THE BUSINESS OF ALLIS-CHALMERS


   Houston Dynamic Service, Inc., a Company subsidiary, operates a business
   in Houston, Texas which services and repairs mechanical equipment,
   including compressors, pumps, turbines, engines, heat exchangers,
   centrifuges, rollers, gears, valves, blowers, kilns, crushers and mills.
   It serves various industrial customers, including those in the
   petrochemical, chemical, refinery, utility, waste and waste treatment,
   minerals processing, power generation, pulp and paper and irrigation
   industries.

   On March 1, 1997, Allis-Chalmers had 42 employees and 7,210 shareholders
   of record.




   Headquarters

   Allis-Chalmers Corporation
   Box 512
   Milwaukee, WI  53201-0512






   Contents

   The Business of Allis-Chalmers                          1
   Report to Our Shareholders                              2
   Market for Common Stock and
      Related Shareholder Matters                          4
   Selected Financial Data                                 5
   Management's Discussion and Analysis                    6
   Report of Independent Accountants                      11
   Consolidated Financial Statements                      12
   Notes to Consolidated Financial Statements             15
   Officers and Directors                                 27
   Board Committees                                       28


   <PAGE>

   REPORT TO OUR SHAREHOLDERS


   H. Sean Mathis
   Chairman of the Board
   and Chief Executive Officer


   Dear Shareholders:

     I am pleased to report that the Allis-Chalmers operating results of
   Houston Dynamic Service, Inc. (HDS) have improved significantly from 1995.
   However, Allis-Chalmers still has major obstacles to overcome to be able
   to successfully continue its business.  The major underfunding of the
   Allis-Chalmers Consolidated Pension Plan (Consolidated Plan) along with
   the continued unsuccessful search for an acquisition or a financing
   partner continue to jeopardize the future of the Company.  This became
   more critical in 1996 as scheduled funding payments became past due to the
   Consolidated Plan.

   Financial Results

        With the sale of the B.R.B. Industries division (BRB) in 1994, the
   Company's continuing operation consists of HDS, a machinery repair and
   service business.

        Sales totaled $4.1 million in 1996, a 27% increase from $3.2 million
   in 1995.  The increase is primarily the result of strong market conditions
   coupled with a more focused marketing strategy and product offering.

        Gross margin as a percentage of sales was 26.1% in 1996 compared with
   25.7% in 1995.

        Marketing and administrative expense of $1.4 million in 1996 was
   slightly higher then the 1995 level of $1.3 million.  The increase was due
   primarily to higher sales and marketing expense at HDS which was required
   to achieve higher sales in 1996.  The increase was kept to a minimum due
   to cost reduction efforts at HDS and the absence of any significant
   corporate expenses incurred  in connection with an acquisition search.  As
   a percentage of sales, marketing and administrative expense decreased to
   35% in 1996 compared with 41% in 1995.

        The Company reported a net loss of $1.7 million (including
   recognition of pension expense of $1.4 million), or $1.72 per common
   share, in 1996 compared with a net loss of $1.4 million (including
   recognition of pension expense of $1.1 million), or $1.44 per common
   share, in 1995.

   Acquisition Environment

   The Company continued to attempt to identify and evaluate acquisition
   candidates and financing partners during 1996.  The Company's environment
   for these transactions was and remains very difficult.  The Company's lack
   of cash for investment, restrictions on debt financing and the uncertainty
   associated with the Company's exposure for the underfunding of the
   Consolidated Plan all contribute to the Company's inability to consummate
   an acquisition or financing.

        Given the present financial condition of the Company, a meaningful
   acquisition will be very difficult to identify and complete.  The Company
   continues to believe, however, that it should investigate suitable
   acquisition or financing opportunities and attempt to develop an alliance
   with a strategic partner in order to increase its operating base and
   generate positive cash flow.  The Company recognizes that any acquisition
   would have to be financed by additional borrowing, new equity financing or
   a capital infusion by a new partner.  The current financial condition of
   the Company is a significant impediment to additional borrowing or an
   equity investment.

   Pension Plan

   The Company is the plan sponsor for the Consolidated Plan.  For the years
   1989 through 1993, retirees covered by the Consolidated Plan outlived the
   assumptions of mortality used in 1988 to calculate the additional funding
   needed to fully fund the Consolidated Plan.  Given this continued
   experience, the Company's independent actuaries revised the mortality
   assumptions used to calculate future liabilities effective January 1, 1994
   to reflect this decrease in mortality.  As a result, the Company has a
   greater future pension liability as its retirees continue to receive
   monthly pensions throughout their longer-projected lives.  This change in
   mortality assumptions, along with a slight increase in the assumption for
   future administrative costs, resulted in an underfunding on a present
   value basis of $15.1 million as of December 31, 1996.

      This underfunded condition required the Company to make significant
   cash contributions to the Consolidated Plan pursuant to ERISA minimum
   funding requirements starting in 1996.  In 1994, the Retirement Protection
   Act of 1994 (Act) was enacted as part of the General Agreement on Tariffs
   and Trade legislation.  This Act requires faster funding of underfunded
   pension plans.  While the first cash contribution to the Consolidated Plan
   for $205,000 was made in January 1996, additional cash contributions and
   interest of $2,386,000 are past due as of December 31, 1996.  In addition
   cash contributions and interest of $4,564,000 are due in 1997.

        Based on the Company's limited financial resources to make
   contributions, this requirement for contributions continues to have a
   material adverse effect on the Company.  The Company is not optimistic
   that in its current condition it will be able to raise additional capital
   to meet its obligations under the Consolidated Plan. Given the inability
   of the Company to fund such an obligation with its current financial
   resources, a notice of intent to terminate the Consolidated Plan was
   mailed to Plan participants on February 12, 1997 and a filing of
   appropriate documentation was made with the Pension Benefit Guaranty
   Corporation (PBGC).  The termination is anticipated to result in the
   assumption by the PBGC of the Consolidated Plan with the  consequence of a
   liability to the PBGC in excess of the current net worth of the Company.
   The Company has been engaged in ongoing discussions with the PBGC
   concerning the liability.  Although it is not possible to predict the
   outcome of such discussions, the Company's options include seeking
   protection from its creditors by commencing another bankruptcy.

   Outlook

   The challenges for 1997 are significant.  In particular, the pension plan
   underfunding issue and the continued search for an acquisition or a
   financing partner are matters on which we must remain focused.  However,
   limited financial resources and the uncertainty of available financing
   will make these challenges most difficult.

        On behalf of the directors and officers of Allis-Chalmers, I request
   the support of you, the shareholders, as we address these difficult
   challenges.

   <PAGE>                                                           [Page 4]

   MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS

   The Company's First Amended and Restated Joint Plan of Reorganization
   (Plan of Reorganization) provided for cancelling the old common stock of
   Allis-Chalmers on December 2, 1988 and issuing new common stock of the
   reorganized Company (Common Stock) to certain holders of claims and
   interests, including holders of old common stock.

   After receiving approval of a majority of shareholders of Common Stock,
   the Company amended its Amended and Restated Certificate of Incorporation
   (Amendment), effective as of July 8, 1992, to effect a 1-for-15 reverse
   stock split of the Common Stock pursuant to which each 15 shares of Common
   Stock, $.01 par value per share, were combined into one share of new
   Common Stock, $.15 par value per share.  In lieu of the issuance of
   fractional shares of Common Stock, the Amendment provided that
   shareholders owning less than 15 shares of Common Stock were entitled to
   receive a cash payment at the rate of $8.85 per share of Common Stock
   (equivalent to $0.59 per share of the presplit Common Stock).  This
   action, decreased the number of outstanding shares of Common Stock to
   1,003,596 from 15,164,195 shares immediately prior to the reverse stock
   split and decreased the number of shareholders to 7,408 from 17,799 prior
   to the reverse stock split.  Per share amounts in the accompanying
   financial statements have been restated to reflect the reverse stock
   split.

