FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

       (Mark One)

       [X]    ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
              EXCHANGE ACT OF 1934

              For the fiscal year ended December 31, 1998

                                       Or

       [ ]    TRANSITION   REPORT  PURSUANT  TO  SECTION  13  OR  15(D)  OF  THE
              SECURITIES EXCHANGE ACT OF 1934

              For the transition period from_________ to______________
              Commission file number 1-2199

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

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

   4180 Cherokee Drive, Brookfield, Wisconsin                53045   
    (Address of principal executive offices)               (Zip code)

Registrant's telephone number, including area code     (414)781-7155       

        Securities registered pursuant to Section 12(b) of the Act: None


           Securities registered pursuant to Section 12(g) of the Act:

                               Title of each class

                          Common Stock - $.15 Par Value


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

       Indicate by check mark if  disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. X

       Indicate by check mark whether the registrant has filed all documents and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes X No

       At  March  1,  1999,   there  were  1,003,028   shares  of  Common  Stock
outstanding.



<PAGE>


                             1998 FORM 10-K CONTENTS


PART I

             Item                                                           Page
             ----                                                           ----
            1.   Business.                                                   3
            2.   Properties.                                                 5
            3.   Legal Proceedings.                                          5
            4.   Submission of Matters to a Vote of
                   Security Holders.                                         7

PART II
            5.   Market for Registrant's Common Equity
                   and Related Stockholder Matters.                          8
            6.   Selected Financial Data.                                    9
            7.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations.                      10
            7A.  Quantitative and Qualitative Disclosures about
                   Market Risk.                                              14
            8.   Financial Statements and Supplementary Data.                15
            9.   Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure.                      30

PART III
          10.    Directors and Executive Officers
                   of the Registrant.                                        31
          11.    Executive Compensation.                                     34
          12.    Security Ownership of Certain Beneficial
                   Owners and Management.                                    35
          13.    Certain Relationships and Related Transactions.             37

PART IV
          14.    Exhibits, Financial Statement Schedules and Reports on
                   Form 8-K.                                                 38

Signatures.                                                                  41


<PAGE>

                                                                               3

                                     PART I


ITEM 1.  BUSINESS.

(a)  Development of the Business

GENERAL

Allis-Chalmers  Corporation  (Allis-Chalmers or the Company) was incorporated in
1913 under Delaware law. The Company sold its major operating businesses in 1988
in accordance  with its First Amended and Restated Joint Plan of  Reorganization
(Plan of Reorganization)  under Chapter 11 of the United States Bankruptcy Code.
The Plan of Reorganization  was confirmed by the Bankruptcy Court on October 31,
1988 after  acceptance  by creditors and  shareholders  and was  consummated  on
December  2,  1988.  See Item 3.  LEGAL  PROCEEDINGS  for a  discussion  of such
proceedings.

The Company has its principal  executive  office in Milwaukee,  Wisconsin and it
maintains  three  wholly-owned  subsidiaries.  One  subsidiary,  Houston Dynamic
Service,  Inc., operates a machine repair business in Houston,  Texas; the other
two subsidiaries, KILnGAS R&D, Inc. and U.S.
Fluidcarbon Inc., are inactive.

On September 22, 1994, the Company sold its B.R.B.  Industries division.  B.R.B.
Industries, which was acquired by the Company on December 20, 1989 in a purchase
of assets,  is a Hoboken,  New Jersey  manufacturer  of molded  fabric  products
serving  the  apparel  and  lingerie  markets  and the home  sewing and  notions
industries.

(b)  Financial Information About Industry Segments

The Company  operates in a single industry  segment -- the repair and service of
mechanical  rotating  equipment  for the  industrial,  utility and  governmental
aftermarkets.

(c)  Narrative Description of Business

The principal business activities of the Company are as follows:


MACHINE REPAIR

Sales of the machine repair business  operated by Houston Dynamic Service,  Inc.
(HDS),  a  wholly-owned  subsidiary  of the Company,  were  $5,021,000  in 1998,
$4,062,000 in 1997 and  $4,060,000 in 1996. The increase in 1998 sales from 1997
and 1996 was  primarily the result of strong  market  conditions  coupled with a
more focused marketing strategy and product offering.

HDS  services  and repairs  various  types of  mechanical  equipment,  including
compressors  (centrifugal,  rotary, axial and reciprocating),  pumps,  turbines,
engines, heat exchangers,  centrifuges,  rollers, gears, valves, blowers, kilns,
crushers and mills.  Services provided include  emergency  repair,  disassembly,
inspection, repair testing, parts duplication, machining, balancing,


<PAGE>


4


metalizing, milling, grinding, boring, welding, modification,  reassembly, field
machining,  maintenance,  alignment,  field service,  installation,  startup and
training.

HDS employed 41 people on December  31,  1998.  It operates out of a facility in
Houston,  Texas which was  purchased  by HDS in 1990.  The  facility  includes a
repair shop and office space.

HDS 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.


OTHER DATA

Competition  in the Company's  machine  repair  business  consists of nine major
original  equipment   manufacturers   (OEM)  and  numerous  smaller  independent
competitors. Many of these competitors have special strengths in certain product
areas because of customer  preferences for OEM suppliers or because  specialized
patented  technologies  are offered.  The principal  methods of competition  are
price, quality, delivery, customer service and warranty.

The principal raw materials and purchased  components used in the machine repair
business  are alloy and  stainless  steels,  castings  and  forgings,  aluminum,
copper, gears and other basic materials.  Alternative sources of supply exist or
could be developed for all of these raw materials and components.  This business
is highly labor intensive.

Some of the  Company's  products,  processes  and systems are covered by patents
owned by or licensed to the Company. No particular product, process or system is
dependent on a single fundamental patent, the loss of which would jeopardize the
Company's business.  The Company licenses the use of a number of its trademarks,
from which it receives income.

During  the  past  three  years,  Amoco  Chemical  was the only  customer  which
accounted for 10% or more of total Company sales -- Amoco Chemical generated 24%
of 1998 sales, 12% of 1997 sales and 16% of 1996 sales.

Expenditures relating to compliance with federal,  state and local environmental
protection  laws are not  expected  to have a material  effect on the  Company's
capital expenditures,  results of operations, financial condition or competitive
position.  The  Company  is not  aware  of any  present  statutory  requirements
concerning  environmental  quality that would necessitate  capital outlays which
would materially  affect the Company.  In conjunction  with  consummation of the
Plan of  Reorganization,  the  Company  settled all known  environmental  claims
asserted by the United States  Environmental  Protection Agency (EPA) as well as
claims  asserted by certain state agencies.  However,  the EPA and third parties
have claimed that  Allis-Chalmers  is liable for cleanup costs  associated  with
certain  hazardous waste disposal sites in which products  manufactured and sold
by  Allis-Chalmers  before  consummation  of the  Plan  of  Reorganization  were
ultimately disposed of by others. Since Allis-Chalmers manufactured and sold the
products  disposed  of in  these  sites  before  consummation  of  the  Plan  of
Reorganization,  Allis-Chalmers has taken the position that all cleanup costs or
other liabilities related to these sites were discharged in the bankruptcy.  See
Item 3. LEGAL PROCEEDINGS.


<PAGE>


                                                                               5

The Company's  employment was 47, 42 and 44 at December 31, 1998, 1997 and 1996,
respectively.

For more  detailed  information,  you should read in their  entirety the audited
1998  Consolidated   Financial  Statements,   Notes  to  Consolidated  Financial
Statements and Management's  Discussion and Analysis of Financial  Condition and
Results of Operations contained elsewhere in this report.

(d)   Financial Information About Foreign and
      Domestic Operations and Export Sales

The Company has no foreign operations or significant export sales.


ITEM 2. PROPERTIES.

The Company's  principal  operating facility is a 25,000 square foot repair shop
and office  building in Houston,  Texas,  which is owned by HDS.  Allis-Chalmers
leases its administrative offices in Milwaukee, Wisconsin on a short-term basis.
The facilities are considered  adequate and suitable for the Company's principal
business.


ITEM 3.  LEGAL PROCEEDINGS.

