<PAGE>
                 UNITED STATE SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

                                   (Mark One)

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR

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

                          COMMISSION FILE NUMBER 1-2199


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


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


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

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

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                     COMMON STOCK, PAR VALUE $0.01 PER SHARE

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

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


At August 12, 2004, there were 9,783,681 shares of common stock outstanding.





<PAGE>

                           ALLIS-CHALMERS CORPORATION

                                    FORM 10-Q

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

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

                                     PART I


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

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

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

     Restated Consolidated Statements of Cash Flows for the six
        months ended June 30, 2004 and 2003.................................  6

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

2.   Management's Discussion and Analysis of Financial Condition and
       Results of Operations................................................ 11

4.   Controls and Procedures................................................ 18


                                     PART II

6.   Exhibits and Reports on Form 8-K....................................... 26

Signatures and Certifications............................................... 27


                                       2




<PAGE>

                                INTRODUCTORY NOTE

     Allis Chalmers Energy Inc. is filing this Amendment No. 1 ("Amendment No.
1") to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004 (the "Original Filing"), which was originally filed on August 16, 2004
(the "Original Filing Date") to reflect the restatement of our financial results
resulting from our determination to change the manner in which we accounted for
the formation of our AirComp LLC subsidiary in July 2003. The restatement is
discussed in more detail in Note 2 to the accompanying consolidated financial
statements. The following Items of the Original Filing are amended by this
Amendment No. 1:

     Part I. Financial Information

     Item 1. Financial Statements

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

     Item 4. Controls and Procedures

     Part II

     Item 6. Exhibits and Reports on Form 8-K

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

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


                                       3




<PAGE>

                          PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

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

Cash and cash equivalents                                                   $        485      $      1,299
Trade receivables, net                                                            10,305             8,823
Lease receivable, current                                                            180               180
Prepaids and other current assets                                                  1,137               887
                                                                            ------------      ------------
   Total current assets                                                           12,107            11,189

Property and equipment, net                                                       31,805            31,128
Goodwill                                                                           7,661             7,661
Other intangible assets, net                                                       2,054             2,290
Debt issuance costs, net                                                             612               567
Lease receivable                                                                     664               787
Deferred offering costs                                                            2,650                 -
Other assets                                                                          79                40
                                                                            ------------      ------------
      Total assets                                                          $     57,632      $     53,662
                                                                            ============      ============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current maturities of long-term debt                                        $      4,848      $      3,992
Trade accounts payable                                                             3,391             3,133
Accrued salaries, benefits and payroll taxes                                         677               591
Accrued interest                                                                     212               152
Accrued expenses                                                                   1,332             1,761
Accounts payable, related parties                                                    541               787
                                                                            ------------      ------------
    Total current liabilities                                                     11,001            10,416

Accrued postretirement benefit obligations                                           520               545
Long-term debt, net of current maturities                                         26,163            28,241
Other long-term liabilities                                                          129               270
Redeemable warrants                                                                1,500             1,500
Redeemable convertible preferred stock                                                 -             4,171
                                                                            ------------      ------------
    Total liabilities                                                             39,313            45,143

Commitments and Contingencies (Note 9 and Note 19)

Minority interests                                                                 4,193             3,978

COMMON SHAREHOLDERS' EQUITY
   Common stock, $.01 par value (20,000,000 shares authorized;
     6,264,758 and 3,926,668 issued and outstanding, respectively)                    63                39
   Capital in excess of par value                                                 19,548            10,748
   Accumulated (deficit)                                                          (5,485)           (6,246)
                                                                            ------------      ------------
    Total shareholders' equity                                                    14,126             4,541
                                                                            ------------      ------------
    Total liabilities and shareholders' equity                              $     57,632      $     53,662
                                                                            ============      ============

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


                                                   4
</TABLE>




<PAGE>

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

                                                      Three Months Ended          Six Months Ended
                                                            June 30,                   June 30,
                                                       2004          2003          2004          2003
                                                    ----------    ----------    ----------    ----------
                                                    (Restated)                  (Restated)
                                                               (in thousands, except per share)
<S>                                                 <C>           <C>           <C>           <C>
Revenues                                            $   11,422    $    7,340    $   21,083    $   14,339
Cost of sales                                            8,419         5,410        15,947        10,405
                                                    ----------    ----------    ----------    ----------

   Gross Profit                                          3,003         1,930         5,136         3,934

General and administrative expense                       1,853         1,020         2,956         2,001
                                                    ----------    ----------    ----------    ----------

   Income/ (loss) from operations                        1,150           910         2,180
                                                                                                   1,933

Other Income (expense)
   Interest income                                           -             -             -             -
   Interest expense                                       (499)         (843)       (1,068)       (1,480)
   Other                                                    18          (186)          205          (174)
   Minority interest                                      (139)         (124)         (212)         (311)
                                                    ----------    ----------    ----------    ----------

Net income/(loss) before income taxes                      530          (243)        1,105           (32)
                                                    ----------    ----------    ----------    ----------

   Provision for income taxes                             (117)          (92)         (220)         (250)
                                                    ----------    ----------    ----------    ----------

Net income/ (loss)                                         413          (335)          885          (282)
                                                    ----------    ----------    ----------    ----------

   Preferred stock dividend                                (36)          (87)         (124)         (481)
                                                    ----------    ----------    ----------    ----------

Net income/ (loss) attributed to common shares      $      377    $     (422)   $      761    $     (763)
                                                    ==========    ==========    ==========    ==========

Net income/ (loss) per common share  basic          $     0.06    $    (0.11)   $     0.15    $    (0.19)
                                                    ==========    ==========    ==========    ==========

Net income/ (loss) per common share diluted         $     0.04    $    (0.11)   $     0.09    $    (0.19)
                                                    ==========    ==========    ==========    ==========

Weighted average number of common shares
outstanding
     Basic                                               6,253         3,927         5,077         3,927
                                                    ==========    ==========    ==========    ==========

    Diluted                                             10,237         3,927         8,394         3,927
                                                    ==========    ==========    ==========    ==========