   Pursuant to the Stock Sales Escrow Agreement which was established in
   conjunction with the Plan of Reorganization, the Company's stock transfer
   agent, Continental Stock Transfer & Trust Company, completed the first
   release of shares of Common Stock from escrow in July 1992.  Stock
   certificates, representing approximately 40% of the outstanding shares of
   Common Stock held in escrow, were distributed to shareholders of record as
   of the close of business on July 8, 1992.  The balance of the outstanding
   shares of Common Stock were released from escrow on August 1, 1995.

   The Common Stock is subject to trading restrictions that are set forth in
   its Amended and Restated Certificate of Incorporation.  The trading
   restrictions are designed to maximize the likelihood of preserving the
   Company's substantial net operating loss carryforwards.  There is no
   established public trading market for the Common Stock.  It is not certain
   when or if trading in the Common Stock will commence or on which
   registered stock exchange or quotation system, if any, the Common Stock
   may eventually be listed or quoted.  At the present time, the Company does
   not intend to file a listing application to any registered national stock
   exchange or Nasdaq for trading or quotation of the Common Stock.

   No dividends were declared or paid during 1996, 1995 or 1994.
                                                                     [Page 5]

   SELECTED FINANCIAL DATA (1)

                              1996       1995       1994      1993      1992
                                   (millions, except per share data)

   Statement of Operations
    Data:
     Sales                   $ 4.1    $   3.2    $  3.6    $   3.3   $  3.8

     Income (loss) from:
       Continuing Operations  (1.7)      (1.4)     (1.1)      (1.3)    (1.7)
       Discontinued
        Operations                -          -     (0.2)       0.2      0.9
       Sale of molded
        fabric products
        division                  -          -     (2.9)         -        -
       Cumulative effect
        of accounting
        change                    -          -         -      (1.0)       -
                                ---        ---       ---        ---      ---
         Net loss             (1.7)      (1.4)     (4.2)      (2.1)     (.8)

     Income (loss) per share
      from:
       Continuing Operations  (1.72)     (1.44)    (1.08)     (1.31)   (1.65)
       Discontinued
        Operations                -          -      (.23)       .24      .82
       Sale of molded
         fabric products
         division                 -          -     (2.82)         -        -
       Cumulative effect
         of accounting
         change                   -          -         -      (1.02)       -
                               ----       ----      ----       ----     ----
         Net loss             (1.72)     (1.44)    (4.13)     (2.09)    (.83)

   Statement of Financial
    Condition Data:

     Total assets               3.4        4.1       4.6       11.5     12.9
     Long-term debt
      classified as:
       Current                  0.1        0.3         -        0.2      1.1
       Long-term                0.3          -       0.3        3.1      2.4
     Shareholders'
      (deficit) investment    (13.6)      (9.9)     (6.9)      (3.2)     8.0



   (1)    Restated to reflect the results of operations of the Company's BRB
          division as discontinued operations.  See Note 3 of Notes to
          Consolidated Financial Statements.


   <PAGE>                                                       [Pages 6-10]

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
   OPERATIONS

   This discussion should be read in conjunction with the Report to Our
   Shareholders and the Consolidated Financial Statements including the Notes
   to Consolidated Financial Statements.

   Overview

   Allis-Chalmers, after emerging from Chapter 11 under the Company's Plan of
   Reorganization which was consummated on December 2, 1988, entered into an
   agreement with AL-CH Company, L.P. (Investor) pursuant to which the
   Investor agreed to purchase 6.1 million shares of Common Stock (40% of the
   outstanding Common Stock) for $3,750,000 in cash.  The Investor is a
   limited partnership controlled by Messrs. Robert E. Nederlander and
   Leonard Toboroff.

   The acquisition environment has been unfavorable since the Investor's cash
   contribution to the Company and remained very difficult for the Company
   during 1996.  The problems continued to include the Company's lack of cash
   for investment, limited availability of debt financing for acquisitions
   and the financial exposure associated with the Allis-Chalmers Consolidated
   Pension Plan (Consolidated Plan).  These conditions become even more
   critical in 1997 since as of  December 31, 1996 payments totaling
   $2,386,000 are past due to the Consolidated Plan.  Therefore, the Company
   continues to proceed cautiously with its efforts to identify and evaluate
   potential candidates for acquisition.  Currently, the Company is not in
   discussions with any such potential candidate.

   The Company continues its efforts to conserve cash resources.  However,
   the expenses associated with the ongoing Securities and Exchange
   Commission and other governmental reporting as well as legal, accounting
   and audit, tax, insurance and costs associated with other corporate
   requirements of a publicly held company will make it difficult for the
   Company, at its present size, to achieve a positive cash flow.

   In 1994, the Company's independent pension actuaries changed the
   assumptions for mortality and administrative expenses used to determine
   the liabilities of the Consolidated Plan.  Primarily as a result of the
   changes in mortality assumptions to reflect decreased mortality rates of
   the Company's retirees, the Consolidated Plan is underfunded on a present
   value basis by $15.1 million.  The Company has recorded the liability
   related to this underfunded position, resulting in the elimination of its
   shareholders' equity.  In the first quarter of 1996, the Company made a
   cash contribution in the amount of $205,000.  The Company did not,
   however, have the financial resources to make the other required payments
   during 1996 and $2,386,000 in payments were past due as of December 31,
   1996.  In addition, there are substantial payments due in 1997 and 1998.
   Given the inability of the Company to fund such an obligation with its
   current financial resources, a Notice of Intent to Terminate the
   Consolidated Plan was mailed to Plan participants on February 12, 1997 and
   the filing of the appropriate documentation was made with the Pension
   Benefit Guaranty Corporation (PBGC).  The termination is anticipated to
   result in the assumption by the PBGC of the Consolidated Plan with the
   consequence of a liability to the PBGC significantly in excess of the
   current net worth of the Company.  The Company has been engaged in ongoing
   discussions with the PBGC concerning the Consolidated Plan.  The failure
   to meet the 1995 minimum obligation of $378,459 to the Consolidated Plan
   also results in a 10% excise tax liability to the IRS at December 31,
   1996.  To date, the IRS has not assessed the additional 100% excise tax
   which may be imposed on the accumulated funding deficiency for 1995.
   Failure to meet the minimum funding obligations for 1996 will also result
   in additional excise tax liabilities to the IRS.  The Company also intends
   to seek a settlement of these tax obligations with the IRS.  Although it
   is not possible to predict the outcome of discussions with the PBGC and
   IRS, the Company's options include seeking protection from its creditors
   by commencing another bankruptcy filing.

   Results of Operations

   Results of operations for 1996 and 1995 reflect the sole operation of the
   business of Allis-Chalmers:  the machine repair business, HDS.  The
   results of operations for 1994 also included the molded-fabric-product
   business, BRB, which was sold in September 1994.

   Sales from continuing operations totaled $4.1 million in 1996, a 27%
   increase over 1995 sales, compared with $3.2 million and $3.6 million in
   1995 and 1994, respectively.  The increase in sales from 1995 is primarily
   the result of strong market conditions coupled with a more focused
   marketing strategy and product offering.

   Gross margins, as a percentage of sales, were 26.1%, 25.7% and 28.2% in
   1996, 1995 and 1994, respectively.

   Marketing and administrative expense was $1.4 million, $1.3 million and
   $1.4 million in 1996, 1995 and 1994, respectively.  The increase in 1996
   was kept to a minimum despite a 27% increase in sales due to continued
   cost reduction efforts and the absence of any significant expenses
   relating to the  Company's search for and evaluation of an acquisition
   candidate in 1996.  Marketing and administrative expense was 34.8% of
   sales in 1996 compared with 41.1% in 1995 and 40.1% in 1994.  Marketing
   and administrative expense has been significantly reduced since 1994 as a
   result of cost reduction activity at HDS and at the Company's corporate
   offices.  A significant portion of the Company's administrative expense
   relates to expenses for Securities and Exchange Commission and other
   governmental reporting as well as the legal, accounting and audit, tax,
   insurance and other requirements of a publicly held company.

   The Company had a loss from operations of $353,000 in 1996 compared with a
   1995 loss of $491,000 and a loss of $382,000 in 1994.  The change from
   1995 resulted primarily from increased sales.

