Page 1
   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, 1996 Allis-Chalmers had 38 employees and 7,309 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                 12
   Consolidated Financial Statements                 13
   Notes to Consolidated Financial Statements        16
   Officers and Directors                            29
   Board Committees                                  30

                                                                       Page 2

   REPORT TO OUR SHAREHOLDERS 

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

   Dear Fellow Shareholders:

        I am pleased to report that on January 16, 1996 I was elected as
   Chairman and Chief Executive Officer of the Company.

        Allis-Chalmers continued to experience tough times in 1995.  Even
   though our operating results remained profitable at Houston Dynamics
   Services, Inc. (HDS), they were down from 1994.  In addition, the
   continued unsuccessful search for an acquisition or a financing partner
   along with the major underfunding in the pension plan continue to strain
   cash resources and jeopardize the future of the Company.  This becomes
   more critical in 1996 as scheduled funding payments become due to the
   Allis-Chalmers Consolidated Pension 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 from continuing operations totaled $3.2 million in 1995, down
   from $3.6 million in 1994.  The decrease is primarily the result of a
   weakened market for machine repairs and services.

        Gross margin as a percentage of sales decreased to 26% in 1995
   compared with 28% in 1994 as a result of decreased sales and a decrease in
   sales of more profitable services at HDS.

        Marketing and administrative expense of $1.3 million in 1995 was
   reduced slightly from the 1994 level of $1.4 million.  The decrease was
   due primarily to the continued cost reduction effort and the absence of
   any significant expenses incurred  in connection with an acquisition
   search.  As a percentage of sales, marketing and administrative expense
   increased slightly to 41% in 1995 compared with 40% in 1994.

        The Company reported a loss from continuing operations of $1.4
   million (including recognition of pension liability of $1.1 million), or
   $1.44 per common share, in 1995 compared with a loss of $1.1 million, or
   $1.08 per common share, in 1994.  In 1994, a loss from discontinued
   operations of $0.2 million or $.23 per common share was incurred along
   with a loss on the sale of BRB of $2.9 million or $2.82 per common share. 
   Altogether, there was a net loss in 1994 of $4.2 million, or $4.13 per
   common share.

   Acquisition Environment

   The Company continued to attempt to identify and evaluate acquisition
   candidates and financing partners during 1995.  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
   Allis-Chalmers Consolidated Pension 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 
                                                                       Page 3

   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 Allis-Chalmers Consolidated
   Pension Plan (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 fund
   fully 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 $11.9 million as of December 31, 1995.

        This underfunded condition requires 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
   has been made in 1996, the Act requires additional cash contributions in
   1996, 1997 and 1998.

        Based on the Company's limited financial resources to make
   contributions, this requirement for contributions will 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
   termination of the Consolidated Plan is likely to occur, with the
   consequence of a liability to the Pension Benefit Guaranty Corporation
   (PBGC) in excess of the current net worth of the Company.  If the Company
   is unable to reach an acceptable arrangement with the PBGC or to raise
   additional capital, it will have to evaluate its alternatives, which
   include, among others, another bankruptcy filing.

   Outlook

   The challenges for 1996 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 focus.  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 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, as of July 8, 1992, 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 1995, 1994 or 1993.

   <PAGE>
                                                                       Page 5
   SELECTED FINANCIAL DATA/1
                                      1995    1994   1993   1992   1991
                                        (millions, except per share data)

   Statement of Operations Data:
     Sales                            $3.2    $3.6   $3.3   $3.8   $5.8

     Income (loss) from:
       Continuing Operations          (1.4)   (1.1)  (1.3)  (1.7)  (0.3)
       Discontinued Operations           -    (0.2)   0.2    0.9    0.7
       Sale of molded fabric
         products division               -    (2.9)     -      -      -
       Cumulative effect of
        accounting change                -       -   (1.0)     -      -
         Net income (loss)            (1.4)   (4.2)  (2.1)   (.8)    .4

     Income (loss) per share from:/2
       Continuing Operations         (1.44)  (1.08) (1.31) (1.65)  (.34)
       Discontinued Operations           -    (.23)   .24    .82    .70
       Sale of molded fabric
         products division               -   (2.82)     -      -      -
       Cumulative effect of
        accounting change                -       -  (1.02)     -      -
         Net income (loss)           (1.44)  (4.13) (2.09)  (.83)   .36

   Statement of Financial 
    Condition Data:

     Total assets                      4.1     4.6   11.5   12.9   14.9

     Long-term debt classified as:
       Current                         0.3       -    0.2    1.1     .8
       Long-term                         -     0.3    3.1    2.4    3.5

     Shareholders' (deficit) 
      investment                      (9.9)   (6.9)  (3.2)   8.0    8.9


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

   2/   Restated to reflect the 1-for-15 reverse stock split effected July,
        1992.

