As filed with the Securities and Exchange Commission on June 24, 2005.
Registration No.                     

FORM S-1

ALLIS-CHALMERS ENERGY INC.

1389
(Primary Standard
Industrial Classification Code Number)

5075 WESTHEIMER, SUITE 890
HOUSTON, TEXAS 77056
(713) 369-0550
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant’s Principal Executive Offices)

VICTOR M. PEREZ, CHIEF FINANCIAL OFFICER
5075 WESTHEIMER, SUITE 890
HOUSTON, TEXAS 77056
(713) 369-0550
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)

WITH COPIES TO:

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JUNE 24, 2005

PROSPECTUS

                     Shares

[LOGO]

ALLIS-CHALMERS ENERGY INC.

Common Stock

     We are selling                      shares of our common stock and the selling stockholders are selling                      shares of our common stock. We will not receive any proceeds from the sale of our common stock by the selling stockholders.

     Our common stock trades on the American Stock Exchange under the symbol “ALY”. On June 22, 2005 the last sale price reported for our common stock on the American Stock Exchange was $4.79 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 6.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

     We have granted Morgan Keegan & Company, Inc. a 30-day option to purchase up to an aggregate of                      shares of common stock, solely to cover over-allotments, if any.

     Morgan Keegan & Company, Inc. expects to deliver the shares of common stock to purchasers on or about      , 2005.

MORGAN KEEGAN & COMPANY, INC.

The date of this prospectus is                        , 2005.

TABLE OF CONTENTS

     You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of this prospectus.

     Unless the context otherwise requires, references in this prospectus to “Allis-Chalmers,” “we,” “us,” “our” or “ours” refer to Allis-Chalmers Energy Inc., together with our operating subsidiaries. When the context requires, we refer to these entities separately. References in this prospectus to the “selling stockholders” refer to the selling stockholders identified under “Principal and Selling Stockholders.” Certain specialized terms used in describing our oil and gas service business are defined in “Certain Definitions.” Except as otherwise expressly provided, all references to numbers of shares and to the exercise price of options and warrants contained in this prospectus have been restated to give retroactive effect to a one-to-five reverse stock split effective on June 10, 2004. Unless otherwise indicated, the information in this prospectus assumes that the underwriter does not exercise its over-allotment option.

i

1

2

3

4

5

RISK FACTORS

     You should carefully consider the following risks before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. If this occurs, the trading price of our common stock could decline, and you could lose all or part of the money you paid to buy our common stock. Although the risks described below are the risks that we believe are material, they are not the only risks relating to our business and our common stock. Additional risks and uncertainties, including those that are not yet identified or that we currently believe are immaterial, may also adversely affect our business, financial condition or results of operations.

Risks Associated With Our Industry

Cyclical Declines In Oil And Natural Gas Prices May Result In Reduced Use Of Our Services, Affecting Our Business, Financial Condition And Results Of Operation And Our Ability To Meet Our Capital Expenditure Obligations And Financial Commitments.

     The oil and natural gas exploration and drilling business is highly cyclical. Generally, as oil and gas prices decrease, exploration and drilling activity declines as marginally profitable projects become uneconomic and are either delayed or eliminated. Declines in the number of operating drilling rigs result in reduced use of and prices for our services. Accordingly, when oil and natural gas prices are relatively low, our revenues and income will suffer. Oil and gas prices depend on many factors beyond our control, including the following:

     Depending on the market prices of oil and gas, companies exploring for oil and gas may cancel or curtail their drilling programs, thereby reducing demand for drilling services. Our contracts are generally short-term, and oil and gas companies tend to respond quickly to upward or downward changes in prices. Any reduction in the demand for drilling services may materially erode both pricing and utilization rates for our services and adversely affect our financial results. As a result, we may suffer losses, be unable to make necessary capital expenditures and be unable to meet our financial obligations.

Our Industry Is Highly Cyclical, And Our Results Of Operations May Be Volatile.

     Our industry is highly cyclical, with periods of high demand and high pricing followed by periods of low demand and low pricing. Periods of low demand intensify the competition in the industry and often result in equipment being idle for long periods of time. We may be required to enter into lower rate contracts in response to market conditions in the future.

     Due to the short-term nature of most of our contracts, changes in market conditions can quickly affect our business. As a result of the cyclicality of our industry, our results of operations have been volatile, and we expect this volatility to continue.

Our Industry Is Highly Competitive, With Intense Price Competition.

     The markets in which we operate are highly competitive. Contracts are traditionally awarded on a competitive bid basis. Pricing is often the primary factor in determining which qualified contractor is awarded a job. The competitive environment has intensified as recent mergers among oil and gas companies have reduced the number of available customers. Many other oil and gas service companies are larger than we are and have greater resources than we have. These competitors are better able to withstand industry downturns, compete on the basis of price and acquire new equipment and technologies, all of which could affect our revenues and profitability. These competitors compete with us both for customers and for acquisitions of other businesses. This competition may cause our business to suffer. We believe that competition for contracts will continue to be intense in the foreseeable future.

6

We May Be Subject To Claims For Personal Injury And Property Damage, Reducing Our Net Worth.

     Our services are used for the exploration and production of oil and natural gas. These operations are subject to inherent hazards that can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and marine life, and suspension of operations. Litigation arising from an accident at a location where our products or services are used or provided may cause us to be named as a defendant in lawsuits asserting potentially large claims. We maintain customary insurance to protect our business against these potential losses. However, we could become subject to material uninsured liabilities which materially reduce our net worth.

We Are Subject To Government Regulations.

     We are subject to various federal, state and local laws and regulations relating to the energy industry in general and the environment in particular. Environmental laws have become more stringent in recent years and have generally sought to impose greater liability on a larger number of potentially responsible parties. Although we are not aware of any proposed material changes in any federal, state and local statutes, rules or regulations, any changes could materially affect our financial condition and results of operations.

We May Experience Increased Labor Costs Or The Unavailability Of Skilled Workers.

     We are dependent upon the available labor pool of skilled employees. We compete with other oil and gas service businesses and other employers to attract and retain qualified personnel with the technical skills and experience required to provide our customers with the highest quality service. We are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. A shortage in the labor pool of skilled workers or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and could require us to enhance our wage and benefits packages. There can be no assurance that labor costs will not increase. Any increase in our operating costs could cause our business to suffer.

Severe Weather Could Have A Material Adverse Impact On Our Business.

     Our business could be materially and adversely affected by severe weather. Repercussions of severe weather conditions may include:

     In addition, oil and natural gas operations of our customers located offshore and onshore in the Gulf of Mexico and in Mexico may be adversely affected by hurricanes and tropical storms, resulting in reduced demand for our services. Further, our customers’ operations in the Mid-Continent and Rocky Mountain regions of the United States are also adversely affected by seasonal weather conditions. This limits our access to these jobsites and our ability to service wells in these areas. These constraints decrease drilling activity and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs.

Our Business May Be Affected By Terrorist Activity And By Security Measures Taken In Response To Terrorism.

     We may experience loss of business or delays or defaults in payments from payers that have been affected by actual or potential terrorist activities. Some oil and gas drilling companies have implemented security measures in response to potential terrorist activities, including access restrictions that could adversely affect our ability to market our services to new and existing customers, and could increase our costs. Terrorist activities and potential terrorist activities and any resulting economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business.

Risks Associated With Our Company

Because We Are Highly Leveraged, We May Have Difficulty Obtaining Additional Financing, And We Could Experience Losses And Fail To Meet Our Capital Expenditure Requirements And Financial Obligations If Our Revenues Or Income Decrease Or If Interest Rates Increase.

7

     As a result of acquisition financing, we are and expect to continue to be highly leveraged. At March 31, 2005, we had approximately $32.9 million of debt outstanding, and we intend to increase debt in the future to fund our expansion. This high level of debt will:

     We may not maintain sufficient revenues to sustain profitability or to meet our capital expenditure requirements and our financial obligations.

If We Fail To Obtain Additional Financing, We May Be Unable To Refinance Our Existing Debt, Expand Our Current Operations Or Acquire New Businesses, Which Could Result In A Failure To Grow Or Result In Defaults Under Our Credit Facilities.

     In order to refinance indebtedness, expand existing operations and acquire additional businesses, we will require substantial amounts of capital. There can be no assurance that financing, whether from equity or debt financings or other sources, will be available or, if available, will be on terms satisfactory to us. If we are unable to obtain such financing, we will be unable to acquire additional businesses and may be unable to meet our obligations under our existing credit agreements.

We May Fail To Acquire Additional Businesses, Which Will Restrict Our Growth And May Result In A Decrease In Our Stock Price.

     Our business strategy includes acquiring companies operating in the oil and natural gas equipment rental and services industry. However, there can be no assurance that we will be successful in acquiring any additional companies. Successful acquisition of new companies will depend on various factors, including, but not limited to:

     There can be no assurance that we will be able to acquire and successfully operate any particular business or that we will be able to expand into areas that we have targeted. The price of our common stock may fall if we fail to acquire additional businesses.

Difficulties In Integrating Acquired Businesses May Result In Reduced Revenues And Income.

     We may not be able to successfully integrate the business of our operating subsidiaries or any business we may acquire in the future. The integration of the businesses will be complex and time consuming, will place a significant strain on management, and may disrupt our businesses. We may be adversely impacted by unknown liabilities of acquired businesses. We may encounter substantial difficulties, costs and delays involved in integrating common accounting, information and communication systems, operating procedures, internal controls and human resources practices, including incompatibility of business cultures and the loss of key employees and customers. These difficulties may reduce our ability to gain customers or retain existing customers, and may increase operating expenses, resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.

If We Do Not Experience Expected Synergies, We May Not Achieve Increases In Revenues And Reductions In Expenses That We Hope To Obtain When Acquiring Businesses.

     We may not be able to achieve the synergies we expect from the combination of businesses, including plans to reduce overhead through shared facilities and systems, cross-market to the businesses’ customers, and access a larger pool of customers due to the combined businesses’ ability to provide a larger range of services.

Failure To Maintain Effective Internal Controls Could Have A Material Adverse Effect On Our Operations.

     We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. During the

8

course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business decision process may be adversely affected, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the price of our stock could decrease as a result.

Our Products And Services May Become Obsolete, Resulting In A Loss Of Customers And Revenues.

     Our business success is dependent upon providing our customers efficient, cost-effective oil and gas drilling equipment, services and technology. It is possible that competing technologies may render our equipment and technologies obsolete, causing us to lose customers and revenues.

Our Historical Results Are Not An Indicator Of Our Future Operations.

     We have made numerous acquisitions during the past four years. As a result of these transactions, our past performance is not indicative of future performance and investors in the common stock should not base their expectations as to our future performance on our historical results.

The Loss Of Key Personnel Would Adversely Affect Our Ability To Effectively Finance And Manage Our Business, Acquire New Businesses, And Obtain And Retain Customers.

     We are dependent upon the efforts and skills of our executives to finance and manage our business, identify and consummate additional acquisitions and obtain and retain customers. These executives include:

     In addition, our development and expansion will require additional experienced management and operations personnel. No assurance can be given that we will be able to identify and retain these employees. The loss of the services of one or more of our key personnel could increase our exposure to the other risks described in this Risk Factors section. We do not maintain key man insurance on any of our personnel.

Failure To Retain Key Personnel Could Hurt Our Operations.