   Interest income in each of the years resulted mainly from earnings on
   short-term investments.  However, for the complete year of 1995, interest
   income also was derived from a note receivable from the sale of BRB in
   September of 1994.  This accounted for the increase in 1995.  Interest
   expense primarily relates to a term loan, the proceeds of which were used
   to purchase the shop and office building from which HDS operates.

   Pension expense was $1,422,000, $1,067,000 and $639,000 in 1996, 1995 and
   1994, respectively.  These amounts relate to the recognition of the
   pension liability associated with the Consolidated Plan in accordance with
   Statement of Financial Accounting Standards No. 87 "Employer's Accounting
   for Pensions."

   The Company incurred a net loss of $1,728,000 (including recognition of
   pension expense of $1,422,000), or $1.72 per common share, in 1996
   compared with a net loss of $1,448,000 (including recognition of pension
   expense of $1,067,000), or $1.44 per common share, in 1995.

   In 1994, the Company incurred a net loss of $4,174,000, or $4.13 per
   common share.  The net loss in 1994 included a loss from continued
   operations of $1,087,000 or 1.08 per common share.  The Company reported a
   loss from discontinued operations of $231,000 or .23 per common share in
   1994.  The 1994 loss from discontinued operations reflected the continued
   declining sales by BRB.  The Company incurred a loss on the sale of BRB of
   $2,856,000 or $2.82 per common share in 1994.  The loss on the sale of BRB
   included the write off of $2,076,720 in intangible assets associated with
   the Company's acquisition of BRB in 1989.

   Liquidity and Capital Resources

   At December 31, 1996, the Company had cash and short term investments
   totaling $1.6 million, a decrease from $1.9 million at December 31, 1995.
   This decrease was the result of expenses associated with the ongoing
   corporate reporting, as well as legal, accounting, pension, audit, tax and
   insurance.

   Trade receivables at December 31, 1996 were $652,000, compared with
   $265,000 at  December 31, 1995.  This increase was primarily the result of
   certain major projects completed and billed by HDS near the end of the
   year.

   Non-trade receivables were $36,000 at December 31, 1996 a decrease from
   $664,000 at December 31, 1995.  The decrease was primarily the result of a
   negotiated settlement for $500,000 for amounts due from the sale of the
   Company's BRB division.

   Inventory at December 31, 1996, was $93,000, down from $128,000 at year
   end 1995.  The higher amount in 1995 was due to a job in progress at the
   end of 1995 which was completed in early 1996.

   The Company had no significant capital expenditure commitments as of
   December 31, 1996.

   Current maturities of long-term debt at December 31, 1996 were $54,000
   compared with $299,000 at year-end 1995.  This decrease was the result of
   the refinancing of the balloon payment due August 20, 1996 from the real
   estate loan originally refinanced by HDS in August, 1993.  The proceeds of
   the original loan were used in 1990 for the purchase of the land and
   building in which HDS operates its business in Houston, Texas.  The amount
   refinanced is required to be repaid in monthly installments of $3,278
   through August 20, 2001, when the remaining unpaid balance shall be due.
   At December 31, 1996, the interest rate on the note was 10.25%.  This rate
   is subject to adjustments during the term of the note in accordance with
   increases or decreases in the prime rate.  The note is secured by the HDS
   facility having a net book value of $472,000 at December 31, 1996 and the
   Company's guaranty.

   The Company's principal sources of cash include earnings from operations
   and interest income on short-term investments.  The cash requirements
   needed for the administrative expenses associated with being a publicly
   held company are significant, and management believes that the Company
   will continue to use a substantial portion of its cash balances in 1997.
   The A-C Reorganization Trust, pursuant to the Plan of Reorganization,
   funds all costs incurred by Allis-Chalmers which relate to implementation
   of the Plan of Reorganization.  Such costs include an allocated share of
   certain expenses for Company employees, professional fees and certain
   other administrative expenses.

   In 1988, the Plan of Reorganization provided for the contribution of $53.8
   million to the Company's then-existing 11 salaried and inactive hourly
   pension plans.  This funding, in addition to the then-existing assets in
   the pension plans, was used to establish a high-grade fixed income
   securities portfolio.  The market value of the portfolio assets was
   matched to the present value of the expected pension benefits and
   administrative expenses of the plans in a way intended to make the pension
   fund immune from interest rate fluctuations, thus substantially
   eliminating the need for future Company contributions.  Effective January
   1, 1989 the 11 remaining Allis-Chalmers pension plans were consolidated
   into a single plan, the Consolidated Plan.  Pursuant to its obligations
   under the Plan of Reorganization, the Company continues as the plan
   sponsor for the Consolidated Plan.

   For the years 1989 through 1993, retirees eligible for benefits under the
   Consolidated Plan have, as a group, outlived the projections based on the
   mortality assumptions used in the Plan of Reorganization for funding the
   Consolidated Plan.  During this period, actual administrative expenses
   have been slightly in excess of assumed levels.  The Company was advised
   by its independent actuaries that effective January 1, 1994 it was
   required to reflect such decreased mortality for funding calculation
   purposes.  This change in the mortality assumptions and an increase in the
   assumption for future administrative expenses have created an underfunded
   condition as of December 31, 1996 in the Consolidated Plan of $15.1
   million on a present value basis.

   This underfunded condition in the Consolidated Plan requires the Company
   to make significant cash contributions to the Consolidated Plan pursuant
   to ERISA funding requirements starting in 1996.  Contributions and
   interest in the amount of $2.4 million were past due as of December 31,
   1996 with payments of $4.6 million due in 1997.

   In 1996, the Company made a payment of $205,000 to the Consolidated Plan.
   The Company has failed to make required quarterly contributions starting
   in April 1996, resulting in the filing of a lien by the PBGC against the
   Company.  Given the inability of the Company to fund such an obligation
   with its current financial resources, a Notice of Intent to Terminate the
   Consolidated Plan was mailed to Plan participants on February 12, 1997 and
   the filing of the appropriate documentation was made with the Pension
   Benefit Guaranty Corporation (PBGC).  The termination is anticipated to
   result in the assumption by the PBGC of the Consolidated Plan with the
   consequence of a liability to the PBGC significantly in excess of the
   current net worth of the Company.  The Company has been engaged in ongoing
   discussions with the PBGC concerning the Consolidated Plan.  The failure
   to meet the 1995 minimum obligation of $378,459 to the Consolidated Plan
   also results in a 10% excise tax liability to the IRS at December 31,
   1996.  To date, the IRS has not assessed the additional 100% excise tax
   which may be imposed on the accumulated funding deficiency for 1995.
   Failure to meet the minimum funding obligations for 1996 will also result
   in additional excise tax liabilities to the IRS.  The Company also intends
   to seek a settlement of these tax obligations with the IRS.  Although it
   is not possible to predict the outcome of discussions with the PBGC and
   IRS, the Company's options include seeking protection from its creditors
   by commencing another bankruptcy filing.

   The Environmental Protection Agency (EPA) and certain state environmental
   protection agencies have requested information in connection with eleven
   potential hazardous waste disposal sites in which products manufactured by
   Allis-Chalmers before consummation of the Plan of Reorganization were
   disposed.  The EPA has claimed that Allis-Chalmers is liable for cleanup
   costs associated with several additional sites.  The EPA's claims with
   respect to one other site were withdrawn in 1994 based upon settlements
   reached with the EPA in the bankruptcy proceeding.  In addition, certain
   third parties have asserted that Allis-Chalmers is liable for cleanup
   costs or associated EPA fines in connection with additional sites.  In one
   of these instances a former site operator has joined Allis-Chalmers and 47
   other potentially responsible parties as a third-party defendant in a
   lawsuit involving cleanup of one of the sites.  In each instance the
   environmental claims asserted against the Company involve its
   prebankruptcy operations.  Accordingly, Allis-Chalmers has taken the
   position that all cleanup costs or other liabilities related to these
   sites were discharged in the bankruptcy.  In one particular site, the
   EPA's Region III has concurred with the Company's position that claims for
   environmental cleanup were discharged pursuant to the bankruptcy.  While
   each site is unique with different circumstances, the Company has notified
   other Regional offices of the EPA of this determination associated with
   the Region III site.  The Company has not received responses from the
   other Regional offices.  No environmental claims have been asserted
   against the Company involving its postbankruptcy operations.