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11
OF THE UNITED STATES BANKRUPTCY CODE

On June 29,  1987,  Allis-Chalmers  and 17 of its  domestic  subsidiaries  filed
separate voluntary  petitions for reorganization  under Chapter 11 of the United
States  Bankruptcy  Code.  The  Plan  of  Reorganization  was  confirmed  by the
Bankruptcy Court on October 31, 1988 after acceptance by the Company's creditors
and shareholders,  and the Plan of Reorganization was consummated on December 2,
1988.

At  confirmation,  the Bankruptcy  Court approved the  establishment  of the A-C
Reorganization  Trust as the primary vehicle for distributions under the Plan of
Reorganization,  two  trust  funds to  service  health  care and life  insurance
programs for retired  employees and a trust fund to process and liquidate future
product  liability claims.  Cash of approximately  $400 million and other assets
with  a net  book  value  of  $38  million  were  distributed  to  creditors  or
transferred  to  the  trusts,   and  the  trusts  assumed   responsibility   for
substantially  all remaining cash  distributions to be made to holders of claims
and interests  pursuant to the Plan of  Reorganization.  The Company was thereby
discharged  of  all  debts  that  arose  before  confirmation  of  the  Plan  of

<PAGE>

6

Reorganization,  and all of its capital stock was canceled and made eligible for
exchange for shares of the reorganized Company.

The Company does not administer any of the aforementioned  trusts and retains no
responsibility for the assets transferred to or distributions to be made by such
trusts pursuant to the Plan of Reorganization.

For a  description  of  restrictions  on the transfer of the common stock of the
reorganized  Company,  see Item 5.  MARKET FOR  REGISTRANT'S  COMMON  EQUITY AND
RELATED STOCKHOLDER MATTERS.


ENVIRONMENTAL PROCEEDINGS

As part of the Plan of  Reorganization,  the Company made a cash payment of $4.5
million to the EPA in  settlement  of the EPA's claims for cleanup  costs at all
sites where the Company was alleged to have disposed of hazardous waste. The EPA
settlement  included  both  past and  future  cleanup  costs at these  sites and
released the Company of liability for claims of  contribution or indemnity which
may be asserted by other potentially  responsible parties against Allis-Chalmers
in connection with these specific sites.

In addition to the EPA settlement, the Company negotiated settlements of various
environmental  claims  which had been  asserted by certain  state  environmental
protection agencies.  These settlements,  totaling approximately  $200,000, were
approved by the Bankruptcy Court.

Since  consummation of the Plan of  Reorganization on December 2, 1988, a number
of parties, including the EPA, have asserted that the Company is responsible for
the cleanup of hazardous waste sites.  These assertions have been made only with
respect to the Company's prebankruptcy  activities. No claims have been asserted
against the Company involving its postbankruptcy operations.

Before the settlement with the EPA in the bankruptcy proceedings, an attempt was
made by the parties to identify all possible  hazardous waste disposal sites and
to settle all liabilities  relating to those sites.  Notwithstanding the breadth
of the settlement, various EPA regional offices have continued to assert cleanup
claims against Allis-Chalmers with respect to several sites. Apparently, not all
offices of the EPA are aware of the settlement agreement,  since at least two of
these claims involve sites with respect to which the EPA specifically agreed not
to sue.

Certain  other  parties  have  asserted  that the  Company  is  responsible  for
environmental   cleanup  costs  or  associated  EPA  fines  in  connection  with
additional sites. In each instance the Company activities complained of occurred
prior to the Company's bankruptcy proceedings and the third parties did not file
proofs of claim in the  bankruptcy  proceedings.  The  filing of such  proofs of
claim is required by the Bankruptcy  Code to effect a claim against a Chapter 11
debtor. A bankruptcy  discharge defense has been asserted by the Company in each
instance.
<PAGE>
                                                                               7


Although the law in this area is still somewhat unsettled,  three Federal Courts
of Appeal have held that a debtor can be  discharged  of  environmental  cleanup
liabilities  related to its  prebankruptcy  activities.  The Company believes it
will prevail in its position that its liability to the EPA and third parties for
prebankruptcy  environmental  cleanup  costs has been fully  discharged.  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.

The EPA and certain  state  agencies  also  continue to request  information  in
connection  with various waste disposal sites in which products  manufactured by
Allis-Chalmers before consummation of the Plan of Reorganization were ultimately
disposed  of by other  parties.  Although  the Company  has been  discharged  of
liabilities  with  respect to hazardous  waste  sites,  it is under a continuing
obligation  to provide  information  with respect to its products to federal and
state agencies.  The A-C Reorganization Trust, under its mandate to provide Plan
of Reorganization implementation services to the Company, has responded to these
informational requests because prebankruptcy activities are involved.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.


<PAGE>


8


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS.                    

The 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 reflect
the reverse stock split.

The Common  Stock is subject to trading  restrictions  that are set forth in the
Company's  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 1998, 1997 or 1996.


<PAGE>


                                                                               9

ITEM 6.  SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>

                                                     1998         1997         1996         1995          1994 1.
                                                     ----         ----         ----         ----          ----   
                                                                   (millions, except per share data)

Statement of Operations Data:
<S>                                              <C>           <C>           <C>          <C>          <C>    
  Sales                                          $     5.0     $    4.1      $   4.1      $   3.2      $   3.6

  Income (loss) from:
    Continuing Operations                               .6        (66.5)        (1.7)        (1.4)        (1.1)
    Discontinued Operations                              -            -            -            -         (0.2)
    Sale of molded fabric
      products division                                  -            -            -            -         (2.9)
                                                 ---------     --------      -------      -------   ----------
      Net income (loss)                                 .6        (66.5)        (1.7)        (1.4)        (4.2)

  Income (loss) per common share 
  (Basic and Diluted) from:
    Continuing Operations                              .62       (66.34)       (1.72)       (1.44)       (1.08)
    Discontinued Operations                              -            -            -            -         (.23)
    Sale of molded fabric
      products division                                  -            -            -            -        (2.82)
                                                 ---------     --------      -------      -------      -------
      Net income (loss)                                .62       (66.34)       (1.72)       (1.44)       (4.13)

Statement of Financial
 Condition Data:

  Total assets                                         2.6          2.7          3.4          4.1          4.6

  Long-term debt classified as:
    Current                                            0.1          0.1          0.1          0.3            -
    Long-term                                          0.2          0.2          0.3            -          0.3

  Shareholders' deficit                              (67.4)       (68.0)       (13.6)        (9.9)        (6.9)



1.  Reflects  the  results of  operations  of the  Company's  BRB  division as a
discontinued operation.

</TABLE>





<PAGE>


10


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
               AND RESULTS OF OPERATIONS.       


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

Overview

Allis-Chalmers, after emerging from Chapter 11 under the Plan of Reorganization,
entered into an agreement with AL-CH Company,  L.P. (Investor) pursuant to which
the Investor agreed to purchase 6.1 million shares (on a prereverse  stock split
basis) 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, two of the Company's directors.

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, insurance
and costs  associated  with other  corporate  requirements  of a  publicly  held
company will continue to make it difficult for the Company, at its present size,
to achieve positive cash flow.

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).

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 was underfunded on a present value basis. In the first quarter of 1996, the
Company made a required cash contribution to the Consolidated Plan in the amount
of $205,000.  The Company did not, however, have the financial resources to make
the other  required  payments  during 1996 and 1997.  Given the inability of the
Company  to fund such  obligations  with its  current  financial  resources,  in
February  1997,   Allis-Chalmers   applied  to  the  Pension  Benefit   Guaranty
Corporation  (PBGC) for a "distress"  termination of the Consolidated Plan under
section  4041(c) of the Employee  Retirement  Income  Security  Act of 1974,  as
amended  (ERISA).  The PBGC  approved the distress  termination  application  in
September 1997 and agreed to a plan termination date of April 14, 1997. The PBGC
became trustee of the terminated Consolidated Plan on September 30, 1997.

