SEC File No. 33-85044-d


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB

[X]      QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934

                   For the quarterly period ended May 31, 2004

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934

Commission file number 33-85044-d

                              NACO Industries, Inc.
--------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

          Utah                                           48-0836971
          ----                                           ----------
(State of Incorporation)                        (IRS Employer Identification

                     395 West 1400 North, Logan, Utah 84341
                     --------------------------------------
                    (Address of principal executive offices)


                     Issuer's telephone number 435-753-8020
--------------------------------------------------------------------------------


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

As of May 31, 2004, the issuer had 1,998,517  shares of Common Stock and 165,412
shares of Preferred Stock outstanding.


     Transitional Small Business Disclosure Format Yes [  ] No  [X]
--------------------------------------------------------------------------------





<PAGE>

PART 1 - FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

NACO INDUSTRIES, INC.
BALANCE SHEETS

                                                    May       November
                                                    31,          30,
ASSETS                                             2004         2003
------                                           ----------   ----------
                                                 (Unaudited)  (Audited)
Current assets:
  Cash                                           $  884,134   $  569,445
  Accounts receivable, net of allowances
    Of $40,983 / $20,643                          1,167,742      933,038
  Current portion of related party receivables       30,000       30,000
  Inventories                                       693,039      802,888
  Other current assets                               14,658       32,714
  Deferred income tax asset                          69,000       69,000
                                                 ----------   ----------
       Total current assets                       2,858,573    2,437,085

Property and equipment, net                         756,552      833,531
Related party receivables                           243,583      258,583
Other assets, net                                   215,703      216,410
                                                 ----------   ----------
Total assets                                     $4,074,411   $3,745,609
                                                 ==========   ==========



                                       2
<PAGE>
NACO INDUSTRIES, INC.
BALANCE SHEETS

                                                          May        November
                                                          31,           30,
LIABILITIES:                                             2004         2003
------------                                           ----------   ----------

                                                       (Unaudited)  (Audited)
Current liabilities:
  Accounts payable                                     $  419,074   $  346,691
  Accrued expenses                                        237,709      341,968
  Income Taxes Payable                                    161,093      157,000
  Current portion of long-term obligations                 93,645       89,000
                                                       ----------   ----------
       Total current liabilities                          911,521      934,659
                                                       ----------   ----------
Long-term liabilities:
  Long-term obligations, less current portion             830,825      878,934
  Deferred income tax liability                            55,000       55,000
                                                       ----------   ----------
       Total long-term liabilities                        885,825      933,934
                                                       ----------   ----------
       Total liabilities                                1,797,346    1,868,593
                                                       ----------   ----------
Stockholders' equity:
   Preferred Stock, 7% Cumulative, convertible
$3.00 par value, 330,000 shares authorized and
165,412 shares issued and outstanding. (Aggregate
liquidation preference $1,304,815 and $1,270,364
respectively)                                             496,236      496,236
  Common stock, $.01 par value, 10,000,000 shares
authorized; 1,998,517 shares issued and outstanding        19,986       19,986

  Additional paid-in capital                            1,017,321    1,017,321
  Retained Earnings                                       743,522      343,473
                                                       ----------   ----------
       Total stockholders' equity                       2,277,065    1,877,016
                                                       ----------   ----------

       Total liabilities and
         Stockholders' equity                          $4,074,411   $3,745,609
                                                       ==========   ==========

See Notes to Financial Statements

                                       3
<PAGE>
<TABLE>
<CAPTION>
NACO INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
                                                    Three months ended             Six months ended
                                                          May 31,                        May 31,
                                                -----------    -----------    -----------    -----------
                                                  2004             2003           2004           2003
                                                -----------    -----------    -----------    -----------
<S>                                             <C>              <C>            <C>            <C>
Sales, net                                      $ 2,992,618      2,767,530      5,205,229      4,621,352

Cost of goods sold                                1,525,093      1,537,332      2,899,986      2,673,067
                                                -----------    -----------    -----------    -----------
       Gross profit                               1,467,525      1,230,198      2,305,243      1,948,285