   Financial Condition

   Shareholders' deficit at December 31, 1996 was $13.6 million.  A three-
   year comparison of shareholders' deficit follows:

               (millions)               1996         1995        1994

   January 1                           $  (9.9)   $   (6.9)    $  (3.2)
   Net loss                               (1.7)       (1.4)       (4.1)
   Pension liability adjustment           (2.0)       (1.6)        0.4
                                          ----        ----        ----
   December 31                         $ (13.6)   $   (9.9)    $  (6.9)
                                          ====        ====        ====

   <PAGE>                                                      [Pages 11-26]

                        REPORT OF INDEPENDENT ACCOUNTANTS


   To the Board of Directors and
    Shareholders of Allis-Chalmers Corporation


   In our opinion, the consolidated financial statements appearing on pages
   12 through 26 of this report present fairly, in all material respects, the
   financial position of Allis-Chalmers Corporation and its subsidiaries at
   December 31, 1996 and 1995, and the results of their operations and their
   cash flows for each of the three years in the period ended December 31,
   1996, in conformity with generally accepted accounting principles.  These
   financial statements are the responsibility of the Company's management;
   our responsibility is to express an opinion on these financial statements
   based on our audits.  We conducted our audits of these statements in
   accordance with generally accepted auditing standards which require that
   we plan and perform the audit to obtain reasonable assurance about whether
   the financial statements are free of material misstatement.  An audit
   includes examining, on a test basis, evidence supporting the amounts and
   disclosures in the financial statements, assessing the accounting
   principles used and significant estimates made by management, and
   evaluating the overall financial statement presentation.  We believe that
   our audits provide a reasonable basis for the opinion expressed above.

   The accompanying financial statements have been prepared assuming that the
   Company will continue as a going concern.  The Company has failed to make
   required contributions to the Allis-Chalmers Consolidated Pension Plan.
   As of December 31, 1996, approximately $2.4 million in contributions and
   interest are past due and an additional $4.6 million in contributions will
   be required during 1997.  The Company does not currently have the
   financial resources to make these required contributions and has expressed
   its intent to terminate the plan effective April 14, 1997, which would
   result in a liability to the Pension Benefit Guaranty Corporation
   significantly in excess of the current net worth of the Company.  This
   matter raises substantial doubt about the Company's ability to continue as
   a going concern.  Management's plans in regard to this matter are
   described in Notes 10 and 11 to the financial statements.  The financial
   statements do not include any adjustments that might result from the
   outcome of this uncertainty.




   Price Waterhouse LLP
   March 24, 1997

   <PAGE>
                             STATEMENT OF OPERATIONS


        Year Ended December 31               1996         1995        1994
                                            (thousands, except per share)

   Sales                                    $ 4,060      $ 3,190    $  3,580
   Cost of sales                              3,000        2,371       2,571
                                             ------       ------      ------
         Gross Margin                         1,060          819       1,009

   Marketing and administrative
    expense                                   1,413        1,310       1,434
   Restructuring costs                            -            -         (43)
                                             ------       ------      ------
       Loss from Operations                    (353)        (491)       (382)
   Other income (expense)
     Interest income                             70          136          99
     Interest expense                           (39)         (46)       (187)
     Pension expense                         (1,422)      (1,067)       (639)
     Other                                       16           20          22
                                             ------       ------      ------
     Loss from Continuing
       Operations                            (1,728)      (1,448)     (1,087)

   Discontinued Operations:
   Loss from operations of molded
    fabric products division                      -            -        (231)
   Loss on sale of molded fabric
     products division                            -            -      (2,856)
                                             ------       ------      ------
       Net Loss                             $(1,728)     $(1,448)   $ (4,174)
                                             ======       ======      ======
   Loss per Common Share:
     Continuing Operations                  $ (1.72)     $ (1.44)   $  (1.08)
     Discontinued Operations                      -            -       (3.05)
                                             ------       ------      ------
       Net Loss per Common Share            $ (1.72)     $ (1.44)   $  (4.13)
                                             ======       ======      ======



                        STATEMENT OF ACCUMULATED DEFICIT

        Year Ended December 31                1996         1995        1994
                                                        (thousands)

   Accumulated deficit beginning
    of year                                 $(8,018)     $(6,570)   $ (2,396)
   Net loss                                  (1,728)      (1,448)     (4,174)
                                             ------       ------      ------
   Accumulated deficit end
    of year                                 $(9,746)     $(8,018)   $ (6,570)
                                             ======       ======      ======


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


   <PAGE>

                        STATEMENT OF FINANCIAL CONDITION


                   December 31                           1996       1995
                                                            (thousands)
   Assets

   Cash and short-term investments                       $ 1,568    $  1,881
   Trade receivables, net (Note 4)                           652         265
   Non-trade receivables (Note 3)                             36         664
   Inventories, net                                           93         128
   Other current assets                                      100         206
                                                          ------      ------
       Total Current Assets                                2,449       3,144
   Net property, plant and
    equipment (Note 5)                                       937         907
                                                          ------      ------
       Total Assets                                      $ 3,386    $  4,051
                                                          ======      ======

   Liabilities and Shareholders' Deficit

   Current maturities of long-term debt                  $    54    $    299
   Trade accounts payable                                     82          73
   Accrued employee benefits                                 136          80
   Reserve for legal expenses                                 50         275
   Accrued pension liability (Note 10)                     6,949       2,493
   Other current liabilities                                 356         324
                                                          ------      ------
       Total Current Liabilities                           7,627       3,544

   Accrued pension liability (Note 10)                     8,131       9,374
   Accrued postretirement benefit
    obligations (Note 10)                                    993       1,020
   Long-term debt (Note 7)                                   279          33

   Shareholders' deficit (Note 8)
     Common stock ($.15 par value, authorized
      2,000,000 shares, outstanding 1,003,028
      at December 31, 1996 and December 31, 1995)            152         152
     Capital in excess of par value                        8,155       8,155
     Accumulated deficit (accumulated deficit of
      $424,208 eliminated on December 2, 1988)            (9,746)     (8,018)
     Pension liability adjustment                        (12,205)    (10,209)
                                                          ------      ------
       Total Shareholders' Deficit                       (13,644)     (9,920)
   Commitments and contingent liabilities
    (Note 11)                                             ------      ------
       Total Liabilities and Shareholders'
        Deficit                                          $ 3,386    $  4,051
                                                          ======      ======


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

   <PAGE>

                             STATEMENT OF CASH FLOWS

        Year Ended December 31                1996         1995        1994
                                                         (thousands)

   Cash flows from operating
    activities:
       Net loss                             $(1,728)     $(1,448)   $ (4,174)
       Adjustments to reconcile net loss
        to net cash (used) provided by
        operating activities:
           Depreciation and amortization         92          112         126
           Loss from discontinued
            operations                            -            -       3,087
           Provision for restructuring
            costs                                 -            -         (48)
           Changes in working capital:
               Decrease in receivables,
                net                             241          240         556
               Decrease (increase) in
                inventories                      35          (34)        (35)
               Decrease (increase) in
                other current assets            106          (21)        443
               Increase (decrease) in
                trade accounts
                payable                           9         (128)       (103)
               Decrease in other current
                liabilities                    (137)         (42)       (404)
               Increase in accrued
                pension liability             1,217        1,067         639
           Net change in working capital
             of discontinued operations           -            -         (20)
           Other                                (27)         (13)         23
                                             ------       ------      ------
               Net cash (used) provided
                by operating activities        (192)        (267)         90

   Cash flows from investing activities:
       Capital expenditures                    (127)        (116)       (109)
       Proceeds from sale of excess
        equipment                                 5            6          20
                                             ------       ------      ------
               Net cash (used) by
                investing activities           (122)        (110)        (89)