<PAGE>


                                                                              11

Upon termination of the Consolidated  Plan,  Allis-Chalmers and its subsidiaries
incurred a liability to the PBGC for an amount equal to the Consolidated  Plan's
unfunded benefit  liabilities.  Allis-Chalmers  and its  subsidiaries  also have
liability to the PBGC, as trustee of the terminated  Consolidated  Plan, for the
outstanding balance of the Consolidated Plan's accumulated funding deficiencies.
The PBGC has estimated that the unfunded benefit liabilities and the accumulated
funding  deficiencies  (together,  the PBGC Liability) total approximately $67.9
million.

In  September  1997,  Allis-Chalmers  and the PBGC  entered into an agreement in
principle for the  settlement of the PBGC Liability  (the PBGC  Agreement).  The
PBGC Agreement calls for the PBGC to release Allis-Chalmers and its subsidiaries
from the PBGC  Liability in return for that number of shares of  Allis-Chalmers'
common  stock  that  represents  35% of the total  number of shares  issued  and
outstanding on a fully-diluted basis.

The PBGC  Agreement is subject to negotiation  of definitive  documentation  and
discussions regarding definitive documentation continue with the PBGC on certain
issues contained in a proposed  agreement  between the Company and the PBGC. The
Company  is close  to  resolving  these  issues  with the PBGC and an  agreement
between the Company and the PBGC should be signed in the near  future.  However,
if a satisfactory  agreement  cannot be finalized with the PBGC,  Allis-Chalmers
will evaluate other alternatives, including a bankruptcy filing. .

The PBGC Agreement is also subject to  satisfactory  resolution of the Company's
tax obligations with respect to the Consolidated  Plan under section 4971 of the
Internal  Revenue Code of 1986, as amended  (Code).  Section 4971(a) of the Code
imposes,  for each taxable year, a first-tier tax of 10 percent on the amount of
the accumulated  funding  deficiency  under a plan like the  Consolidated  Plan.
Section 4971(b) of the Code imposes an additional,  second-tier tax equal to 100
percent  of  such  accumulated  funding  deficiency  if  the  deficiency  is not
"corrected"  within a specified  period.  Liability  for the taxes imposed under
section  4971  extends,  jointly and  severally,  to  Allis-Chalmers  and to its
commonly-controlled subsidiary corporations.

Prior to its  termination,  the  Consolidated  Plan had an  accumulated  funding
deficiency  in the  taxable  years  1995,  1996,  and 1997.  Those  deficiencies
resulted  in  estimated   first-tier   taxes  under  Code  section   4971(a)  of
approximately $900,000.

On March 2, 1998,  Allis-Chalmers  sent the  Internal  Revenue  Service  (IRS) a
formal Offer in Compromise  of the  Company's  tax liability  under Code section
4971. On July 16, 1998, the parties reached a settlement  agreement in principle
in the amount of $75,000.  Following final IRS approval,  payment of this amount
was made on August 11, 1998.

The acquisition  environment has been unfavorable since the Investor's 1989 cash
contribution  to the Company and remained very  difficult for the Company during
1998.  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. Therefore, the Company
continues  to proceed  cautiously  with its  efforts to  identify  and  evaluate
potential candidates for acquisition.


<PAGE>


12

Results of Operations

Results of operations for 1998,  1997 and 1996 reflect the sole operation of the
business of Allis-Chalmers: the machine repair business, HDS.

Sales totaled $5.0 million in 1998,  compared with $4.1 million in both 1997 and
1996.  The increase in sales for 1998 from 1997 and 1996 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 29.7%,  25.0% and 26.1% in 1998,
1997 and 1996, respectively.

Marketing and  administrative  expense was $1.7  million,  $1.7 million and $1.4
million  in 1998,  1997 and 1996,  respectively.  Marketing  and  administrative
expense  was  33.6% of sales in 1998  compared  with  40.9% in 1997 and 34.8% in
1996.  While  there  were  additional  costs  incurred  in  1998 in  pursuit  of
acquisitions and certain  engineering costs at HDS, these costs were offset by a
reduction in 1998 of legal expenses as compared to 1997 (which had  nonrecurring
legal expenses  associated  with the  termination of the  Consolidated  Plan and
related  negotiations  with the PBGC and  IRS).  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, insurance and other requirements of a publicly held company.

Interest income in each of the years resulted mainly from earnings on short-term
investments.  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
and additional financing for capital improvements at HDS.

Pension  expense  which  relates 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," was $1,397,000
and $1,422,000 in 1997 and 1996, respectively. In 1998 there was no expense as a
result of termination of the Consolidated  Plan. The 1997 expense was for a nine
month period as the transfer of the Consolidated  Plan to the PBGC took place on
September 30, 1997.  The  termination  of the  Consolidated  Plan resulted in an
additional $64.5 million pension expense in 1997,  including $.9 million for IRS
excise taxes.

The  Company  had net  income of  $618,000,  or $.62 per  common  share in 1998,
compared  with a net  loss of  $66,545,000  (including  recognition  of  pension
expense of  $65,926,000),  or $66.34 per common share, in 1997 and a net loss of
$1,728,000 in 1996.  Net income in 1998 included  income of $825,000 as a result
of a $900,000 IRS liability  settled for $75,000.  Pension expense accounted for
$65.73 per common share of the net loss in 1997.

Liquidity and Capital Resources

At December 31, 1998, the Company had cash and short-term  investments  totaling
$223,000,  a decrease from $699,000 at December 31, 1997.  This decrease was the
result of acquisition

<PAGE>


                                                                              13


expenses in 1998 and expenses  associated with the ongoing corporate  reporting,
as well as legal, accounting and audit, and insurance expenses. In addition, HDS
had expenditures of $353,000 for capital items.

Trade receivables at December 31, 1998 were $796,000,  compared with $683,000 at
December 31, 1997. This increase was primarily the result of increased sales and
certain major projects completed and billed by HDS near the end of the year.

Inventory at December 31, 1998 was  $127,000,  an increase from $101,000 at year
end 1997.

Net  property,  plant and  equipment  at December  31, 1998 was  $1,308,000,  an
increase from $1,107,000 at December 31, 1997. The Company incurred  $353,000 on
capital  expenditures  during  1998.  Approximately  $234,000  was  invested  in
machinery and equipment  acquisitions while approximately  $119,000 was spent to
improve HDS's facilities (including air conditioning and upgrading its telephone
system).  The  expenditures  for additional or upgrades of machinery and tooling
were necessary to reduce production costs by decreasing  downtime and increasing
production efficiency output, helping to position the Company for further growth
through  the  increased  capacity  and  service  capabilities  it  offers to the
marketplace.

Current  maturities of long-term debt at December 31, 1998 were $60,000 compared
with  $38,000 at year-end  1997.  The  increase  was due to  financing of an air
conditioning  system  installed at HDS. In addition,  there were payments on the
real estate loan  refinanced by HDS in August 1996. 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 is due. At December 31, 1998, the interest rate on the
note was 10.5%. 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 $444,000 at December 31, 1998)
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 generated by HDS for these purposes in
1999.

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.

The 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

<PAGE>

14

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.

Management  considers the Company's only  significant  application  that is year
2000 sensitive to be its  accounting  system.  The Company has received  written
assurances  from its software  provider that the accounting  system is year 2000
compliant.

Financial Condition

Shareholders'  deficit at December  31,  1998 was $67.4  million.  A  three-year
comparison of shareholders' deficit follows:

                                 (millions)       1998        1997        1996
                                                  ----        ----        ----

January 1                                      $  (68.0)   $  (13.6)    $  (9.9)
Net income (loss)                                    .6       (66.5)       (1.7)
Pension liability adjustment                         .0        12.1        (2.0)
                                               --------    --------     -------

December 31                                    $  (67.4)   $  (68.0)    $ (13.6)
                                               ========    ========     =======



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                   RISK.                                              

None.