Operating expenses:
  Selling expenses                                  575,267        515,596      1,048,070        903,989
  General and administrative expenses               266,337        246,359        567,572        489,343
                                                -----------    -----------    -----------    -----------
       Total operating expenses                     841,604        761,955      1,615,642      1,393,332
                                                -----------    -----------    -----------    -----------

       Income from operations                       625,921        468,243        689,601        554,953

Other income (expense):
  Interest income                                       992          1,137          2,255          1,726
  Interest expense                                  (23,387)       (27,370)       (46,806)       (53,082)
                                                -----------    -----------    -----------    -----------
       Total other income (expense)                 (22,395)       (26,233)       (44,551)       (51,356)
                                                -----------    -----------    -----------    -----------

Income before income taxes                      $   603,526        442,010        645,050        503,597

Income tax expense                                  230,000        168,000        245,000        191,000
                                                -----------    -----------    -----------    -----------

       Net income                               $   373,526        274,010        400,050        312,597
                                                ===========    ===========    ===========    ===========

Adjustment for preferred dividends in arrears             0              0        (34,451)       (34,451)

                                                -----------    -----------    -----------    -----------
Adjusted net income to common stockholders      $   373,526        274,010        365,599        278,146
                                                ===========    ===========    ===========    ===========
Earnings per common share:

 Basic:                                         $       .19            .14            .18            .14
                                                ===========    ===========    ===========    ===========

 Diluted:                                       $       .19            .14            .18            .14
                                                ===========    ===========    ===========    ===========
Weighted average number of common
  Shares outstanding:
    Basic                                         1,999,000      1,974,000      1,999,000      1,974,000
                                                ===========    ===========    ===========    ===========
    Diluted                                       1,999,000      1,974,000      1,999,000      1,974,000
                                                ===========    ===========    ===========    ===========
</TABLE>

                        See Notes to Financial Statements

                                       4
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
                                                           Six months ended
                                                        ----------------------
                                                          May 31,      May 31
                                                        ---------    ---------
                                                           2004         2003
Cash flows from operating activities
  Net income                                            $ 400,050    $ 312,597
  Adjustments to reconcile net income to
   net cash provided by (used in) operating activities:
     Depreciation                                          83,937       86,934
     Amortization                                           3,707        4,373
     Deferred income taxes                                      0      (16,000)
   (Increase) decrease in:
     Accounts receivable, net                            (234,704)    (652,723)
     Receivable from related parties                       15,000       15,000
     Inventory                                            109,849       (6,643)
     Other                                                 18,056        3,424
   Increase (decrease) in:
     Accounts payable                                      72,382      201,833
     Taxes Payable                                          4,093      160,360
     Accrued expenses                                    (104,259)    (104,839)
                                                        ---------    ---------
 Net cash provided by operating activities                368,111        4,316
                                                        ---------    ---------

Cash flows from investing activities
  Purchase of  property and equipment                      (6,958)     (42,026)
  Other Assets                                             (3,000)     (10,404)

                                                        ---------    ---------
        Net cash used in investing activities              (9,958)     (52,430)
                                                        ---------    ---------

Cash flows from financing activities
  Net change in line of credit                                  0            0
  Cash received for long-term debt                              0       43,975
  Payments on long-term debt                              (43,464)     (34,059)
  Dividend Payment                                              0      (69,473)
                                                        ---------    ---------

        Net cash used in financing activities             (43,464)     (59,557)
                                                        ---------    ---------

Increase in cash                                          314,689     (107,671)

        Cash, beginning of period                         569,445      234,964
                                                        ---------    ---------

        Cash, end of period                             $ 884,134    $ 127,293
                                                        =========    =========

See Notes to Financial Statements
Supplemental disclosures:
    Income taxes paid                                   $ 240,907    $  73,159
    Interest Paid                                       $  45,101    $  49,054

                       See Notes to Financial Statements.