   Cash flows from financing activities:
       Net proceeds from issuance of
        long-term debt                          311           67           -
       Payment of long-term debt               (310)         (34)       (154)
       Retirement of long-term debt               -            -      (2,795)
       Proceeds from certificate of
         deposit                                  -            -       3,000
                                             ------       ------      ------
               Net cash provided (used)
                by financing activities           1           33          51
                                             ------       ------      ------
   Net (decrease) increase in cash and
    short-term investments                     (313)        (344)         52

   Cash and short-term investments at
    beginning of year                         1,881        2,225       2,173
                                             ------       ------      ------
   Cash and short-term investments
    at end of year                          $ 1,568      $ 1,881    $  2,225
                                             ======       ======      ======
   Supplemental information -
    interest paid                           $    39      $    46    $    189
                                             ======       ======      ======


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


   <PAGE>
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


   NOTE 1.  EMERGENCE FROM CHAPTER 11

   Allis-Chalmers Corporation ("Allis-Chalmers" or the "Company") emerged
   from Chapter 11 proceedings on October 31, 1988 under a plan of
   reorganization which was consummated on December 2, 1988.  The Company was
   thereby discharged of all debts that arose before confirmation of its
   First Amended and Restated Joint Plan of Reorganization (Plan of
   Reorganization), and all of its capital stock was cancelled and made
   eligible for exchange for shares of common stock of the reorganized
   Company (Common Stock).

   Claims asserted against the Company and allowed by the Bankruptcy Court
   beyond those recorded prior to the consummation date amounted to
   approximately $483 million.  Such amounts were subsequently recorded by
   the Company in 1988.  Because total recorded liabilities discharged at
   consummation exceeded the book value of assets and Common Stock
   distributed to creditors and the various trusts at that date,
   extraordinary income of $388.1 million was recorded.

   See the Plan of Reorganization and the First Amended Disclosure Statement
   dated September 14, 1988 for additional information regarding
   distributions to holders of claims and interests.


   NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Description of Business

   Allis-Chalmers through its wholly-owned subsidiary, Houston Dynamic
   Service, Inc., services and repairs various types of mechanical equipment,
   including compressors, pumps, turbines, engines, heat exchangers,
   centrifuges, rollers, gears, valves, blowers, kilns, crushers and mills.

   Principles of Consolidation

   The consolidated financial statements include the accounts of Allis-
   Chalmers and its subsidiaries.  All significant intercompany transactions
   have been eliminated.

   Short-Term Investments

   Short-term investments consist primarily of government repurchase
   agreements and commercial paper with original maturities at date of
   purchase less than three months.

   Fair Value of Financial Instruments

   The carrying amounts in the Statement of Financial Condition for cash and
   short-term investments, trade receivables and long-term debt approximate
   their fair market value.

   Inventories

   Inventories are stated at the lower of cost, determined by the first-in,
   first-out method, or market.

   Properties and Depreciation

   Plant and equipment used in the business are stated at cost and
   depreciated on the straight-line basis over the estimated useful lives of
   the assets which generally range from 40 years for buildings, 3 to 12
   years for machinery and equipment and 3 to 12 years for tools, patterns,
   furniture and fixtures.  Maintenance and repairs are expensed as incurred.
   Expenditures which significantly increase asset values or extend useful
   lives are capitalized.

   Income Taxes

   Deferred income taxes are determined on the liability method in accordance
   with Statement of Financial Accounting Standards (FASB) No. 109.  See Note
   6. Income Taxes.

   (Loss) Income Per Common Share

   (Loss) Income per common share is based on the average number of shares of
   common stock outstanding.

   Statement of Cash Flows

   For purposes of the Statement of Cash Flows, the Company considers all
   highly liquid debt instruments with a maturity of three months or less at
   date of purchase to be cash equivalents.

   Use of Estimates

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

   Major Customers

   In 1996 and 1995, Amoco Chemical was the only customer which accounted for
   10% or more of total sales -- 16% of 1996 sales and 26% of 1995 sales.  In
   1994, the Company had two customers which accounted for 10% or more of
   total sales -- Amoco Chemical generated 19% and Chevron Corporation
   generated 15%.

   NOTE 3.  SALE OF BRB DIVISION

   On September 22, 1994, the Company sold substantially all of the assets,
   excluding accounts receivable and certain other assets, and certain
   liabilities of its BRB division.  Pursuant to the terms and conditions of
   an Asset Purchase Agreement, dated as of August 4, 1994 and as amended on
   September 22, 1994 (the "Asset Purchase Agreement"), by and between the
   Company and BRB Industries Corp., a New Jersey corporation, the purchase
   price was $737,343, which consisted of $280,000 paid in cash at closing,
   $100,000 payable in cash within 120 days after closing and a secured
   promissory note in the amount of $357,343.

   The Company recorded a loss on the sale of $2,856,000 which included the
   write-off of $2,076,720 of intangible assets associated with the Company's
   acquisition of BRB in 1989.

   The Company did not sell the accounts receivable nor transfer the accounts
   payable of the BRB business.  Pursuant to the terms of the Asset Purchase
   Agreement, the collection of the BRB receivables and payment of BRB
   payables was administered on behalf of the Company by BRB management and
   the proceeds from the collection of receivables over the payment of the
   accounts payable were to be transferred to the Company.

   In September 1996, a negotiated settlement was made for $500,000 for
   amounts due from the sale.  This included amounts due from the promissory
   note as well as collection of receivables.

   Sales of this discontinued operation were $3,676,800 for the nine months
   ended September 20, 1994.


   NOTE 4.  RECEIVABLES

              December 31                           1996          1995
                                                       (thousands)

   Trade accounts receivable                      $    682      $    571
   Allowance for doubtful receivables                  (30)         (306)
                                                     -----         -----
                                                  $    652      $    265
                                                     =====         =====

   NOTE 5.  PROPERTY, PLANT AND EQUIPMENT

              December 31                           1996          1995
                                                       (thousands)

   Land and buildings                             $    545      $    522
   Machinery and equipment                           1,339         1,302
   Tools, patterns, furniture, fixtures
     and leasehold improvements                        441           380
                                                    ------        ------
                                                     2,325         2,204
   Accumulated depreciation                         (1,388)       (1,297)
                                                    ------        ------
                                                  $    937      $    907
                                                    ======        ======


   NOTE 6.  INCOME TAXES

   Temporary differences are differences between the tax basis of assets and
   liabilities and their reported amounts in the financial statements that
   will result in differences between income for tax purposes and income for
   financial statement purposes in future years.

   The following table depicts the temporary differences as of December 31,
   1996 and 1995:

                                                     1996          1995
                                                        (millions)

   Net future tax deductible items                $     13      $     10
   Net operating loss carryforwards
    and other tax credits                              189           187
   Valuation allowance                                (202)         (197)
                                                    ------        ------
   Net deferred taxes                             $      0      $      0
                                                    ======        ======


   Net future tax deductible items relate primarily to estimated future
   bankruptcy claim payments to be made by the Company's two grantor trusts.
   Gross deferred tax liabilities at December 31, 1996 are not material.

   The Plan of Reorganization established the A-C Reorganization Trust to
   settle claims and to make distributions to creditors and certain
   shareholders.  The Company transferred cash and certain other property to
   the A-C Reorganization Trust on December 2, 1988.  Payments made by the
   Company to the A-C Reorganization Trust do not generate tax deductions for
   the Company upon the transfer but generate deductions for the Company as
   payments are made by the A-C Reorganization Trust to holders of claims.

   The Plan of Reorganization also created a trust to process and liquidate
   product liability claims.  Payments made by the A-C Reorganization Trust
   to the product liability trust do not generate current tax deductions for
   the Company.  Future deductions will be available to the Company as the
   product liability trust makes payments to liquidate claims.

   The Company believes the above-named trusts are grantor trusts and
   therefore includes the income or loss of these trusts in the Company's
   income or loss for tax purposes, resulting in an adjustment of the tax
   basis of net operating and capital loss carryforwards.  The income or loss
   of these trusts is not included in the Company's results of operations for
   financial reporting purposes.