                                                                       Page 6

   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 1995.  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 Consolidated Plan.  These
   conditions become most critical in 1996 as funding payments become 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 have made it difficult for the
   Company, at its present size, to achieve a positive cash flow.

   The Company's independent pension actuaries have 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 of $11.9 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 its
   first cash contribution in the amount of $205,000.  The Company currently
   does not have the financial resources to make all the required payments
   during 1996.  In addition, there are substantial payments due in 1997 and
   1998.  Given the inability of the Company to fund this obligation, a
   termination of the Consolidated Plan will likely occur with the
   consequence of a liability to the PBGC in excess of the current net worth
   of the Company.  The Company intends to continue discussions with the PBGC
   concerning its obligations under the Consolidated Plan.  Although it is
   not possible to predict the outcome of such discussions, if the Company is
   unable to negotiate a settlement with the PBGC on terms that are
   acceptable to the Company, Allis-Chalmers will be required to evaluate its
   options, which include attempting to raise additional capital to eliminate
   the underfunding or seeking protection from its creditors by commencing
   voluntary bankruptcy proceedings under the federal bankruptcy laws.  The
   Company is not
                                                                       Page 7

   optimistic that in its current condition it will be able to raise
   additional capital to meet its obligations under the Consolidated Plan.

   Results of Operations

   Results of operations for 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 $3.2 million in 1995 compared
   with $3.6 million and $3.3 million in 1994 and 1993, respectively.  The
   decrease in sales from 1994 is primarily the result of a weakened demand
   for machine repair services supplied by HDS.

   Gross margins, as a percentage of sales, were 25.7%, 28.1% and 23.3% in
   1995, 1994 and 1993, respectively.  The decrease in the margin percentage
   in 1995 compared with 1994 resulted mainly from decreased sales and a
   decrease in sales of more profitable services.

   Marketing and administrative expense was $1.3 million, $1.4 million and
   $2.0 million in 1995, 1994 and 1993, respectively.  The decrease in 1995
   was primarily 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 1995.  Marketing and
   administrative expense was 41.1% of sales in 1995 compared with 40.0% in
   1994 and 60.6% in 1993.  Marketing and administrative expense has been
   significantly reduced since 1993 as a result of cost reduction activity at
   HDS and at the Company's corporate offices.  In addition, the 1994
   decrease from 1993 resulted from increased sales and non-recurring costs
   associated with the 1993 acquisition search.  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 $491,000 in 1995 compared with a
   1994 loss of $382,000 and a loss of $1,229,000 in 1993.  The drop from
   1994 resulted primarily from decreased 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.  The
   reduction in interest income in 1994 compared to 1993 was due to a lower
   level of investments.  Interest expense relates to a term loan, the
   proceeds of which were used for the BRB acquisition and a real estate
   loan, the proceeds of which were used to purchase the shop and office
   building from which HDS operates.  The term loan used for the BRB
   acquisition, was paid off in late 1994, thereby significantly reducing the
   interest expense in 1995.

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

                                                                       Page 8

   The Company incurred a loss from continuing operations of $1,448,000
   (including recognition of pension liability of $1,067,000), or $1.44 per
   common share, in 1995 compared with a loss from continuing operations of
   $1,087,000, or $1.08 per common share, in 1994.  The Company reported a
   loss from discontinued operations of $231,000 or $.23 per common share in
   1994.  There was no gain or loss from discontinued operation in 1995.  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.

   In 1993, the Company incurred a net loss of $2,107,000, or $2.09 per
   common share.  The net loss in 1993 included the cumulative effect of a
   one-time charge of $1,029,000, or $1.02 per common share, related to
   certain postretirement benefits in compliance with an accounting change
   required by generally accepted accounting principles.

   The Company incurred a net loss of $1,448,000 (including recognition of
   pension liability of $1,067,000), or $1.44 per common share, in 1995
   compared with a net loss of $4,174,000, or $4.13 per common share, in
   1994. 