     We require highly skilled personnel to operate equipment and provide technical services. To the extent that demand for drilling services increases, shortages of qualified personnel could arise, creating upward pressure on wages and difficulty in obtaining skilled personnel.

We Are Dependent On A Few Customers Operating In A Single Industry And Our Cash Flow Would Be Seriously Affected If One Or More Significant Customers Fail To Pay Us.

     Our customers are engaged in the oil and natural gas drilling business in the United States, Mexico and elsewhere. We are dependent upon a few customers, including our largest customer in Mexico, for a significant portion of our revenues. This concentration of customers may impact our overall exposure to credit risk, and customers will likely be similarly affected by changes in economic and industry conditions. A failure by one or more significant customers to pay us could materially reduce our cash flow and result in losses.

Our Operations In Mexico And Elsewhere May Expose Us To Political And Other Uncertainties, Including Risks Of:

9

Environmental Liabilities Relating To Discontinued Operations Could Result In Substantial Losses.

     We reorganized under the bankruptcy laws in 1988. Since that time, a number of parties, including the Environmental Protection Agency, have asserted that we are responsible for the cleanup of hazardous waste sites. These assertions have been made only with respect to our pre-bankruptcy activities. We believe that such claims are barred by applicable bankruptcy law, and we have not experienced any material expense in relation to any such claims. However, if we do not prevail with respect to these claims in the future, we could become subject to material environmental liabilities which could materially impact our net worth.

Products Liability Claims Relating To Discontinued Operations Could Result In Substantial Losses.

     We reorganized under the bankruptcy laws in 1988. Since that time, we have been regularly named in products liability lawsuits primarily resulting from the manufacture of products containing asbestos. In connection with our bankruptcy, a special products liability trust was established to be responsible for products liability claims. We believe that claims against us are banned by applicable bankruptcy law, and that the products liability trust will continue to be responsible for products liability claims. Since 1988, no court has ruled that we are responsible for products liability claims. However, if we are held responsible for product liability claims, we could suffer substantial losses. We have not manufactured products containing asbestos since our bankruptcy in 1988.

Risks Associated With An Investment In Our Common Stock

A Large Number Of Shares Are Eligible For Future Sale, Which May Reduce The Price Of Our Common Stock.

     Sales of substantial amounts of shares of common stock in the public market could have an adverse effect on the market value of our common stock. We have filed a Registration Statement with the Securities and Exchange Commission registering the resale of approximately 11.7 million shares of our currently outstanding common stock and approximately 2.7 million shares of common stock which may be issued upon exercise of options and warrants. Substantially all other outstanding shares of common stock are freely tradable. Market sales of common stock or the availability of common stock may reduce the price of the common stock.

We Do Not Expect To Pay Dividends On Our Common Stock And Investors Will Be Able To Receive Cash In Respect Of The Shares Of Our Common Stock Only If They Sell The Shares.

     We have no intention in the foreseeable future to pay any cash dividends on our common stock and our credit agreements restrict the payment of dividends on our common stock. Therefore an investor in our common stock, in all likelihood, will obtain an economic benefit from our common stock only by selling our common stock.

10

USE OF PROCEEDS

     We estimate that the net proceeds from the sale of shares of our common stock by us will be approximately $           million, or approximately $           million if the underwriter exercises its over-allotment option in full (after deducting the underwriting discounts and the estimated offering expenses payable by us). The proceeds from the exercise of warrants and options held by selling stockholders that will be exercised in connection with the offering will be $          . The net proceeds from the sale of the shares of our common stock by us and from the exercise of the warrants and option will be used for general corporate purposes, which may include acquisitions, capital expenditures and working capital. Although we continuously review acquisition opportunities, we have no binding commitments relating to any such acquisitions.

DIVIDEND POLICY

     We currently intend to continue our policy of retaining earnings to finance the growth of our business. As a result, we do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit facilities restrict our ability to pay dividends on our common stock.

11

PRICE RANGE OF COMMON STOCK

     Our common stock is traded on the American Stock Exchange under the symbol “ALY.” Prior to September 13, 2004, our common stock was quoted on the OTC Bulletin Board and traded sporadically. The following table sets forth, for periods prior to September 13, 2004, high and low bid information per share of common stock, as reported on the OTC Bulletin Board, and for periods since September 13, 2004, high and low sale prices per share of common stock reported on the American Stock Exchange. The quotations reported on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Share prices for periods prior to June 10, 2004, set forth herein have been adjusted to give retroactive effect to a one-to-five reverse stock split effected June 10, 2004.

     On June 22, 2005, there were approximately 2,100 holders of record of our common stock and the last reported sale price of our common stock as reported by the American Stock Exchange was $4.79 per share.

12

CAPITALIZATION

     The following table sets forth our unaudited cash and capitalization as of March 31, 2005. You should read this table in conjunction with our financial statements and the notes to our financial statements included elsewhere in this prospectus.

13

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 regarding our business, financial condition, results of operations and prospects. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements. However, these are not the exclusive means of identifying forward-looking statements. Although forward-looking statements in this prospectus reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Further information about the risks and uncertainties that may impact us are described in the Risk Factors section beginning on page 6. You should read the Risk Factors section carefully. You should not place undue reliance on forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to update publicly any forward-looking statements in order to reflect any event or circumstance occurring after the date of this prospectus or currently unknown facts or conditions or the occurrence of unanticipated events.

14

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

     The following selected historical consolidated financial information for each of the years in the five-year period ended December 31, 2004, has been derived from our audited consolidated financial statements. The following selected historical consolidated financial information for the three months ended March 31, 2005 and 2004 has been derived from our unaudited consolidated financial statements, and, in the opinion of our management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. This information is only a summary and you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which discusses factors affecting the comparability of the information presented, and in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical consolidated financial statements have been restated as described in Note 2 to the consolidated financial statements for the three months ended March 31, 2004 and for the year ended December 31, 2003, included elsewhere herein. Results for interim periods may not be indicative of results for full fiscal years.

15

16

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

     The following discussion and analysis should be read in conjunction with our selected historical financial information and our accompanying financial statements and the notes to those financial statements included elsewhere in this document. The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of risks and uncertainties, including, but not limited to, those discussed above under “Risk Factors.”

Overview Of Our Business

     We provide services and equipment to oil and gas exploration and development companies, principally in Texas, Louisiana, New Mexico, Colorado, Oklahoma, offshore in the United States Gulf of Mexico, and offshore and onshore in Mexico. We currently operate in five sectors of the oilfield service industry: directional and horizontal drilling; casing and tubing; compressed air drilling; production services; and rental tools.

     We derive operating revenues from rates per day and rates per job that we charge for the labor and equipment required to provide a service. The price we charge for our services depends upon several factors, including the level of oil and gas drilling activity in the particular geographic regions in which we operate and the competitive environment. Contracts are awarded based on the price, quality of service and equipment, and the general reputation and experience of our personnel. The demand for drilling services has historically been volatile and is affected by the capital expenditures of oil and gas exploration and development companies, which can fluctuate based upon the prices of oil and natural gas, or the expectation for the prices of oil and natural gas.

     The number of working drilling rigs, typically referred to as the “rig count,” is an important indicator of activity levels in the oil and gas industry. The rig count in the U.S. increased from 862 as of December 31, 2002 to 1,243 on December 31, 2004, according to the Baker Hughes rig count. Furthermore, directional and horizontal rig counts increased from 283 as of December 31, 2002 to 440 on December 31, 2004, which accounted for 32.8% and 35.4% of the total U.S. rig count, respectively. As of March 31, 2005, this trend has continued, with the rig count climbing to 1,331, of which 503 or 37.8% were directional and horizontal rigs. Currently, we believe that the number of available drilling rigs is insufficient to meet the demand for drilling rigs. Consequently, unless a significant number of additional drilling rigs are brought online, the rig count may not increase substantially despite the strong demand.

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

Cyclical Nature Of Equipment Rental And Services Industry

     The oil and gas equipment rental and services industry is highly cyclical. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for oil and the domestic supply and demand for natural gas. The peaks and valleys of demand are further apart than those of many other cyclical industries. This is primarily a result of the industry being driven by commodity demand and corresponding price increases. As demand increases, producers raise their prices. The price escalation enables producers to increase their capital expenditures. The increased capital expenditures ultimately result in greater revenues and profits for services and equipment companies. The increased capital expenditures also ultimately result in greater production which historically has resulted in increased supplies and reduced prices.

     Demand for our services has been strong throughout 2003, 2004 and 2005. Management believes demand will remain strong throughout 2005 due to high oil prices and increased demand and declining production costs for natural gas as compared to other energy sources. Because of these market fundamentals for natural gas, management believes the long-term trend of activity in our markets is favorable. However, these factors could be more than offset by other developments affecting the worldwide supply and demand for oil and natural gas products.

17

Results Of Operations

     In February 2002, we acquired 81% of the outstanding stock of Jens’ Oilfield Service, Inc. In February 2002, we also purchased substantially all the outstanding common stock and preferred stock of Strata Directional Technology, Inc. The results from our casing and tubing services and directional drilling services are included in our operating results from February 1, 2002.

     In July 2003, through our subsidiary Mountain Air, we entered into a limited liability company agreement with M-I L.L.C., a company owned by Smith International and Schlumberger N.V., to form AirComp, LLC. We own 55% and M-I owns 45% of AirComp. We have consolidated AirComp into our financial statements beginning with the quarter ending September 30, 2003.

     In September 2004, we acquired the remaining 19% of Jens’ Oilfield Service, Inc. and we acquired Safco-Oil Field Products, Inc. In November 2004, AirComp acquired substantially all of the assets of Diamond Air Drilling Services, Inc. and Marquis Bit Co., LLC, and in December 2004, we acquired Downhole Injection Systems, LLC. We consolidated the results of these acquisitions from the day they were acquired.

     In 2004 and the first quarter of 2005 we reported our production services and our rental tool segment as our other services segment. In April 2005, we acquired Delta Rental Service, Inc. and in May 2005, we acquired Capcoil Tubing Services, Inc. Beginning in the second quarter of 2005 we will report the operations of Downhole and Capcoil as our production services segment and will report the operations of Safco-Oil and Delta as our rental tools segment.

     The foregoing acquisitions affect the comparability from period to period of our historical results, and our historical results may not be indicative of our future results.

Comparison Of Three Months Ended March 31, 2004 And March 31, 2005

     Our revenues for the three months ended March 31, 2005 were $19.3 million, an increase of 100% compared to $9.7 million for the three months ended March 31, 2004. Revenues increased for all of our business segments due to increased demand for our services due to the general increase in oil and gas industry activity. Revenues increased most significantly at our directional drilling services segment due to the addition of operations and sales personnel and the opening of new operations offices, which increased our capacity and market presence. Additionally, our compressed air drilling services segment revenues increased in the 2005 period compared to the 2004 period due to the acquisition of Diamond Air and Marquis Bit, which we refer to herein collectively as Diamond Air, on November 1, 2004, and improved pricing in West Texas.

     Revenues increased at our casing and tubing services segment due to increased revenues from Mexico, improved market conditions, improved market penetration and the addition of operating personnel which broadened our capabilities. The acquisition of Safco-Oil Field Products, Inc. in September 2004 and the acquisition of Downhole Injection Systems, LLC in December 2004 also contributed to casing and tubing revenues as a result of cross marketing opportunities.

