Total hammer bit inventory                                         $1,229                 $  --

Hammer inventory                                                      465                    --

Chemical inventory                                                    202                    --
                                                                                             --

Coil tubing and related inventory                                     568                    --
                                                                   ------                 -----

Total inventory                                                    $2,464                 $  --
                                                                   ======                 =====
</TABLE>

                                       12




<PAGE>

NOTE 7 - DEBT

The long-term debt of the Company and its subsidiaries as of March 31, 2005
consists of the following:

                                                                     March 31,
                                                                  (in thousands)
                                                                       2005
                                                                  --------------
Debt of Allis-Chalmers Energy
-----------------------------
Revolving line of credit                                                  4,967
Bank term loan                                                            5,722
Capital expenditure and acquisition line                                    793
Notes payable to former directors                                            96

Debt of Jens'
-------------
Subordinated seller note                                                  4,000
Note payable under non-compete agreement                                    453
Bank term loan                                                              223
Equipment installment note                                                  307
Real estate loan                                                            553

Debt of Strata
--------------
Vendor financing                                                          1,164

Debt of Safco
-------------
Note payable under non-compete agreement                                    150

Debt of Downhole
----------------
Vehicle installment note                                                     11
Notes payable to a former shareholders                                       22
Note payable to insurance company                                           106

Debt of Mountain Air
--------------------
Term loan                                                                   185
Seller note                                                                 500

Debt of AirComp
---------------
Revolving line of credit                                                  1,639
Bank term loan                                                            6,480
Delayed draw term loan                                                      670
Subordinated note payable to M-I LLC                                      4,818

                                                                     -----------
Total debt                                                           $   32,859

Less: short-term debt and current maturities                              4,109
                                                                     -----------
Long-term debt obligations                                           $   28,750
                                                                     ===========

As of March 31, 2005 the Company's debt was approximately $32.9 million.

On December 7, 2004, the Company entered into an amended and restated credit
agreement which consolidated and increased various credit facilities previously
maintained by the Company and two of its subsidiaries, Jens' and Strata. The
credit agreement governing the facilities was entered into jointly by
Allis-Chalmers, Jens', Strata, and Safco, and is guaranteed by our MCA and
OilQuip subsidiaries. The amended credit facilities include:

         o    A $10.0 million revolving line of credit. Borrowings are subject
              to a borrowing base calculated as 85% of eligible accounts
              receivables, as defined. Outstanding borrowings under this line of
              credit were $5.0 million as of March 31, 2005.

         o    A term loan with a principal balance of $5.7 million payable in
              monthly payments of principal of $105,583 per month. Prepayments
              are also required in an amount equal to 20% of our collections
              from Matyep in Mexico.

                                       13




<PAGE>

         o    A $6.0 million capital expenditure and acquisition line of credit.
              Borrowings under this facility are payable monthly over four years
              beginning in January 2006. Availability of this capital
              expenditure term loan facility is subject to security acceptable
              to the lender in the form of equipment or other acquired
              collateral. The outstanding principal balance was $793,000 as of
              March 31, 2005.

The credit facilities mature on December 31, 2008 and are secured by liens on
substantially all of the Company's assets. The agreement governing these credit
facilities contains customary events of default and financial covenants. It also
limits the Company's ability to incur additional indebtedness, make capital
expenditures, pay dividends or make other distributions, create liens, and sell
assets. Interest accrues at an adjustable rate based on the prime rate. The
interest rate was 6.81% as of March 31, 2005. There is a 0.5% per annum fee on
the undrawn portion of the revolving line of credit and the capital expenditure
line.

Jens' has a subordinated note payable to Jens Mortensen, the seller of Jens' and
a director of the Company, in the amount of $4.0 million with a fixed interest
rate of 7.5%. Interest is payable quarterly and the final maturity of the note
is January 31, 2006. In connection with the purchase of Jens', the Company
agreed to pay a total of $1.2 million to Mr. Mortensen in exchange for a
non-compete agreement. Monthly payments of $20,576 are due under this agreement
through January 31, 2007. As of March 31, 2005, the remaining balance was
approximately $453,000, including $247,000 classified as short-term. The note is
subordinated to the rights of the Company's bank lenders.

Jens' also has several small equipment financings and a real estate loan which
in the aggregate total $778,000 as of March 31, 2005. First, Jens' has two bank
term loans aggregating $ 223,000 which accrue interest at an adjustable rate
based on the prime rate (7.25% at March 31, 2005) and which require monthly
payments of $13,000 plus accrued interest. The maturity date of one of the
loans, with a balance of $177,000, is September 17, 2006, while the second loan,
with a balance of $48,000, matures January 12, 2007. Jens also has a five-year
equipment financing term loan with a principal balance of $307,000 at March 31,
2005. The loan is payable in monthly installments of principal and interest
equal to $6,449 per month through December 2009. Finally, Jens' has a real
estate term loan which is payable in equal monthly installments of $4,344 with
the remaining outstanding balance due on January 1, 2010. The interest rate
floats based on the prime rate. The outstanding principal balance was $553,000
at March 31, 2005.