                                       5
<PAGE>
NACO INDUSTRIES, INC.
Notes to Financial Statements (Unaudited)
May 31, 2004

NOTE A - BASIS OF PRESENTATION

In the opinion of  management of NACO  Industries,  Inc.  (the  "Company"),  all
adjustments  (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included.  Operating results for the six-month
period ended May 31, 2004 are not necessarily indicative of the results that may
be expected  for the fiscal year ending  November  30,  2004.  These  statements
should be read in conjunction with the financial statements and related notes in
the Company's Annual Report on Form 10-KSB for the year ended November 30, 2003.

NOTE B - DIVIDENDS]

Dividends on the  Company's  preferred  stock are  cumulative  at 7%. At May 31,
2004, dividends in the amount of $312,343 were in arrears.

NOTE C - RELATED PARTY OPERATING LEASES

The Company leases its Logan, Utah  manufacturing and sales facility and certain
equipment from P.V.C.,  Inc.  (PVC),  a corporation  owned 100% by the Company's
majority  shareholder,  Verne Bray.  The lease  agreement  requires rents in the
amount of  approximately  $25,213  per month.  The Company  has  guaranteed  the
mortgage on the  facilities it leases from PVC. At May 31, 2004 and November 30,
2003,  the  outstanding  mortgage  balances  were  approximately   $626,000  and
$645,000,  respectively.  At May 31, 2004,  the Company had a lease deposit with
PVC of $23,000, which is included in "Other Assets" on the balance sheet.

In  addition,  Mr.  Bray has  signed an  indemnification  agreement  to hold the
Company  harmless  for  funds  paid by the  Company  on behalf  of  Rimshot  LLC
("Rimshot"),  an inactive limited  liability company owned by a son of Mr. Bray.
The  disinterested  members of the  Company's  Board of  Directors  approved the
Company's execution of the indemnification agreement. The agreement covers costs
advanced to Rimshot for start-up  operations and principal and interest payments
made on leased  machinery  used by  Rimshot.  The  agreement  calls for  monthly
payments of $2,500,  which  commenced  on October 1, 2000 and are  scheduled  to
continue  until the  balance is paid in full.  Pursuant  to the  indemnification
agreement, Mr. Bray conveyed to the Company a security interest in all PVC lease
receivables from the Company.  The Company has also signed a security  agreement
with PVC that allows the Company to offset  payments  due to PVC in the event of
default on the indemnification agreement.

At May 31, 2004 and November 30, 2003,  Verne Bray and related entities owed the
Company $273,583 and $288,583, respectively.

NOTE D - STOCK-BASED COMPENSATION

The Company has stock-based  employee  compensation  plans,  which are described
more fully in Note 12 to the  Company's  financial  statements  included  in the
Company's Annual Report on Form 10-KSB for the year ended November 30, 2003. The
Company   accounts  for  those  plans  under  the  recognition  and  measurement
principles of APB Opinion 25,  "Accounting  for Stock Issued to Employees,"  and
related interpretations,  and has adopted the disclosure-only provisions of SFAS
123,  "Accounting for Stock-Based  Compensation."  Accordingly,  no compensation
cost has been  recognized in the financial  statements,  as all options  granted
under  those plans had an  exercise  price  equal to or greater  than the market
value of the underlying  common stock on the date of the grant. Had compensation
cost for the Company's stock options been determined  based on the fair value at
the grant date  consistent  with the  provisions  of SFAS 123, the Company's net
earnings  and  earnings per share for the six months ended May 31, 2004 and 2003
would have been reduced to the pro forma amounts indicated below.