     Our cost of revenues consists principally of our labor costs and benefits, equipment rentals, maintenance and repairs of our equipment, depreciation, insurance and fuel. Because many of our costs are fixed, our gross profit as a percentage of revenues is generally affected by our level of revenues. Our gross profit for the quarter ended March 31, 2005 increased 164.2% to $5.6 million, or 29.1% of revenues, compared to $2.1 million, or 22.1%, of revenues for the three months ended March 31, 2004, due to increased revenues and improved pricing in the directional drilling services segment, increased revenues at our compressed air drilling services segment, increased revenues from Mexico and improved market conditions for our domestic casing and tubing segment.

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

     General and administrative expense was $3.4 million in the first quarter of 2005 period compared to $1.1 million for the first quarter of 2004. General and administrative expense increased in the 2005 quarter due to the additional expenses associated with the acquisitions completed in the second half of 2004, and the hiring of additional sales and administrative personnel for our other businesses. General and administrative expense also increased because of increased legal, accounting fees and other expenses related to our financing and acquisition activities, increased legal, accounting, and consulting fees in connection with our internal controls and corporate governance process, and increased corporate accounting and administrative staff. General and administrative expenses include $394,000 of amortization expense in the first quarter of 2005 compared to $219,000 in the first quarter of 2004. The increase in amortization expense is due to the amortization of

18

intangible assets in connection with our acquisitions and the amortization of deferred financing costs. As a percentage of revenues, general and administrative expenses were 17.5% in the 2005 quarter and 11.4% in the 2004 quarter.

     Income from operations for the three months ended March 31, 2005 totaled $2.2 million, a 118.2% increase over the $1.0 million in income from operations for the three months ended March 31, 2004, reflecting the increase in our revenues and gross profit, offset in part by increased depreciation and general and administrative expenses.

     Our interest expense was $521,000 in the first quarter of 2005, compared to $569,000 in the first quarter of 2004. Interest expense decreased in the 2005 quarter due to the prepayment, in December 2004, of our 12% $2.4 million subordinated note.

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

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

     The following table compares revenues and income from operations for each of our business segments for the quarters ended March 31, 2004 and March 31, 2005. Income from operations consists of our revenues less cost of revenues, general and administrative expenses, and depreciation and amortization:

Directional Drilling Services

     Revenues for the first quarter ended March 31, 2005 for our directional drilling services segment were $9.9 million, an increase of 88.5% from the $5.3 million in revenues for the first quarter ended March 31, 2004. Income from operations increased 183.7% to $1.9 million for the first quarter of 2005 from $662,000 for the comparable 2004 period. The improved results for this segment are due to the increase in drilling activity in the Texas and Gulf Coast areas, the establishment of new operations in West Texas and Oklahoma, and the addition of operations and sales personnel which increased our capacity and market presence. Increased personnel expenses were more than offset by the growth in revenues, improved pricing for our services and cost savings as a result of purchases, in late 2003 and in 2004, of most of the down-hole motors used in directional drilling. Previously we had leased these motors.

Casing And Tubing Services

     Revenues for the quarter ended March 31, 2005 for the casing and tubing services segment were $3.6 million, an increase of 83.6% from the $1.9 million in revenues for the quarter ended March 31, 2004. Revenues from domestic operations increased to $1.9 million in the 2005 period from $917,000 in the 2004 period as a result of improved market conditions for our services in South Texas and the addition of personnel which improved our capabilities and expanded our offered services. Revenues from Mexican operations increased to $1.6 million in the 2005 first quarter from $1.0 million in the 2004 period as a result of increased drilling activity in Mexico and the addition of equipment that increased our capacity. Income from operations increased by 200.2% to $1.3 million in the first quarter of 2005 from $442,000 in the first quarter of 2004. The increase in this segment’s operating income is due to increased revenues both domestically and in our Mexico operations.

19

Compressed Air Drilling Services

     Our compressed air drilling revenues were $4.2 million for the three months ended March 31, 2005, an increase of 69.3% compared to $2.5 million in revenues for the three months ended March 31, 2004. Income from operations increased to $527,000 in the 2005 period compared to income from operations of $255,000 in the 2004 period. Our compressed air drilling revenues and operating income for the 2005 year increased compared to the prior year due in part to the acquisition of Diamond Air as of November 1, 2004.

Other Services

     Revenues for this segment consist of Safco’s rental tool business, acquired in September 2004, and Downhole’s production services business acquired in December 2004. This segment had revenues and an operating loss of $1.7 million and $119,000, respectively, in the first quarter of 2005. We acquired Delta and Capcoil in the second quarter of 2005 and, in the future, we will report the results of operations of Delta and Safco in our rental tool segment and will report the results of operations of Downhole and Capcoil in our production services segment.

20

Comparison Of Years Ended December 31, 2003 And December 31, 2004

     Our revenues for the year ended December 31, 2004 were $47.7 million, an increase of 45.8% compared to $32.7 million for the year ended December 31, 2003. Revenues increased due to increased demand for our services due to the general increase in oil and gas drilling activity. Revenues increased most significantly at our directional segment due to the addition of operations and sales personnel, which increased our capacity and market presence. Additionally, our compressed air drilling services' revenues in 2004 increased compared to the 2003 year due to the inclusion, for a full year in 2004, of the business contributed by M-I in connection with the formation of AirComp in July 2003 and the acquisition of Diamond Air in November 2004. We have consolidated AirComp into our financial statements beginning with the quarter ended September 30, 2003. Mexico operations at our casing and tubing services segment also contributed to an increase in revenues which was offset in part by a decrease in domestic revenues for this segment due to increased competition for casing and tubing services in South Texas. Finally, we acquired Safco-Oil in September 2004 and acquired Downhole in December 2004.

     Our gross profit for the year ended December 31, 2004 increased 42.9% to $12.4 million, or 26.0% of revenues, compared to $8.7 million, or 26.6 % of revenues for the year ended December 31, 2003, due to the increase in revenues in the directional drilling segment, the compressed air drilling segment and the casing and tubing segment’s Mexican operations, which more than offset lower revenues and higher costs in our domestic casing and tubing segment. Our cost of revenues consists principally of our labor costs and benefits, equipment rentals, maintenance and repairs of our equipment, depreciation, insurance and fuel. Because many of our costs are fixed, our gross profit as a percentage of revenues is generally affected by our level of revenues.

     General and administrative expense was $8.0 million in 2004 compared to $6.2 million in 2003. General and administrative expense increased in 2004 due to additional expenses associated with the inclusion of AirComp for a full year, acquisitions completed in the second half of 2004, and the hiring of additional sales and administrative personnel at each of our subsidiaries. General and administrative expense also increased because of increased professional fees and other expenses related to our financing and acquisition activities, including the listing of our common stock on the American Stock Exchange, and increased corporate accounting and administrative staff. As a percentage of revenues, general and administrative expenses were 16.8% in 2004 and 18.9% in 2003.

     Depreciation and amortization was $3.6 million for the year ended December 31, 2004 compared to $2.9 million for the year ended December 31, 2003 due to the inclusion of AirComp for a full year and the increase in our assets resulting from capital expenditures and acquisitions completed in 2004.

     Income from operations for the year ended December 31, 2004 totaled $4.2 million, a 61.0% increase over the $2.6 million in income from operations for the prior year, reflecting the increase in our revenues and gross profit, offset in part by an increase in general and administrative expense and amortization. Income from operations for the year ended December 31, 2004 includes $188,000 in additional accrued expense for post-retirement medical benefits associated with discontinued operations. The increase in this accrued expense was based on the present value of the expected retiree benefit obligations as determined by a third party actuary. Income from operations for the 2003 year includes income of $99,000 which resulted from a reduction in projected post-retirement benefits based on the third party actuary at the end of 2003. (Please refer to Note 3 — “Pension and Post Retirement Benefit Obligations”).

     Our interest expense increased to $2.8 million in 2004, compared to $2.5 million for the prior year, in spite of the decrease in our total debt. Interest expense in 2004 includes $359,000 in warrant put amortization including the retirement of warrants in connection with the prepayment, in December 2004, of our $2.4 million 12.0% subordinated note. Interest expense in 2003 includes $216,000 in connection with the acceleration, in 2003, of the amortization of a put obligation related to subordinated debt at Mountain Compressed Air. The subordinated debt was paid off in connection with the formation of AirComp in 2003.

     Minority interest in income of subsidiaries for 2004 was $321,000 compared to $343,000 for 2003. The increase in net income at AirComp was offset in part by the elimination of minority interest in Jens’, which was 19%-owned by director Jens Mortensen until September 30, 2004.

     We had net income attributed to common stockholders of $764,000 for the year ended December 31, 2004 compared to net income attributed to common stockholders of $2.3 million for the year ended December 31, 2003. In 2003, we recognized a non-operating gain on sale of an interest in a subsidiary in the amount of $2.4 million in connection with the formation of AirComp, and recognized a one-time gain of $1.0 million in the third quarter of 2003 as a result of settling a lawsuit against the former owners of Mountain Air Drilling.

21

     The following table compares revenues and income from operations for each of our business segments for the years ended December 31, 2003 and December 31, 2004. Income from operations consists of our revenues less cost of revenues, general and administrative expenses, and depreciation and amortization:

Directional Drilling Services Segment

     Revenues for the year ended December 31, 2004 for our directional drilling services segment were $24.8 million, an increase of 54.8% from $16.0 million in revenues for the year ended December 31, 2003. Income from operations increased by 177.5% to $3.1 million for 2004 from $1.1 million for 2003. The improved results for this segment are due to the increase in drilling activity in the Texas and Gulf Coast areas and the addition of operations and sales personnel which increased our capacity and market presence. Increased personnel expenses were more than offset by the growth in revenues and cost savings as a result of purchases, in late 2003 and in 2004, of most of the down-hole motors used in directional drilling. Previously, we had leased these motors.

Casing And Tubing Services Segment

     Revenues for the year ended December 31, 2004 for the casing and tubing services segment were $10.4 million, an increase of 3.5% from the $10.0 million in revenues for the year ended December 31, 2003. Revenues from domestic operations decreased from $6.7 million in 2003 to $5.2 million in the 2004 year as a result of increased competition in South Texas, resulting in fewer contracts awarded to us and lower pricing for our services. Revenues from Mexican operations, however, increased from $3.7 million in 2003 to $5.1 million in 2004 as a result of increased drilling activity in Mexico and the addition of equipment that increased our capacity. Income from operations decreased by 11.1% to $3.2 million in 2004 from $3.6 million in 2003. The decrease in this segment’s operating income is due to the decrease in revenues from domestic operations and increases in wages and benefits domestically, which was partially offset by increased revenues from Mexico.

Compressed Air Drilling Services Segment

     Our compressed air drilling revenues were $11.6 million for the year ended December 31, 2004, an increase of 73.1% compared to $6.7 million in revenues for the year ended December 31, 2003. Income from operations increased to $1.2 million in 2004 compared to income from operations of $17,000 in 2003. Our compressed air drilling revenues and operating income for the 2004 year increased compared to the prior year due to the inclusion, for a full year in 2004, of the business contributed by M-I in connection with the formation of AirComp in July 2003, and the acquisition of Diamond Air in November 2004.