Strata, the Company's directional drilling subsidiary, entered into a short-term
vendor financing agreement with a major supplier of downhole drill motors. The
agreement consists of an extension of amounts due to the supplier for motor
rentals, lease and repair costs. As of March 31, 2005, the outstanding balance
was $1.2 million. Payment of interest is due monthly and principal payments of
$582,000 are due in each of April 2005 and December 2005. The interest rate is
fixed at 8.0%.

In connection with the purchase of Safco, the Company agreed to pay a total of
$150,000 to the sellers in exchange for a non-compete agreement. The Company is
required to make yearly payments of $50,000 through September 30, 2007. As of
March 31, 2005, the balance due was $150,000.

Downhole has notes payable to two former shareholders totaling $22,000. Downhole
also has a vehicle installment note. The note is payable over 10 months at
$1,137 per month without interest. At March 31, 2005, the balance due was
$11,371.

AirComp has the following credit facilities:

         o    A $3.5 million bank line of credit of which $1.6 million was
              outstanding at March 31, 2005. Interest accrues at an adjustable
              rate based on the prime rate. The average interest rate was 7.66%
              as of March 31, 2005. The Company pays a 0.5% per annum fee on the
              undrawn portion. Borrowings under the line of credit are subject
              to a borrowing base consisting of 80% of eligible accounts
              receivable.

                                       14




<PAGE>

         o    A term loan with a remaining principal balance of $6.5 million
              that accrues interest at an adjustable rate based on either the
              London Interbank Offered Rate ("LIBOR") or the prime rate. The
              average interest rate was 6.41% as of March 31, 2005. Principal
              payments of $286,000 are due quarterly, plus interest, with a
              final maturity date of June 27, 2007.

         o    A "delayed draw" term loan facility in the amount of $1.5 million
              to be used for capital expenditures. Interest accrues at an
              adjustable, adjustable rate based on either the LIBOR or the prime
              rate. Quarterly principal payments commence on March 31, 2006 in
              an amount equal to 5.0% of the outstanding balance as of December
              31, 2005, with a final maturity of June 27, 2007. The outstanding
              principal balance was $670,000 as of March 31, 2005.

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. Allis-Chalmers and Mountain Compressed Air guarantee 55%
of the obligations of AirComp under these facilities.

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 March 31, 2005, $441,000 of
interest was included in accrued interest. We are not liable for the obligations
of AirComp under this note.

In 2000 the Company compensated directors, including current directors
Nederlander and Toboroff, who served on the board of directors from 1989 to
March 31, 1999 without compensation by issuing promissory notes totaling
$325,000. The notes accrued interest at the rate of 5.0% per annum. The notes
matured on March 31, 2005, and the Company is in the process of locating and
paying the holders of these notes. As of March 31, 2005, the notes totaling
$96,300, including accrued interest remained outstanding.

As part of the acquisition of Mountain Air in 2001, the Company issued a note to
the sellers of Mountain Air in the original amount of $2.2 million accruing
interest at an interest rate of 5.75% per annum. The note was reduced to $1.5
million as a result of the settlement of a legal action against the sellers in
2003. In March 2005, the Company reached an agreement with the sellers and
holders of the note as a result of an action brought against the Company by the
sellers. Under the terms of the agreement, the Company has paid to the plaintiff
$1.0 million in cash, and agreed to pay an additional $350,000 on June 1, 2006,
and an additional $150,000 on June 1, 2007, in settlement of all claims. (See
Note 11 - Legal Matters). Mountain Air also has a term loan in the amount of
$185,000 at March 31, 2005 accruing interest of 5.0% per annum. Principal and
interest of $5,039 are payable monthly with a final maturity date of June 30,
2008.

The Company's Chief Executive Officer and Chairman, Munawar H. Hidayatallah is a
personal guarantor of the Company's debt consisting of the Jens' $4.0 million
subordinated seller note. The Company pays Mr. Hidayatallah an annual guarantee
fee equal to one-quarter of one percent of the total amount of the debt
guaranteed by Mr. Hidayatallah. These fees aggregated $3,625 during the three
months ended March 31, 2005.

NOTE 8 - STOCKHOLDERS' EQUITY

As of January 1, 2005, we executed a business development agreement with CTTV
Investments LLC, ("CTTV"), an affiliate of ChevronTexaco Inc., whereby we issued
20,000 shares of our common stock to CTTV, and further agreed to issue up to an
additional 60,000 shares to CTTV contingent upon our subsidiaries receiving
certain levels of revenues, in 2005, from ChevronTexaco and its affiliates. CTTV
was a minority owner of Downhole.

                                       15




<PAGE>

NOTE 9 - REVERSE STOCK SPLIT

The Company effected a reverse stock split on June 10, 2004. As a result of the
reverse stock split, every five shares of the Company's common stock was
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. All share and related amounts presented have been
retroactively adjusted for the stock split.