                                       6
<PAGE>
                                       2004                     2003
                                       ----                     ----
Net income - as reported           $   400,050              $   312,597
Net income - pro forma             $   391,181              $   303,728
Earnings per share - as reported   $      0.18              $       .14
Earnings per share - pro forma     $      0.20              $       .15

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

Introduction
NACO Industries, Inc. ("NACO" or the "Company") manufactures and sells polyvinyl
chloride ("PVC")  products.  The Company's  primary line of business consists of
manufacturing PVC pipe fittings and valves, which are sold throughout the United
States through wholesale  distributors to irrigation,  industrial,  construction
and utility industries.  The Company  manufactures and sells fabricated fittings
(4"  through  30" in  diameter),  as well as molded  fittings  (4" though 10" in
diameter).  Pipefittings produced by the Company include tees, reducers, elbows,
couplers, end caps, and bolted repair couplers. NACO also manufactures and sells
PVC valves (4" through 12" in diameter).

Results of Operations
     The following  discussion  relates to the three and six month periods ended
May  31,  2004  and  May  31,  2003,  respectively.   For  comparison  purposes,
percentages  of  sales  will be  used  rather  than  dollars.  In the  following
discussion, the three months ended May 31, 2004 and May 31, 2003 are referred to
as 2Q04 and 2Q03,  respectively.  The six months  ended May 31, 2004 and May 31,
2003 are referred to as 6M04 and 6M03, respectively.  Readers are cautioned that
results of  operations  for the three and six months  ended May 31, 2004 are not
necessarily  indicative  of the results that may be expected for the fiscal year
ending November 30, 2004.

     Overview.  The Company  obtained a net profit  before taxes of $603,526 for
2Q04,  compared to a net profit  before taxes of $442,010 for 2Q03.  The Company
obtained a net profit  before  taxes of  $645,050  for 6M04,  compared  to a net
profit before taxes of $503,597 for 6M03.  Gross margin as a percentage of sales
for  2Q04  and 2Q03  was  49.0%  and  44.5%,  respectively.  Gross  margin  as a
percentage  of sales for 6M04 and 6M03 was 44.3% and  42.2%,  respectively.  The
increase in the Company's  net profit  before taxes and gross margin  percentage
was mainly due to several factors as explained below.

     Net Sales: Net sales for 2Q04 increased by 8.1% to $2,992,618,  compared to
net sales of $2,767,530 for 2Q03.  Management  believes that the increase in net
sales  from  2Q03 to 2Q04  was due  primarily  to an  increase  in  sales in the
agricultural  market. Net sales in the agricultural  market increased 19.3% from
2Q03 to 2Q04.  Management believes the increase in net sales in the agricultural
market  was  mainly  due to an  improved  economy  nationwide.  Net sales in the
utility market  decreased  18.7% or $180,000  approximately,  from 2Q03 to 2Q04.
Management  believes the decrease in net sales in the utility  market was mainly
due to decreased  sales to one large Original  Equipment  Manufacturer,  ("OEM")
customer that was awarded  several  domestic and foreign  construction  projects
during the 2Q03 that did not repeat in 2Q04. Agricultural and utility sales as a
percentage of total sales were 73.0% and 27.0% for 2Q04, and 64.8% and 35.2% for
2Q03,  respectively.  Net  sales  for 6M04  increased  by  12.6% to  $5,205,229,
compared  to net sales of  $4,621,352  for 6M03.  Management  believes  that the
increase in net sales from 6M03 to 6M04 was also due  primarily  to the increase
in sales in the  agricultural  market.  Net  sales  in the  agricultural  market
increased 15.0% from 6M03 to 6M04,  primarily as a result of an improved economy
nationwide.  Net sales in the utility  market  increased  4.9% or  approximately
$71,000 from 6M03 to 6M04.  Management believes that the increase in utility net
sales was mainly due to two different factors. 1) The general improvement in the
economy and 2) The increased sales effort of the Company's sales department. The


                                       7
<PAGE>

Company added an additional salesman in 2003 who has been able to increase sales
in his  area  over  historical  volume.  Agricultural  and  utility  sales  as a
percentage of total sales were 70.5% and 29.5% for 6M04, and 68.5% and 31.5% for
6M03, respectively.