<PAGE>


                                                                              15

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                   Index to Consolidated Financial Statements
                   ------------------------------------------
               
                                                                            Page
                                                                            ----

Financial Statements:

   Report of Independent Accountants                                         16
   Statement of Operations for the Three Years Ended December 31, 1998       17
   Statement of Accumulated Deficit for the Three Years Ended
      December 31, 1998                                                      17
   Statement of Financial Condition at December 31, 1998 and 1997            18
   Statement of Cash Flows for the Three Years Ended December 31, 1998       19
   Notes to Consolidated Financial Statements                                20

   Financial Statement Schedule

       II     Valuation and Qualifying Accounts                              40




<PAGE>


16


                        REPORT OF INDEPENDENT ACCOUNTANTS


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

In our opinion, the consolidated financial statements listed in the accompanying
index  present  fairly,  in all material  respects,  the  financial  position of
Allis-Chalmers  Corporation and its  subsidiaries at December 31, 1998 and 1997,
and the results of their  operations  and their cash flows for each of the three
years in the period ended  December  31,  1998,  in  conformity  with  generally
accepted  accounting  principles.  In addition,  in our opinion,  the  financial
statement  schedule listed in the  accompanying  index presents  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated  financial statements.  These financial statements
and  financial  statement  schedule  are  the  responsibility  of the  Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements and financial  statement  schedule 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  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's application for
a distress  termination  of the  Allis-Chalmers  Consolidated  Pension Plan (the
"Consolidated  Plan") was approved by the Pension Benefit  Guaranty  Corporation
("PBGC") on September 30, 1997. At such date, the PBGC became the trustee of the
Consolidated  Plan and the Company and its  subsidiaries  incurred an  estimated
liability to the PBGC for unfunded benefit  liabilities and accumulated  funding
deficiencies  totaling  approximately $68 million. The Company does not have the
financial  resources  to fund this  liability  to the PBGC.  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 Note 9 to the
consolidated financial statements.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.



PricewaterhouseCoopers  LLP
Milwaukee, Wisconsin
March 24, 1999


<PAGE>


                                                                              17

                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>



                                  Year Ended December 31            1998               1997                1996   
                                  ----------------------         ----------         ----------         -----------
                                                                           (thousands, except per share)

<S>                                                             <C>                 <C>                <C>        
Sales                                                           $     5,021         $    4,062         $     4,060
Cost of sales                                                         3,530              3,048               3,000
                                                                -----------         ----------         -----------
      Gross Margin                                                    1,491              1,014               1,060

Marketing and administrative expense                                  1,689              1,660               1,413
                                                                -----------         ----------         -----------

    Loss from Operations                                               (198)              (646)               (353)
Other income (expense)
  Interest income                                                        33                 54                  70
  Interest expense                                                      (50)               (45)                (39)
  Pension expense (Note 9)                                                -            (65,926)             (1,422)
  Other (Note 9)                                                        833                 18                  16
                                                                -----------         ----------         -----------

   Net Income (Loss)                                            $       618         $  (66,545)        $    (1,728)
                                                                ===========         ==========         ===========

   Net Income (Loss) per Common Share
      (Basic and Diluted)                                       $       .62         $   (66.34)        $     (1.72)
                                                                ===========         ==========         ===========
<CAPTION>


                        STATEMENT OF ACCUMULATED DEFICIT

                                  Year Ended December 31            1998               1997                1996   
                           -----------------------------        -----------         ----------         -----------
                                                                                                       (thousands)

Accumulated deficit beginning of year                           $   (76,291)        $   (9,746)        $    (8,018)
Net income (loss)                                                       618            (66,545)             (1,728)
                                                                -----------         ----------         -----------
Accumulated deficit end of year                                 $   (75,673)        $  (76,291)        $    (9,746)
                                                                ===========         ==========         ===========

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

</TABLE>

<PAGE>


18

<TABLE>
<CAPTION>

                        STATEMENT OF FINANCIAL CONDITION


                                             December 31               1998                 1997  
                                             -----------            ----------         -----------
                                                                                       (thousands)

Assets

<S>                                                                 <C>                <C>        
Cash and short-term investments                                     $      223         $       699
Trade receivables, net (Note 3)                                            796                 683
Inventories, net                                                           127                 101
Other current assets                                                       112                 121
                                                                    ----------         -----------
    Total Current Assets                                                 1,258               1,604

Net property, plant and equipment (Note 4)                               1,308               1,107
                                                                    ----------         -----------
    Total Assets                                                    $     2,566        $     2,711
                                                                    ===========        ===========

Liabilities and Shareholders' Deficit

Current maturities of long-term debt                                $       60         $        38
Trade accounts payable                                                     291                 219
Accrued employee benefits                                                  155                 123
Accrued pension liability (Note 9)                                      67,901              68,801
Other current liabilities                                                  312                 284
                                                                    ----------         -----------
    Total Current Liabilities                                           68,719              69,465

Accrued postretirement benefit obligations (Note 9)                        981                 990
Long-term debt (Note 6)                                                    232                 240

Shareholders' deficit (Note 7)
  Common stock ($.15 par value, authorized
   2,000,000 shares, outstanding 1,003,028
   at December 31, 1998 and December 31, 1997)                             152                 152
  Capital in excess of par value                                         8,155               8,155
  Accumulated deficit (accumulated deficit of
   $424,208 eliminated on December 2, 1988)                            (75,673)            (76,291)
                                                                    ----------         -----------

    Total Shareholders' Deficit                                        (67,366)            (67,984)
Commitments and contingent liabilities (Note 10)                                                  
                                                                    ----------         -----------
    Total Liabilities and Shareholders'
     Deficit                                                        $     2,566        $     2,711
                                                                    ===========        ===========


The accompanying Notes are an integral part of the Financial Statements.
</TABLE>


<PAGE>

                                                                              19


                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>


                                  Year Ended December 31            1998               1997                1996   
                                  ----------------------         ----------         ----------         -----------
                                                                                    (thousands)

Cash flows from operating activities:
<S>                                                             <C>                 <C>                <C>         
    Net income (loss)                                           $       618         $  (66,545)        $    (1,728)
    Adjustments to reconcile net income (loss)
      to net cash used by operating activities:
       Depreciation and amortization                                    149                131                  92
       Changes in working capital:
           (Increase) decrease in receivables, net                     (113)               (31)               241
           (Increase) decrease in inventories                           (26)                (8)                 35
           Decrease in other current assets                               9                 15                 106
           Increase in trade accounts payable                            72                137                   9
           Increase (decrease) in other current
            liabilities                                                  60               (135)               (137)
            (Decrease) increase in accrued pension
            liability                                                  (900)            65,926               1,217
       Other                                                             (9)                (3)                (27)
                                                                -----------         ----------         -----------
           Net cash used by operating activities                       (140)              (513)               (192)

Cash flows from investing activities:
    Capital expenditures                                               (353)              (304)               (127)
    Proceeds from sale of excess equipment                                3                  3                   5
                                                                -----------         ----------         -----------
           Net cash used by investing activities                       (350)              (301)               (122)

Cash flows from financing activities:
    Net proceeds from issuance of long-term debt                         66                  -                 311
    Payment of long-term debt                                           (52)               (55)               (310)
                                                                -----------         ----------         -----------
           Net cash provided (used) by financing
            activities                                                   14                (55)                  1
                                                                -----------         ----------         -----------

Net decrease in cash and  short-term
 investments                                                           (476)              (869)               (313)

Cash and short-term investments at
 beginning of year                                                      699              1,568               1,881
                                                                -----------         ----------         -----------

Cash and short-term investments at end of year                  $       223         $      699         $     1,568
                                                                ===========         ==========         ===========

Supplemental information - interest paid                        $        50         $       45         $        39
                                                                ===========         ==========         ===========



The accompanying Notes are an integral part of the Financial Statements.
</TABLE>


<PAGE>


20


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.



<PAGE>


                                                                              21

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 (SFAS) No. 109. See Note 5. Income
Taxes.

Income (Loss) Per Common Share

In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." This statement  establishes revised standards for
computing  and  presenting  earnings  per share and was  adopted by the  Company
during the fourth quarter of 1997.  Given the fact that the Company did not have
any common stock  equivalents over the past several years, its income (loss) per
common  share  remain  unchanged  as basic and  diluted  per share  amounts  are
identical.  As  such,  the  adoption  of  this  statement  did  not  impact  the
historically reported income (loss) per common share amounts.

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 1998,  1997 and 1996 Amoco Chemical was the only customer which accounted for
10% or more of total  sales -- 24% of 1998  sales,  12% of 1997 sales and 16% in
1996.