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


                                                     5
</TABLE>




<PAGE>

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

                                                                                  Six Months Ended
                                                                                      June 30,
                                                                                  2004          2003
                                                                               ----------    ----------
                                                                                (restated)
<S>                                                                            <C>           <C>
Cash flows from operating activities:
Net income (loss)                                                              $      885    $     (282)
Adjustments to reconcile net (loss) to net
     cash provided by operating activities:
Depreciation and amortization expense                                               1,607         1,380
Fair value of warrant issued to consultant                                             14             -
(Gain) loss on sale of fixed assets                                                     -           181
Amortization of discount on debt                                                      109           367
Minority interest in income of subsidiary                                             212           311
Changes in working capital:
     Decrease (increase) in accounts receivable                                    (1,482)       (1,597)
     Decrease (increase) in other current assets                                     (250)         (619)
     Decrease (increase) in other assets                                               84            35
     Decrease (increase) in lease deposit                                               -           525
     (Decrease) increase in accounts payable                                          258         1,385
     (Decrease) increase in accrued interest                                           60           468
     (Decrease) increase in accrued expenses                                         (429)         (393)
     (Decrease) increase in other long-term liabilities                              (141)            -
     (Decrease) increase in accrued employee benefits and payroll taxes              (185)          (88)
                                                                               ----------    ----------

Net cash provided by operating activities                                             742         1,673
                                                                               ----------    ----------

Cash flows from investing activities:
    Proceeds from sale of fixed assets                                                  -           700
    Purchase of equipment                                                          (1,879)         (821)
                                                                               ----------    ----------

Net cash provided (used) by investing activities                                   (1,879)         (121)
                                                                               ----------    ----------

Cash flows from financing activities:
     Proceeds from issuance of common stock, net                                    1,865             -
     Repayments of long-term debt                                                  (1,331)       (1,668)
     Debt issuance costs                                                             (211)            -
                                                                               ----------    ----------

Net cash provided (used) by financing activities                                      323        (1,668)
                                                                               ----------    ----------

Net increase (decrease) in cash and cash equivalents                                 (814)         (116)

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

Cash and cash equivalents at end of period                                     $      485    $       30
                                                                               ==========    ==========

Supplemental information - interest paid                                       $    1,068    $    1,480
                                                                               ==========    ==========

                                  This interim statement is unaudited.

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


                                                    6
</TABLE>




<PAGE>

                           ALLIS-CHALMERS CORPORATION

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

PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT
EVENTS OCCURRING AFTER AUGUST 16, 2004. FOR A DESCRIPTION OF THESE EVENTS,
PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE THE DATE OF THE ORIGINAL
FILING.

EXPLANATORY NOTE

This Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (the "Original Filing"), includes restatements
related to our unaudited consolidated financial statements for the period ended
June 30, 2004. The restatement is discussed in Note 2.


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

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

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

ORGANIZATION OF BUSINESS

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

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

On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
merger, all of OilQuip's outstanding common stock was converted into 2,000,000
shares of Allis-Chalmers' common stock.

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

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

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

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


                                       7




<PAGE>

USE OF ESTIMATES

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

PRINCIPLES OF CONSOLIDATION

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


REVENUE RECOGNITION

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

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

The Company discloses the results of its segments in accordance with SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
No. 131"). The Company designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. At June 30, 2004
and 2003, the Company operated in three segments organized by service line:
casing services, directional drilling services and compressed air drilling
services.

NOTE 2 - RESTATEMENT

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

Increase In Book Value Of Fixed Assets. Under joint venture accounting, the
Company 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, the
Company 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, the Company established negative goodwill which reduced fixed assets
in the amount of $1,550,000. The negative goodwill was amortized by the Company
over the lives of the related fixed assets. Under purchase accounting, the
Company 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.


                                       9




<PAGE>

Increase In Net Income. As a result of the increase in fixed assets during the
six months ended June 30, 2004, depreciation expense related to the fixed assets
increased by $98,000, depreciation expense was increased by $120,000 as a result
of the reversal of amortization of negative goodwill, and minority interest
expense decreased by $44,000, resulting in reduction in net income attributable
to common stockholders of $174,000.

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

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

Cash and cash equivalents                           $     485                $     485
Trade receivables, net                                 10,305                   10,305
Lease Receivable, current                                 180                      180
Prepaid expenses and other                              1,137                    1,137
                                                    ---------                ---------
Total current assets                                   12,107                   12,107

Property and equipment, net                            27,234        4,571      31,805
Goodwill                                                7,661                    7,661
Other intangible assets, net                            2,054                    2,054
Debt issuance costs, net                                  612                      612
Lease receivable, less current portion                    664                      664
Deferred offering costs                                 2,650                    2,650
Other Assets                                               79                       79
                                                    ---------    ---------   ---------
Total Assets                                        $  53,061    $   4,571   $  57,632
                                                    =========    =========   =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current maturities of long-term debt                $   4,848                $   4,848
Trade accounts payable                                  3,391                    3,391
Accrued salaries, benefits and payroll taxes              677                      677
Accrued interest                                          212                      212
Accrued expenses                                        1,332                    1,332
Accounts payable, related parties                         541                      541
                                                    ---------                ---------
Total current liabilities                              11,001                   11,001

Accrued postretirement benefit obligations                520                      520
Long-term debt, net of current maturities              26,163                   26,163
Other long-term liabilities                               129                      129
Redeemable warrants                                     1,500                    1,500
Redeemable convertible preferred stock
including accrued dividends                                --                       --
                                                    ---------                ---------
Total liabilities                                      39,313                   39,313

Commitments and Contingencies

Minority interests                                      2,782        1,411       4,193

COMMON STOCKHOLDERS' EQUITY

Common stock                                               63                       63
Capital in excess of par value                         18,593          955      19,548
Accumulated (deficit)                                  (7,690)       2,205      (5,485)
                                                    ---------    ---------   ---------
Total stockholders' equity                             10,966        3,160      14,126
                                                    ---------    ---------   ---------
Total liabilities and stockholders' equity          $  53,061    $   4,571   $  57,632
                                                    =========    =========   =========
</TABLE>