NOTE 10 - SEGMENT INFORMATION

At March 31, 2005, the Company had four operating segments including Casing and
Tubing Services (Jens'), Directional Drilling Services (Strata) Compressed Air
Drilling Services (AirComp) and Other Services (Safco and Downhole). All of the
segments provide services to the energy industry. The revenues, operating income
(loss), depreciation and amortization, interest, capital expenditures and assets
of each of the reporting segments plus the corporate function are reported below
for the quarters ended March 31, 2005 and March 31, 2004 (in thousands):


                                                       QUARTER ENDED MARCH 31,
                                                        2005           2004
                                                   -------------   -------------
                                                                    (RESTATED)
REVENUES:
Casing services                                    $      3,560    $      1,939
Directional drilling services                             9,901           5,253
Compressed air drilling services                          4,181           2,469
Other services                                            1,692              --
                                                   -------------   -------------
Total revenues                                     $     19,334    $      9,661
                                                   =============   =============

OPERATING INCOME (LOSS):
Casing services                                    $      1,327    $        442
Directional drilling services                             1,878             662
Compressed air drilling services                            527             255
Other services                                             (119)             --
General corporate                                        (1,366)           (329)
                                                   -------------   -------------
Total income/ (loss) from operations               $      2,247    $      1,030
                                                   =============   =============

DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services                                    $        440    $        361
Directional drilling services                               150             101
Compressed air drilling services                            448             351
Other services                                              224              --
General corporate                                            46              25
                                                   -------------   -------------
Total depreciation and amortization expense        $      1,308    $        838
                                                   =============   =============

INTEREST EXPENSE:
Casing services                                    $         99    $        165
Directional drilling services                                22              75
Compressed air drilling services                            231             159
Other services                                                1              --
General corporate                                           168             170
                                                   -------------   -------------
Total interest expense                             $        521    $        569
                                                   =============   =============

CAPITAL EXPENDITURES:
Casing services                                    $      1,640    $        379
Directional drilling services                               263             705
Compressed air drilling services                            779             326
Other services                                               37              --
General corporate                                             9               1
                                                   -------------   -------------
Total capital expenditures                         $      2,728    $      1,411
                                                   =============   =============

                                       16




<PAGE>

GOODWILL:
Casing services                                    $      3,673    $         --
Directional drilling services                             4,168           4,168
Compressed air drilling services                          3,510           3,493
Other services                                              425              --
General corporate                                            --              --
                                                   -------------   -------------
Total Goodwill                                     $     11,776    $      7,661
                                                   =============   =============

ASSETS:
Casing services                                    $     23,406    $     17,159
Directional drilling services                            14,811          11,459
Compressed air drilling services                         29,265          23,046
Other services                                            7,186              --
General corporate                                         9,708           1,351
                                                   -------------   -------------
Total assets                                       $     84,376    $     53,015
                                                   =============   =============

REVENUES:
United States                                      $     17,561    $      8,632
International                                             1,773           1,029
                                                   -------------   -------------
TOTAL                                              $     19,334    $      9,661
                                                   =============   =============

NOTE 11 - LEGAL MATTERS

The Company is named from time to time in legal proceedings related to the
Company's activities prior to its bankruptcy in 1988; however, the Company
believes that it was discharged from liability for all such claims in the
bankruptcy and believes the likelihood of a material loss relating to any such
legal proceeding is remote.

At December 31, 2004, Mountain Compressed Air, Inc. was a defendant in an action
brought in April 2004 in the District Court of Mesa County, Colorado, by the
former owner of Mountain Air Drilling Service Company, Inc. from whom Mountain
Compressed Air, Inc. acquired assets in 2001. The plaintiff sought to accelerate
payment of the note issued in connection with the acquisition and sought $1.9
million in damages (representing principal and interest due under the note), on
the basis that Mountain Compressed Air failed to provide financial statements
required by the note. The Company raised several defenses to the plaintiff's
claim. In March 2005, the Company reached an agreement with the plaintiff to
settle the action and agreed to pay to the plaintiff $1.0 million in cash, and
to pay to the plaintiff an additional $350,000 on June 1, 2006, and an
additional $150,000 on June 1, 2007, in settlement of all amounts due under the
promissory note and all other claims. The $1.0 million cash payment was made on
April 1, 2005.

The Company is involved in various other legal proceedings in the ordinary
course of business. The legal proceedings are at different stages; however, the
Company believes that the likelihood of material loss relating to any such legal
proceeding is remote.

NOTE 12 - SUBSEQUENT EVENTS

On April 1, 2005, the Company acquired 100% of the outstanding stock of Delta
Rental Service, Inc. ("Delta") for $4.6 million in cash and 223,114 shares of
the Company's common stock and two promissory notes totaling $350,000. Delta,
located in Lafayette, Louisiana, is a rental tool company providing specialty
rental items to the oil and gas industry such as spiral heavy weight drill pipe,
test plugs used to test blow-out preventors, well head retrieval tools, spacer
spools and assorted handling tools. For the year ended December 31, 2004, Delta
had revenues of $3.3 million.

On April 4, 2005, the Company amended its December 7, 2004 credit agreement with
its lender to extend the final maturity of its credit facilities for one year to
December 31, 2008, obtain the lender's consent for the Delta acquisition,
include the Company's Delta and Downhole subsidiaries as parties to the credit
agreement, and provide for increased availability under the $10.0 million
revolving line of credit and the $6.0 million capital expenditure and
acquisition line of credit based on the receivables and assets of Delta and
Downhole.