<PAGE>


22
<TABLE>
<CAPTION>


NOTE 3.  RECEIVABLES

                                             December 31                   1998               1997   
                                          --------------               -----------        -----------
                                                                                 (thousands)
<S>                                                                    <C>                <C>        
Trade accounts receivable                                              $       817        $       719
Allowance for doubtful receivables                                             (21)               (36)
                                                                       -----------        -----------
                                                                       $       796        $       683
                                                                       ===========        ===========

<CAPTION>

NOTE 4.  PROPERTY, PLANT AND EQUIPMENT

                                             December 31                   1998               1997   
                                          --------------               -----------        -----------
                                                                                 (thousands)
<S>                                                                    <C>                <C>        
Land and buildings                                                     $       545        $       545
Machinery and equipment                                                      1,606              1,426
Tools, patterns, furniture, fixtures
  and leasehold improvements                                                   752                582
                                                                       -----------        -----------
                                                                             2,903              2,553
Accumulated depreciation                                                    (1,595)            (1,446)
                                                                       -----------        -----------
                                                                       $     1,308        $     1,107
                                                                       ===========        ===========
</TABLE>


NOTE 5.  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. A valuation  allowance is  established  for
deferred tax assets when management, based upon available information, considers
it more likely than not that a benefit from such assets will not be realized.

The following  table depicts the temporary  differences  as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>

                                                                         1998              1997   
                                                                     -----------        ----------
                                                                               (millions)

<S>                                                                  <C>                <C>        
Net future tax deductible items                                      $        35        $        36
Net operating loss carryforwards and other tax credits                       156                188
Valuation allowance                                                         (191)              (224)
                                                                     -----------        -----------

Net deferred taxes                                                   $         0        $         0
                                                                     ===========        ===========
</TABLE>

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, 1998 and 1997 are not material.


<PAGE>


                                                                              23

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, 1998 are estimated to consist of net operating
losses of $439.0 million  expiring 1999 through 2013,  investment tax credits of
$1.0 million  expiring  1999 through 2001 and energy tax credits of $1.0 million
expiring 1999 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 


<PAGE>


24

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.  While  the
Company's Common Stock is subject to trading  restrictions which are designed to
maximize the likelihood of preserving its net operating  loss  carryforwards,  a
change in ownership of the Company could also limit the use of its net operating
loss carryforwards.

NOTE 6.  LONG-TERM DEBT
<TABLE>
<CAPTION>

                                             December 31             1998               1997   
                                             -----------         -----------        -----------
                                                                                    (thousands)

<S>                                                              <C>                <C>        
Real estate loan                                                 $       226        $       248
Other                                                                     66                 30
                                                                 -----------        -----------
                                                                         292                278
Less amounts classified as current                                        60                 38
                                                                 -----------        -----------
                                                                 $       232        $       240
                                                                 ===========        ===========


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, 1998 and 1997, the interest rate on the note was 10.5%. The 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 $444,000 at December 31, 1998) and the Company's guaranty.


NOTE 7.  SHAREHOLDERS' DEFICIT

The components of Shareholders' Deficit are as follows:

                                             December 31             1998               1997   
                                             -----------         -----------        -----------
                                                                                    (thousands)

<S>                                                              <C>                <C>        
Common stock                                                     $       152        $       152
Capital in excess of par value                                         8,155              8,155
Accumulated deficit                                                  (75,673)           (76,291)
Pension liability adjustment                                               -                  -
                                                                 -----------        -----------
       Shareholders' Deficit                                     $   (67,366)       $   (67,984)
                                                                 ===========        ===========
</TABLE>

<PAGE>


                                                                              25

SFAS 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 $12.2  million in 1996 was  recorded.  This unfunded
amount  was  recognized  as  expense  in 1997 in  connection  with the  distress
termination of the Consolidated Plan and recognition of the Company's  liability
to the PBGC.

NOTE 8.  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 9.  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).

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 were invested in a dedicated
bond portfolio that consisted of high-grade fixed income securities in which the
market value of the assets was 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
were required if the mortality assumptions used in calculating the present value
of the  pension  benefits  expected 

<PAGE>

26


to be paid or the  assumptions  used in  calculating  the future  administrative
expenses proved 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. 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.

This underfunded condition in the Consolidated Plan required the Company to make
significant  cash  contributions  to  the  Consolidated  Plan  pursuant  to  the
Employment  Retirement Income Security Act of 1974, as amended (ERISA),  funding
requirements starting in 1996.

The Company 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  obligations with its lack of financial  resources,  in February 1997,
Allis-Chalmers  applied  to  the  PBGC  for  a  "distress"  termination  of  the
Consolidated Plan under section 4041(c) of ERISA. The PBGC approved the distress
termination  application in September  1997 and agreed to a termination  date of
April 14, 1997. The PBGC became trustee of the terminated  Consolidated  Plan on
September 30, 1997.

Upon termination of the Consolidated  Plan,  Allis-Chalmers and its subsidiaries
incurred a liability to the PBGC for an amount equal to the Consolidated  Plan's
unfunded benefit  liabilities.  Allis-Chalmers  and its subsidiaries also have a
liability to the PBGC, as trustee of the terminated  Consolidated  Plan, for the
outstanding balance of the Consolidated Plan's accumulated funding deficiencies.
The PBGC has estimated that the unfunded benefit liabilities and the accumulated
funding  deficiencies  (together,  the PBGC Liability) total approximately $67.9
million.

In  September  1997,  Allis-Chalmers  and the PBGC  entered into an agreement in
principle for the  settlement of the PBGC Liability  (the PBGC  Agreement).  The
PBGC Agreement calls for the PBGC to release Allis-Chalmers and its subsidiaries
from the PBGC  Liability in return for that number of shares of  Allis-Chalmers'
common  stock  that  represents  35% of the total  number of shares  issued  and
outstanding on a fully-diluted basis.

The PBGC  Agreement is subject to negotiation  of definitive  documentation  and
discussions regarding definitive documentation continue with the PBGC on certain
issues contained in a proposed  agreement  between the Company and the PBGC. The
Company  is close  to  resolving  these  issues  with the PBGC and an  agreement
between the Company and the PBGC should be signed in the near  future.  However,
if a satisfactory  agreement  cannot be finalized with the PBGC,  Allis-Chalmers
will evaluate other alternatives, including a bankruptcy filing. .

The PBGC Agreement is also subject to  satisfactory  resolution of the Company's
tax obligations with respect to the Consolidated  Plan under section 4971 of the
Internal  Revenue Code of 1986, as amended  (Code).  Section 4971(a) of the Code
imposes,  for each taxable year, a first-tier tax of 10 percent on the amount of
the accumulated  funding  deficiency  under a plan like the  Consolidated  Plan.
Section 4971(b) of the Code imposes an additional,  second-tier tax equal to

<PAGE>

                                                                              27

100 percent of such  accumulated  funding  deficiency  if the  deficiency is not
"corrected"  within a specified  period.  Liability  for the taxes imposed under
section  4971  extends,  jointly and  severally,  to  Allis-Chalmers  and to its
commonly-controlled subsidiary corporations.

Prior to its  termination,  the  Consolidated  Plan had an  accumulated  funding
deficiency  in the  taxable  years  1995,  1996,  and 1997.  Those  deficiencies
resulted  in  estimated   first-tier   taxes  under  Code  section   4971(a)  of
approximately  $900,000.  This amount was accrued by the Company at December 31,
1997.

On March 2, 1998,  Allis-Chalmers  sent the IRS a formal Offer in  Compromise of
the  Company's tax  liability  under Code section  4971.  On July 16, 1998,  the
parties  reached a  settlement  agreement in principle in the amount of $75,000.
Following  final IRS  approval,  payment  of this  amount was made on August 11,
1998.