   Liquidity and Capital Resources

   At December 31, 1995 the Company had cash and short term investments
   totaling $1.9 million, a decrease from $2.2 million at December 31, 1994.  
   This decrease was the result of expenses associated with the ongoing
   corporate reporting, as well as legal, accounting, audit, tax and
   insurance.

   Trade receivables at December 31, 1995 were $265,000, below the level of
   $388,000 at  December 31, 1994.  The decrease is a result of lower sales.

   Non-trade receivables were $664,000 at December 31, 1995 a decrease from
   $781,000 at December 31, 1994.  These receivables represent the proceeds
   from the sale of BRB.  In 1995, BRB made periodic payments against this
   balance, however, it is currently past due under the original terms.  This
   amount is secured by filings against the assets of BRB, which according to
   their latest unaudited statement are more than sufficient to cover this
   debt.  Management is in the process of pursuing all monies owed including
   reviewing its strategic alternatives available.

   Inventory at December 31, 1995, was $128,000, up from $94,000 at year end
   1994.  This increase is due to one in progress job that will not be
   completed until early 1996.

   The Company had no significant capital expenditure commitments as of
   December 31, 1995.

   Current maturities of long-term debt at December 31, 1995 were $299,000
   compared with $20,000 at year-end 1994.  This increase was the result of
   the balloon payment due August 20, 1996 from the real estate loan
   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 was
   approximately $320,400 and is required to be repaid in monthly
   installments of $3,469 through August 20, 1996, when the
                                                                       Page 9

   remaining unpaid balance shall be due.  At December 31, 1995, the interest
   rate on the note was 10.75%.  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 $468,800 at December 31, 1995 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 1996. 
   In addition the Company is liable for contributions of $2.5 million to the
   Consolidated Plan in 1996, $205,000 of which was paid in the first quarter
   of 1996.

   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 1994, 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 in the Consolidated Plan of $11.9 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 are
   projected to be $2.5 million in 1996, then increasing to $3.1 million in
   1997 and $8.1 million in 1998.  

   In 1996, the Company made a payment of $205,000 against the $2.5 million. 
   Based on the Company's limited financial resources to make contributions,
   this requirement for future contributions will have a material adverse
   change on the Company.  The inability of the Company to fund such an
   obligation will likely lead to a termination of the Consolidated Plan with
   the consequence of a liability to the Pension Benefit Guaranty Corporation
   in excess of the
                                                                      Page 10

   net worth of the Company.  If the Company is unable to reach an acceptable
   arrangement with the PBGC or to raise additional capital, it will have to
   evaluate its alternatives, which include, among others, 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 six 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, eight third
   parties have asserted that Allis-Chalmers is liable for cleanup costs or
   associated EPA fines in connection with seven 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, 1995 was $9.9 million.  A three-year
   comparison of shareholders' (deficit) investment follows:

             (millions)                1995      1994      1993

   January 1                          $(6.9)    $(3.2)    $ 8.0
   Net loss                            (1.4)     (4.1)     (2.1)
   Pension liability adjustment        (1.6)      0.4      (9.1)
                                      -----     -----     -----
   December 31                        $(9.9)    $(6.9)    $(3.2)
                                      =====     =====     =====

   Accounting Changes

   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 insurance claims for a select
   group of retirees (SMI Retirees) of the prior Simplicity Manufacturing
   Division of Allis-Chalmers.  In December 1990 the Financial Accounting
   Standards Board issued Statement of Financial Accounting Standards No. 106
   ("FAS No. 106"), "Employers Accounting for Postretirement Benefits Other
   Than Pensions."  This statement requires the expensing of retiree medical
   and life benefit costs on an accrual basis by the beginning of 1993.  The
   Company's prior policy was to recognize these costs on a cash basis. 
   During the first quarter
                                                                      Page 11

   of 1993, the Company elected to recognize immediately the entire unfunded
   accumulated postretirement benefit obligation rather than to amortize this
   transition obligation to expense over 20 years.

   In adopting FAS No. 106, the Company recorded, in the first quarter of
   1993, a one-time, non-cash charge against earnings of $1,029,000, or $1.02
   per common share, using the cumulative catchup method.  This adjustment
   represents the discounted present value of expected future SMI Retiree
   health care benefits.  No change in the Company's practice of funding
   these benefits on a cash basis is presently anticipated. 