                                       10




<PAGE>

<TABLE>
                                                      Three Months Ended June 30, 2004
                                                      -------------------------------
                                                       As       Restatement       As
                                                    Reported    Adjustments    Restated
                                                    --------    -----------    --------
<S>                                                 <C>          <C>          <C>
Revenues                                            $  11,422           --    $  11,422
Cost of revenues                                        8,340           79        8,419
                                                    ---------    ---------    ---------
Gross margin                                            3,082          (79)       3,003

General and administrative expense                      1,853           --        1,853
                                                    ---------    ---------    ---------
Income/ (loss) from operations                          1,229          (79)       1,150

Other income (expense):
Interest income                                            --           --           --
Interest expense                                         (499)          --         (499)
Minority interests in income of subsidiaries             (161)          22         (139)
Other                                                      18           --           18
                                                    ---------    ---------    ---------
Total other income (expense)                             (642)          22         (620)
                                                    ---------    ---------    ---------
Net income/ (loss) before income taxes                    587          (57)         530

Provision for foreign income tax                         (117)          --         (117)
                                                    ---------    ---------    ---------
Net income/ (loss)                                        470          (57)         413

Preferred stock dividend                                  (36)          --          (36)
                                                    ---------    ---------    ---------
Net income attributed to common stockholders        $     434    $     (57)   $     377
                                                    =========    =========    =========

Income/ (loss) per common share - basic             $    0.07                 $    0.06
                                                    =========                 =========

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

Weighted average number of common shares
outstanding:
     Basic                                              6,253                     6,253
                                                    =========                 =========
     Diluted                                           10,237                    10,237
                                                    =========                 =========
</TABLE>


                                       11




<PAGE>

<TABLE>
                                                       Six Months Ended June 30, 2004
                                                       ------------------------------
                                                        As      Restatement       As
                                                     Reported   Adjustments    Restated
                                                     --------   -----------    --------
<S>                                                 <C>          <C>          <C>
Revenues                                            $  21,083           --    $  21,083
Cost of revenues                                       15,729          218       15,947
                                                    ---------    ---------    ---------
Gross margin                                            5,354         (218)       5,136

General and administrative expense                      2,956           --        2,956
                                                    ---------    ---------    ---------
Income/ (loss) from operations                          2,398         (218)       2,180

Other income (expense):
Interest income                                            --           --           --
Interest expense                                       (1,068)          --       (1,068)
Minority interests in income of subsidiaries             (256)          44         (212)
Other                                                     205           --          205
                                                    ---------    ---------    ---------
Total other income (expense)                           (1,119)          44       (1,075)
                                                    ---------    ---------    ---------
Net income/ (loss) before income taxes                  1,279         (174)       1,105

Provision for foreign income tax                         (220)          --         (220)
                                                    ---------    ---------    ---------
Net income/ (loss)                                      1,059         (174)         885

Preferred stock dividend                                 (124)          --         (124)
                                                    ---------    ---------    ---------
Net income attributed to common stockholders        $     935    $    (174)   $     761
                                                    =========    =========    =========

Income/ (loss) per common share - basic             $    0.18                 $    0.15
                                                    =========                 =========

Income/ (loss) per common share - diluted           $    0.11                 $    0.09
                                                    =========                 =========

Weighted average number of common shares
outstanding:
     Basic                                              5,077                     5,077
                                                    =========                 =========
     Diluted                                            8,394                     8,394
                                                    =========                 =========
</TABLE>


                                       12




<PAGE>

<TABLE>
                                                           Six Months Ended June 30, 2004
                                                           ------------------------------
                                                            As        Restatement     As
                                                         Reported     Adjustment   Restated
                                                         --------     ----------   --------
<S>                                                      <C>          <C>         <C>
Cash flows from operating activities:
Net income/ (loss)                                       $   1,059    $    (174)  $     885
Adjustments to reconcile net income/ (loss) to
net cash provided by operating activities:
Depreciation and amortization  expense                       1,389          218       1,607
Fair value of warrant issued to consultant                      14           --          14
Amortization of discount on debt                               109           --         109
Minority interest in income of subsidiaries                    256          (44)        212
Changes in working capital:
Decrease (increase) in accounts receivable                  (1,482)          --      (1,482)
Decrease (increase) in other current assets                   (250)          --        (250)
Decrease (increase) in other assets                             84           --          84
Increase (decrease) in accounts payable                        258           --         258
Increase (decrease) in accrued interest                         60           --          60
Increase (decrease) in accrued expenses                       (429)          --        (429)
Increase (decrease) in other long-term liabilities            (141)          --        (141)
Increase (decrease) in accrued employee benefits
and payroll taxes                                             (185)          --        (185)
                                                         ---------    ---------   ---------

Net cash provided by operating activities                      742           --         742
                                                         ---------                ---------

Cash flows from investing activities:
Purchase of equipment                                       (1,879)                  (1,879)
Proceeds from sale of equipment                                 --                       --
                                                         ---------                ---------

Net cash (used) by investing activities                     (1,879)                  (1,879)
                                                         ---------                ---------

Cash flows from financing activities:
Proceeds from issuance of common stock, net                  1,865                    1,865
Repayments of long-term debt                                (1,331)                  (1,331)
Debt issuance costs                                           (211)                    (211)
                                                         ---------                ---------

Net cash provided (used) by financing activities               323                      323
                                                         ---------                ---------

Net increase (decrease) in cash and cash
equivalents                                                   (814)                    (814)

Cash and cash equivalents:

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

End of the year                                          $     485                $     485
                                                         =========                =========

Supplemental information:

Interest paid                                            $   1,068                $   1,068
                                                         =========                =========
</TABLE>


                                           13


<PAGE>

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

                                             Three Months
                                             Ended
                                             March 31, 2004
                                             --------------

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

Net income (loss) per share, basic
Previously reported                            $   0.03
Total adjustments                                 (0.01)
                                               --------
Restated                                       $   0.02

Net income (loss) per share, diluted

Previously reported                            $   0.02
Total adjustments                                 (0.00)
                                               --------
Restated                                       $   0.02

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

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

                                             Three Months        Six Months
                                                Ended              Ended
                                           June 30, 2003       June 30, 2003
                                           -------------       -------------
Net income (loss) attributed to
    common shareholders
Previously reported                          $    (330)          $    (513)
Adjustment                                         (92)               (250)
                                             ---------           ---------
Restated                                     $    (422)          $    (763)
                                             =========           =========


Net income (loss) per share, basic
    and diluted
Previously reported                          $   (0.08)          $   (0.13)
Adjustment                                       (0.03)              (0.06)
                                             ---------           ---------
Restated                                     $   (0.11)          $   (0.19)
                                             =========           =========


NOTE 3 - ACQUISITIONS

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

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


                                       14




<PAGE>

The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations as of June 30, 2003, based on the historical statements of
operations, as if the transaction had occurred as of the beginning of the period
presented.