   Tax carryforwards at December 31, 1996 are estimated to consist of net
   operating losses of $510 million expiring 1998 through 2009, investment
   tax credits of $7 million expiring 1997 through 2001 and energy tax
   credits of $3 million expiring 1997 through 2001.

   During 1990, the Company initiated litigation against the Internal Revenue
   Service (IRS) in the United States Bankruptcy Court for the Southern
   District of New York, challenging the validity and retroactive
   applicability of proposed regulations issued by the IRS on August 13,
   1990.  On January 2, 1992 the IRS issued final regulations under Sections
   269 and 382 of the Internal Revenue Code of 1986 relating to the use of
   net operating loss carryforwards following corporate reorganizations under
   the Bankruptcy Code.

   Following issuance of the final regulations the Company withdrew its
   retroactivity challenge because the final regulations were made
   retroactive only to August 14, 1990 and are not applicable to a plan of
   reorganization that was completed before then.  The Company's Plan of
   Reorganization was consummated on December 2, 1988.  The Company, however,
   continued to challenge the validity of other provisions of the
   regulations.

   On June 8, 1992, the Bankruptcy Court issued a decision denying the
   Company's motion for a judgment against the IRS with respect to the
   application of Section 269 of the IRS Code to the Company.  The Court also
   granted the IRS's motion to dismiss the Company's complaint challenging
   the regulations.  The Court entered judgment pursuant to its decision on
   June 29, 1992 and, consistent with the advice of its counsel, the Company
   decided not to appeal that judgment.

   Although the Company was unable to obtain a judgment that would have
   prevented the IRS from applying Section 269 to the Company, the Court's
   ruling leaves the Company in substantially the same position it was in
   prior to issuance of the final regulations.  The possibility of an IRS
   challenge under Section 269 of the Internal Revenue Code to the Company's
   use of its prepetition net operating loss carryforwards has always existed
   and, in light of the Court's ruling, that possibility continues to exist.

   The Court, however, stated that, should the IRS ever seek to use its new
   Section 269 regulations to limit the Company's use of its net operating
   loss carryforwards, nothing in its opinion would prejudice the Company's
   right to defend itself by using the Court's confirmation finding that the
   primary purpose of the Company's Plan of Reorganization was not tax
   avoidance.


   NOTE 7.  LONG-TERM DEBT

              December 31                            1996          1995
                                                       (thousands)

   Real estate loan                               $    267      $    282
   Other                                                66            50
                                                    ------        ------
                                                       333           332
   Less amounts classified as current                   54           299
                                                    ------        ------
                                                  $    279      $     33
                                                    ======        ======

   The real estate loan relates to the 1990 purchase of the land and building
   in Houston, Texas which had previously been leased by HDS.  In August
   1996, HDS refinanced this loan which is required to be repaid in monthly
   installments of $3,278 through August 20, 2001 when the remaining unpaid
   balance shall be due.  At December 31, 1996, the interest rate on the note
   was 10.25%.  This rate will be adjusted during the term of the note in
   accordance with increases or decreases in the prime rate.  The note is
   secured by the HDS facility having a net book value of $472,000 at
   December 31, 1996 and the Company's guaranty.


   NOTE 8.  SHAREHOLDERS' DEFICIT

   The components of Shareholders' Deficit are as follows:

              December 31                           1996          1995
                                                        (thousands)

   Common stock                                 $      152     $     152
   Capital in excess of par value                    8,155         8,155
   Retained deficit                                 (9,746)       (8,018)
   Pension liability adjustment                    (12,205)      (10,209)
                                                    ------        ------
          Shareholders' Deficit                 $  (13,644)    $  (9,920)
                                                    ======        ======


   Statement of Financial Accounting Standards No. 87, "Employers' Accounting
   for Pensions," requires recognition in the Statement of Financial
   Condition of a minimum pension liability.  The minimum pension liability
   that must be recognized is equal to the excess of the accumulated benefit
   obligation over plan assets.  A reduction of shareholders' investment in
   the amount of approximately $10.2 million in 1995 and $12.2 million in
   1996 was recorded.

   Pursuant to the Stock Sales Escrow Agreement which was established in
   conjunction with the Plan of Reorganization, the Company's stock transfer
   agent, Continental Stock Transfer & Trust Company, completed the first
   release of shares of Common Stock from escrow in July 1992.  Stock
   certificates, representing approximately 40% of the shares of Common Stock
   held in escrow, were distributed to shareholders of record as of the close
   of business on July 8, 1992.  The balance of outstanding shares of Common
   Stock were released from escrow on August 1, 1995.

   In conjunction with consummation of the Plan of Reorganization, the
   cumulative retained deficit at December 2, 1988 of $424.2 million was
   eliminated.


   NOTE 9.  LONG-TERM STOCK INCENTIVE PLAN

   The Company's Long-Term Stock Incentive Plan (1989) provides for the grant
   of stock options, stock appreciation rights, performance shares,
   restricted stock, restricted stock units and other stock-based awards.
   Under the plan the maximum number of shares which may be granted with
   respect to stock-based awards is 50,000.  Options may be granted at prices
   equal to or not less than the fair market value at date of grant, except
   that options to purchase up to 13,333 shares may be granted at a price
   which is not less than the fair market value on October 25, 1989, the date
   on which the plan was approved by shareholders.  Options are exercisable
   within a period not to exceed 10 years from date of grant.  The plan also
   provides for the discretionary grant of stock appreciation rights which
   allow the holder to receive in cash or shares of common stock the
   difference between the exercise price and the fair market value of the
   stock at the date of exercise.  There have been no grants under the plan.


   NOTE 10.  POSTRETIREMENT BENEFIT OBLIGATIONS

   Pensions

   As of the date of the Chapter 11 filings in June 1987 the Company
   sponsored 19 defined benefit plans providing pensions for substantially
   all U.S. employees.  The pension plan for U.S. salaried employees was
   capped and frozen effective March 31, 1987, so there have been no further
   benefit accruals after that date.  As a result of divestitures during the
   Chapter 11 proceedings, eight active plans were transferred to the buyers
   of the businesses, leaving the Company as sponsor of 11 plans, none of
   which permitted additional benefit accruals.  Effective January 1, 1989
   the 11 remaining plans were consolidated into a single plan, the Allis-
   Chalmers Consolidated Pension Plan (Consolidated Plan). The Company
   continues as the plan sponsor for the Consolidated Plan.

   In accordance with the Plan of Reorganization, the 11 plans received a
   Company contribution of $53.8 million in December 1988.  As a result of
   actions taken in connection with this contribution and the then-existing
   securities of the pension plans, the assets of the Consolidated Plan are
   invested in a dedicated bond portfolio that consists of high-grade fixed
   income securities in which the market value of the assets is matched to
   the present value of the anticipated pension benefits and administrative
   expenses of the Consolidated Plan in a way intended to make the pension
   fund immune from interest rate fluctuations.

   Under the Plan of Reorganization, future contributions to the Consolidated
   Plan are required if the mortality assumptions used in calculating the
   present value of the pension benefits expected to be paid or the
   assumptions used in calculating the future administrative expenses prove
   inaccurate.  For the years 1989 through 1993, retirees eligible for
   benefits under the Consolidated Plan, as a group, outlived the projections
   of the mortality assumptions used in the Plan of Reorganization for
   funding the Consolidated Plan.  For the same five years, actual
   administrative expenses were slightly in excess of assumed levels.
   Effective January 1, 1994, the Company's independent actuaries reflected
   such decreased mortality for funding calculation purposes.  This change in
   assumptions and an increase in the assumption for future administrative
   expenses created an underfunded condition in the Consolidated Plan of
   approximately $9 million on a present value basis.  The recognition of
   this $9 million liability by the Company in 1993 caused a corresponding
   reduction in equity.

   For the years 1994 through 1996, the mortality experience was negative
   compared with the revised assumptions, in an amount in excess of the 1989-
   1993 average actuarial loss.  This mortality loss was partially offset,
   however, by gains in the asset portfolio.  At year end 1996, the
   Consolidated Plan remained in an underfunded condition with a recorded
   liability of $15.1 million.