   <PAGE>
                                                                      Page 12

                        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
   13 through 27 of this report present fairly, in all material respects, the
   financial position of Allis-Chalmers Corporation and its subsidiaries at
   December 31, 1995 and 1994, and the results of their operations and their
   cash flows for each of the three years in the period ended December 31,
   1995, 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.  As discussed in Note 10 to the
   consolidated financial statements, the Company's pension actuary is
   currently estimating that significant cash contributions to the Company's
   consolidated pension plan will be required in the years 1996 through 1998. 
   The Company does not currently have the financial resources to make these
   estimated cash contributions which 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 Note 11.  The financial statements
   do not include any adjustments that might result from the outcome of this
   uncertainty.

   As discussed in Note 10 to the consolidated financial statements, the
   Company changed its method of accounting for postretirement benefits other
   than pensions effective January 1, 1993.

   Price Waterhouse LLP
   Milwaukee, Wisconsin
   February 27, 1996

   <PAGE>
                                                                      Page 13

                             STATEMENT OF OPERATIONS

             Year Ended December 31            1995        1994        1993
                                                (thousands, except per share)

   Sales                                     $3,190      $3,580      $3,298
   Cost of sales                              2,371       2,571       2,528
                                             ------      ------      ------
     Gross Margin                               819       1,009         770

   Marketing and administrative expense       1,310       1,434       1,999
   Restructuring costs                            -         (43)          -
                                             ------      ------      ------
       Loss from Operations                    (491)       (382)     (1,229)

   Other income (expense)
     Interest income                            136          99         124
     Interest expense                           (46)       (187)       (241)
     Pension expense                         (1,067)       (639)          -
     Other                                       20          22          18
                                             ------      ------      ------
       Loss from Continuing Operations
         Before Income Taxes                 (1,448)     (1,087)     (1,328)
   Charge in lieu of income taxes                 -           -           -
     Loss from Continuing                    ------      ------      ------
     Operations Before Cumulative
     Effect of Accounting Changes            (1,448)     (1,087)     (1,328)

   Discontinued Operations:
   (Loss) income from Operations of
     molded fabric products division              -        (231)        250
   Loss on sale of molded fabric
     products division                            -      (2,856)          -
                                             ------      ------      ------
       Loss Before Cumulative
       Effect of Accounting Changes          (1,448)     (4,174)     (1,078)

   Cumulative effect of accounting changes        -           -      (1,029)
                                             ------      ------      ------
       Net Loss                             $(1,448)    $(4,174)    $(2,107)
                                            =======     =======     =======
   (Loss) Income per Common Share
     Before cumulative effect of
      accounting changes:
        Continuing Operations               $ (1.44)    $ (1.08)    $ (1.31)
        Discontinued Operations                   -       (3.05)        .24
     Cumulative effect of accounting 
      changes                                     -           -       (1.02)
                                             ------      ------      ------
       Net Loss per Common Share            $ (1.44)    $ (4.13)    $ (2.09)
                                            =======     =======     =======

                        STATEMENT OF ACCUMULATED DEFICIT

           Year Ended December 31            1995        1994        1993   
                                                      (thousands)

   Accumulated deficit beginning of year   $(6,570)    $(2,396)    $  (289)
   Net loss                                 (1,448)     (4,174)     (2,107)
                                           -------     -------     -------
   Accumulated deficit end of year         $(8,018)    $(6,570)    $(2,396)
                                           =======     =======     =======

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

   <PAGE>
                                                                      Page 14

                        STATEMENT OF FINANCIAL CONDITION

                    December 31                           1995        1994
                                                             (thousands)
   Assets

   Cash and short-term investments                      $ 1,881     $ 2,225
   Trade receivables, net (Note 4)                          265         388
   Non-trade receivables (Note 3)                           664         781
   Inventories, net                                         128          94
   Other current assets                                     206         185
                                                         ------      ------
       Total Current Assets                               3,144       3,673

   Net property, plant and equipment (Note 5)               907         923
                                                         ------      ------
       Total Assets                                     $ 4,051     $ 4,596
                                                        =======     =======

   Liabilities and Shareholders' Deficit

   Current maturities of long-term debt                 $   299     $    20
   Trade accounts payable                                    73         201
   Accrued employee benefits                                 80         121
   Reserve for legal expenses                               275         275
   Accrued pension liability (Note 10)                    2,493           -
   Other current liabilities                                324         325
                                                         ------      ------
       Total Current Liabilities                          3,544         942