                                         THREE MONTHS          SIX MONTHS
                                         ENDED JUNE 30,      ENDED JUNE 30,
                                         --------------      --------------
                                                     (UNAUDITED)
                                          (in thousands, except per share)

                                              2003               2003
                                              ----               ----

Revenues                                   $   8,181          $  16,061
Operating income (loss)                    $     522          $   2,219
Net income (loss)                          $    (666)         $    (298)

Net income (loss) per common share

       Basic                               $   (0.17)         $   (0.08)
       Diluted                             $   (0.17)         $   (0.08)

NOTE 4 - DEBT

Debt is as follows at June 30:
                                                                       2004
                                                                    ---------
                                                                  (in thousands)

Debt of Mountain Air
Note payable to Wells Fargo - Equipment leasing                     $     223
Note payable to Seller of Mountain Air Drilling Service Company         1,555

Debt of Jens'
Note payable to Wells Fargo -Term Note                                  3,672
Note payable to Wells Fargo -Real Estate Note                             118
Line of Credit with Wells Fargo                                           248
Subordinated Note payable to Seller of Jens                             4,000
Note payable to Seller of Jens' for non-compete agreement                 638
Note payable to Texas State Bank - Term Note                              354

Debt of Strata
Vendor financing                                                        1,746
Line of Credit with Wells Fargo                                         2,782

Debt of Allis-Chalmers
Notes payable to certain former Directors                                 394
Note payable to Wells Fargo - Subordinated Debt, net                    2,309

Debt of AirComp, LLC
Line of Credit to Wells Fargo                                             807
Note payable to Wells Fargo                                             6,857
Note payable to Wells Fargo                                               490
Subordinated Note payable to M-I L.L.C                                  4,818
                                                                    ---------
Total debt                                                             31,011
Less short-term debt and current maturities                             4,848
                                                                    ---------
Long-term debt obligations                                          $  26,163
                                                                    =========

Substantially all of the Company's assets are pledged as collateral under the
credit agreements.


                                       15




<PAGE>

NOTE 5 - SHAREHOLDERS' EQUITY

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

     o    In exchange for an investment of $2,000,000, the Company issued
          620,000 shares of common stock for a purchase price equal to $2.50 per
          share, and issued warrants to purchase 800,000 shares of common stock
          at an exercise price of $2.50 per share, expiring on April 1, 2006, to
          an investor group (the "Investor Group") consisting of entities
          affiliated with Donald and Christopher Engel and directors Robert
          Nederlander and Leonard Toboroff. The aggregate purchase price for the
          common stock was $1,550,000, and the aggregate purchase price for the
          warrants was $450,000.

     o    Energy Spectrum converted its 3,500,000 shares of Series A 10%
          Cumulative Convertible Preferred Stock, including accrued dividend
          rights, into 1,718,090 shares of common stock. The conversion of the
          preferred stock will have an impact on the earnings per share in
          future periods since the Company will not record any dividends.

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


NOTE 6 - REVERSE STOCK SPLIT

The Company effected a reverse stock split on June 10, 2004 in order to increase
the share price of the common stock. As a result of the reverse stock split,
every five shares of the Company's common stock were combined into one share of
common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from approximately 6,070 to
approximately 2,140. The Company currently has an application pending to list
the Common Stock on the American Stock Exchange, which has an initial listing
requirement that the Common Stock trade for a minimum of $3.00 per share and
certain other qualitative and quantitative listing requirements. There can be no
assurance that the Company will be successful in listing the Common Stock on the
American Stock Exchange.


                                       16




<PAGE>

NOTE 7 - SEGMENT INFORMATION

The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(AirComp). All of the segments provide services to the petroleum exploration and
production industry. The revenues, operating income (loss), depreciation and
amortization, interest, capital expenditures and assets of each of the reporting
segments plus the General Corporate function are reported below for the quarters
and the six months ended June 30, 2004 and 2003:

<TABLE>
                                                  Three Months Ended June 30,  Six Months Ended June 30,
                                                       2004          2003          2004          2003
                                                    (Restated)                  (Restated)
                                                                       (in thousands)
<S>                                                 <C>           <C>           <C>           <C>
REVENUES:
Casing services                                     $   2,446     $   2,644     $   4,386     $   5,153
Directional drilling services                           6,422         3.503        11,675         6,983
Compressed air drilling services                        2,554         1,193         5,022         2,203
                                                    ---------     ---------     ---------     ---------

Total revenues                                      $  11,422     $   7,340     $  21,083     $  14,339
                                                    =========     =========     =========     =========

OPERATING INCOME (LOSS):
Casing services                                     $     783     $     988     $   1,225     $   2,227
Directional drilling services                             727           255         1,389           511
Compressed air drilling services                          340            71           594           (36)
General corporate                                        (700)         (404)       (1,028)         (769)
                                                    ---------     ---------     ---------     ---------

Total income/(loss) from operations                 $   1,150     $   910     $   2,180     $   1,933
                                                    =========     =========     =========     =========

DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services                                     $     355     $     275     $     717     $     690
Directional drilling services                             114            39           214           119
Compressed air drilling services                          237           180           626           511
General corporate                                          25            (3)           50            60
                                                    ---------     ---------     ---------     ---------

Total depreciation and amortization expense         $     731     $     491     $   1,607     $   1,380
                                                    =========     =========     =========     =========

INTEREST EXPENSE:
Casing services                                     $     155     $     230     $     320     $     393
Directional drilling services                              67            77           142           140
Compressed air drilling services                          158           331           317           574
General corporate                                         119           205           289           373
                                                    ---------     ---------     ---------     ---------

Total interest expense                              $     499     $     843     $   1,068     $   1,480
                                                    =========     =========     =========     =========