Other Services Segment

     Revenues for this segment consist of Safco-Oil’s rental tool business, acquired in September 2004, and Downhole’s production services acquired in December 2004. Revenues for this segment for the year ended December 31, 2004 were $987,000 with a loss from operations of $67,000. We acquired Delta and Capcoil in the second quarter of 2005 and, in the future, we will report the results of operations of Delta and Safco-Oil in our rental tool segment and will report the results of operations of Downhole and Capcoil in our production services segment.

22

Comparison Of Years Ended December 31, 2002 And 2003

     Revenues for the year ended December 31, 2003 totaled $32.7 million, an increase of 81.9% from the $18.0 million in revenues for the year ended December 31, 2002. The increase in revenues was due to the general increase in oil and gas drilling activity and the inclusion of AirComp, our compressed air drilling venture, beginning in July 2003. The increase in revenues also reflected the first full year of revenue contribution from the casing and tubing segment and the directional drilling segment, both of which were acquired in February 2002.

     Our gross profit for the year ended December 31, 2003 was $8.7 million, or 26.6% of revenues, compared to $3.4 million, or 18.9 % of revenues for the year ended December 31, 2002, due to increased revenues, increased utilization of our equipment and personnel and increased pricing in each of our business segments due to the increase in industry activity. Our cost of revenues consists principally of our labor costs and benefits, equipment rentals, maintenance and repairs of our equipment, insurance and fuel. Because many of our costs are fixed, our gross profit as a percentage of revenues is generally affected by our level of revenues. Gross profit as a percentage of revenues increased as a result of higher revenues and better pricing for our services.

     General and administrative expenses were $6.2 million, or 18.9% of revenues, in 2003 compared to $3.8 million, or 21.1% of revenues, in 2002. The increase in general and administrative expenses reflected the formation of AirComp in July 2003, the hiring of additional sales force and operations personnel due to the improvement in the oil and gas drilling market, and the inclusion of the operations of our casing and tubing services and directional drilling services segments for a full year in 2003.

     Depreciation and amortization expenses increased to $2.9 million in 2003 compared to $2.6 million in 2002, due to the formation of AirComp and the acquisition of our casing and tubing services and directional drilling services segments in February 2002.

     Income from operations for the year 2003 totaled $2.6 million reflecting the general increase in oil and gas drilling activity and the inclusion of revenues and operating income of AirComp beginning in July 2003. In the comparable period of 2002, we incurred an operating loss of $1.0 million. During the third quarter of 2002, we reorganized in order to contain costs and recorded charges related to the reorganization in the amount of $495,000. These charges consisted of related payroll costs for terminated employees of $307,000, consulting fees of $113,000, and costs associated with a terminated rent obligation of $75,000. We also recorded one-time charges for costs related to abandoned acquisitions and an abandoned private placement in the amount of $233,000.

     Interest expense increased to $2.5 million in 2003, compared to $2.3 million in the prior year due to increased debt associated with acquisitions completed in 2002, and debt associated with the formation of AirComp in July 2003.

     Minority interest in income of subsidiaries for 2003 was $343,000 compared to $189,000 in 2002 due to the increase in the net income of our casing and tubing services subsidiary which until September 30, 2004, was owned 19% by Jens Mortensen; and the formation of Aircomp in July 2003.

     In the third quarter of 2003, we recorded a one-time gain on the reduction of a note payable of $1.0 million as a result of settling a lawsuit against the former owners of Mountain Air Drilling Service Co. Inc. The gain was calculated in part by discounting the note payable to $1.5 million using a present value calculation and accreting the note payable to $1.9 million, the amount due in September 2007. We will record interest expense totaling $394,043 over the life of the note payable beginning July 2003. In addition, we also recorded a one-time non-operating gain on the sale of an interest in a subsidiary of $2.4 million in connection with the formation of AirComp. We have adopted a policy that any gain or loss incurred in the future on the sale in the stock of a subsidiary will be recognized as such in the income statement.

     Our net loss for 2002 included a discount given to the holder of the Houston Dynamic Services note in the amount of $191,000 as an incentive to pay-off the note in September 2002.

     We had a net income attributed to common stockholders of $2.3 million, or $0.58 per common share, for the year ended December 31, 2003 compared with a net loss of $4.3 million, or $1.14 per common share, for the year ended December 31, 2002.

23

     The following table compares revenues and income from operations for each of our business segments for the years ended December 31, 2002 and 2003. Income from operations consists of our revenues less cost of revenues, general and administrative expenses, and depreciation and amortization:

Directional Drilling Services Segment

     Revenues for 2003 for directional drilling services were $16.0 million, an increase of 145.2% from $6.5 million in revenues for 2002 due to increased drilling activity in the Texas and Gulf Coast areas in 2003. Operating income increased to $1.1 million for 2003 compared to a loss of $576,000 from operations for the same period in 2002 due to the increase in revenues, which more than offset an increase in operating expenses due to the addition of operations and sales personnel.

Casing And Tubing Services Segment

     Revenues for the year ended December 31, 2003 for the casing and tubing services segment were $10.0 million, an increase of 28.7% from $7.8 million for the year ended December 31, 2002. Revenues from domestic operations increased to $6.3 million in 2003 from $5.1 million in 2002 as a result of a general improvement in oil and gas drilling activity in South Texas and the inclusion of this segment, which was acquired in February 2002, for a full year in 2003. Revenues from Mexican operations increased to $3.7 million in 2003 from $2.7 million in 2002 as a result of increased drilling activity in Mexico. Income from operations increased 45.4% to $3.6 million in 2003 from $2.5 million in 2002 due to the increase in revenues.

Compressed Air Drilling Services Segment

     Our compressed air drilling revenues were $6.7 million in 2003, an increase of 82.2% compared to $3.7 million in revenues in 2002. Revenues increased in 2003 due to the inclusion of revenues contributed by M-I through the formation of AirComp in July 2003. Operating income increased to $17,000 in 2003 from a loss of $945,000 from operations in 2002 due to the inclusion, for six months in the 2003 period, of the business contributed by M-I in connection with the formation of AirComp in July 2003. Through this venture, we expanded the geographical areas in which we operate to include gas drilling in West Texas along with the drilling and workover operations of Mountain Air in the San Juan basin in New Mexico.

Liquidity And Capital Resources

     Our on-going capital requirements arise primarily from our need to service our debt, to acquire and maintain equipment, to fund acquisitions and to fund our working capital requirements. Our primary sources of liquidity are borrowings under our credit facilities, proceeds from the issuance of equity securities and cash flows from operations. We had cash and cash equivalents of $6.0 million at March 31, 2005, compared to $7.3 million at December 31, 2004, $1.3 million at December 31, 2003 and $146,000 at December 31, 2002.

Operating Activities

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

24

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

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

     During the year ended December 31, 2004, we generated $3.3 million in cash from operating activities compared to $1.9 million in cash from operating activities for the same period in 2003. Net income before preferred stock dividend for the year ended December 31, 2004 decreased to $888,000, compared to $2.9 million in the 2003 period. Revenues and income from operations increased in 2004 due to increased demand for our services due to the general increase in oil and gas drilling activity. Net income in 2003 includes a $1.0 million gain from the settlement of a lawsuit and a $2.4 million non-operating gain on the sale of interest in AirComp. Non-cash expenses in 2004 consisted of $3.6 million of depreciation and amortization, $334,000 of minority interest in the income of a subsidiary and $350,000 in amortization of discount on debt. Non-cash expenses in 2003 totaled $305,000, consisting of depreciation and amortization expense of $2.9 million, minority interest in the income of a subsidiary of $343,000 and amortization of discount on debt of $516,000, offset by the $3.4 million of non-cash gains.

     During the year ended December 31, 2004, changes in working capital used $1.9 million in cash compared to a use of $1.3 million in cash in the 2003 period, principally due, in the 2004 period, to an increase of $2.3 million in accounts receivable, an increase of $638,000 in other current assets, and a decrease of $398,000 in accrued expenses and other liabilities, offset in part by an increase of $1.1 million in accounts payable, an increase of $299,000 in accrued interest and a decrease of $229,000 in lease receivable. Our accounts receivable increased by $2.3 million at December 31, 2004 due to the increase in our revenues in 2004. Current assets increased $638,000 due primarily to an increase in prepaid insurance premiums. Accounts payable increased by $1.3 million at December 31, 2004 due to the increase in our cost of sales associated with the increase in our revenues and the acquisitions completed in the fourth quarter of 2004.

     During the year ended December 31, 2003, we generated $1.9 million in cash from operating activities compared to $2.2 million in cash from operating activities for the same period in 2002. Net income before preferred stock dividend for the 2003 period improved to $2.9 million, compared to a net loss of $4.0 million in the comparable 2002 period, due to the increase in revenues and income from operations in 2003 due to the general increase in oil and gas drilling activity and the formation of AirComp, our compressed air drilling subsidiary, in July 2003. Net income for 2003 includes a $1.0 million gain from the settlement of a lawsuit and a $2.4 million non-operating gain on sale of interest in AirComp. Non-cash expenses totaled $305,000 in 2003, which is net of a $1.0 million non-cash gain from the settlement of a lawsuit and a $2.4 million non-operating gain on the sale of an interest in a subsidiary, compared to $3.4 million in non-cash expenses in 2002, consisting principally of depreciation and amortization expense, including amortization of discount on debt, and minority interest in the income of a subsidiary.

     During the year ended December 31, 2003, changes in working capital used $1.3 million in cash compared to the year ended December 31, 2002, when changes in working capital provided $2.8 million in cash principally due, in 2003, to an increase in accrued expenses of $1.7 million, an increase in accounts receivable and other current assets of $5.6 million, and an increase in accounts payable of $2.2 million. The increase in accrued expenses was primarily due to an increase of $397,000 due to motor costs and related expenses, and an increase in accrued employee benefits and payroll taxes of $1.3 million. The increase in accrued expenses was partially offset by a decrease in accrued interest of $126,000 due to the retirement of subordinated debt carrying an interest rate of 12% and lower interest rates on other debt with variable interest rates. Accounts receivable increased $4.4 million due to an increase in revenues in our directional drilling services segment, our compressed air drilling services segment due to the inclusion of the business contributed by M-I to AirComp in July 2003, and our casing and tubing services segment. Other current assets decreased primarily because of the recovery of a lease deposit related to an equipment lease which was paid off in June 2003. Accounts payable increased by $2.3 million in the 2003 period due to increased costs related to increased revenues, and the inclusion of the accounts payable of AirComp in July 2003.

25

Investing Activities

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

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

     During the year ended December 31, 2004, we used $9.1 million in investing activities, consisting principally of capital expenditures of approximately $4.6 million, including $1.6 million to purchase equipment for our directional drilling services segment, approximately $1.2 million to purchase casing equipment and approximately $1.4 million to make capital repairs to existing equipment in our compressed air drilling services segment. In September 2004, we acquired 100% of the outstanding stock of Safco-Oil for $1.0 million. As of November 1, 2004, AirComp acquired substantially all the assets of Diamond Air for $4.6 million in cash and the assumption of approximately $450,000 of debt. We contributed our share of the purchase price, or $2.5 million, to AirComp in order to fund the purchase. Finally, in December 2004, we acquired Downhole for approximately $1.1 million in cash, 568,466 shares of our common stock and the payment or assumption of $950,000 of debt.

     During the year ended December 31, 2003, we used $4.5 million in investing activities, consisting of the purchases of equipment of $5.4 million, which was partially offset by the proceeds from the sale of equipment of $843,000.