                                       17




<PAGE>

Additionally, the amendment documented the lender's consent to the $1.5 million
settlement with the former owners of Mountain Air Drilling Service and to the
prepayment of the $4.0 million Jens' subordinated seller note by an amount not
to exceed $397,000.

As of May 1, 2005, the Company acquired 100% of the outstanding capital stock of
Capcoil Tubing Services, Inc. ("Capcoil") for $2.7 million, 168,161 shares of
the Company's common stock and the payment or assumption of approximately $1.3
million of debt. Capcoil, located in Kilgore, Texas, is engaged in downhole well
servicing by providing coil tubing services to enhance production from existing
wells. Capcoil had revenues of $5.8 million for the year ended December 31,
2004.

On May 2, 2005, the Company amended its December 7, 2004 credit agreement with
its lender to obtain its consent to the Capcoil acquisition, include Capcoil as
a party to the credit agreement and increase the availability under the $10.0
million revolving line of credit and the $6.0 million capital expenditure line
of credit based on the receivables and other assets of Capcoil.

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



                                       18




<PAGE>


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

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
SELECTED HISTORICAL FINANCIAL DATA AND OUR ACCOMPANYING FINANCIAL STATEMENTS AND
THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS DOCUMENT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THAT REFLECT OUR PLANS,
ESTIMATES AND BELIEFS. 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 ABOVE UNDER "RISK
FACTORS."

OVERVIEW OF OUR BUSINESS

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 wells. 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,
Colorado and Oklahoma. 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, Louisiana and Oklahoma. 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. As a result of three acquisitions
completed in September and December of 2004, and on April 1, 2005, we are also
engaged in providing oilfield rental tools, principally renting spiral drill
pipe and other specialty tools to oil and gas operators and providing downhole
production services. Our production services business provides techniques,
chemical processes and related services to increase production from existing
wells. The operations from the rental tools and production services have been
aggregated into the Other Services segment. 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 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.

Our operating expenses represent all direct and indirect costs associated with
the operation and maintenance of our equipment. The principal elements of these
costs are direct and indirect labor and benefits, repairs and maintenance of our
equipment, insurance, equipment rentals, fuel and depreciation. Operating
expenses do not necessarily fluctuate in proportion to changes in revenues
because we have a fixed base of inventory of equipment and facilities to support
our operations, and we may also seek to preserve labor continuity to market our
services and maintain our equipment.

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 first three quarters of 2004. See Note
2 to the Consolidated Financial Statements.

                                       19




<PAGE>

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004

Our revenues for the three months ended March 31, 2005 were $19.3 million, an
increase of 98.9% compared to $9.7 million for the three months ended March 31,
2004. Revenues increased for all of our business segments due to increased
demand for our services due to the general increase in oil and gas industry
activity. Revenues increased most significantly at our directional drilling
services segment due to the addition of operations and sales personnel and the
opening of new operations offices, which increased our capacity and market
presence. Additionally, our compressed air drilling services division revenues
increased in the 2005 period compared to the 2004 period due to the acquisition
of Diamond Air and Marquis Bit (collectively "Diamond Air") on November 1, 2004
and improved pricing in West Texas.

Revenues increased at our casing and tubing services segment due to increased
revenues from Mexico, improved market conditions and improved market penetration
for our services in South Texas and the addition of operating personnel which
broadened our capabilities. Also contributing to increased revenues was the
acquisition of Safco Oilfield Products, Inc. ("Safco"), our rental tools
subsidiary, as of September 1, and the acquisition of Downhole Injection
Systems, LLC. ("Downhole"), our production services subsidiary, as of December
1, 2004.

Our gross profit for the quarter ended March 31, 2005 increased 167.7% to $5.6
million, or 29.1% of revenues, compared to $2.1 million, or 21.6%, of revenues
for the three months ended March 31, 2004, due to increased revenues and
improved pricing in the directional drilling services segment, increased
revenues at our compressed air drilling services segment, including the
acquisition of Diamond Air, increased revenues from Mexico and improved market
conditions for our domestic casing and tubing segment. Our cost of revenues
consists principally of our labor costs and benefits, equipment rentals,
maintenance and repairs of our equipment, depreciation, 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.

Depreciation expense was $914,000 for the first quarter of 2005 compared to
$619,000 for the first quarter of 2004 due to the increase in our assets
resulting from our capital expenditures and the acquisitions completed in 2004.

General and administrative expense was $3.4 million in the first quarter of 2005
period compared to $1.1 million for the first quarter of 2004. General and
administrative expense increased in the 2005 quarter due to the additional
expenses associated with the acquisitions completed in the second half of 2004,
and the hiring of additional sales and administrative personnel. General and
administrative expense also increased because of increased legal, accounting
fees and other expenses related to our financing and acquisition activities,
including the filing of an S-1 registration statement, increased consulting fees
in connection with our internal controls and corporate governance process, and
increased corporate accounting and administrative staff. General and
administrative expenses include $394,000 of amortization expense in the first
quarter of 2005 compared to $219,000 in the first quarter of 2004. The increase
in amortization expense is due to the amortization of intangible assets in
connection with our acquisitions and the amortization of deferred financing
costs. As a percentage of revenues, general and administrative expenses were
17.6% in the 2005 quarter and 11.3% in the 2004 quarter.