CAPITAL EXPENDITURES
Casing services                                     $      46     $     201     $     425     $     242
Directional drilling services                              83            61           788            69
Compressed air drilling services                          338           379           664           494
General corporate                                           1             5             2            16
                                                    ---------     ---------     ---------     ---------

Total capital expenditures                          $     468     $     646     $   1,879     $     821
                                                    =========     =========     =========     =========

ASSETS:
Casing services                                     $  17,060     $  16,562     $  17,060     $  16,562
Directional drilling services                          12,795         8,125        12,795         8,125
Compressed air drilling services                       23,160         9,038        23,160         9,038
General corporate                                       4,617         1,322         4,617         1,322
                                                    ---------     ---------     ---------     ---------

Total assets                                        $  57,632     $  35,047     $  57,632     $  35,047
                                                    =========     =========     =========     =========
</TABLE>


                                       17




<PAGE>

NOTE 8 - LEGAL MATTERS

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

The Company is a defendant in an action (the "Action") brought in April 2004
(No. 04CV308) in the District Court of Mesa County Colorado by the former owner
of Mountain Air Drilling Service Company, Inc. nka Pattongill & Murphy, Inc.,
from whom the Company's Mountain Compressed Air, Inc. ("MCA") acquired assets in
2001. The plaintiff seeks to accelerate payment of a note (the "Note") issued in
connection with the acquisition and are seeking $1,863,000 in damages
(representing principal and interest due under the Note), on the basis that MCA
has failed to provide financial statements required by the Note. The Company
believes the claim is without merit because MCA no longer maintains separate
financial statements and the Company provides plaintiff with the Company's
publicly available financial statements. The financial statements disclose as a
separate segment the operations of AirComp, which conducts business using the
assets acquired from plaintiff. In addition, the rights of the holder of the
Note are subordinated to certain senior lease obligations, and therefore even if
the plaintiff had the right to accelerate the debt under the terms of the Note,
the plaintiff is prevented from doing so pursuant to the terms of the
subordination agreement until September, 2007, at which time the Note will
mature by its terms. Finally, the Company has claims in the amount of $12,000
for legal fees and other expenses that the plaintiff agreed to pay the Company
in connection with the settlement of an earlier lawsuit involving the
acquisition of assets from plaintiff.

NOTE 9 - SUBSEQUENT EVENTS

On March 15, 2004, the Company filed an application to list the common stock on
the American Stock Exchange. However, approval of listing of the common stock is
subject to numerous conditions, and there can be no assurance that the
application will be approved.

On July 17, 2004 our Strata and Jens subsidiaries entered into amendments to
their respective Wells Fargo Credit, Inc. credit agreements. The amendments
provide for an increase in the permitted capital expenditures in 2004 by Strata,
and also permitted additional indebtedness by Jens. Each of the amendments also
included consents to a $10.0 million to $15.0 million equity offering by the
Company and waived any requirement that the net proceeds be contributed to
Strata or Jens and used to prepay outstanding borrowings under the credit
facilities.

On August 10, 2004 we completed the private placement of 3,504,667 shares of our
common stock at a price of $3.00 per share. Net proceeds to us, after selling
commissions and expenses, are estimated to be $9.6 million. The private
placement was structured as what is known as a "private investment in public
equity" or "PIPE" offering, in which we issued shares pursuant to an exemption
from the Securities Act of 1933, and have agreed to subsequently register the
common stock under the Securities Act of 1933 to allow investors to resell the
common stock in public markets.

We will use the net proceeds of the offering to reduce debt, for acquisitions,
and for general corporate purposes. While we are in discussions and in the
analysis phase with potential acquisition candidates, as of this date, the
Company has not entered into definitive agreements with respect to any
acquisition candidate.


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

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


                                       18


<PAGE>

BACKGROUND
----------

Prior to May 2001, we operated primarily through Houston Dynamic Services, Inc
("HDS"). In May 2001, as part of a strategy to acquire and develop businesses in
the natural gas and oil services industry, we consummated a merger (the "OilQuip
Merger") in which we acquired 100% of the capital stock of OilQuip Rentals, Inc.
("OilQuip"), which owned 100% of the capital stock of Mountain Air. In December
2001, we disposed of HDS, and in February 2002, we acquired substantially all of
the capital stock of Strata and approximately 81% of the capital stock of Jens'.
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form AirComp LLC. We contributed substantially all of our compressed air
drilling assets with an estimated net book value of approximately $6,300,000
million to AirComp. Simultaneously, Aircomp acquired the compressed air drilling
assets of M-I with an appraised value $10,269,000 as determined by a third party
appraisal. In addition, AirComp issued a subordinated note to M-I in the amount
of $4.8 million. We owns 55% and M-I L.L.C. owns 45% of AirComp. The Company
consolidated AirComp into its financial statements for the quarter ended
September 30, 2003.

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

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

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

REVENUE RECOGNITION. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In addition, our
revenue recognition policy determines the timing of certain expenses, such as
commissions. We follow specific and detailed guidelines in measuring revenue.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause our operating results to vary significantly
from quarter to quarter and could result in future operating losses. Revenues
are recognized by the Company and its subsidiaries as services are rendered,
provided that pricing is fixed or determinable and collection is reasonably
assured. The Securities and Exchange Commission's ("SEC") Staff Accounting
Bulletin No. 104 ("SAB No. 104"), REVENUE RECOGNITION IN FINANCIAL STATEMENTS,
provides guidance on the SEC staff's views on application of generally accepted
accounting principles to selected revenue recognition issues. Our revenue
recognition policy is in accordance with generally accepted accounting
principles and SAB No. 104.

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


                                       19


<PAGE>

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

GOODWILL AND OTHER INTANGIBLES. The Company has recorded approximately
$7,661,000 of goodwill and $2,054,000 of other identifiable intangible assets.
(Is this number still accurate with the changes at AirComp?) The Company
allocates purchase price to intangible assets when it makes a business
combination. The excess of the purchase price after allocation of fair values to
tangible assets is allocated to identifiable intangibles and thereafter to
goodwill. Purchase price allocations have been made to intangible assets and
goodwill in connection with the acquisition of the Mountain Air, Strata and
Jens' operating segments, as well as the reverse merger between the Company and
OilQuip. Subsequently, the Company has performed its initial impairment tests
and annual impairment tests in accordance with Financial Accounting Standards
Board No. 141, BUSINESS COMBINATIONS, and Financial Accounting Standards Board
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The initial valuations of
intangibles related to the Mountain Air, Strata and Jens' operating segments
required the use of third-party valuation experts who in turn developed
assumptions to value the carrying amount of the individual reporting units.
Changes to these assumptions could require a provision for impairment in future
periods.