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, 1998, 1997
and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>

                                                          1998             1997                1996   
                                                      -----------       -----------        -----------

<S>                                                   <C>               <C>                <C>        
Service cost                                          $         -       $         -        $         -
Interest cost on accumulated benefit obligation                53                62                 54
Amortization of unrecognized net gain                         (22)               (3)               (17)
                                                      -----------       -----------        -----------
Net postretirement benefit expense                    $        31       $        59                 37
                                                      ===========       ===========        ===========
</TABLE>

Presently,  the Company's postretirement benefit obligations are not funded. The
status and a reconciliation of the Company's  postretirement benefit obligations
as of December 31, 1998 and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>

                                                                    1998               1997  
                                                               -----------        -----------
<S>                                                            <C>                <C>        
Actuarial present value of accumulated postretirement
 benefit obligation                                            $       606        $       733
Unrecognized net gain                                                  375                257
                                                               -----------        -----------
Accrued postretirement benefit liability                       $       981        $       990
                                                               ===========        ===========

<PAGE>

28
<CAPTION>


                                                                    1998               1997  
                                                               -----------        -----------

<S>                                                            <C>                <C>        
Obligation at beginning of year                                $       733        $       867
Interest cost                                                           53                 62
Actuarial gain                                                        (140)              (134)
Benefit payments                                                       (40)               (62)
                                                               -----------        -----------
Obligation at end of year                                      $       606        $       733
                                                               ===========        ===========
</TABLE>

The  assumed  health  care cost trend  rate used in  measuring  the  accumulated
postretirement  benefit  obligation  was 6.5% at  December  31, 1998 and 7.0% at
December 31, 1997.  The assumed rate  decreases each year until an ultimate rate
of 5.0% is reached at December 31,  2004.  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 approximately $40,000 at December 31, 1998.
The discount rate used in determining  the  accumulated  postretirement  benefit
obligation was 7.50% at December 31, 1998 and December 31, 1997.


NOTE 10.  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.

<PAGE>

                                                                              29

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.  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
obligations   with  its  current   financial   resources,   in  February   1997,
Allis-Chalmers  applied  to  the  PBGC  for  a  "distress"  termination  of  the
Consolidated Plan under section 4041(c) of ERISA. The PBGC approved the distress
termination  application in September 1997 and agreed to a plan termination date
of April 14, 1997. The PBGC became trustee of the terminated  Consolidated  Plan
on September 30, 1997.

For additional information regarding the Consolidated Plan, see Note 9.


NOTE 11.  RELATED PARTY TRANSACTIONS

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, 1998.




<PAGE>


30


NOTE 12.  QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>

  (unaudited)
                                               First            Second                Third                    Fourth
                                               Quarter          Quarter               Quarter*                 Quarter      
                                -----------------------------------------------------------------------------------------
                                 1998         1997      1998        1997       1998       1997         1998        1997 
                                ------      -------   --------   ---------   --------    --------    --------   ---------
                                                             (thousands, except per share)

<S>                           <C>         <C>        <C>        <C>         <C>         <C>        <C>         <C>     
Sales                         $  1,503    $  1,028   $  1,249   $    985    $   943     $    813   $  1,326    $  1,236
Gross Margin                       486         211        312        268        273          161        420         374

Net Income (Loss)                  137        (604)      (197)      (554)       680      (65,187)        (2)       (200)

Net Income (Loss) per
  Common Share
  (basic and diluted)              .14        (.60)      (.20)      (.55)       .68       (64.99)       0.0        (.20)

*Net loss and loss per share  amounts have been  restated  compared with amounts
  previously  reported  by  the  Company  to  reflect  the  termination  of  the
  Consolidated  Plan and recognition of the related  liability to the PBGC as of
  September 30, 1997. Net income in the third quarter of 1998 included income of
  $825,000 as a result of a $900,000 IRS liability settled for $75,000.

</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE.                     

None.



<PAGE>


                                                                              31

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a)    Identification of Directors

       The following individuals were elected as directors of the Company at the
       meeting of  shareholders  on October 25, 1989 (or have been  appointed to
       fill vacancies  caused by the resignation of two such directors) to serve
       until the next meeting of shareholders.

       John R. Collins,  age 71, a director  since  December  1988.  Mr. Collins
       retired in 1989 after serving since 1985 as  Administrative  Assistant to
       the   Secretary-Treasurer  of  International  Union,  United  Automobile,
       Aerospace & Agricultural Implement Workers of America -- UAW.

       John T. Grigsby, Jr., age 58, a director since December 1988. Mr. Grigsby
       has been a Vice  Chairman of the Board of the Company  since May 1989, an
       Executive Vice President since October 1989 and Chief  Financial  Officer
       since January 1996,  having  previously served since December 1988 as the
       Company's  Chairman and Chief Executive  Officer.  Prior to that time and
       since July 1987,  Mr.  Grigsby  was  employed  by the Company as Managing
       Director,  Restructure  Project.  Mr.  Grigsby  also  serves  as the  A-C
       Reorganization Trustee, as President of Thomson McKinnon Securities, Inc.
       during  winddown and  liquidation  of its affairs and President and Chief
       Executive Officer of N.W. Liquidating, Inc. He has been a director of 1st
       Southern  Bank of Boca  Raton,  Florida  since  September  1987 and First
       Florida Industries, Inc. since July 1985.

       H. Sean Mathis,  age 51, a director  since  December 1988. Mr. Mathis was
       elected as Chairman and Chief Executive Officer of the Company on January
       16, 1996 and prior thereto Mr.  Mathis served as a Vice  President of the
       Company since July 1989. From July 1996 to September 1997, Mr. Mathis was
       Chairman of the Board of Universal Gym Equipment  Inc., a privately owned
       company  (Universal).  In July 1997, Universal filed for protection under
       Federal  Bankruptcy  Laws.  In September  1997,  Mr.  Mathis  resigned as
       Chairman of the Board of  Universal.  From 1991 to 1993,  Mr.  Mathis was
       President of RCL Acquisition  Corp.,  the  predecessor  firm of HMG. From
       1993 to 1995,  Mr.  Mathis was  President  and a Director  of RCL Capital
       Corporation,  which was merged into DISC Graphics in November 1995.  From
       1988 to October  1993,  Mr.  Mathis was a  Director  and Chief  Operating
       Officer of Ameriscribe Corporation (Ameriscribe),  a national provider of
       reprographic and related facilities management services. From August 1992
       to May 1994, Mr. Mathis acted as the Federal Court Appointed  Trustee for
       International Wire News Service Liquidation Corp.,  formerly United Press
       International (UPI). From November 1991 through July 1992, Mr. Mathis was
       Vice Chairman and Director of UPI (then a news syndication  service).  In
       August  1992,  as a  part  of a  restructuring  program,  UPI  filed  for
       protection  under  the  Federal  Bankruptcy  Laws.  Mr.  Mathis is also a
       Director of Thousand Trails, Inc., an operator of recreational parks.

<PAGE>


32


       Claude D.  Montgomery,  age 46, a director  since  December  1988.  Since
       November  1996,  Mr.  Montgomery  has been a partner  in  Phillips  Lytle
       Hitchcock Blaine & Huber, a law firm. From June 1993 to October 1996, Mr.
       Montgomery was a director and  shareholder in Marcus  Montgomery  P.C., a
       law firm, formerly known as Marcus Montgomery Wolfson P.C. Mr. Montgomery
       was a director and  shareholder  in Varet,  Marcus & Fink P.C.,  formerly
       known as Milgrim,  Thomajan & Lee P.C., attorneys,  New York, from August
       1989 through June 1993.

       Robert E. Nederlander, age 65, a director since May 1989. Mr. Nederlander
       was elected by the Board of  Directors on November 16, 1993 to serve as a
       Vice Chairman of the Board,  having  previously served as Chairman of the
       Board and Chief  Executive  Officer  of the  Company  since May 1989.  He
       resigned as Vice Chairman on October 18, 1996.  He is also  President and
       director  of  Nederlander  Organization,  Inc.,  New  York,  an owner and
       operator of one of the world's largest chains of theaters, since November
       1981;  President of  Nederlander  Television and Film  Productions,  Inc.
       since October 1985;  Partner in the New York Yankees  Baseball Club since
       1973 and  Managing  General  Partner  from  September  13,  1990  through
       December 31, 1991;  director and Chairman of the Board of Riddell Sports,
       Inc.  since  April  1988;   Chairman  of  the  Board  of  MEGO  Financial
       Corporation  since January 1988; a director of MEGO Mortgage  Corp.  from
       September  1996  until  June  1998,  News  Communications,  Inc.  and HFS
       Incorporated since 1995 (which was merged into Cendant in 1997).