     Cash used in investing activities in 2002 was $8.5 million, reflecting the acquisitions of our Jens’ and Strata subsidiaries for a total of $8.3 million, purchases of other equipment of $518,000, and proceeds from the sales of equipment of $367,000.

Financing Activities

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

     During the year ended December 31, 2004, financing activities provided a net of $11.8 million in cash. We received $16.9 million in net proceeds from the issuance of common stock, $8.2 million in borrowings under long-term debt facilities and a $689,000 increase in net borrowings under our revolving lines of credit. The proceeds were used to repay long-term debt totaling $13.5 million and to pay $391,000 in debt issuance costs. During the year ended December 31, 2003, financing activities provided a net of $3.8 million in cash. In 2003, we received $14.1 million from the issuance of long-term debt and $30.5 million from borrowings under our credit facilities. These proceeds were used to pay long-term debt in the amount of $10.8 million and make principal payments on outstanding borrowings under our lines of credit in the amount of $29.4 million. We also used $408,000 in cash for debt issuance costs in 2003. During the year ended December 31, 2002, financing activities provided a net of $6.3 million in cash. In 2002, we received $9.7 million from the issuance of long-term debt and $7.1 million from borrowings under our credit facilities. These proceeds were used to pay long-term debt in the amount of $4.1 million and make principal payments on outstanding borrowings under our lines of credit in the amount of $5.8 million. We also used $588,000 in cash for debt issuance costs in 2002.

     In April 2004, Energy Spectrum, the holder of our preferred stock, converted its 3,500,000 shares of Series A 10% Cumulative Convertible Preferred Stock, including accrued dividend rights, into 1,718,090 shares of common stock.

     On August 10, 2004, we completed the private placement of 3,504,667 shares of our common stock at a price of $3.00 per share. Net proceeds to us, after selling commissions and expenses, was approximately $9.6 million. On September 30, 2004, we completed the private placement of 1,956,634 shares of our common stock at a price of $3.00 per share. Net proceeds to us, after selling commissions and expenses, was approximately $5.4 million. We used the net proceeds of the private placement offerings to fund the acquisitions of Safco, Downhole, Delta and Capcoil.

     In September 2004, we issued 1.3 million shares of our common stock to Jens Mortensen, a director, in exchange for his 19% interest in Jens’. As a result of this transaction, we now own 100% of Jens’. The purchase price was valued at $6.4 million, which was the value of the 1.3 million shares of common stock issued to Mr. Mortensen based on the last sale price of the common stock as reported on the American Stock Exchange on the date of issuance. This amount was treated

26

as a contribution to stockholders equity. On our balance sheet, we eliminated the amount recorded as Jens’ minority interest, $2.0 million. The balance of the contribution ($4.5 million) was allocated as follows: In June 2004, we obtained an appraisal of the fixed assets of Jens’, which valued the fixed assets at $20.1 million. The book value of the fixed assets was $15.8 million. We increased the value of Jens’ fixed assets by 19% of the excess of the appraised value over the book value of the assets, or $813,511. The balance of the purchase price, or $3.7 million, was allocated to goodwill.

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

     On April 1, 2005, we issued 223,114 shares of common stock in connection with the acquisition of Delta and on May 1, 2005, we issued 168,161 shares of common stock in connection with the acquisition of Capcoil.

     We have several bank credit facilities and other debt instruments at Allis-Chalmers, all of which are consolidated in our financial statements. As described below, AirComp, which is majority-owned by us, has a separate credit facility. The agreements governing these credit facilities contain customary events of default and financial covenants, and limit our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, create liens, and sell assets. At March 31, 2005, we had $32.9 million in outstanding indebtedness, of which $28.8 million was long-term debt and $4.1 million was the current portion of long-term debt. Allis-Chalmers and its subsidiaries other than AirComp are all parties to or guarantors of the Allis-Chalmers credit facilities.

     We have a credit agreement dated December 7, 2004 that provides for the following credit facilities:

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

     Our Jens’ subsidiary has a subordinated note in the amount of $4.0 million payable to Jens Mortensen, who sold Jens’ to us and is one of our directors. The note accrues interest at 7.5% per annum and provides for quarterly interest payments. The principal and interest are due on January 31, 2006. In connection with the purchase of Jens’, we also agreed to pay a total of $1.2 million to Mr. Mortensen in exchange for a non-compete agreement. We are required to make monthly payments of $20,576 through January 31, 2007. As of March 31, 2005, the balance due was approximately $453,000, including $247,000 classified as current portion of long-term debt.

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

     Strata entered into a short-term vendor financing agreement that provides extended payment terms for the purchase, lease and repair costs related to downhole drill motors. As of March 31, 2005, the outstanding balance was $1.2 million.

27

Payment of interest is due monthly and principal payments of $582,000 are due in each of April 2005 and December 2005. The interest rate is fixed at 8.0%.

     AirComp has the following credit facilities:

     The AirComp credit facilities are secured by liens on substantially all of AirComp’s assets. We guarantee 55% of the obligations of AirComp under these facilities.

     AirComp also has a subordinated note payable to M-I in the amount of $4.8 million bearing interest at an annual rate of 5.0%. In 2007, each party has the right to cause AirComp to sell its assets (or the other party may buy out such party’s interest), and in such event this note (including accrued interest) is due and payable. The note is also due and payable if M-I sells its interest in AirComp or upon a termination of AirComp. At March 31, 2005, $441,000 of interest was included in accrued interest.

     As part of the acquisition of Mountain Air in 2001, we issued a note to the sellers of Mountain Air in the original amount of $2.2 million which accrued interest at 5.75% per annum. This note was reduced to $1.5 million in 2003 as a result of the settlement of a legal action against the sellers. In April 2005, we settled a subsequent legal action by paying $1.0 million in cash and agreeing to pay an additional $350,000 on June 1, 2006, and $150,000 on June 1, 2007, in extinguishment of all amounts due under the promissory note and all other claims. Mountain Air has a term loan in the amount of $185,000 at March 31, 2005 with an interest rate of 5.0%. Principal and interest payments of $5,039 are due on the last day of each month. The final maturity date is June 30, 2008.

28

     The following table summarizes our obligations and commitments to make future payments under our notes payable, operating leases, employment contracts and consulting agreements for the periods specified as of December 31, 2004.

     We have no off balance sheet arrangements, other than normal operating leases and employment agreements, that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. We do not guarantee obligations of any unconsolidated entities.

     We have identified capital expenditure projects that will require up to approximately $7.0 million for the last three quarters of 2005, exclusive of any acquisitions. We believe that our current cash generated from operations, cash available under credit facilities and cash on hand will provide sufficient funds for our identified projects.

     Our business strategy includes both internal growth and acquisitions. We are regularly involved in discussions with a number of potential acquisition candidates and from time to time enter into non-binding letters of intent for acquisitions, only some of which are consummated. We also expect to make significant capital expenditures to acquire equipment and to maintain our existing equipment. We will also need to refinance our existing debt facilities as they become due and provide funds for capital expenditures and acquisitions. We are currently in discussions to refinance our debt. To effect our business strategy, we will require additional equity or debt financing in excess of our current working capital, amounts available under credit facilities and the proceeds of this offering. There can be no assurance that we will be successful in raising additional debt or equity capital or that we will do so on terms that will be acceptable to us.

Recent Developments

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

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

     In May 2005, we acquired 100% of the outstanding capital stock of Capcoil Tubing Services, Inc. for $2.7 million, 168,161 shares of our common stock and the payment or assumption of approximately $1.3 million of debt. Capcoil, located in Kilgore, Texas, provides capillary and coil tubing services to enhance production from existing wells. Capcoil had revenues of $5.8 million for the year ended December 31, 2004.

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

Critical Accounting Policies

     We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout

29

Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements included elsewhere in this document. Our preparation of this document and our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

     Allowance For Doubtful Accounts. The determination of the collectibility of amounts due from our customers requires us to use estimates and make judgments regarding future events and trends, including monitoring our customer payment history and current credit worthiness to determine that collectibility is reasonably assured, as well as consideration of the overall business climate in which our customers operate. Those uncertainties require us to make frequent judgments and estimates regarding our customers’ ability to pay amounts due us in order to determine the appropriate amount of valuation allowances required for doubtful accounts. Provisions for doubtful accounts are recorded when it becomes evident that the customers will not be able to make the required payments at either contractual due dates or in the future.

     Revenue Recognition. We provide rental equipment and drilling services to our customers at per day and per job contractual rates and recognize the drilling related revenue as the work progresses and when collectibility is reasonably assured. The Securities and Exchange Commission’s Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition In Financial Statements, provides guidance on the SEC staff’s views on application of generally accepted accounting principles to selected revenue recognition issues. Our revenue recognition policy is in accordance with generally accepted accounting principles and SAB No. 104.

     Impairment Of Long-Lived Assets. Long-lived assets, which include property, plant and equipment, goodwill and other intangibles, comprise a significant amount of our total assets. We make judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, the carrying values of these assets are reviewed for impairment or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires the Company to make long-term forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for our products and services, future market conditions and technological developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period.

     Goodwill And Other Intangibles. We have recorded approximately $11.8 million of goodwill and $5.0 million of other identifiable intangible assets. We perform purchase price allocations to intangible assets when it makes a business combination. Business combinations and purchase price allocations have been consummated for purchase of the Mountain Air, Strata and Jens’ operating segments. The excess of the purchase price after allocation of fair values to tangible assets is allocated to identifiable intangibles and thereafter to goodwill. Subsequently, we have performed its initial impairment tests and annual impairment tests in accordance with Financial Accounting Standards Board No. 141, Business Combinations, and Financial Accounting Standards Board No. 142, Goodwill And Other Intangible Assets. These initial valuations used two approaches to determine the carrying amount of the individual reporting units. The first approach is the Discounted Cash Flow Method, which focuses on the expected cash flow of the Company. In applying this approach, the cash flow available for distribution is projected for a finite period of years. Cash flow available for distribution is defined as the amount of cash that could be distributed as a dividend without impairing our future profitability or operation. The cash flow available for distribution and the terminal value (the value at the end of the estimation period) are then discounted to present value to derive an indication of value of the business enterprise. This valuation method is dependent upon the assumptions made regarding future cash flow and cash requirements. The second approach is the Guideline Company Method which focuses on comparing the Company to selected reasonably similar publicly traded companies. Under this method, valuation multiples are: (i) derived from operating data of selected similar companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the Company relative to the selected guideline companies; and (iii) applied to the operating data of the Company to arrive at an indication of value. This valuation method is dependent upon the assumption that the value of the Company can be evaluated by analysis of its earnings and its strengths and weaknesses relative to the selected similar companies. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period.

     AirComp And Sale Of Interest In Subsidiary. We have adopted SEC Staff Accounting Bulletin (SAB) No. 51, Accounting for Sales of Stock by a Subsidiary, to account for its investment in AirComp. AirComp has been accounted for and consolidated as a subsidiary under SFAS No. 141, Business Combinations. Pursuant to SAB No. 51, the Company has recorded its own contribution of assets and liabilities at its historical cost basis. Since liabilities exceeded assets, the Company’s basis in AirComp was a negative amount. The Company has accounted for the assets contributed from M-I at a fair market value as determined by an outside appraiser. The Company gave M-I a 45% interest in AirComp in exchange for

30

the assets contributed. As a result of the formation of the venture and its retention of a 55% interest in the venture, the Company realized an immediate gain to the extent of its negative basis and its 55% interest in the combined assets and liabilities of the venture. In accordance with SAB No. 51, the Company has recorded its negative basis investment in AirComp as an addition to equity and its share of the combined assets and liabilities realized from M-I assets as non-operating income.