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

RESTATEMENT

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

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

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


                                       20


<PAGE>

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003:
-----------------------------------------------------------

Our revenues for the second quarter ended June 30, 2004 were $11,422,000, an
increase of 55.6% compared to $7,340, 000 for the second quarter of 2003. The
increase in revenues in the quarter was principally due to the inclusion of the
revenues of Aircomp, our joint venture with M-I formed in July 2003, and an
increase in revenues for our Directional Drilling Services, offset in part by a
decrease in revenues in our Casing Services segment. Revenues for the second
quarter ended June 30, 2004 for the Casing Services, Directional Drilling
Services and Compressed Air Drilling were $2,446,000, $6,422,000, and
$2,554,000, respectively, compared to $ 2,644,000, $3,503,000, and $1,193,000,
respectively, for the second quarter of 2003. Revenues for the Casing Services
segment decreased $198,000, or 7.4%, for the second quarter of 2004, compared to
the second quarter of 2003, due to an increased competitive environment in South
Texas and a decrease in drilling in Mexico by PEMEX due to bad weather. Our
revenues from Directional Drilling Services increased $2,919,000, or 83.3%, for
the second quarter of 2004 compared to the year-ago quarter, due to an increase
in demand for our services and our increased penetration of the Gulf Coast area.
Revenues for the Compressed Air Drilling Services segment increased $1,361,000,
or 114.0% during the second quarter of 2004 compared to the 2003 second quarter,
principally due to the formation of Aircomp, our joint venture company with M-I.
Through Aircomp, we were able to expand the geographical areas in which we
operate to include geothermal drilling in California and natural gas drilling in
West Texas.

Gross profit, as a percentage of sales, was 26.2% for the quarter ended June 30,
2004 compared to 26.3% for the quarter ended June 30, 2003. Because we have made
significant investments in equipment and have a constant number of operations
personnel, many of our costs of revenues are relatively fixed, and as a result,
our gross profit margins are significantly impacted by either increases or
decreases in pricing structures and revenues.

General and administrative expense was $1,853,000 in the second quarter of 2004
compared with $1,020,000 in the second quarter of 2003. General and
administrative expense increased in 2004 compared to 2003 due to the inclusion
of AirComp and the hiring of additional sales and administrative personnel at
each of the Company's subsidiaries to meet increased demand for our services and
due to increased professional fees and other expenses related to the Company's
financing activities.

Operating income for the second quarter ended June 30, 2004 totaled $1,150,000,
a 25.1% increase over the comparable period in 2003, reflecting the inclusion of
operating income of AirComp and increased revenue for Directional Drilling
Services. In the comparable period of 2003, operating income was $910,000.
Operating income (loss) for the quarter ended June 30, 2004 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $783,000, $727,000, $340,000 and ($700,000),
respectively. Operating income (loss) for the quarter ended June 30, 2003 for
the Casing Services, Directional Drilling Services, Compressed Air Drilling
Services and General Corporate segments were $988,000, $255,000, $71,000 and
($404,000), respectively. Operating income for the Casing Services decreased
approximately $205,000 due to reduced revenues. Operating income for Directional
Drilling Services increased approximately $472,000 due to our increased
penetration of the Gulf Coast area. Compressed Air Drilling Services increased
approximately $269,000 due the expanded geographical areas in which AirComp
operates. General Corporate segments decreased approximately ($296,000) due to
increased professional fees and other expenses related to the Company's
financing activities.

Our interest expense for the second quarter of 2004, decreased to $499,000 from
$843,000 for the second quarter of 2003 due to the reduction in our debt.

We had a net income attributed to common shareholders of $377,000, or $0.06 per
common share, for the quarter ended June 30, 2004 compared with a net loss of
($422,000), or ($0.11) per common share, for the quarter end June 30, 2003.

PRO FORMA RESULTS

The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations, based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented. Pro forma
results of operations set forth below includes results of operations for the
quarter ended June 30, 2004 and 2003.


                                       21


<PAGE>

Pro forma revenues for the second quarter of 2004 totaled $11,423,000, compared
to pro forma revenues in the second quarter of 2003 of $8,181,000, an increase
of approximately 40%. The increase in 2004 compared to 2003 was primarily due to
higher revenues resulting from the overall upturn in the petroleum industry. Pro
forma sales for the second quarter of 2004 for AirComp totaled $2,554,000,
compared to pro forma sales in the second quarter of 2003 of $2,034,000. The pro
forma sales in 2004 for AirComp increased $520,000 due to increased drilling
activity in West Texas and a slight increase in activity in the San Juan basin
over the same period in 2003.

Pro forma gross profit, as a percentage of sales, was 26.2% for the quarter
ended June 30, 2004 compared with a pro forma gross profit of 19.0 % for the
quarter ended June 30, 2003. The gross profit percentage increased as a result
of increased revenues and service pricing in the Directional Drilling Services
segments. Because we have made significant investments in equipment and have a
constant number of operations personnel, many of our costs of revenues are
relatively fixed, and as a result, our gross profit margins are significantly
impacted by either increases or decreases in pricing structures and revenues.

Pro forma general and administrative expense was $1,853,000 in 2004 compared
with $1,020,000 in 2003. The pro forma general and administrative expense
increased in 2004 compared to 2003 due to the additional administrative costs
associated with AirComp and the hiring of additional sales force and
administrative personnel at each of the Company's subsidiaries to meet increased
demand for our services and due to increased professional fees and other
expenses related to the Company's financing activities.

The Company had pro forma operating income for the second quarter of 2004 of
$1,150,000, an increase of 112.6 % as compared to pro forma operating income of
$541,000 in the second quarter of 2003. The increase in pro forma operating
income for 2004 was primarily due to higher revenues resulting from the overall
upturn in the petroleum industry.