   This underfunded condition in the Consolidated Plan requires the Company
   to make significant cash contributions to the Consolidated Plan pursuant
   to ERISA funding requirements starting in 1996.  Contributions and
   interest in the amount of $2.4 million were past due as of December 31,
   1996 with payments of $4.6 million due in 1997.

   The Company has failed to make required quarterly contributions starting
   in April 1996, resulting in the filing of a lien by the Pension Benefit
   Guaranty Corporation (PBGC) against the Company.  Given the inability of
   the Company to fund such an obligation with its current financial
   resources, a Notice of Intent to Terminate the Consolidated Plan was
   mailed to Plan participants on February 12, 1997 and the filing of the
   appropriate documentation was made with the Pension Benefit Guaranty
   Corporation (PBGC).  The termination is anticipated to result in the
   assumption by the PBGC of the Consolidated Plan with the  consequence of a
   liability to the PBGC significantly in excess of the current net worth of
   the Company.  The Company has been engaged in ongoing discussions with the
   PBGC concerning the Consolidated Plan.  The failure to meet the 1995
   minimum obligation of $378,459 to the Consolidated Plan also results in a
   10% excise tax liability to the IRS at December 31, 1996.  To date, the
   IRS has not assessed the additional 100% excise tax which may be imposed
   on the accumulated funding deficiency for 1995.  Failure to meet the
   minimum funding obligations for 1996 will also result in additional excise
   tax liabilities to the IRS.  The Company also intends to seek a settlement
   of these tax obligations with the IRS.  Although it is not possible to
   predict the outcome of discussions with the PBGC and IRS, the Company's
   options include seeking protection from its creditors by commencing
   another bankruptcy filing.

   The funded status of the Consolidated Plan is as follows:

                                              December 31,    December 31,
                                                  1996            1995
                                                       (thousands)

   Actuarial present value of:
     Vested benefit obligation                   $(235,211)     $ (251,292)
                                                   =======         =======
     Accumulated benefit obligation              $
                                                  (235,211)     $ (251,292)
                                                   =======         =======
     Projected benefit obligation                $(235,211)     $ (251,292)

   Plan assets at fair value                       220,131         239,425
                                                   -------         -------
   Excess of projected benefit
     obligation over plan assets                   (15,080)        (11,867)
   Unrecognized net loss                            12,205          10,209
                                                   -------         -------
   Accrued pension liability before
     adjustment for minimum liability               (2,875)         (1,658)

   Adjustment required to recognize
     minimum liability                             (12,205)*       (10,209)*
                                                   -------         -------
   Accrued pension liability recognized
     in the statement of financial
     condition                                   $ (15,080)     $  (11,867)
                                                   =======         =======

   *This adjustment causes a corresponding reduction of equity.

   Effective January 1, 1994, the Company's actuaries changed the mortality
   assumptions used to calculate future pension liabilities.  The Unisex
   Pension 1984 Table was replaced by a newly created mortality assumption
   which reflects the actual mortality experience of the Consolidated Plan
   from 1989 through 1993.  The effect of this change on the Company's
   Statement of Financial Condition was material as a result of the
   requirement to recognize a minimum pension liability under generally
   accepted accounting principles.

   The projected benefit obligation as of December 31 was determined using an
   assumed discount rate of 7.45% for 1996 and 6.88% for 1995.

   The components of pension expense are as follows:

                                           1996        1995         1994
                                                   (thousands)
   Service cost                        $        -   $       -    $       -
   Interest cost on projected
     benefit obligation                    16,997      18,451       17,361
   Actual return on plan assets            (5,900)    (52,480)      12,064
   Net amortization and deferral           (9,675)     35,096      (28,786)
                                          -------     -------      -------
       Net pension expense             $    1,422   $   1,067    $     639
                                          =======     =======      =======

   The net periodic pension expense is based on the assumed long-term rate of
   return on plan assets of 8.87% in 1996, 8.87% in 1995, and 7.09% in 1994.

   The Consolidated Plan pays premiums to the PBGC based on the number of
   participants in the plan (fixed rate premium) and the funded status of the
   plan (variable rate premium).  Given that the Consolidated Plan is
   underfunded, the variable rate portion of the PBGC premium was charged
   starting in 1995.  The 1996 variable rate premium (included above as
   interest cost) was approximately $619,000, and the 1995 variable rate
   premium was approximately $250,000.  As long as the underfunding exists,
   this variable rate premium will be an additional demand on the assets of
   the Consolidated Plan.

   Medical and Life

   Pursuant to the Plan of Reorganization, the Company assumed the
   contractual obligation to Simplicity Manufacturing, Inc. (SMI) to
   reimburse SMI for 50% of the actual cost of medical and life insurance
   claims for a select group of retirees (SMI Retirees) of the prior
   Simplicity Manufacturing Division of Allis-Chalmers.

   Net postretirement benefit expense for the years ended December 31, 1996,
   1995 and 1994 included the following components (in thousands):

                                           1996        1995         1994

   Service cost                        $        -   $       -    $       -
   Interest cost on accumulated
    benefit obligation                         54          59           60
   Amortization of unrecognized
    net gain                                  (17)        (24)          (9)
                                          -------     -------      -------
   Net postretirement benefit
    expense                            $       37   $      35           51
                                          =======     =======      =======

   Presently, the Company's postretirement benefit obligations are not
   funded.  The status of the Company's postretirement benefit obligations as
   of December 31, 1996 and 1995 was as follows (in thousands):

                                                     1996        1995

   Actuarial present value of accumulated
    postretirement benefit obligation               $     867    $     790
   Unrecognized net gain                                  126          230
                                                      -------      -------
   Accrued postretirement benefit
    liability                                       $     993    $   1,020
                                                      =======      =======

   The assumed health care cost trend rate used in measuring the accumulated
   postretirement benefit obligation was 7.5% at December 31, 1996 and 7.75%
   at December 31, 1995.  The assumed rate in 1997 decreases 1/4% per year
   until an ultimate rate of 6.5% is reached at December 31, 2001.  The
   health care cost trend rate has a significant effect on the amounts
   reported.  For example, a one percentage point increase in the health care
   cost trend rate would increase the accumulated postretirement benefit
   obligation by $53,220 at December 31, 1996.  The discount rate used in
   determining the accumulated postretirement benefit obligation was 7.50%
   and 7.25% at December 31, 1996 and December 31, 1995, respectively.


   NOTE 11.  COMMITMENTS AND CONTINGENT LIABILITIES

   Substantially all litigation proceedings pending against the Company were
   resolved pursuant to emergence from the Chapter 11 proceedings in
   1988.Various loans, lease agreements and other commitments and contractual
   obligations of the Company were also satisfied pursuant to the Plan of
   Reorganization.  The Company knows of no significant pre-Plan of
   Reorganization lawsuits presently pending against it or its subsidiaries
   which have not been assumed by the various trusts or other entities.

   The Company is a party to litigation matters and claims which are normal
   in the course of its operations, and, while the results of litigation and
   claims cannot be predicted with certainty, management believes that the
   final outcome of such matters will not have a material adverse effect on
   the Company's consolidated financial position.

   Environmental Matters

   The Environmental Protection Agency (EPA) and certain state environmental
   protection agencies have requested information in connection with eleven
   potential hazardous waste disposal sites in which products manufactured by
   Allis-Chalmers before consummation of the Plan of Reorganization were
   disposed.  The EPA has claimed that Allis-Chalmers is liable for cleanup
   costs associated with several additional sites.  The EPA's claims with
   respect to one other site were withdrawn in 1994 based upon settlements
   reached with the EPA in the bankruptcy proceeding.  In addition, certain
   third parties have asserted that Allis-Chalmers is liable for cleanup
   costs or associated EPA fines in connection with additional sites.  In one
   of these instances a former site operator has joined Allis-Chalmers and 47
   other potentially responsible parties as a third party defendant in a
   lawsuit involving cleanup of one of the sites.  In each instance the
   environmental claims asserted against the Company involve its
   prebankruptcy operations.  Accordingly, Allis-Chalmers has taken the
   position that all cleanup costs or other liabilities related to these
   sites were discharged in the bankruptcy.  In one particular site, the
   EPA's Region III has concurred with the Company's position that claims for
   environmental cleanup were discharged pursuant to the bankruptcy.  While
   each site is unique with different circumstances, the Company has notified
   other Regional offices of the EPA of this determination associated with
   the Region III site.  The Company has not received responses from the
   other Regional offices.  No environmental claims have been asserted
   against the Company involving its postbankruptcy operations.