     Stock Based Compensation. We account for our stock-based compensation using Accounting Principles Board, or APB, Opinion No. 25. Under APB No. 25, compensation expense is recognized for stock options with an exercise price that is less than the market price on the grant date of the option. For stock options with exercise prices at or above the market value of the stock on the grant date, we adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting For Stock-Based Compensation. We have adopted the disclosure-only provisions of SFAS 123 for the stock options granted to our employees and directors. Accordingly, no compensation cost has been recognized for these options. Many equity instrument transactions are valued based on pricing models such as Black-Scholes, which require judgments by management. Values for such transactions can vary widely and are often material to the financial statements.

Recently Issued Accounting Standards

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

     In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R revises SFAS No. 123, Accounting For Stock-Based Compensation, and focuses on accounting for share-based payments for services by employer to employee. The statement requires companies to expense the fair value of employee stock options and other equity-based compensation. The statement does not require a certain type of valuation model and either a binomial or Black-Scholes model may be used. Under the current rules, we will be required to prepare financial statements in accordance with the provisions of SFAS 123R beginning in the first quarter of 2006. We are currently evaluating the method of adoption and the impact on our operating results. Our future cash flows will not be impacted by the adoption of this standard.

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

Quantitative and Qualitative Disclosure About Market Risk.

     We are exposed to market risk primarily from changes in interest rates and foreign currency exchange risks.

Interest Rate Risk.

     Fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations expose us to market risk. We are vulnerable to significant fluctuations in interest rates affecting our adjustable rate debt, and any future refinancing of our fixed rate debt and our future debt.

     At March 31, 2005, we were exposed to interest rate fluctuations on approximately $20.9 million of notes payable and bank credit facility borrowings carrying adjustable interest rates. A hypothetical one hundred basis point increase in interest rates for these notes payable would increase our annual interest expense by approximately $209,000. Due to the uncertainty of fluctuations in interest rates and the specific actions that might be taken by us to mitigate the impact of such fluctuations and their possible effects, the foregoing sensitivity analysis assumes no changes in our financial structure.

31

     We have also been subject to interest rate market risk for short-term invested cash and cash equivalents. The principal of such invested funds would not be subject to fluctuating value because of their highly liquid short-term nature. As of March 31, 2005, we had $6.0 million invested in short-term investments.

Foreign Currency Exchange Rate Risk.

     Our casing and tubing subsidiary conducts business in Mexico through a single customer. This business exposes us to foreign exchange risk. To control this risk, we provide for payment in U.S. dollars. However, we have historically provided our partner with a discount upon payment equal to 50% of any loss suffered by our Mexican customer between the date of invoicing and the date of payment. To date, such payments have not been material in amount.

32

BUSINESS

The Company

     We provide services and equipment to oil and gas exploration and development companies, principally in Texas, Louisiana, New Mexico, Colorado, Oklahoma, offshore in the United States Gulf of Mexico, and offshore and onshore in Mexico. We currently operate in five sectors of the oil and gas service industry: directional and horizontal drilling; casing and tubing; compressed air drilling; production services; and rental tools. We identify and pursue opportunities in the oil and gas service industry that we believe are growing faster than the industry as a whole and where we can capitalize on our competitive strengths.

      Over the past several years, we have significantly expanded the geographic scope of our operations and the range of services we provide through internal growth and strategic acquisitions. Key to this strategy has been our ability to successfully identify, acquire and integrate strategic and complementary businesses. Since 2001, we have completed nine acquisitions, including two in 2005. Along with our acquisition growth, we have achieved organic growth through geographic expansion, through the acquisition of additional equipment and personnel, and by cross selling our services from our various operating locations.

     We were incorporated in 1913 under Delaware law. We reorganized in bankruptcy in 1988, and sold all of our major businesses. In May 2001, we consummated a merger in which we acquired OilQuip Rentals, Inc. and its wholly-owned subsidiary, Mountain Compressed Air, Inc. In December 2001, we sold Houston Dynamic Services, Inc., our last pre-bankruptcy business. In February 2002, we acquired approximately 81% of the capital stock of Jens’ Oilfield Service, Inc. and substantially all of the capital stock of Strata Directional Technology, Inc. In July 2003, we entered into a limited liability company operating agreement with a division of M-I L.L.C., a joint venture between Smith International and Schlumberger N.V., to form a Texas limited liability company named AirComp LLC. We own 55% and M-I owns 45% of AirComp. In September 2004, we increased our ownership of Jens’ Oilfield Service, Inc. to 100%. In September 2004, we acquired 100% of the outstanding stock of Safco-Oil Field Products, Inc. In November 2004, AirComp acquired substantially all of the assets of Diamond Air Drilling Services, Inc. and Marquis Bit Co., LLC, collectively. In December 2004, we acquired Downhole Injection Services, LLC. In April 2005, we acquired Delta Rental Service, Inc., and, in May 2005, we acquired Capcoil Tubing Services, Inc. As a result of these transactions, our prior results for each of the casing and tubing sector, the directional drilling sector and the air drilling sector may not be indicative of current or future operations of those sectors. In January 2005, we changed our name from Allis-Chalmers Corporation to Allis-Chalmers Energy Inc.

Business Strategy

     We intend to continue to pursue the growth strategy that has allowed us to significantly increase our revenues and profitability over the last several years. The key elements of this strategy include:

     Increasing Our Market Presence. We intend to increase our market share by expanding our customer base and by offering additional services and increasing sales to existing customers. To accomplish this we will continue to acquire additional equipment and personnel and cross sell our services from our various operating locations.

     Expanding Geographically. In the last twelve months, we opened new operating locations in Grand Junction, Colorado, Oklahoma City, Oklahoma and Corpus Christi, Midland and Alice, Texas. We intend to continue to establish new operating locations in active oil and gas producing areas in the United States where we can optimize the utilization of our equipment and personnel. We also intend to expand our international operations through strategic alliances similar to our casing and tubing operations in Mexico.

     Selectively Pursuing Acquisitions. We intend to continue our disciplined pursuit of acquisition opportunities. We seek acquisitions that have high growth potential and add new services, operations and personnel, provide us with access to new markets, enhance our current market position or enlarge our customer base. Over the last four years, we have completed nine acquisitions, including three during 2004 and two in 2005.

     The number of working drilling rigs is an important indicator of activity levels in the oil and gas industry, typically referred to as the “rig count.” The rig count in the U.S. increased from 862 as of December 31, 2002 to 1,243 on December 31, 2004, according to the Baker Hughes rig count. Furthermore, directional and horizontal rig counts increased from 283 as of December 31, 2002 to 440 on December 31, 2004, which accounted for 32.8% and 35.4% of the total U.S. rig count, respectively. As of March 31, 2005, this trend has continued, with the rig count climbing to 1,331, of which 503 or 37.8% were directional and horizontal rigs. Currently we believe that the number of available drilling rigs is insufficient to meet the demand for drilling rigs. Consequently, unless a significant number of drilling rigs are brought online, the rig count may not increase substantially despite the strong demand.

Description Of Businesses

Directional Drilling Services

     We provide directional, horizontal and measurement while drilling services to oil and gas companies operating both onshore and offshore in Texas and Louisiana. According to Baker Hughes, 38% of all wells in the United States are currently drilled directionally. We expect that figure to grow significantly over the next several years as companies seek to exploit maturing fields and sensitive foundations. Management believes directional drilling offers several advantages over conventional drilling including:

     Our teams of experienced personnel utilize state of the art tools to provide services including well planning and engineering to meet drilling performance and geological or reservoir targets set by the customer, directional drilling tool configuration, well site directional drilling supervision and guidance, new well and reentry drilling, steerable drilling and log while drilling services. Since 2002 we have increased our team of directional drillers from ten to more than 70.

Casing And Tubing Services

     We supply specialized equipment and trained operators to install casing and tubing, change out drill pipe and retrieve production tubing for both onshore and offshore drilling and workover operations, which we refer to as casing and tubing services. Most wells drilled for oil and natural gas require some form of casing and tubing to be installed in the drilling and completion phase. We currently provide casing and tubing services primarily to areas in South Texas and Mexico. We are also targeting regional expansion in East Texas and Oklahoma.

     We provide equipment used in casing and tubing services in Mexico to Materiales y Equipo Petroleo, S.A. de C.V., which we refer to as Matyep. Matyep provides equipment and services for offshore and onshore drilling operations to Petroleos Mexicanos, known as Pemex, in Villahermosa, Reynosa, Veracruz and Ciudad del Carmen, Mexico. Matyep provides all personnel, repairs, maintenance, insurance and supervision for provision of the casing and tubing crew and torque turn service. We have approximately $8.0 million of equipment in Mexico. Services to offshore drilling operations in Mexico are seasonal, with less activity during the first quarter of each calendar year due to weather conditions.

     For the years ended December 31, 2004, 2003 and 2002, our Mexico operations accounted for approximately $5.1 million, $3.3 million and $2.7 million, respectively, of our revenues. We provide extended payment terms to Matyep and maintain a high accounts receivable balance due to these terms. The accounts receivable balance was approximately $968,000 at December 31, 2004 and was approximately $1.4 million at December 31, 2003. Jens’ has been providing

34

services to Pemex in association with Matyep since 1997; however, the loss of Matyep as a customer or a default on its receivables would have a material adverse effect on our business.

Compressed Air Drilling Services

     AirComp, LLC provides engineering services, compressed air and chemicals for the compressed air drilling, workover, completion and transmission segments of the oil and gas industry, which we refer to as compressed air drilling services. We believe AirComp is the world’s second largest provider of compressed air drilling services. We have a combined fleet of over 80 compressors and boosters. Our broad and diversified product line enables us to compete in the under balanced drilling market with an equipment package engineered and customized to specifically meet customer requirements.

     Under balanced drilling shortens the time required to drill a well and enhances production by minimizing formation damage. There is a continuing trend in the industry to drill, complete, and work over wells with under balanced drilling operations and we expect the market to continue to grow.

Production Services

     In December 2004, we acquired Downhole and in May 2005 we acquired Capcoil. With these two acquisitions, we supply specialized equipment and trained operators to install capillary tubing and coiled tubing into flowing oil and gas wells up to depths of approximately 20,000 feet, typically without interrupting production for both onshore and offshore producing wells. Chemicals are injected through the tubing to targeted zones. The result is improved production from treatment of downhole corrosion, scale, paraffin and salt build-up in producing wells. Natural gas wells with low bottom pressures can experience fluid accumulation in the tubing and well bore. This injection system can inject a foaming agent which lightens the fluids allowing them to flow out of the well. Additionally, corrosion inhibitors can be introduced to reduce corrosion in the well.

     We have an inventory of specialized equipment consisting of capillary and coil tubing units in various sizes ranging from one-quarter inch to one and one-quarter inch along with nitrogen pumping and transportation equipment. We also maintain a full range of stainless and carbon steel coiled tubing and related supplies used in the installation of the tubing. We sell or rent the tubing and charge a fee for its installation, servicing and removal, which includes the service personnel and associated equipment on a turn key hourly basis. We do not provide the chemicals injected into the well.