The Company had a pro forma net income of $377,000, or $0.06 per common share,
for the quarter ended June 30, 2004 compared with a pro forma net loss of
($666,000), or ($0.17) per common share, for the quarter ended June 30 2003.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003:
---------------------------------------------------------

Our revenues for the six months ended June 30, 2004 were $21,083,000, an
increase of 47.0% compared to $14,339,000 for the second quarter of 2003. The
increase in revenues for the six months ended June 30, 2004 was principally due
to the inclusion of the revenues of Aircomp, our joint venture with M-I formed
in July 2003, and an increase in revenues for our Directional Drilling Services,
offset in part by a decrease in revenues in our Casing Services segment.
Revenues for the six months ended June 30, 2004 for the Casing Services,
Directional Drilling Services and Compressed Air Drilling were $4,386,000,
$11,675,000, and $5,022,000, respectively, compared to $ 5,153,000, $6,983,000,
and $2,203,000, respectively, for the six months ended June 30, 2003. Revenues
for the Casing Services segment decreased $767,000, or 14.9%, for the first six
months of 2004, compared to the first six months of 2003, due to an increased
competitive environment in South Texas and a decrease in drilling in Mexico by
PEMEX due to bad weather. Our revenues from Directional Drilling Services
increased $4,692,000, or 67.2%, for the six months of 2004 compared to the
year-ago period, due to an increase in demand for our services and our increased
penetration of the Gulf Coast area. Revenues for the Compressed Air Drilling
Services segment increased $2,819,000, or 128.0% during the six months of 2004
compared to the six months of 2003, principally due to the formation of Aircomp,
our joint venture company with M-I. Through Aircomp, we were able to expand the
geographical areas in which we operate to include geothermal drilling in
California and natural gas drilling in West Texas.

Gross profit, as a percentage of sales, was 24.4% for the six months ended June
30, 2004 compared with 27.4% for the six months ended June 30, 2003. The gross
profit percentage decreased as a result of relatively fixed direct costs and
decreased service pricing in the Casing Services and Compressed Air Drilling
Services segments offset by increased revenues and pricing in the Directional
Drilling segment. Because we have made significant investments in equipment and
have a constant number of operations personnel, many of our costs of revenues
are relatively fixed, and as a result, our gross profit margins are
significantly impacted by either increases or decreases in pricing structures or
revenues.

General and administrative expense was $2,956,000 in 2004 compared with
$2,001,000 in 2003. General and administrative expense increased in 2004
compared to 2003 due to the additional administrative costs associated with
AirComp and the hiring of additional sales force and administrative personnel at
each of the Company's subsidiaries to meet increased demand for our services and
due to increased professional fees and other expenses related to the Company's
financing activities.

Operating income for the six months ended June 30, 2004 totaled $2,180,000, a
12.8% increase over the comparable period in 2003, reflecting the inclusion of
operating income of AirComp and the increased revenues from Directional Drilling
Services, offset in part by a decrease in revenues in our Casing Services
segment. In the comparable period of 2003, operating income was $1,933,000.


                                       22


<PAGE>

Operating income (loss) for the six months ended June 30, 2004 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $1,225,000, $1,389,000, $594,000 and
($1,028,000), respectively. Operating income (loss) for the six months ended
June 30, 2003 for the Casing Services, Directional Drilling Services, Compressed
Air Drilling Services and General Corporate segments were $2,227,000, $511,000,
($36,000) and ($769,000), respectively. Operating income for the Casing Services
decreased approximately $1,009,000 due reduced revenues. Operating income for
Directional Drilling Services increased approximately $878,000 due to an
increase in demand for our services and increased penetration of the Gulf Coast
area. Compressed Air Drilling Services increased approximately $630,000 due the
expanded geographical areas in which AirComp operates. General Corporate
segments decreased approximately ($259,000) due to increased professional fees
and other expenses related to the Company's financing activities.

Our interest expense decreased to $1,068,000 for the six months of 2004,
compared to $1,480,000 for the six months of the prior year due to the reduction
of our debt.

We had a net income attributed to common shareholders of $761,000, or $0.15 per
common share, for the six months ended June 30, 2004 compared with a net loss of
($763,000), or ($0.19) per common share, for the six months ended June 30, 2003.

PRO FORMA RESULTS

The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations, based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented. Pro forma
results of operations set forth below includes results of operations for the six
months ended June 30, 2004 and 2003.

Pro forma revenues for the six months of 2004 totaled $21,083,000, compared to
pro forma sales in the six months of 2003 of $16,061,000, an increase of
approximately 31%. The increase in 2004 compared to 2003 was primarily due to
higher revenues resulting from the overall upturn in the petroleum industry. Pro
forma sales for the second six months of 2004 for AirComp totaled $3,925,000,
compared to pro forma sales in the second six months of 2003 of $2,203,000. The
pro forma sales in 2004 for AirComp increased $1,722,000 due to increased
drilling activity in West Texas and a slight increase in activity in the San
Juan basin over the same period in 2003.

Pro forma gross profit, as a percentage of sales, was 24.3% for the six months
ended June 30, 2004 compared with a pro forma gross margin of 29.6% for the six
months ended June 30, 2003. The gross margin ratio decreased as a result of
relatively fixed direct costs and decreased revenues and service pricing in the
Casing Services and Compressed Air Drilling Services segments, offset in part by
increased revenues and service pricing in the Directional Drilling segment..
Because we have made significant investments in equipment and have a constant
number of operations personnel, many of our costs of revenues are relatively
fixed, and as a result, our gross profit margins are significantly impacted by
either increases or decreases in revenues.

Pro forma general and administrative expense was $2,956,000 in 2004 compared
with $2,001,000 in 2003. The pro forma general and administrative expense
increased in 2004 due to the overhead costs associated with AirComp and the
hiring of additional sales force and administrative personnel at each of the
Company's subsidiaries to meet increased demand in the market.

The Company had pro forma operating income for the first six months of 2004 of
$2,180,000, an increase of 10.0% as compared to pro forma operating income of
$2,219,000 in the first six months of 2003. The increase in pro forma operating
income for 2004 was primarily due to higher revenues resulting from the overall
upturn in the petroleum industry.