Income from operations for the three months ended March 31, 2005 totaled $2.2
million, a 120.0% increase over the $1.0 million in income from operations for
the three months ended March 31, 2004, reflecting the increase in our revenues
and gross profit, offset in part by increased in general and administrative
expenses.

Our interest expense was $521,000 in the first quarter of 2005, compared to
$569,000 for the first quarter of 2004. Interest expense decreased in the 2005
quarter due to the prepayment, in December 2004, of our 12% $2.4 million
subordinated note. Interest expense in the 2004 quarter includes $216,000 in
connection with the acceleration, in 2003, of the amortization of a put
obligation related to subordinated debt at Mountain Compressed Air. The
subordinated debt including accrued interest was paid off in connection with the
formation of AirComp in 2003.

Minority interest in income of subsidiaries for the 2005 quarter was $144,000
compared to $73,000 for the 2004 quarter due to the increase in profitability at
AirComp, including the acquisition of Diamond Air as of November 1, 2004. The
increase in net income at AirComp was offset in part by the elimination of
minority interest in Jens', which was 19%-owned by director Jens Mortensen until
September 30, 2004.

                                       20




<PAGE>

We had net income attributed to common stockholders of $1.6 million for the
first quarter of 2005, an increase of 308.1%, compared to net income attributed
to common stockholders of $384,000 for the first quarter of 2004. The net income
attributed to common stockholders in the 2004 period is after $88,000 in
preferred stock dividends.

The following table compares revenues and income from operations for each of our
business segments for the quarters ended March 31, 2005 and March 31, 2004.
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
                                    -----------------------------    -------------------------------
                                     2005       2004      Change       2005       2004       Change
                                    -------    -------    -------    -------     -------     -------
                                                            (in thousands)
<S>                                 <C>        <C>        <C>        <C>         <C>         <C>
Casing and tubing services          $ 3,560    $ 1,939    $ 1,621    $ 1,327     $   442     $   885
Directional drilling services         9,901      5,253      4,648      1,878         662       1,216
Compressed air drilling services      4,181      2,469      1,712        527         255         272
Other services                        1,692         --      1,692       (119)         --        (119)
General corporate                        --         --         --     (1,366)       (329)     (1,037
                                    -------    -------    -------    -------     -------     -------
Total                               $19,334    $ 9,661    $ 9,673    $ 2,247     $ 1,030     $ 1,217
                                    =======    =======    =======    =======     =======     =======
</TABLE>


CASING AND TUBING SERVICES SEGMENT

Revenues for the quarter ended March 31, 2005 for the casing and tubing services
segment were $3.6 million, an increase of 89.5% from the $1.9 million in
revenues for the quarter ended March 31, 2004. Revenues from domestic operations
increased to $1.9 million in the 2005 period from $917,000 in the 2004 period as
a result of improved market conditions for our services in South Texas and the
addition of personnel which improved our capabilities and our offering of
services. Revenues from Mexican operations increased to $1.6 million in the 2005
first quarter from $1.0 million in the 2004 period as a result of increased
drilling activity in Mexico and the addition of equipment that increased our
capacity. Income from operations increased by 225.0% to $1.3 million in the
first quarter of 2005 from $442,000 in the first quarter of 2004. The increase
in this segment's operating income is due increased revenues both domestically
and in our Mexico operations.

DIRECTIONAL DRILLING SERVICES SEGMENT

Revenues for the first quarter ended March 31, 2005 for our directional drilling
services segment were $9.9 million, an increase of 86.7% from the $5.3 million
in revenues for the first quarter ended March 31, 2004. Income from operations
increased 171.4% to $1.9 million for the first quarter of 2005 from $662,000 for
the comparable 2004 period. The improved results for this segment are due to the
increase in drilling activity in the Texas and Gulf Coast areas, the
establishment of new operations in West Texas and Oklahoma, and the addition of
operations and sales personnel which increased our capacity and market presence.
Our increased operating expenses as a result of the addition of personnel were
more than offset by the growth in revenues, improved pricing for our services
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.

COMPRESSED AIR DRILLING SERVICES SEGMENT

Our compressed air drilling revenues were $4.2 million for the three months
ended March 31, 2005, an increase of 68.0% compared to $2.5 million in revenues
for the three months ended March 31, 2004. Income from operations increased to
$527,000 in the 2005 period compared to income from operations of $255,000 in
the 2004 period. Our compressed air drilling revenues and operating income for
the 2005 year increased compared to the prior year due in part to the
acquisition of Diamond Air as of November 1, 2004.


                                       21




<PAGE>

OTHER SERVICES SEGMENT

Revenues for this segment consist of Safco's rental tool business, acquired
September 1, 2004, and Downhole's production services acquired December 1, 2004,
the effective date of their respective acquisitions. Revenues for this segment
were $1.7 million with a loss from operations of $119,000. It is our plan to
grow in these businesses thereby improving profitability as we increase our
market presence and our critical mass.