     Gross Margin:  Gross margin, as a percentage of sales for 2Q04 and 2Q03 was
49.0% and 44.5%, respectively. Gross margin for 2Q04 increased from 2Q03, mainly
due to an increase in  agricultural  sales as a  percentage  of total net sales.
Agricultural  sales have  historically  had a higher  gross  margin than utility
sales.  Agricultural and utility sales as a percentage of total sales were 73.0%
and 27.0% for 2Q04, and 64.8% and 35.2% for 2Q03,  respectively.  Material costs
decreased  as a  percentage  of net sales  from  33.6% in 2Q03 to 30.9% in 2Q04.
Management  believes the decrease in material costs as a percentage of sales was
mainly due to  decreased  sales to one large  Original  Equipment  Manufacturer,
("OEM"),  customer that was awarded  several  domestic and foreign  construction
projects  during the 2Q03 that did not repeat in 2Q04. The material  costs, as a
percentage  of OEM sales,  is higher than material cost for typical sales in the
agricultural and utility markets. Labor and related expenses increased $7,305 or
1.9%, from 2Q03 to 2Q04,  mainly due to an annual wage increase of approximately
2.7% and an 81.0%  increase in Workman's  Compensation  premium  expense.  Gross
margin  as a  percentage  of  sales  for 6M04 and  6M03  was  44.3%  and  42.2%,
respectively.  Gross  margin  for 6M04  increased  from  6M03,  mainly due to an
increase in agricultural sales as a percentage of total net sales.  Agricultural
and utility  sales as a percentage of total sales were 70.5% and 29.5% for 6M04,
and  68.5%  and 31.5% for 6M03,  respectively.  Material  costs  decreased  as a
percentage of net sales from 33.3% in 6M03 to 31.7% in 6M04. Management believes
the  decrease  in  material  costs as a  percentage  of sales was  mainly due to
decreased sales to one large Original Equipment Manufacturer,  ("OEM"), customer
as explained above.  Labor and related expenses  increased  $114,551,  or 15.9%,
from 6M03 to 6M04, mainly due to an annual wage increase of approximately  2.7%,
a 58.4% increase in workers'  compensation  premium expense and a 56.2% increase
in health insurance costs. Prior to January 1, 2004, the Company "self-funded" a
portion of its employees' health insurance claims,  and there were several large
medical claims  incurred in 1Q04,  which  increased  health  insurance  expense.
Effective  January 1, 2004 the Company  began  operating  under a fully  insured
plan. As a result of the Company's  shift to a  fully-insured  plan,  management
believes the  Company's  health  insurance  expense will be more  consistent  in
future periods.  Another  contributing factor to health insurance expense was to
general cost increases throughout the health insurance industry. These increases
in medical and hospital costs were also a  contributing  factor to the Company's
increased workers, compensation expense.

     Selling:  Selling  expenses  were 19.2% of net sales for 2Q04,  compared to
18.6% for 2Q03.  The increase in selling  expenses as a percentage  of sales was
due to several principal factors. In actual dollars,  selling expenses increased
$59,508,  or 11.5%,  from 2Q03 to 2Q04.  Freight out expense increased 11.8%, or
$22,882, from 2Q03 to 2Q04, and increased as a percentage of net sales from 7.0%
in 2Q03 to 7.3% in 2Q04.  Management  believes freight expense  increased partly
due to the increase in sales volume, partly due to freight surcharges by freight
companies  for  increased  fuel  prices  and partly  due to  increased  sales in
geographical  areas where freight  costs are higher than the average  historical
costs on Company sales. Salaries and related expenses increased $18,447, or 8.8%
from 2Q03 to 2Q04,  mainly due to the  addition  of a new  salesman to the sales
force.  Selling expenses were 20.1% of net sales for 6M04, compared to 19.6% for
6M03. In actual dollars,  selling expenses  increased  $143,918,  or 15.9%, from
6M03 to 6M04.  Salaries and related expenses  increased  $58,206,  or 15.4% from
6M03 to 6M04, mainly due to the addition of the new salesman to the sales force.