       John E. Sundman,  age 72, a director  since  December  1988.  Mr. Sundman
       retired in December  1991 as Vice  President of Corcap,  Inc.,  Hartford,
       Connecticut,  a position  which he held since July 1988,  when Corcap was
       spun off by Lydall, Inc., Manchester,  Connecticut. He remains a director
       of Corcap, Inc.

       Allan R. Tessler,  age 62, a director since  September  1992. Mr. Tessler
       served  as  Chairman  of the Board and  Chief  Executive  Officer  of the
       Company from November 1993 until January 1996. Mr. Tessler is Chairman of
       the Board and Chief Executive  Officer of International  Financial Group,
       Inc.  since 1987;  and Co-Chief  Executive  Officer of Data  Broadcasting
       Corporation since June 1992. Mr. Tessler is also Chairman of the Board of
       Enhance Financial Services Group, Inc.,  Jackpot  Enterprises,  Inc., and
       Checker   Holdings   Inc.  and   director  of  The   Limited,   Inc.  and
       Marketwatch.com.

       Leonard  Toboroff,  age 66, a director since May 1989.  Mr.  Toboroff has
       been a Vice Chairman of the Board and an Executive  Vice President of the
       Company since May 1989; a director and Vice  Chairman of Riddell  Sports,
       Inc. from April 1988 to the present; a practicing  attorney  continuously
       since  1961 to the  present;  a  director  since  August  1987 and former
       Chairman and Chief  Executive  Officer from  December 1987 to May 1988 of
       Ameriscribe;  and  formerly  a  director,  Chairman  and Chief  Executive
       Officer  from May 1982  through  June  1982 and Vice  Chairman  June 1982
       through September 1988 of American Bakeries Company. Mr. Toboroff is also
       a director of Banner Aerospace, Inc. and Saratoga Beverage, Inc.



<PAGE>


                                                                              33

(b)    Identification of Executive Officers
<TABLE>
<CAPTION>


        Name, Age as of March 1,
           1998, and Position                          Business Experience 
       --------------------------------------------------------------------------------------------------

<S>                                                <C>                      
        H. Sean Mathis, 51,                       See Item 10, subsection (a) above.
        Chairman of the Board and
        Chief Executive Officer

        Leonard Toboroff, 66,                     See Item 10, subsection (a) above.
        Vice Chairman of the Board
        and Executive Vice
        President

        John T. Grigsby, Jr., 58,                 See Item 10, subsection (a) above.
        Vice Chairman of the Board,
        Executive Vice President and
        Chief Financial Officer

        Jeffrey I. Lehman, 49,                    Mr. Lehman commenced his employment with
        Treasurer                                 Allis-Chalmers and was elected to his current position
                                                  in February 1996.  Since 1991, Mr. Lehman has been
                                                  employed by the A-C Reorganization Trust and
                                                  Thomson McKinnon Securities during winddown and
                                                  liquidation of their affairs.  He has also provided
                                                  financial consultation since 1985.
</TABLE>


(c)     Identification of Certain Significant Employees

        None

(d)     Family Relationships

        None

(e)     Business Experience

        See this Item 10, subsections (a) and (b) above.

(f)     Involvement in Certain Legal Proceedings

        None

<PAGE>


34



(g)     Promoters and Control Persons

        Not applicable


ITEM 11.  EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

No executive  officer  earned in excess of $100,000 in 1998.  H. Sean Mathis who
served as Chairman of the Board and Chief  Executive  Officer in 1996,  1997 and
1998 received no compensation for his services as such..

LONG-TERM STOCK INCENTIVE PLAN

The Company's Long-Term Stock Incentive Plan (1989), adopted by the shareholders
at the 1989  shareholders  meeting,  provides  for  grants to  officers  and key
employees of stock  options,  stock  appreciation  rights,  performance  shares,
restricted  stock,  restricted  stock units and other  stock-based  awards.  The
maximum number of shares which may be granted with respect to stock-based awards
is 50,000. Options to purchase shares may be granted at prices equal to not less
than the fair market value at the 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 Stock Incentive Plan was
approved by shareholders.  Options are exercisable within a period not to exceed
10 years  from date of grant.  Stock  appreciation  rights  allow the  holder to
receive the  difference  between the exercise price and the fair market value of
the stock at the date of  exercise in cash or shares of common  stock.  No stock
options or stock appreciation rights have been granted to date.


RETIREMENT PLAN

The  Consolidated  Plan covered 6 active employees at the beginning of 1998. The
Consolidated  Plan is a tax qualified  defined benefit  pension plan.  Effective
March 31, 1987, the  Consolidated  Plan was capped and frozen,  without  further
increase in benefits provided by the Company after that date.

The  retirement  benefits paid under this plan are before any  adjustment  for a
surviving  spouse's  pension  and are not subject to Social  Security  offset or
other deductions.

SAVINGS PLAN

The Company's  Savings Plan was initiated in 1968.  The Savings Plan permits the
Company to contribute in its discretion cash or stock to participants' accounts.
However, on June 1, 1985, the Company discontinued  contributions to the Savings
Plan.


<PAGE>

                                                                              35


During 1998  contributions  by Company  participants  to the Savings  Plan under
Section  401(k) of the Internal  Revenue Code totaled  $23,721.  At December 31,
1997 there were a total of 192 participants in the Savings Plan, of whom 19 were
active employees of the Company.

Due to the significant administrative costs associated with the Savings Plan, on
December  22, 1997,  the Company  filed an  Application  for  Determination  for
Terminating the Savings Plan with the IRS. The  participants in the Savings Plan
were notified of the termination  which became effective  September 20, 1998, at
which time all funds had been withdrawn from the Savings Plan.


COMPENSATION OF DIRECTORS

Since  December  1,  1990,  the  annual  retainer  for  services  as a  director
(previously  $13,500 per year) has been  suspended,  the attendance fee for each
Board meeting  attended was reduced from $425 to $100 and the attendance fee for
each Committee meeting was suspended.


TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT

None.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN
          BENEFICIAL OWNERS AND MANAGEMENT.

(a)     Security Ownership of Certain Beneficial Owners

        The following  table lists the beneficial  ownership with respect to all
        persons known to the Company to be the beneficial  owner of more than 5%
        of the Company's Common Stock as of March 1, 1999.

                                              Amount and Nature     Percent of
                   Name and Address             of Ownership           Class
                   ----------------             ------------           -----

        AL-CH Company, L.P., 810 Seventh
        Avenue, New York, NY  10019
        (includes shares held by Messrs.
        Nederlander and Toboroff
        as described below)                       407,251(1)          40.6%



<PAGE>


36


                                              Amount and Nature     Percent of
                   Name and Address             of Ownership          Class
                   ----------------             ------------          -----

        Wells Fargo Bank, P.O. Box 60347,
        Los Angeles, CA  90060, Trustee
        under that certain Amended and
        Restated Retiree Health Trust
        Agreement for UAW Retired
        Employees of Allis-Chalmers
        Corporation                               136,406             13.6%

        Firstar Trust Company,
        777 East Wisconsin Avenue,
        Milwaukee, WI  53202, Trustee
        under that certain Amended and
        Restated Retiree Health Trust
        Agreement for Non-UAW Retired
        Employees of Allis-Chalmers
        Corporation                               101,977             10.2%

        (1)    Messrs.  Nederlander  and Toboroff are  beneficial  owners of and
               have shared  voting power and shared  dispositive  power over the
               407,251  shares of common  stock held by AL-CH  Company,  L.P., a
               Delaware limited  partnership,  of which the general partners are
               Q.E.N.,   Inc.,  a  Michigan   corporation   controlled   by  Mr.
               Nederlander,  and Lenny Corp., a Delaware corporation  controlled
               by Mr. Toboroff. Mr. Allan R.
               Tessler is a limited partner in AL-CH Company, L.P.