LIQUIDITY AND CAPITAL RESOURCES

Our on-going capital requirements arise primarily from our need to service our
debt and retire redeemable securities, to complete acquisitions and maintain
equipment, and to fund our working capital requirements. 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 $6.0 million at March 31, 2005 compared to $7.3 million at
December 31, 2004.

OPERATING ACTIVITIES

In the quarter ended March 31, 2005, we used $822,000 in cash from operating
activities compared to $1.6 million in cash generated from operating activities
for the same period in 2004. Net income attributed to common shareholders for
the quarter ended March 31, 2005 increased to $1.6 million, compared to $384,000
in the 2004 period. Revenues and income from operations increased in the first
quarter of 2005 due to increased demand for our services due to the general
increase in oil and gas drilling activity, both domestically and in Mexico, the
addition of operations and marketing personnel which increased our market
presence and capabilities and the acquisitions completed in the second half of
2004. Non-cash additions to net income totaled $1.5 million in the first quarter
of 2005 consisting of $1.3 million of depreciation and amortization and $144,000
of minority interest in the income of AirComp. Non-cash additions to net income
in the first quarter of 2004 totaled $984,000, consisting of depreciation and
amortization expense of $836,000, minority interest of $73,000 and amortization
of discount on debt of $75,000.

During the three months ended March 31, 2005, changes in working capital used
$3.8 million in cash compared to the three months ended March 31, 2004 when
changes in working capital provided $166,000 in cash, principally due, in the
2005 period, to an increase of $3.4 million in accounts receivable, an increase
of $515,000 in other assets, and an increase in accrued salaries and payroll of
$185,000, offset in part by a decrease of $92,000 in accrued expenses. Accounts
receivable increased by $3.4 million at March 31, 2005 due to the increase in
our revenues in the first quarter of 2005. Other assets increased $515,000 due
primarily to an increase in prepaid insurance related to insurance premium
deposits required for our policies that went into affect April 1, 2005.

During the three months ended March 31, 2004, changes in working capital
provided $166,000 in cash, principally due to a decrease in accounts receivables
and other current assets of $489,000, an increase in accounts payable of
$350,000 and accrued interest of $89,000, offset in part by a decrease in
accrued expenses of $595,000, and a decrease in accrued salaries, benefits,
payroll taxes and other long-term liabilities of $167,000. Accounts receivables
decreased as of March 31, 2004 compared to December 31, 2003 due to improved
collection of past due receivables. Accounts payable increased at March 31, 2004
compared to December 31, 2003 due to increased operational expenses. The
decrease in accrued expenses at March 31, 2004 was due to a decrease in accrued
operating expenses of $391,000, a decrease in accrued professional fees of
$37,000, and a decrease in accrued restructuring costs of $167,000. Accrued
restructuring costs included amounts due to certain former employees. .

INVESTING ACTIVITIES

During the quarter ended March 31, 2005, we used $2.7 million in investing
activities, consisting of principally of the purchase of equipment of $1.6
million for casing equipment, approximately $263,000 for the purchase of
downhole motors and approximately $779,000 for new compressed air drilling
equipment. During the quarter ended March 31, 2004, we used $1.4 million in
investing activities, consisting of the purchases of equipment of $379,000 in
casing equipment, approximately $705,000, for the purchase of downhole motors
and $326,000 for repairs related to compressed air equipment.

                                       22




<PAGE>

FINANCING ACTIVITIES

During the three months ended March 31, 2005, financing activities provided a
net of $2.2 million in cash. We received $2.4 million, net, in borrowings under
long-term debt facilities and paid $178,000 in debt issuance costs. During the
three months ended March 31, 2004 financing activities used $1.0 million in cash
consisting of $944,000 for the repayment of long-term debt and $75,000 for debt
issuance costs.

We have several bank credit facilities and other debt instruments at
Allis-Chalmers and at our principal operating subsidiaries, all of which are
consolidated in our financial statements. The agreement governing these credit
facilities contains customary events of default and financial covenants. It also
limits our ability to incur additional indebtedness, make capital expenditures,
pay dividends or make other distributions, create liens, and sell assets. At
March 31, 2005, we had $32.9 million in outstanding indebtedness, of which $28.8
million was long-term debt and $4.1 million was the current portion of long-term
debt.

We have a credit agreement dated December 7, 2004 governing three credit
facilities entered into by Allis-Chalmers, Jens', Strata and Safco, and is
guaranteed by our MCA and OilQuip subsidiaries. The credit facilities consist
of:

         o    A $10.0 million revolving line of credit. Borrowings are subject
              to a borrowing base calculated as 85% of eligible accounts
              receivables, as defined. Outstanding borrowings under this line of
              credit were $5.0 million as of March 31, 2005.

         o    A term loan with a principal balance at March 31, 2005 of $5.7
              million payable in monthly payments of principal of $105,583 per
              month. We are also required to prepay this term loan by an amount
              equal to 20% of the accounts receivables collections from Matyep
              in Mexico.

         o    A $6.0 million capital expenditure and acquisition line of credit.
              Borrowings under this facility are payable monthly over four years
              beginning January 2006. Availability of this capital expenditure
              term loan facility is subject to security acceptable to the lender
              in the form of equipment or other acquired collateral. Outstanding
              borrowings under this line of credit were $793,000 as of March 31,
              2005.