   Accrued pension liability (Note 10)                    9,374       9,228
   Accrued postretirement benefit obligations (Note 10)   1,020       1,046
   Long-term debt (Note 7)                                   33         279

   Shareholders' deficit (Note 8)
     Common stock ($.15 par value, authorized
      2,000,000 shares, outstanding 1,003,028
      at December 31, 1995 and December 31, 1994)           152         152
     Capital in excess of par value                       8,155       8,155
     Accumulated deficit (accumulated deficit of
      $424,208 eliminated on December 2, 1988)           (8,018)     (6,570)
     Pension liability adjustment                       (10,209)     (8,636)
                                                         ------      ------

       Total Shareholders' Deficit                       (9,920)     (6,899)

   Commitments and contingent liabilities (Note 11)      ------      -------

       Total Liabilities and Shareholders' 
        Deficit                                         $ 4,051     $ 4,596
                                                        =======     =======

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

   <PAGE>
                                                                      Page 15
                             STATEMENT OF CASH FLOWS

               Year Ended December 31             1995       1994      1993
                                                          (thousands)
   Cash flows from operating activities: 
     Net loss                                 $ (1,448)  $ (4,174)  $ (2,107)
     Adjustments to reconcile net loss 
      to net cash (used) provided by 
      operating activities:
       Depreciation and amortization               112        126        133
       Loss (income) from discontinued 
        operations                                   -      3,087       (250)
       Cumulative effect of accounting 
        changes                                      -          -      1,029
       Provision for restructuring costs             -        (48)         -
       Change in working capital:
         Decrease in receivables, net              240        556          4
         (Increase) decrease in inventories        (34)       (35)        72
         Decrease (increase) in other 
          current assets                           (21)       443        (50)
         (Decrease) in trade accounts 
          payable                                 (128)      (103)       (50)
         (Decrease) increase in other 
          current liabilities                      (42)      (404)       238
       Net change in working capital of
        discontinued operations                      -        (20)       836
       Pension expense                           1,067        639          -
       Other                                       (13)        23        136
                                                ------     ------     ------
         Net cash (used) provided by 
          operating activities                    (267)        90         (9)

   Cash flows from investing activities:
     Capital expenditures                         (116)      (109)       (67)
     Proceeds from sale of excess equipment          6         20         13
                                                ------     ------     ------
     Net cash (used) by investing activities      (110)       (89)       (54)

   Cash flows from financing activities:
     Net proceeds from issuance of 
      long-term debt                                67          -      3,319
     Payment of long-term debt                     (34)      (154)      (313)
     Retirement of long-term debt                    -     (2,795)    (3,263)
     Proceeds from certificate of deposit            -      3,000          -
                                                ------     ------     ------
       Net cash provided (used) by 
        financing activities                        33         51       (257)
                                                ------     ------     ------
   Net (decrease) increase in cash and 
    short-term investments                        (344)        52       (320)

   Cash and short-term investments at
    beginning of year                            2,225      2,173      2,493
                                                ------     ------     ------
   Cash and short-term investments at 
    end of year                               $  1,881    $ 2,225    $ 2,173
                                              ========    =======    =======
   Supplemental information - interest paid   $     46    $   189    $   266
                                              ========    =======    =======

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

   <PAGE>
                                                                      Page 16
   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 commercial paper with original
   maturities at date of purchase less than three months.

   Fair Value of Financial Instruments

   The carrying amounts in the Consolidated Balance Sheets for cash and
   short-term investments, non-trade receivable and long-term debt
   instruments approximate their fair market value.

                                                                      Page 17
   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.  Under
   FASB 109, certain income and expense items are recognized for financial
   statement and income tax purposes in different time periods.  Income tax
   benefits of loss and tax credit carryforwards are not recognized until
   realized.  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 and issuable under the Plan of Reorganization.

   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 1995, the Company recorded sales to one customer which accounted for
   10% or more of total sales -- Amoco Chemical generated 26% of 1995 sales,
   19% of 1994 sales and 22% of 1993 sales.  In 1994 the Company, had two
   customers which accounted for 10% or more of total sales.  Amoco Chemical
   (detailed above) and Chevron Corporation generated 15% of 1994 sales.  In
   1993 sales of 10% or more of the total sales were made to two customers --
   Amoco Chemical (detailed above) and Siemens Corporation at 11% of 1993
   sales.
                                                                      Page 18

   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 consists 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 will be administered on behalf of the Company by BRB management
   and the proceeds from the collection of receivables over the payment of
   the accounts payable will be transferred to the Company.