     General and administrative: General and administrative expenses represented
8.9% of net sales for 2Q04,  compared  to 8.9% for 2Q03.  Overall,  general  and
administrative  expenses increased  $19,978,  or 8.1% from 2Q03 to 2Q04. General
and  administrative  expenses as a percentage  of net sales were 10.9% for 6M04,


                                       8
<PAGE>

compared to 10.6% for 6M03.  Overall,  general and administrative  expenses were
$567,457  and  $489,343  for 6M04 and 6M03,  respectively.  Salaries and related
expenses increased $41,414, or 12.9%, from 6M03 to 6M04, due mainly to increased
health  insurance  costs as explained in the section  entitled  "Gross  Margins"
above. Health insurance costs for general and administrative employees increased
$17,338,  or  68.5%  from  6M03 to 6M04.  The  Company  also had a 2.7%  average
increase in salaries effective on December 1, 2003. Another  contributing factor
to increases  in salaries and related  expenses was the hiring of a new engineer
during 1Q04 to expedite the development of new products.

     Other: Other  expenses/revenues were .8% of net sales for 2Q04, compared to
1.0% for 2Q03,  mainly  due to  decreased  interest  expense.  Interest  expense
decreased from .9% of net sales for 2Q03 to .8% of net sales for 2Q04.  Interest
expense decreased $2,011 from 2Q03 to 2Q04, mainly due to improved cash flow and
lower borrowings  during the quarter.  Other  expenses/revenues  were .9% of net
sales for 6M04, compared to 1.1% for 6M03, also mainly due to decreased interest
expense.  Interest  expense  decreased from 1.1% of net sales for 6M03 to .9% of
net sales for 6M04.  Interest expense decreased $4,178 from 6M03 to 6M04, mainly
due to improved cash flow and lower borrowings during the period.  The Company's
effective  interest rate (interest  expense  divided by the average debt balance
for the applicable period) for 6M04 and 6M03 was 9.56% and 9.90%, respectively.

Liquidity and Capital Resources
     The Company's  principal  sources of liquidity have  historically been cash
from  operations,  credit  facilities  and equity  financing.  Cash  provided by
operating activities was $368,111 in 6M04. Cash as of May 31, 2004 was $884,134,
up $314,689 from  November 30, 2003.  The Company's  working  capital  increased
$444,626 from November 30, 2003 to May 31, 2004, due primarily to an increase in
current assets.  The increase in current assets was mainly due to an increase in
cash. The increase in cash was mainly due to increased  sales and profits during
6M04.

     As of May 31, 2004 the Company had an unused bank revolving  line-of-credit
with Zions Bank, which allows the Company to borrow a maximum of $1,200,000. The
line-of-credit  bear's  interest  at the prime  rate plus  1.75% is  secured  by
receivables and  inventories  and expires on March 31, 2005. The  line-of-credit
agreement  contains  covenants  related to minimum  net worth,  earnings  before
interest and taxes, debt and dividends.

     On May 31, 2004, the Company was in compliance with all loan covenants with
Zions Bank.  The maximum line is $1,200,000,  of which,  based on the "Borrowing
Base  Certificate"  prepared by the Company,  there was $1,200,000  available to
borrow as of May 31, 2004.

     The Company  has a note with  WebBank  Corporation.  The note is secured by
land,  buildings  and  equipment  owned by the Company.  The note has a variable
interest  rate equal to the prime  interest  rate as reported by The Wall Street
Journal,  plus one and one-half percent (1.5%) provided  however,  that the rate
shall never exceed  14.75% nor be less than 9.75%.  The rate on May 31, 2004 was
9.75%.  The term of the note is 15 years from the date of closing  (April  1999)
and the note requires  monthly  payments.  On May 31, 2004, the monthly  payment
required was $11,972.  On May 31, 2004, the outstanding  balance of the note was
$842,307 and the Company was in compliance with all loan covenants with WebBank.
This note is subordinated to the Zions Bank line of credit.