Rental Tools

     In September 2004, we acquired Safco-Oil and in April 2005, we acquired Delta. With these acquisitions, we supply specialized equipment for both onshore and offshore drilling and workover operations, which we refer to as rental tools services. Most wells drilled for oil and natural gas require some form of rental tools in the completion phase of a well.

     We have an inventory of specialized equipment consisting of heavy-weight spiral drill pipe, double studded adaptors, test plugs, wear sleeves, adaptor spools, baskets and spacer spools and other assorted handling tools in various sizes to met our customers demands. We charge customers for rental equipment on a daily basis. The customer is liable for damaged or lost equipment. We currently provide rental tool services primarily in Texas, Oklahoma, Louisiana, and offshore in the Gulf of Mexico.

     We plan to further expand our rental tools operations in the domestic oil and gas industry through joint marketing efforts with our other business segments and through selected acquisitions.

35

Customers

     Our customers are the major and independent oil and gas companies operating in the U.S. and Mexico. In 2004, Matyep in Mexico represented 11.0.% and Burlington Resources Inc. represented 10.1% of our consolidated revenues. In 2003, Matyep, Burlington Resources Inc. and El Paso Energy Corporation represented 10.1%, 11.1% and 13.8%, respectively, of our revenues. The loss without replacement of our larger existing customers could have a material adverse effect on our operations.

Suppliers

     The equipment utilized in our business is generally available new from manufacturers or at auction. Currently, due to the high level of activity in the oil service industry, there is a high demand for new and used equipment. Consequently, there is a limited amount of many types of equipment available at auction and significant backlogs on new equipment. However, we own sufficient equipment for our projected operations over the next twelve months. The cost of acquiring new equipment to expand our business could increase as a result of the high demand for equipment in the industry.

     Historically, we have sought to purchase equipment for our rental tools on an opportunistic basis; however, there is currently a shortage of equipment, which is available new from our suppliers. We believe there is a six to eight month backlog on orders to these suppliers. However, we currently own sufficient equipment for projected operations over the next twelve month and we believe the shortage of equipment will result in increased demand for our services.

Competition

     We experience significant competition in all areas of our business. In general, the markets in which we compete are highly fragmented, and a large number of companies offer services that overlap and are competitive with our services and products. We believe that the principal competitive factors are technical and mechanical capabilities, management experience, past performance and price. While we have considerable experience, there are many other companies that have comparable skills. Many of our competitors are larger and have greater financial resources than we do.

     There are three major directional drilling companies, Schlumberger, Halliburton and Baker Hughes, that market both worldwide and in the U.S. as well as numerous small regional players, including us. There are believed to be at least 50 regional directional and horizontal drilling companies operating in the U.S. Management estimates that the regional market companies account for approximately 15% of the domestic market.

     Two large companies, Frank’s Casing Crew and Rental Tools and Weatherford, have a substantial portion of the casing and tubing market in south Texas. The market remains highly competitive and fragmented with at least 30 casing and tubing crew companies working in the U.S. Our primary competitors in Mexico are South American Enterprises and Weatherford, both of which provide similar products and services.

     Our largest competitor for compressed air drilling services is Weatherford. Weatherford focuses on large projects, but also competes in the more common compressed air, mist, foam and aerated mud drilling applications. Other competition comes from smaller regional companies.

     There are two other significant competitors in the chemical injection services market, Weatherford and Dyna Coil. We believe we have an approximate 30% market share in the southwestern United States for chemical injection services using the capillary coiled tubing system.

     The rental tool business is highly fragmented with hundreds of companies offering various rental tool services. Our largest competitors include Weatherford, Oil and Gas Rental Tools, Quail Rental Tools and Knight Rental Tools.

Backlog

     We do not view backlog of orders as a significant measure for our business because our jobs are short-term in nature, typically one to thirty days, without significant on-going commitments.

36

Employees

     Our strategy includes acquiring companies with strong management and entering into long-term employment contracts with key employees in order to preserve customer relationships and assure continuity following acquisition. We believe we have good relations with our employees, none of whom are represented by a union. We actively train employees across various functions, which we believe is crucial to motivate our workforce and maximize efficiency. Employees showing a higher level of skill are trained on the more technically complex equipment and given greater responsibility. All employees are responsible for on-going quality assurance. At June 1, 2005, we had 414 employees.

Insurance

     We carry a variety of insurance coverages for our operations, and are partially self-insured for certain claims in amounts that we believe to be customary and reasonable. However, there is a risk that our insurance may not be sufficient to cover any particular loss or that insurance may not cover all losses. Finally, insurance rates have in the past been subject to wide fluctuation, and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions.

Federal Regulations And Environmental Matters

     Our operations are subject to federal, state and local laws and regulations relating to the energy industry in general and the environment in particular. Environmental laws have in recent years become more stringent and have generally sought to impose greater liability on a larger number of potentially responsible parties. Because we provide services to companies producing oil and gas, which are toxic substances, we may become subject to claims relating to the release of such substances into the environment. While we are not currently aware of any situation involving an environmental claim that would likely have a material adverse effect on us, it is possible that an environmental claim could arise that could cause our business to suffer. We do not anticipate any material expenditures to comply with environmental regulations affecting our operations.

     In addition to claims based on our current operations, we are from time to time named in environmental claims relating to our activities prior to our bankruptcy in 1988 (See “— Legal Proceedings”).

Intellectual Property Rights

     Except for our relationships with our customers and suppliers described above, we do not own any patents, trademarks, licenses, franchises or concessions which we believe are material to the success of our business. As part of our overall corporate strategy to focus on our core business of providing services to the oil and gas industry and to increase stockholder value, we are investigating the sale or license of our worldwide rights to trade names and logos for products and services outside the energy sector.

Description Of Properties

     To support our directional drilling operations, we maintain operating locations in Houston, Midland and Corpus Christi, Texas, and in Oklahoma City, Oklahoma.

     To support our compressed air drilling compressed air drilling operations, we maintain operating locations in Houston, San Angelo and Fort Stockton, Texas, Farmington, New Mexico, and Grand Junction and Denver, Colorado.

     To support our casing and tubing operations, we maintain operating locations in Alice, Edinburg, Victoria and Pearsall, Texas.

     To support our production services operations, we maintain operating locations in Midland, Corpus Christi and Kilgore, Texas.

     To support our tool rental operations, we maintain operating locations in Houston, Texas and Lafayette, Louisiana.

     We maintain our principal executive offices in Houston, Texas.

     We own our facilities in Edinburg, Texas; all other facilities are leased.

37

Legal Proceedings

     On June 29, 1987, we filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Our plan of reorganization was confirmed by the Bankruptcy Court after acceptance by our creditors and stockholders, and was consummated on December 2, 1988.

     At confirmation of our plan of reorganization, the United States Bankruptcy Court approved the establishment of the A-C Reorganization Trust as the primary vehicle for distributions and the administration of claims under our 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. The trusts assumed responsibility for substantially all remaining cash distributions to be made to holders of claims and interests pursuant to our plan of reorganization. We were thereby discharged of all debts that arose before confirmation of our plan of reorganization.

     We do not administer any of the aforementioned trusts and retain no responsibility for the assets transferred to or distributions to be made by such trusts pursuant to our plan of reorganization.

     As part of our plan of reorganization, we settled U.S. Environmental Protection Agency claims for cleanup costs at all known sites where we were alleged to have disposed of hazardous waste. The EPA settlement included both past and future cleanup costs at these sites and released us of liability to other potentially responsible parties in connection with these specific sites. In addition, we negotiated settlements of various environmental claims asserted by certain state environmental protection agencies.

     Subsequent to our bankruptcy reorganization, the EPA and state environmental protection agencies have in certain cases asserted we are liable for cleanup costs or fines in connection with several hazardous waste disposal sites containing products manufactured by us prior to consummation of the Plan of Reorganization. In each instance, we have taken the position that the cleanup cost or other liabilities related to these sites were discharged in the bankruptcy, and the cases have been disposed of without material cost. A number of Federal Courts of Appeal have issued rulings consistent with this position and based on such rulings we believe that we will continue to prevail in our position that our liability to the EPA and third parties for claims for environmental cleanup costs that had pre-petition triggers have been discharged. A number of claimants have asserted claims for environmental cleanup costs that had pre-petition triggers, and in each event, the A-C Reorganization Trust, under its mandate to provide Plan of Reorganization implementation services to us, has responded to such claims, generally, by informing claimants that our liabilities were discharged in the bankruptcy. Each of such claims has been disposed of without material cost. However, there can be no assurance that we will not be subject to environmental claims relating to pre-bankruptcy activities that would have a material, adverse effect on us.

     The EPA and certain state agencies continue from time to time to request information in connection with various waste disposal sites containing products manufactured by us before consummation of the Plan of Reorganization that were disposed of by other parties. Although we have been discharged of liabilities with respect to hazardous waste sites, we are under a continuing obligation to provide information with respect to our products to federal and state agencies. The A-C Reorganization Trust, under its mandate to provide Plan of Reorganization implementation services to us, has responded to these informational requests because pre-bankruptcy activities are involved.

     We have been advised that the A-C Reorganization Trust will be terminated and its assets distributed during 2005, and as a result we will assume the responsibility of responding to claimants and to the EPA and state agencies previously undertaken by the A-C Reorganization Trust. However, we have been advised by the A-C Reorganization Trust that its cost of providing these services has not been material in the past, and therefore we do not expect to incur material expenses as a result of responding to such requests. However, there can be no assurance that we will not be subject to environmental claims relating to pre-bankruptcy activities that would have a material, adverse effect on us.

     We are named as a defendant from time to time in product liability lawsuits alleging personal injuries resulting from our activities prior to our reorganization involving asbestos. These claims are referred to and handled by a special products liability trust formed to be responsible for such claims in connection with our reorganization. As with environmental claims, we do not believe we are liable for product liability claims relating to our business prior to our bankruptcy; moreover, the products liability trust is defending all such claims. However, there can be no assurance that we will not be subject to material product liability claims in the future.

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

38

MANAGEMENT

Board Of Directors and Executive Officers

     Our executive officers and directors are:

     Munawar H. Hidayatallah has served as our Chairman of the Board and Chief Executive Officer since May 2001, and was President from May 2001 through February 2003. Mr. Hidayatallah was Chief Executive Officer of OilQuip Rentals, Inc., which merged with us in May 2001, from its formation in February 2000 until the date of the merger. From December 1994 until August 1999, Mr. Hidayatallah was the Chief Financial Officer and a director of IRI International, Inc., which was acquired by National Oilwell, Inc. in early 2000. IRI International, Inc. manufactured, sold and rented oilfield equipment to the oilfield and natural gas exploration and production sectors. From August 1999 until February 2000, Mr. Hidayatallah worked as a consultant to IRI International, Inc. and Riddell Sports Inc.

     David Wilde became our President and Chief Operating Officer in February 2005. Mr. Wilde was President and Chief Executive Officer of Strata from October 2003 through February 2005 and served as Strata’s President and Chief Operating Officer from July 2003 until October 2003. From February 2002 until July 2003, Mr. Wilde was our Executive Vice President of Sales and Marketing. From May 1999 until February 2002, Mr. Wilde served as Sales and Operations Manager at Strata. Mr. Wilde has more than 30 years’ experience in the directional drilling and rental tool sectors of the oil service industry.