Our credit facilities mature on December 31, 2008 and are secured by liens on
substantially all our assets. The interest rate payable on borrowings fluctuates
based on the prime rate. The average interest rate was 6.81% as of March 31,
2005. We pay a 0.5% per annum fee on the undrawn portion of the revolving line
of credit and the capital expenditure line.

Our Jens' subsidiary has a subordinated note in the amount of $4.0 million
payable to Jens Mortensen, who sold Jens' to us and is one of our directors. The
note accrues interest at 7.5% per annum and provides for quarterly interest
payments. 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 March 31, 2005, the
balance due was approximately $453,000, including $247,000 classified as current
portion of long-term debt.

Jens' also has several small equipment financings and a real estate loan which
in the aggregate total $778,000 as of March 31, 2005. First, Jens' has two bank
term loans aggregating $ 223,000 which accrue interest at an adjustable rate
based on the prime rate (7.25% at March 31, 2005) and which require monthly
payments of $13,000 plus accrued interest. The maturity date of one of the
loans, with a balance of $177,000, is September 17, 2006, while the second loan,
with a balance of $48,000, matures January 12, 2007. Jens also has a five-year
equipment financing term loan with a principal balance of $307,000 at March 31,
2005. The loan is payable in monthly installments of principal and interest
equal to $6,449 per month through December 2009. Finally, Jens' has a real
estate term loan which is payable in equal monthly installments of $4,344 with
the remaining outstanding balance due on January 1, 2010. The interest rate
floats based on the prime rate. The outstanding principal balance was $553,000
at March 31, 2005.

                                       23




<PAGE>

Strata, the Company's directional drilling subsidiary, entered into a short-term
vendor financing agreement with a major supplier of downhole drill motors. The
agreement consists of an extension of amounts due to the supplier for motor
rentals, lease and repair costs. As of March 31, 2005, the outstanding balance
was $1.2 million. Payment of interest is due monthly and principal payments of
$582,000 are due in each of April 2005 and December 2005. The interest rate is
fixed at 8.0%.

In connection with the purchase of Safco, we 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 March 31, 2005, the
balance due was $150,000.

Downhole has notes payable to two former shareholders totaling $22,000. Downhole
also has a vehicle installment note. The note is payable over 10 months at
$1,137 per month without interest. At March 31, 2005, the balance due was
$11,371.

AirComp has the following credit facilities:

         o    A $3.5 million bank line of credit of which $1.6 million was
              outstanding at March 31, 2005. Interest accrues at an adjustable
              rate based on the prime rate. The average interest rate was 7.66%
              as of March 31, 2005. We pay a 0.5% per annum fee on the undrawn
              portion. Borrowings under the line of credit are subject to a
              borrowing base consisting of 80% of eligible accounts receivable.

         o    A term loan with a remaining principal balance of $6.5 million
              which accrues interest at an adjustable rate based on either the
              London Interbank Offered Rate ("LIBOR") or the prime rate. The
              average interest rate was 6.41% as of March 31, 2005. Principal
              payments of $286,000 are due quarterly, plus interest, with a
              final maturity date of June 27, 2007.

         o    A "delayed draw" term loan facility in the amount of $1.5 million
              to be used for capital expenditures. Interest accrues at an
              adjustable, adjustable rate based on either the LIBOR or the prime
              rate. Quarterly principal payments commence on March 31, 2006 in
              an amount equal to 5.0% of the outstanding balance as of December
              31, 2005, with a final maturity of June 27, 2007. The outstanding
              principal balance was $670,000 as of March 31, 2005.

The AirComp credit facilities are secured by liens on substantially all of
AirComp's assets. Allis-Chalmers and Mountain Compressed Air guarantee 55% of
the obligations of AirComp under these facilities.

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 March 31, 2005, $441,000 of
interest was included in accrued interest. We are not liable for the obligations
of AirComp under this note.

In 2000 the Company compensated directors, including current directors
Nederlander and Toboroff, who served on the board of directors from 1989 to
March 31, 1999 without compensation by issuing promissory notes totaling
$325,000. The notes accrued interest at the rate of 5.0% per annum. The notes
matured on March 31, 2005, and the Company is in the process of locating and
paying the holders of these notes. As of March 31, 2005, the notes totaling
$96,300, including accrued interest remained outstanding.

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 which accrued
interest at 5.75% per annum. This note was reduced to $1.5 million in 2003 as a
result of the settlement of a legal action against the sellers. In March 2005,
we reached an agreement with the seller's to settle subsequent legal action by
agreeing to pay $1.0 million in cash on April 1, 2005, and to pay an additional
$350,000 on June 1, 2006, and an additional $150,000 on June 1, 2007, in
extinguishment of all amounts due under the promissory note and all other
claims. Mountain Air has a term loan in the amount of $185,000 at March 31, 2005
with an interest rate of 5.0%. Principal and interest payments of $5,039 are due
on the last day of each month. The final maturity date is June 30, 2008.