     Management  believes  that its capital  resources  on hand at May 31, 2004,
revenues from sales and bank resources will be sufficient to satisfy its working
capital  requirements  for the  foreseeable  future.  There can be no assurance,
however,  that additional debt or equity  financing may not be required or that,
if such  financing is required,  it will be available on terms  favorable to the


                                       9
<PAGE>

Company,  if at all. The Company's  inability to secure additional  financing or
raise  additional  capital  would likely have a material  adverse  effect on the
Company's operations,  financial condition,  and its ability to continue to grow
and expand its operations.

Critical Accounting Policies

     NACO's  significant  accounting  policies  are  described  in Note 1 to the
Company's  financial  statements included in the Company's Annual Report on Form
10-KSB for the year ended November 30, 2003.  Included within these policies are
the Company's "critical  accounting  policies." Critical accounting policies are
those  policies  that are most  important to the  preparation  of the  Company's
financial  statements and require  management's  subjective and complex judgment
due to the  need  to make  estimates  about  the  effect  of  matters  that  are
inherently  uncertain.  The Company's  critical  accounting  policies  relate to
allowance for doubtful  accounts,  inventory  valuation,  product warranties and
allowances  for deferred  income  taxes.  The  application  of these  accounting
policies  involves  the exercise of judgment  and the use of  assumptions  as to
future  uncertainties  and, as a result,  actual results could differ materially
from these estimates.

     Allowance for Doubtful  Accounts:  The Company has established an allowance
for estimated bad debts by applying a historical  percentage of bad debts to net
sales each month. In addition, all accounts over 90 days are evaluated as to the
collectibility  of each  account  and a  specific  reserve  is  established  for
specific  customer  accounts  identified  as  doubtful or  non-collectible.  The
Company's customer base is such that changes in either the customer's  financial
position  or the  economy as a whole could  cause  actual  write-offs  to differ
materially from the estimated  reserve.  The allowance for doubtful  accounts at
May 31, 2004 was  $40,984,  compared to $51,525 at fiscal year end  November 30,
2003.

     Inventories:  The  Company  evaluates  inventory  on  an  annual  basis  to
determine obsolete and slow moving inventory.  All inventory that has not moved,
been used in manufacturing or sold in the past year is reserved against. Also an
additional reserve is made for slow moving inventory.  Based on usage during the
past year, a reserve is  calculated by taking the  prevailing  interest rate for
money  borrowed  multiplied  by the value of  inventory in excess of a six-month
supply.  Inventory in excess of a  three-year  supply is reserved at 100% of the
value of that  excess  inventory.  The  reserve  for  obsolete  and slow  moving
inventories  at May 31,  2004 was $80,000  compared  to $60,000 at November  30,
2003.

     The Company takes a complete physical  inventory once a year and a physical
inventory of the top 80% of the dollars in inventory every month.  This helps to
offset any  inventory  adjustments  at year-end.  Any year-end  adjustments  are
reflected  during the fourth  quarter after the year-end  physical  inventory is
completed. Since only 80% of the dollars in inventory are counted each quarter a
"quantity reserve" is made each quarter for the parts not counted.  The quantity
reserve at May 31, 2004 was $20,000 compared to $0 at November 30, 2003.

     Product  Warranties:  The Company's current  liabilities include an accrued
warranty  account for anticipated  product warranty claims based on a historical
percentage of sales plus any specific claims that have been  identified.  Actual
claims could be materially  different than the historical  estimates made by the
Company.  The accrual for warranty claims at May 31, 2004 was $78,871,  compared
to $72,014 at November 30, 2003.

     Deferred Income Tax Valuation  Allowances:  The Company's current assets at
May 31, 2004 include an entry for deferred  taxes in the amount of $55,000.  The
Company evaluates the realizability of its net deferred tax asset on a quarterly
basis and a valuation allowance is provided.  In the opinion of management,  the


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<PAGE>

total asset value at May 31, 2004 is  realizable,  therefore  no  allowance  was
provided.  However, the Company's operating results are subject to certain risks
that could adversely affect the Company's  operating  results and its ability to
operate profitably.  The Company's operating results could be adversely affected
by increased competition in the markets in which the Company's products compete,
manufacturing delays and inefficiencies  associated with expanding the Company's
manufacturing  capacity,  adverse weather conditions,  increases in labor or raw
materials expenses,  changes in economic conditions,  unanticipated  expenses or
events and other factors that could materially change the need for an allowance.