The Company incurred a pro forma net income of $761,000, or $0.15 per common
share, for the six months ended June 30, 2004 compared with a pro forma net loss
of ($298,000), or ($0.08) per common share, for the six months ended June 30
2003.


                                       23


<PAGE>

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

Cash and cash equivalents totaled $485,000 at June 30, 2004 compared to
$1,299,000 at December 31, 2003. The decrease in cash and cash equivalents was
due to $1,879,000 in purchases of equipment, $1,331,000 of repayment of
long-term debt, and $211,000 of debt issuances costs offset in part by $742,000
in net cash provided by operating activities and $1,865,000 of net proceeds from
the issuance of common stock.

Net trade receivables at June 30, 2004 were $10,305,000 compared to $8,823,000
at December 31, 2003, due to increased sales at Strata and AirComp.

Net property, plant and equipment were $31,805,000 at June 30, 2004 compared to
$31,128,000 at December 31, 2003. The increase in net property, plant and
equipment was due to the addition of approximately $788,000 of downhole motors
and other assets used in the operations at Strata, the addition of casing
equipment of approximately $425,000 at Jens', and capital repairs to the
existing equipment of approximately $664,000 at AirComp. Capital expenditures
for the six months of 2004 were $1,879,000 compared to capital expenditures for
2003 of $821,000. Capital expenditures for the balance of 2004 are projected to
be approximately $3,100,000. We expect these expenditures will be funded from
operating cash flows and lines of credit already in place available for capital
projects.

Trade accounts payable at June 30, 2004 were $3,391,000 as compared to
$3,133,000 at December 31, 2003. The increase was primarily due to increased
operational expenses.

At June 30, 2004, other current liabilities, excluding the current portion of
long-term debt and trade accounts payable, were $2,762,000 consisting of
interest in the amount of $212,000, accrued salary and benefits in the amount of
$677,000, income taxes payable of $45,000, accrued restructuring costs of
$98,000, related party payables of $541,000, accrued operating expenses of
$1,153,000, and legal and professional expenses in the amount of $36,000.
Included in accrued restructuring costs was compensation in the amount of
$98,000 due to former employees of the Company. At December 31, 2003, other
current liabilities, excluding the current portion of long-term debt and trade
accounts payable, were $3,291,000 consisting of interest in the amount of
$152,000, accrued salary and benefits in the amount of $591,000, income taxes
payable of $45,000, accrued restructuring costs of $296,000, related party
payables of $787,000, accrued operating expenses of $1,358,000, and legal and
professional expenses in the amount of $62,000. Included in accrued
restructuring costs was compensation in the amount of $166,000 due to former
employees of the Company. All of these balance sheet accounts decreased
significantly from December 31, 2003 balances due to increased cash flow from
operations.

Long-term debt including current maturities was $31,011,000 at June 30, 2004 as
compared to $32,233,000 at December 31, 2003. The decrease in long-term debt
resulted from scheduled principal repayments as well as a prepayment on Strata's
vendor financed note of approximately $637,000.

CAPITAL REQUIREMENTS

Our long-term capital needs are to repay and/or refinance our existing debt,
provide funds for existing operations, and to secure funds for acquisitions in
the oil and gas equipment rental and services industry. In order to pay our
debts as they become due, including the amounts due to the bank lenders
described above, we will require additional financing, which may include the
issuance of equity or debt securities, as well as secured and unsecured loans.
See "Recent Developments" below for a discussion of capital transactions
completed subsequent to June 30, 2004. In March 2004, we entered into an
agreement with Morgan Joseph & Co. Inc. to assist us in restructuring our
outstanding debt and to pursue an offering of its common stock. However, there
can be no assurance that the Company will be successful in such efforts. Any new
issuance of equity securities may further dilute existing shareholders.

RECENT DEVELOPMENTS

The Company effected a reverse stock split on June 10, 2004 in order to increase
the share price of the common stock. As a result of the reverse stock split,
every five shares of the Company's common stock were combined into one share of
common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from approximately 6,070 to
approximately 2,140. The Company currently has an application pending to list
the Common Stock on the American Stock Exchange, which has an initial listing
requirement that the Common Stock trade for a minimum of $3.00 per share and
certain other qualitative and quantitative listing requirements. There can be no
assurance that the Company will be successful in listing the Common Stock on the
American Stock Exchange.

On July 17, 2004 our Strata and Jens subsidiaries entered into amendments to
their respective Wells Fargo Credit, Inc. credit agreements. The amendments
provide for an increase in the permitted capital expenditures in 2004 by Strata,
and also permitted additional indebtedness by Jens. Each of the amendments also
included consents to a $10.0 million to $15.0 million equity offering by us and
waived any requirement that the net proceeds be contributed to Strata or Jens
and used to prepay outstanding borrowings under the credit facilities.


                                       24


<PAGE>

On August 10, 2004 we completed the private placement of 3,504,677 shares of our
common stock at a price of $3.00 per share. Net proceeds to us, after selling
commissions and expenses, are estimated to be $9.6 million. The private
placement was structured as what is known as a "private investment in public
equity" or "PIPE" offering, in which we issued shares pursuant to an exemption
from the Securities Act of 1933, and have agreed to subsequently register the
common stock under the Securities Act of 1933 to allow investors to resell the
common stock in public markets.

We will use the net proceeds of the offering to reduce debt, for acquisitions,
and for general corporate purposes. While we are in discussions and in the
analysis phase with potential acquisition candidates, as of this date, the
Company has not entered into definitive agreements with respect to any
acquisition.

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.


                                       25


<PAGE>

                                     PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits listed on the Exhibit Index located at Page 28 of this Quarterly
Report are filed as part of this Form 10-Q.

(b) Reports on Form 8-K

Reports on Form 8-K were filed on June 3, 2004 and on June 24, 2004.


                                       26




<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,
2004.


                                                ALLIS-CHALMERS CORPORATION
                                                --------------------------
                                                       (REGISTRANT)

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



                                       27




<PAGE>

                                  EXHIBIT INDEX

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

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

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

        * Compensation Plan or Arrangement


                                       28