                                       24




<PAGE>

As of January 1, 2005, we executed a business development agreement with CTTV
Investments LLC, ("CTTV"), an affiliate of ChevronTexaco Inc., whereby we issued
20,000 shares of our common stock to CTTV, and further agreed to issue up to an
additional 60,000 shares to CTTV contingent upon our subsidiaries receiving
certain levels of revenues, in 2005, from ChevronTexaco and its affiliates. CTTV
was a minority owner of Downhole.

We have no off balance sheet arrangements, other than normal operating leases
and employee contracts, that have or are likely to have a current or future
material 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 have identified capital expenditure projects that will require up to
approximately $6.0 million for the remainder of 2005, exclusive of any
acquisitions. We believe that our current cash generated from operations, cash
available under our credit facilities and cash on hand 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.

RECENT DEVELOPMENTS

On April 1, 2005, we acquired 100% of the outstanding stock of Delta Rental
Service, Inc. ("Delta") for $4.6 million in cash, 223,114 shares of our common
stock and two promissory notes totaling $350,000. Delta, located in Lafayette,
Louisiana, is a rental tool company providing specialty rental items to the
oilfield such as spiral heavy wate drill pipe, test plugs used to test blow-out
preventors, well head retrieval tools, spacer spools and assorted handling
tools. For the year ended December 31, 2004, Delta had revenues of $3.3 million.

On April 4, 2005, we amended our December 7, 2004 credit agreement to extend the
final maturity of our credit facilities for one year to December 31, 2008,
include our Delta and Downhole subsidiaries as parties to our credit facilities,
and provide for increased availability under our $10.0 million revolving line of
credit and our $6.0 million acquisition line of credit based on the receivables
and assets of Delta and Downhole.

Additionally, the amendment documented the lender's consent to the $1.5 million
settlement with the former owners of Mountain Air Drilling Service described
above and the prepayment of the $4.0 million Jens' subordinated seller note by
an amount not to exceed $397,000.

As of May 1, 2005, the Company acquired 100% of the outstanding capital stock of
Capcoil Tubing Services, Inc. ("Capcoil") for $2.7 million, 168,161 shares of
the Company's common stock and the payment or assumption of approximately $1.3
million of debt. Capcoil, located in Kilgore, Texas, is engaged in downhole well
servicing by providing coil tubing services to enhance production from existing
wells. Capcoil had revenues of $5.8 million for the year ended December 31,
2004.

On May 2, 2005, the Company amended its December 7, 2004 credit agreement with
its lender to obtain its consent to the Capcoil acquisition, to include Capcoil
as a party to the credit agreement and increase the availability under the $10.0
million revolving line of credit and the $6.0 million capital expenditure line
of credit based on the receivables and other assets of Capcoil.

                                       25




<PAGE>

CRITICAL ACCOUNTING POLICIES

Please see our Annual Report on Form 10-K for the year ended December 31, 2004
for a description of the policies that are 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. No material changes to such information have occurred during
the three months ended March 31, 2005.

ITEM 3. 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 affecting our
adjustable rate debt, and any future refinancing of our fixed rate debt and our
future debt.

At March 31, 2005, we were exposed to interest rate fluctuations on
approximately $20.9 million of notes payable and bank credit facility borrowings
carrying adjustable interest rates. A hypothetical one hundred basis point
increase in interest rates for these notes payable would increase our annual
interest expense by approximately $209,000. 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 March 31, 2005, we had $6.0 million invested in short-term 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. To date, such payment have not been material in amount.

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.
                                     26



<PAGE>

                                     PART II

ITEM 1. LEGAL PROCEEDINGS

At December 31, 2004, Mountain Compressed Air, Inc. was a defendant in an action
brought in April 2004 in the District Court of Mesa County, Colorado, by the
former owner of Mountain Air Drilling Service Company, Inc. from whom Mountain
Compressed Air, Inc. acquired assets in 2001. The plaintiff sought to accelerate
payment of the note issued in connection with the acquisition and sought $1.9
million in damages (representing principal and interest due under the note), on
the basis that Mountain Compressed Air failed to provide financial statements
required by the note. The Company raised several defenses to the plaintiff's
claim. In March 2005, the Company reached an agreement with the plaintiff to
settle the action and agreed to pay to the plaintiff $1.0 million in cash, and
to pay to the plaintiff an additional $350,000 on June 1, 2006, and an
additional $150,000 on June 1, 2007, in settlement of all amounts due under the
promissory note and all other claims. The $1.0 million cash payment was made on
April 1, 2005.

The Company is involved in various other legal proceedings in the ordinary
course of business. The legal proceedings are at different stages; however, the
Company believes that the likelihood of material loss relating to any such legal
proceeding is remote.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The exhibits listed on the Exhibit Index located at Page 29 of this
Quarterly Report are filed as part of this Form 10-Q.


                                       27





<PAGE>




                                   SIGNATURES

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


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

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




                                       28





<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 Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

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




                                     29