Factors Affecting Future Results
     Statements  contained in this Quarterly  Report on Form 10-QSB that are not
purely historical are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All forward-looking statements involve various
risks and  uncertainties.  Forward-looking  statements  contained in this Report
include  statements  regarding the Company's  plans,  market  opportunities  and
acceptance,  expectations,  goals, revenues, financial performance,  strategies,
mission and  intentions  for the future.  Such  forward-looking  statements  are
included under. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and encompass the Company's beliefs, expectations,  hopes
or intentions  regarding  future  events.  Words such as "expects,"  "believes,"
"anticipates," "should," and "likely" also identify forward-looking  statements.
All  forward-looking  statements included in this Report are made as of the date
hereof,  based on information  available to the Company as of such date, and the
Company  assumes no obligation to update any  forward-looking  statement.  It is
important to note that such statements may not prove to be accurate and that the
Company's  actual results and future events could differ  materially  from those
anticipated in such statements.  All subsequent written and oral forward-looking
statements  attributable  to the  Company  or  persons  acting on its behalf are
expressly qualified in their entirety by this section and other factors included
elsewhere in this Report.


Item 3 - Controls and Procedures

         An  evaluation  was  performed  under  the  supervision  and  with  the
participation  of the Company's  management,  including the Company's  principal
executive officer and principal  financial officer,  of the effectiveness of the
Company's  disclosure  controls and procedures as of May 31, 2004. Based on that
evaluation, the Company's management,  including its principal executive officer
and  principal  accounting  officer,  concluded  that the  Company's  disclosure
controls and procedures are effective to ensure that information  required to be
disclosed by the Company in reports  filed or submitted by the Company under the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and  reported  as  specified  in the SEC's  rules and forms.  There have been no
significant  changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the evaluation.





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PART II - OTHER INFORMATION

Item 3 - Defaults  Upon  Senior  Securities

         (b) During the fiscal year ended  November  30, 2003 and  November  30,
         2002, the Company paid $69,473 and $69,473 respectively in dividends on
         its Series 1 Class A 7%  Cumulative  Convertible  Preferred  Stock (the
         "Preferred  Stock").  During the prior year ended  November 30, 2001 no
         dividends were paid. As of July 14, 2004, the total dividend in arrears
         with respect to the Preferred Stock was $312,343.

Item 4 - Submission of Matters to a Vote of Security Holders

         None

Item 6 - Exhibits and Reports on Form 8-K


      (a)         Exhibit 31.1      Certification of Chief Executive Officer

                  Exhibit 31.2      Certification of Chief Financial Officer



                  Exhibit 32.1      Certification of Chief Executive Officer

                  Exhibit 32.2      Certification of Chief Financial Officer


     (b) Reports on form 8-K. None



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SIGNATURES
In accordance with the  requirements of the Securities  Exchange Act of 1934, as
amended,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Naco Industries, Inc.
Registrant


By       /s/ VERNE E. BRAY                                  July 13, 2004
   -----------------------------------------                ---------------
         Verne E. Bray                                      Date
         CEO, Secretary, Chairman
         (Principal Executive Officer)

By       /s/  W. MICHAEL HOPKINS                            July 13, 2004
   -----------------------------------------                ---------------
         W. Michael Hopkins Date President                  Date


By       /s/ JEFFREY J. KIRBY                               July 13, 2004
   -----------------------------------------                ---------------
         Jeffrey J. Kirby                                   Date
         Executive Vice President/
         Chief Financial Officer/Treasurer
         (Principal Financial and Accounting Officer)





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