   Sales of discontinued operations were $3,676,800 for the nine months ended
   September 20, 1994 and $6,455,000 for the twelve months ended December 31,
   1993.

   NOTE 4.  RECEIVABLES

                    December 31                    1995         1994
                                                      (thousands)
   Trade accounts receivable                     $  571        $  707
   Allowance for doubtful receivables              (306)         (319)
                                                 ------        ------
                                                 $  265        $  388
                                                 ======        ======

   NOTE 5.  PROPERTY, PLANT AND EQUIPMENT

                    December 31                    1995         1994
                                                      (thousands)
   Land and buildings                            $  522        $  522
   Machinery and equipment                        1,302         1,230
   Tools, patterns, furniture, fixtures
     and leasehold improvements                     380           370
                                                 ------        ------
                                                  2,204         2,122
   Accumulated depreciation                      (1,297)       (1,199)
                                                 ------        ------
                                                 $  907        $  923
                                                 ======        ======
 
                                                                     Page 19
   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,
   1995 and 1994:
                                                  1995           1994
                                                      (Millions)

   Net future tax deductible items               $  10          $  11
   Net operating loss carryforwards and 
     other tax credits                             187            178
   Valuation allowance                            (197)          (189)
                                                 -----          -----
   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, 1995 are not material.

   Operations are entirely in the United States (U.S.).  Due to the losses
   before income taxes for 1995, 1994 and 1993 there was no charge in lieu of
   taxes in those years.

   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 should 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, 1995 are estimated to consist of net
   operating losses of $506 million expiring 1998 through 2009, capital
   losses of $132,000 expiring in 1996, investment tax credits of $7 million
   expiring 1997 through 2001 and energy tax credits of $3 million expiring
   1997 through 2001.  In addition, as discussed above, the net operating
   loss carryforwards will be significantly impacted by the future settlement
   of claims.  Based upon the A-C Reorganization 

                                                                      Page 20

   Trust's estimated amount of allowed claims, pending claims and assets
   available to settle such claims as of December 31, 1995, the net operating
   loss carryforwards will be increased by approximately $8 million.  This
   net increase will result from future deductions as payments on claims are
   made, which will increase net operating loss carryforwards, partially
   offset as a result of the discharge of indebtedness, which will decrease
   net operating loss carryforwards.

   The realization of estimated carryforwards is subject to the occurrence or
   nonoccurrence of future events.

   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.
                                                                      Page 21

   NOTE 7.  LONG-TERM DEBT

                       December 31               1995           1994
                                                     (thousands)
   Real estate loan                            $  282         $  299
   Other                                           50              -
                                               ------         ------
                                                  332            299
   Less amounts classified as current             299             20
                                               ------         ------
                                               $   33         $  279
                                               ======         ======

   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
   1993, HDS refinanced this loan.  The amount refinanced under the note is
   approximately $320,400 and is required to be repaid in monthly
   installments of $3,469 through August 20, 1996, when the remaining unpaid
   balance shall be due.  At December 31, 1995, the interest rate on the note
   was 10.75%.  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 $469,000 at
   December 31, 1995 and the Company's guaranty.

   NOTE 8.  SHAREHOLDERS' DEFICIT

   The components of Shareholders' Deficit are as follows:

                         December 31             1995           1994
                                                     (thousands)

   Common stock                               $    152       $    152
   Capital in excess of par value
     - Common stock transactions                 7,715          7,715
     - Utilization of tax carryforwards to
         offset charge in lieu of taxes            440            440
   Retained deficit                             (8,018)        (6,570)
   Pension liability adjustment                (10,209)        (8,636)
                                              --------       --------
      Shareholders' Deficit                   $ (9,920)      $ (6,899)
                                              ========       ========

   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 liability that must
   be recognized is equal to the excess of the accumulated benefit obligation
   over plan assets.  As of December 31, 1995 and 1994, $9.4 million and $9.2
   million of the obligation was classified as a long-term liability,
   respectively.  An additional $2.5 million was classified as a current
   liability as of December 31, 1995.  No current liability existed at
   December 31, 1994.  A reduction of shareholders' investment in the amount
   of approximately $9.1 million was separately reported in 1993 and adjusted
   to $8.6 million in 1994 and $10.2 million in 1995.