(b)     Security Ownership of Management

        The  following  table sets forth the number of shares of Common Stock of
        the Company  beneficially owned as of March 1, 1999 by directors and all
        directors and executive  officers as a group.  Except as otherwise noted
        in the  footnotes,  the persons  listed have sole voting and  investment
        power over the shares beneficially owned.



<PAGE>


                                                                              37


                                           Amount and Nature        Percent of
                Name                          of Ownership            Class
                ----                          ------------            -----

        John R. Collins                                0               *
        John T. Grigsby, Jr.                       9,535               1.0%
        H. Sean Mathis                                 0              *
        Claude D. Montgomery                         533(1)           *
        Robert E. Nederlander                    407,251(2)          40.6%(2)
        John E. Sundman                            3,333              *
        Allan R. Tessler                               0              *
        Leonard Toboroff                         407,251(2)         40.6%(2)
                                                              
        All directors and                                     
        officers as a group                                   
        (nine persons)                           420,652            42.0%
                                                              
        *less than 1%                                         

        (1)    Shares are owned  beneficially by Mr.  Montgomery's  spouse as to
               which he disclaims beneficial ownership.

        (2)    Messrs.  Nederlander  and Toboroff are  beneficial  owners of and
               have shared  voting power and shared  dispositive  power over the
               407,251  shares of common  stock held by AL-CH  Company,  L.P., a
               Delaware limited  partnership,  of which the general partners are
               Q.E.N.,   Inc.,  a  Michigan   corporation   controlled   by  Mr.
               Nederlander,  and Lenny Corp., a Delaware corporation  controlled
               by Mr. Toboroff. Mr. Allan R.
               Tessler is a limited partner in AL-CH Company, L.P.

(c)     Changes in Control

        None


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(a)     Transactions with Management and Others

        None

(b)     Certain Business Relationships

        None

(c)     Indebtedness of Management

        None

(d)     Transactions with Promoters

        Not applicable
                                                     


<PAGE>


38

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
          AND REPORTS ON FORM 8-K.                                      



(a)     List of Documents Filed. The Index to Financial Statements and Financial
        Schedule  is included on page 15 of this  report.  Financial  statements
        Schedules not included in this report have been omitted because they are
        not  applicable  or the required  information  is shown in the Financial
        Statements or Notes thereto.

(b)     Reports  on Form 8-K.  There  were no  Reports  on Form 8-K filed in the
        fourth quarter of 1998.

(c)     Exhibits:

          2 .1. First Amended  Disclosure  Statement pursuant to Section 1125 of
        the Bankruptcy Code, which includes the First Amended and Restated Joint
        Plan  of  Reorganization  dated  September  14,  1988  (incorporated  by
        reference to the Company's Report on Form 8-K dated December 1, 1988).

          3.1.   Amended  and   Restated   Certificate   of   Incorporation   of
        Allis-Chalmers  Corporation  (incorporated by reference to the Company's
        Report on Form 8- A dated August 12, 1992).

          3.2. By-laws of Allis-Chalmers  Corporation (incorporated by reference
        to the Company's Report on Form 8-A dated August 12, 1992).

        10.1.  Amended and  Restated  Retiree  Health  Trust  Agreement  between
        Allis-Chalmers   Corporation  and  Wells  Fargo  Bank  (incorporated  by
        reference to Exhibit C-1 of the First Amended and Restated Joint Plan of
        Reorganization dated September 14, 1988 included in the Company's Report
        on Form 8-K dated December 1, 1988).

        10.2.  Amended and  Restated  Retiree  Health  Trust  Agreement  between
        Allis-Chalmers  Corporation and Firstar Trust Company  (incorporated  by
        reference to Exhibit C-2 of the First Amended and Restated Joint Plan of
        Reorganization dated September 14, 1988 included in the Company's Report
        on Form 8-K dated December 1, 1988).

<PAGE>

                                                                              39

        10.3. Reorganization Trust Agreement between Allis-Chalmers  Corporation
        and John T. Grigsby,  Jr., Trustee (incorporated by reference to Exhibit
        D of the First Amended and Restated Joint Plan of Reorganization dated
        September 14, 1988  included in the  Company's  Report on Form 8-K dated
        December 1, 1988).

        10.4.   Product   Liability  Trust  Agreement   between   Allis-Chalmers
        Corporation and Bruce W. Strausberg,  Trustee (incorporated by reference
        to  Exhibit  E  of  the  First  Amended  and  Restated   Joint  Plan  of
        Reorganization dated September 14, 1988 included in the Company's Report
        on Form 8-K dated December 1, 1988).

        10.5.* Allis-Chalmers  Corporation Long-Term Stock Incentive Plan (1989)
        (incorporated  by reference to the Company's Report on Form 10-Q for the
        three months ended September 30, 1989).

        10.6.  Subscription  and Shareholder  Agreement  between  Allis-Chalmers
        Corporation and AL-CH Company,  L.P. dated May 18, 1989 (incorporated by
        reference to the Company's Report on Form 8-K dated May 24, 1989).

        10.7.   Commercial   Installment   Loan   Agreement   by   and   between
        Allis-Chalmers  Corporation and Marine Midland Bank,  N.A.,  dated as of
        December 20, 1989  (incorporated by reference to the Company's Report on
        Form 8-K dated December 20, 1989).

        10.8.* Employment Agreement between Allis-Chalmers  Corporation and John
        T. Grigsby,  Jr.  (incorporated  by reference to the Company's Report on
        Form 10-Q for the three months ended September 30, 1989).

        10.9.*  Allis-Chalmers  Savings Plan  (incorporated  by reference to the
        Company's Report on Form 10-K for the year ended December 31, 1988).

        10.10.*  Allis-Chalmers   Consolidated  Pension  Plan  (incorporated  by
        reference  to the  Company's  Report  on Form  10-K for the  year  ended
        December 31, 1988).

        21.1.  Subsidiaries of Allis-Chalmers Corporation.

        27.1.  Financial Data Schedule.

*A management contract or compensatory plan or arrangement.


<PAGE>


40


            ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

                                   (thousands)
<TABLE>
<CAPTION>



                              Balance at                                                   Balance
   Year Ended                  Beginning                                                  at Close
December 31, 1996             of Period            Additions           Deductions        of Period
-----------------            -----------           ---------           ----------        ---------

<S>                          <C>                   <C>                 <C>               <C>      
Doubtful receivables         $       306           $       0           $      276(a)     $      30


Plant rearrangement          $        68           $       0           $       68        $       0
                             -----------           ---------           ----------        ---------



                              Balance at                                                   Balance
   Year Ended                  Beginning                                                  at Close
December 31, 1997             of Period            Additions           Deductions        of Period
-----------------            -----------           ---------           ----------        ---------

Doubtful receivables         $        30           $       6           $        0        $      36
                             -----------           ----------          ----------        ---------



                              Balance at                                                   Balance
   Year Ended                  Beginning                                                  at Close
December 31, 1998             of Period            Additions           Deductions        of Period
-----------------            -----------           ---------           ----------        ---------

Doubtful receivables         $        36           $       0           $       15        $      21
                             -----------           ----------          ----------        ---------

</TABLE>



(a) Includes writeoff of uncollectible receivables, less recoveries.


<PAGE>

                                                                              41

                                   SIGNATURES

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

                                           Allis-Chalmers Corporation



                                           /s/John T. Grigsby, Jr.    
                                           John T. Grigsby, Jr.
                                           Vice Chairman, Executive Vice
                                           President and Chief Financial Officer
                                           Date: March 29, 1999


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  as  amended,  this report has been signed on March 26, 1999 by the
following persons on behalf of the registrant and in the capacities indicated.



/s/H. Sean Mathis                             /s/Robert E. Nederlander         
H. Sean Mathis                                Robert E. Nederlander, Director
Chairman of the Board,
Chief Executive Officer
and Director



/s/ John R. Collins                           /s/John E. Sundman               
John R. Collins, Director                     John E. Sundman, Director




/s/John T. Grigsby, Jr.                       /s/Allan R. Tessler              
John T. Grigsby, Jr. Director                 Allan R. Tessler, Director



/s/Claude D. Montgomery                       /s/Leonard Toboroff              
Claude D. Montgomery, Director                Leonard Toboroff, Director