     Victor M. Perez became our Chief Financial Officer in August 2004. From July 2003 to July 2004, Mr. Perez was a private consultant engaged in corporate and international finance advisory. From February 1995 to June 2003, Mr. Perez was Vice President and Chief Financial Officer of Trico Marine Services, Inc., a marine transportation company serving the offshore energy industry. Mr. Perez was Vice President of Corporate Finance with Offshore Pipelines, Inc., an oilfield marine construction company, from October 1990 to January 1995 when that company merged with a subsidiary of McDermott International. Mr. Perez also has 15 years’ experience in international energy banking. Mr. Perez is a director of Safeguard Security Holdings.

     Theodore F. Pound III became our General Counsel in October 2004 and was elected Secretary in January 2005. For ten years prior to joining us, he practiced law with the law firm of Wilson, Cribbs & Goren, P.C., Houston, Texas. Mr. Pound has practiced law for more than twenty-four years. Mr. Pound has been our lead counsel in each of our acquisitions beginning in 2001.

39

     Todd C. Seward has served as our Chief Accounting Officer since September 2002 and from October 2001 through September 2002 served as our Corporate Controller. Mr. Seward served as secretary from May 2004 through January 2005. From February 2000 to October 2001, Mr. Seward was an Executive Accounting Consultant where he served as a Regional Controller for Cemex, the world’s third largest cement company. From February 1997 until February 2000, Mr. Seward served as Director of Finance for APS Holdings, Inc., a $750 million consumer branded auto parts distributor and reseller. Mr. Seward has 20 years of experience in all aspects of accounting, financial and treasury management.

     Terrence P. Keane has served as President and Chief Executive Officer of our AirComp, LLC subsidiary since its formation on July 1, 2003, and served as a consultant to M-I, LLC in the area of compressed air drilling from July 2002 until June 2003. From March, 1999 until June 2002, Mr. Keane served as Vice President and General Manager — Exploration, Production and Processing Services for Gas Technology Institute where Mr. Keane was responsible for all sales, marketing, operations and research and development of the exploration, production and processing business unit. For more than ten years prior to joining the Gas Technology Institute, Mr. Keane had various positions with Smith International, Inc., Houston Texas, most recently in the position of Vice President Worldwide Operations and Sales for Smith Tool.

     David K. Bryan has served as President and Chief Executive Officer of Strata since February 2005. Mr. Bryan served as Vice President of Strata from June 2002 until February 2005. From February 2002 to June 2002 he served as General Manager, and from May 1999 through February 2002 he served as Operations Manager of Strata. Mr. Bryan has been involved in the directional drilling sector since 1979.

     Jens H. Mortensen, Jr. has served as our director since November 2002 and as Vice-Chairman since February 2005 and served as our President and Chief Operating Officer from February 2003 through February 2005. Mr. Mortensen founded Jens’, one of our subsidiaries, in 1982 after having spent eight years in operations and sales positions with a South Texas casing crew operator. Mr. Mortensen’s experience includes extensive knowledge of specialized equipment utilized to install the various strings of casing required to drill and complete oil and gas wells.

     John E. McConnaughy, Jr. was appointed to our board of directors in May 2004. Mr. McConnaughy has served as Chairman and Chief Executive Officer of JEMC Corporation, a personal holding company, since he founded it in 1985. His career includes positions of management with Westinghouse Electric and the Singer Company, as well as service as a director of numerous public and private companies. In addition, he previously served as Chairman and Chief Executive Officer of Peabody International Corp. and Chairman and Chief Executive Officer of GEO International Corp. He retired from Peabody in February 1986 and GEO in October 1992. Mr. McConnaughy currently serves on the boards of Wave Systems Corp., Consumer Portfolio Services, Inc., Overhill Farms, Inc., Levcor International, Inc. and Positron Corporation. He also serves as Chairman of the Board of Trustees of the Strang Cancer Prevention Center and as Chairman Emeritus for the Harlem School of the Arts. Mr. McConnaughy holds a B.A. in Economics from Denison University and an M.B.A in Marketing and Finance from the Harvard Graduate School of Business Administration.

     Victor F. Germack was appointed to our board of directors in January 2005. Mr. Germack has served since 1980 as President of Heritage Capital Corp., a company engaged in investment banking services. In addition, Mr. Germack formed, and since 2002 has been President of, RateFinancials Inc., a company that rates and ranks the financial reporting of U.S. public companies.

     David A. Groshoff is Vice President of J.P.Morgan Investment Management, Inc. and Chief Compliance Officer of J.P.Morgan Investment Advisers’ closed end high yield bond fund, the Pacholder High Yield Fund, Inc. Prior to joining J.P.Morgan (at that time Pacholder Associates, Inc.) in 1997, Mr. Groshoff worked in private legal practice in Cincinnati, Ohio. Mr. Groshoff serves on our Board on behalf of the Pension Benefit Guaranty Corporation, which has the right to appoint one director for so long as it holds 117,020 shares of our common stock. Mr. Groshoff is also a member of the Board of Directors of Fansteel, Inc., a manufacturer of aerospace castings and engineered metal components.

     Thomas E. Kelly was appointed to our board of directors in January 2005. Mr. Kelly was an owner and founder of Downhole Injection Systems, LLC, which we purchased in December 2004. Since 1997, Mr. Kelly has been the Chairman and CEO of United Fuel & Energy Corp., the largest provider of fuel, lubricants and services in the Permian Basin of West Texas. Mr. Kelly is also a director of BPZ Energy a Houston based exploration and production company with properties in Peru and Ecuador and was Chief Executive Officer of BPZ Energy from September 2004 until May 2005. Mr. Kelly has been involved in oil and gas exploration projects since 1981, including Baytech, Inc. which he co-founded in 1981 and was involved in until it was sold in 2002. Mr. Kelly currently serves on the board of directors of BPZ Energy which is a public company.

40

     Thomas O. Whitener, Jr. has served as our director since February 1, 2002. Mr. Whitener is a founding partner of Energy Spectrum Capital and has been a partner since May 1996. Mr. Whitener has also served as a managing director of Energy Spectrum Securities Corp., a financial advisory firm for energy companies, since October 1997. Mr. Whitener has been financing companies in the energy industry since 1974. From 1987 to 1996, Mr. Whitener was an investment banker with R. Reid Investments Inc. and Dean Witter Reynolds.

     Robert E. Nederlander has served as our director since May 1989. Mr. Nederlander served as our Chairman of the board of directors from May 1989 to 1993, and as our Vice Chairman of the board of directors from 1993 to 1996. Mr. Nederlander has been a Director of Cendant Corp. since December 1997 and Chairman of the Corporate Governance Committee of Cendant Corp. since 2002. Mr. Nederlander was a director of HFS, Inc. from July 1995 to December 1997. Since November 1981, Mr. Nederlander has been President and/or Director of the Nederlander Organization, Inc., owner and operator of legitimate theaters in New York City. Since December 1998, Mr. Nederlander has been a managing partner of the Nederlander Company, LLC, operator of legitimate theaters outside New York City. Mr. Nederlander was Chairman of the board of directors of Varsity Brands, Inc. (formerly Riddell Sports Inc.) from April 1988 to September 2003 and was the Chief Executive Officer of such corporation from 1988 through April 1, 1993. Mr. Nederlander has been a limited partner and a director of the New York Yankees since 1973. Mr. Nederlander has been President of Nederlander Television and Film Productions, Inc. since October 1985 and was Chairman of the Board and Chief Executive Officer of Mego Financial Corp. from January 1988 to January 2002. Mr. Nederlander was a director of Mego Mortgage Corp. from September 1996 until June 1998.

     Jeffrey R. Freedman was appointed to our board of directors in January 2005. Mr. Freedman served as our Executive Vice President — Corporate Development from January 2002 to November 2002. Since January 2003, Mr. Freedman has been involved in real estate development in South Florida. From 1994 through March 2002, Mr. Freedman was Managing Director — Oil Services and Equipment for Prudential Securities with responsibilities for institutional equity research of oilfield services and contract drilling companies in the U.S. public markets. Mr. Freedman has been involved and held various positions with major institutional brokerage firms in equity research relating to the oil service sector over the last twenty years.

     Leonard Toboroff has served as our director and Vice Chairman of the board of directors since May 1989 and served as our Executive Vice President from May 1989 until February 2002. Mr. Toboroff served as a director and Vice President of Varsity Brands, Inc. (formerly Riddell Sports Inc.) from April 1988 through October 2003, and is also a director of Engex Corp. Mr. Toboroff has been a practicing attorney continuously since 1961.

Board of Directors

     Our Board has ten members who serve for a term of one year or until their successors are elected and take office. See “Transactions with Selling Stockholders and Other Related Parties – Stockholders Agreement” for a description of an agreement pursuant to which certain of our stockholders have agreed to vote to elected certain persons to become members of our board of directors.

Audit Committee

     We have an Audit Committee consisting of three directors, Mr. McConnaughy, who serves as Chairman, Mr. Groshoff and Mr. Germack. All of our audit committee members are “independent” under the applicable American Stock Exchange and Securities and Exchange Commission rules regarding audit committee membership. Our board of directors has determined that Mr. Germack qualifies as an “audit committee financial expert” under applicable Securities and Exchange Commission rules and regulations governing the composition of the Audit Committee.

     The Audit Committee assists our board of directors in fulfilling its oversight responsibility by overseeing and evaluating (i) the conduct of our accounting and financial reporting process and the integrity of the financial statements that will be provided to stockholders and others; (ii) the functioning of our systems of internal accounting and financial controls; and (iii) the engagement, compensation, performance, qualifications and independence of our independent auditors. Our board of directors adopted a written Audit Committee charter in March 2002, which was amended in May 2004. The charter is reviewed annually and revised as appropriate.

     The independent auditors have unrestricted access and report directly to the Audit Committee. The Audit Committee meets privately with and has unrestricted access to the independent auditors and all of our personnel. The Audit

41

Committee has selected UHY Mann Frankfort Stein & Lipp, LLP as our independent auditors for the fiscal year ended December 31, 2005.

Compensation Committee

     The Compensation Committee consists of two independent, non-employee directors, Thomas E. Kelly and Thomas O. Whitener. The Compensation Committee formulates and oversees the execution of our compensation strategies, including by making recommendations to our Board of Directors with respect to compensation arrangements for senior management, directors and other key employees. The Compensation Committee also administers our 2003 Incentive Stock Plan.

Nominating Committee

     The Nominating Committee of our Board of Directors was established in January 2005 to select nominees for the Board of Directors. The Nominating Committee does not have a charter. The Nominating Committee consists of Mr. Nederlander, as Chairman, and Mr. Freedman, both of whom are independent as defined for such purpose by the American Stock Exchange. The Company has no formal procedure pursuant to which stockholders may recommend nominees to our Board of Directors or Nominating Committee and the Board of Directors believes that the lack of a formal procedure will not hinder the consideration of qualified nominees. The Nominating Committee will utilize a variety of methods for identifying and evaluating nominees for directors. Candidates may come to the attention of the Nominating Committee through current board members, stockholders and other persons.

42

Executive Compensation

     The following table sets forth the compensation paid or awarded by us in 2004, 2003 and 2002 to our Chief Executive Officer and the four other most highly compensated officers for the year ended December 31, 2004.