                                                                      Page 22

   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
                                                                      Page 23

   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 year 1994, 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 offset, however, by gains in the
   asset portfolio.  At year end 1995, the Consolidated Plan remained in an
   underfunded condition with a recorded liability of $11.9 million.

   This underfunded condition requires 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 into law as part of the General Agreement on
   Tariffs and Trade legislation.  In general, this Act requires faster
   funding of underfunded pension plans.  The Act requires accelerated cash
   contributions (when compared with prior projections) projected as follows:

                                           Estimated Minimum  
                                        Required Contributions
                                              (millions)

                       1996                     $2.5
                       1997                     $3.1
                       1998                     $8.1

   These projections are based on various assumptions which may change and,
   in turn, alter these estimated minimum required contributions.

   Based on the Company's limited financial resources to make contributions,
   this requirement for contributions will have a material adverse effect on
   the Company.  Given the inability of the Company to fund such an
   obligation with its current financial resources, a termination of the
   Consolidated Plan is likely to occur, with the consequence of a liability
   to the Pension Benefit Guaranty Corporation in excess of the current net
   worth of the Company.
                                                                      Page 24

   The funded status of the Consolidated Plan is as follows:

                                               December 31,  December 31,
                                                   1995          1994
                                                       (thousands)
   Actuarial present value of:
     Vested benefit obligation                 $ (251,292)   $ (221,316)
                                               ==========    ==========

     Accumulated benefit obligation            $ (251,292)   $ (221,316)
                                               ==========    ==========

     Projected benefit obligation              $ (251,292)   $ (221,316)

   Plan assets at fair value                      239,425       212,088
                                               ----------    ----------
   Excess of plan assets (projected benefit
     obligation)                                  (11,867)       (9,228)
   Unrecognized net loss (gain)                    10,209         8,636
                                               ----------    ----------
   (Accrued pension liability)/asset before
     adjustment for minimum liability              (1,658)         (592)

   Adjustment required to recognize
     minimum liability                            (10,209)*      (8,636)*
                                               ----------    ----------
   Accrued pension liability recognized in
     the statement of financial condition      $  (11,867)   $   (9,228)
                                               ==========    ==========

   * This adjustment causes a corresponding reduction of equity.

   Effective January 1, 1994, the 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.

   The projected benefit obligation as of December 31 was determined using an
   assumed discount rate of 6.88% for 1995 and 8.87% for 1994.

                                                                      Page 25
   The components of pension income are as follows:

                      December 31         1995         1994          1993
                                                   (thousands)
   Service cost - benefits earned
     during the year                   $      -     $      -      $       -
   Interest cost on projected
     benefit obligation                  18,451       17,361         18,263
   Actual return on plan assets         (52,480)      12,064        (35,262)
   Net amortization and deferral         35,096      (28,786)        16,999
                                       --------     --------      ---------
     Net pension (income) cost         $  1,067     $    639      $       -
                                       ========     ========      =========

   The net periodic pension income is based on the assumed long-term rate of
   return on plan assets of 8.87% in 1995, 7.09% in 1994, and 8.06% in 1993.

   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 1995 variable rate premium was approximately
   $250,000, and the 1996 variable rate premium is estimated to be
   approximately $560,000.  As long as the underfunding exists, this variable
   rate premium will be an additional demand on the assets of the
   Consolidated Plan.

   Under the terms of the Plan of Reorganization, the Company had agreed not
   to consent to an involuntary termination, deliver a notice of intent to
   terminate or take any action having a similar effect in respect of the
   Consolidated Plan prior to December 2, 1993.  This requirement ended as of
   December 3, 1993 and no other provisions of the Plan of Reorganization
   prohibit a termination 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.  Prior to 1993, the
   cost of these benefits was recognized on a cash basis.