   Allis-Chalmers Consolidated Pension Plan

   Contributions to the Consolidated Plan were required starting in 1996 due
   to a change in the mortality assumptions used in calculating the present
   value of the pension benefits expected to be paid and the assumptions used
   in calculating the future administrative expenses compared with the
   projections of the mortality and administrative expense assumptions used
   in the Plan of Reorganization for funding the Consolidated Plan.
   Contributions were projected to be $2.5 million in 1996, then increasing
   to $3.1 million in 1997 and $8.1 million in 1998.   After making one
   installment of $205,000 on January 15, 1996, the Company failed to make
   any subsequent installments.  Under these circumstances, the Company
   announced on February 14, 1997 that it filed with the PBGC to initiate the
   termination of the Consolidated Plan.  In accordance with PBGC
   requirements, notices were mailed to the almost 9,000 Consolidated Plan
   participants.  It is anticipated that the PBGC will assume the
   responsibilities of the Consolidated Plan.  The Company's failure to make
   required quarterly contributions starting in April 1996, resulted in the
   filing of a lien by the PBGC against the Company.  Given the inability of
   the Company to fund such an obligation with its current financial
   resources, a Notice of Intent to Terminate the Consolidated Plan was
   mailed to Plan participants on February 12, 1997 and the filing of the
   appropriate documentation was made with the Pension Benefit Guaranty
   Corporation (PBGC).  The termination is anticipated to result in the
   assumption by the PBGC of the Consolidated Plan with the  consequence of a
   liability to the PBGC significantly in excess of the current net worth of
   the Company.  The Company has been engaged in ongoing discussions with the
   PBGC concerning the Consolidated Plan.  The failure to meet the 1995
   minimum obligation of $378,459 to the Consolidated Plan also results in a
   10% excise tax liability to the IRS at December 31, 1996.  To date, the
   IRS has not assessed the additional 100% excise tax which may be imposed
   on the accumulated funding deficiency for 1995.  Failure to meet the
   minimum funding obligations for 1996 will also result in additional excise
   tax liabilities to the IRS.  The Company also intends to seek a settlement
   of these tax obligations with the IRS.  Although it is not possible to
   predict the outcome of discussions with the PBGC and IRS, the Company's
   options include seeking protection from its creditors by commencing
   another bankruptcy filing.

   NOTE 12.  RELATED PARTY TRANSACTIONS

   As of December 31, 1996, the Company owes approximately $198,000 to the A-
   C Reorganization Trust for costs paid by the A-C Reorganization Trust on
   behalf of the Company.  These costs primarily relate to legal costs and
   are recorded within other current liabilities in the Statement of
   Financial Condition.

   H. Sean Mathis, Chairman of the Board and Chief Executive Officer, Leonard
   Toboroff, Vice Chairman of the Board and Executive Vice President and John
   T. Grigsby, Jr., Vice Chairman of the Board, Executive Vice President and
   Chief Financial Officer did not receive any compensation for their
   services as executive officers of the Company for the three years ended
   December 31, 1996.


   NOTE 13.  QUARTERLY FINANCIAL DATA
     (unaudited)


                    First          Second          Third           Fourth
                   Quarter        Quarter         Quarter         Quarter
                 1996    1995    1996   1995    1996    1995   1996     1995
                                (thousands, except per share)

   Sales         $985    $769  $1,156  $ 853   $ 968   $ 770   $951  $   798
   Gross Margin   290     182     342    261     176     175    252      201
   Net Loss      (339)   (432)   (378)  (360)   (461)   (402)  (550)    (254)
   Loss per
    Share        (.34)   (.43)   (.38)  (.35)   (.46)   (.40)  (.54)    (.26)


   <PAGE>                                                       [Pages 27-28]
   OFFICERS

   H. Sean Mathis
   chairman of the board and chief executive officer


   Leonard Toboroff
   vice chairman of the board and executive vice president


   John T. Grigsby, Jr.
   vice chairman of the board, executive vice president
   and chief financial officer


   Jeffrey I. Lehman
   treasurer


   William L. Vaitl
   secretary & assistant treasurer


   DIRECTORS

   John R. Collins
   retired administrative assistant to the secretary-treasurer, International
   Union, United Automobile, Aerospace & Agricultural Implement Workers of
   America--UAW


   John T. Grigsby, Jr.
   trustee, A-C Reorganization Trust;  president, Thomson McKinnon
   Securities, Inc. during winddown and liquidation of its affairs; president
   and chief executive officer, N.W. Liquidating, Inc.; director, 1st
   Southern Bank of Boca Raton, Florida and First Florida Industries, Inc.


   H. Sean Mathis
   president and director of Universal Gym Equipment, Inc.; director,
   USTrails Inc. and Allied Digital Technologies Corp.


   Claude D. Montgomery
   partner, Phillips Lytle Hitchcock Blaine & Huber, attorneys


   Robert E. Nederlander
   president, director, Nederlander Organization, Inc.; president,
   Nederlander Television and Film Productions, Inc.; partner, New York
   Yankees Baseball Club; chairman of the board, Riddell Sports, Inc.;
   chairman of the board, MEGO Financial Corporation; director HFS
   Incorporated, MEGO Mortgage Corp. and News Communications, Inc.


   John E. Sundman
   director, retired vice president, Corcap, Inc.


   Allan R. Tessler
   chairman of the board, chief executive officer, International Financial
   Group, Inc.; co-chief executive officer, Data Broadcasting Corporation;
   chairman of the board, Great Dane Holdings, Inc., Jackpot Enterprises,
   Inc. and Enhance Financial Services Group, Inc.; director, The Limited,
   Inc.


   Leonard Toboroff
   director and vice chairman, Riddell Sports, Inc.; practicing attorney;
   director, Banner Aerospace, Inc. and Saratoga Beverage, Inc.


   BOARD COMMITTEES

   Executive Committee -- The Executive Committee may exercise all the powers
   and authority of the Board in the management of the business and affairs
   of the Company  except those powers specifically reserved for the Board.
   Although the Executive Committee has very broad powers, in practice it
   meets only when calling a meeting of the Board is impractical.  Its
   members are Messrs. Nederlander (chairman), Grigsby, Mathis, Tessler and
   Toboroff.

   Audit Committee -- The Audit Committee is responsible for recommending to
   the full Board the engagement and discharge of the independent auditor of
   the Company.  It reviews financial data published by the Company and the
   reports of the independent auditor.  It monitors the accounting policies
   and practices of the Company's businesses.  Its members are Messrs.
   Sundman (chairman), Collins and Montgomery.

   Officers' Compensation Committee -- The Officers' Compensation Committee
   reviews and makes recommendations to the full Board regarding the
   compensation and other benefits of officers.  Its members are Messrs.
   Mathis (chairman) and Sundman.

   Director Nominating Committee -- The Director Nominating Committee
   investigates and makes recommendations to the Board regarding nominees for
   election as directors.  Its members are Messrs. Nederlander (chairman),
   Collins, Grigsby, Montgomery and Toboroff.







   Escrow Agent,
   Transfer Agent and
   Registrar

   Continental Stock Transfer &
     Trust Company
   2 Broadway
   New York, New York  10004


   ANNUAL REPORT ON FORM 10-K

   The Company's Annual Report on Form 10-K to the Securities and Exchange
   Commission will be furnished without charge to shareholders upon written
   request to the Secretary, Allis-Chalmers Corporation, Box 512, Milwaukee,
   Wisconsin  53201-0512.