   Effective January 1, 1993, the Company adopted Statement of Financial
   Standards No. 106 (FAS No. 106), "Employers' Accounting for Postretirement
   Benefits Other Than Pensions," which requires employers to account for the
   cost of these benefits on an accrual basis.  As part of adopting the new
   standard, the Company recorded in the first quarter of 1993 a one-time,
   non-cash charge against earnings of $1,029,000 using the cumulative
   catchup method.  
                                                                      Page 26

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

                                                       1995         1994

   Service cost                                       $   -        $   -
   Interest cost on accumulated benefit obligation       59           60
   Amortization of unrecognized net gain                (24)          (9)
                                                      -----        -----
   Net postretirement benefit expense                 $  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, 1995 and 1994 was as follows (in thousands):

                                                       1995         1994
   Actuarial present value of accumulated 
     postretirement benefit obligation              $   790      $   754
   Unrecognized net gain                                230          292
                                                    -------      -------
   Accrued postretirement benefit liability         $ 1,020      $ 1,046
                                                    =======      =======

   The assumed health care cost trend rate used in measuring the accumulated
   postretirement benefit obligation was 7.75% at December 31, 1995 and 8.0%
   at December 31, 1994.  The assumed rate in 1995 decreases 1/4% per year
   until an ultimate rate of 6.5% is reached at December 31, 2001.  The
   assumed rate in 1994 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 $58,000 at
   December 31, 1995.  The discount rate used in determining the accumulated
   postretirement benefit obligation was 7.25% and 8.25% at December 31, 1995
   and December 31, 1994, 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.

                                                                      Page 27
   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 six 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, eight third
   parties have asserted that Allis-Chalmers is liable for cleanup costs or
   associated EPA fines in connection with seven 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 are 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 are projected to be $2.5 million in 1996, then increasing to
   $3.1 million in 1997 and $8.1 million in 1998.  These projections are
   based on various assumptions which may change and, in turn, alter these
   estimated required contributions.  The Company currently does not have the
   financial resources to make all the required payments.  Given the
   inability of the Company to fund this obligation, a termination of the
   Consolidated Plan will likely occur, with the consequence of a liability
   to the Pension Benefit Guaranty Corporation (PBGC) in excess of the
   current net worth of the Company.  The Company intends to continue
   discussions with the PBGC concerning its obligations under the
   Consolidated Plan.  Although it is not possible to predict the outcome of
   such discussions, if the Company is unable to negotiate a settlement with
   the PBGC on terms that are acceptable to the Company, Allis-Chalmers will
   be required to evaluate its options, which include attempting to raise
   additional capital to eliminate the underfunding or seeking protection
   from its creditors by commencing voluntary bankruptcy proceedings under
   the federal bankruptcy laws.  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.

                                                                      Page 28
   NOTE 12.  QUARTERLY FINANCIAL DATA
     (unaudited)
                        First       Second          Third         Fourth
                       Quarter      Quarter         Quarter       Quarter
                     1995  1994   1995    1994   1995    1994    1995   1994
                               (thousands, except per share)
   Sales             $769  $733   $853  $1,041   $770    $ 882   $798   $924
   Gross Margin       182   178    261     359    175      262    201    210
   (Loss) Income 
    from:
     Continuing
      operations     (432) (316)  (360)   (176)  (402)    (315)  (254)  (280)
     Discontinued
      operations        -   (13)     -    (137)     -     (137)     -     56
    Sale of molded
     fabric products
     division           -     -      -       -      -   (2,808)     -    (48)
   Net (Loss)        (432) (329)  (360)   (313)  (402)  (3,260)  (254)  (272)
   Income (Loss) 
    per Share:
     Continuing
      operations     (.43) (.32)  (.35)   (.17)  (.40)    (.31)  (.26)  (.28)
     Discontinued
      operations        -  (.01)     -    (.14)     -     (.13)     -    .06
     Sale of molded
      fabric products
      division          -     -      -       -      -    (2.78)     -   (.05)
     Loss per Share  (.43) (.33)  (.35)   (.31)  (.40)   (3.22)  (.26)  (.27)

                                                                      Page 29
   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

   Robert E. Nederlander
   vice chairman

   Jeffrey I. Lehman
   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; disposition assets trustee; president,
   Thomson McKinnon Securities, Inc. during winddown and liquidation of its
   affairs; president and chief executive officer, Nationwise Automotive,
   Inc. an automotive replacement parts retailer; director, 1st Southern Bank
   of Boca Raton, Florida and First Florida Industries, Inc.

   H. Sean Mathis
   president and director of Gulfstream Capital Partners, Inc.; director,
   USTrails Inc. and Allied Digital Technologies Corp.

   Claude D. Montgomery
   director and shareholder, Marcus Montgomery & Wolfson P.C., 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 Corporation

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

                                                                      Page 30
   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.