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 August 31,1997

                [ ] 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 Registrant as specified in its charter)

                  Utah                                  48-0836971
                  ----                                  ----------
        (State of Incorporation)                    (Federal I.R.S. No.)

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

                   Registrant's Telephone Number 801-753-8020
                                                 ------------

         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 August 31, 1997, the  Registrant  had 1,843,750  shares of Common
Stock and 165,412 shares of Preferred Stock outstanding.

         Transitional Small Business Disclosure Format        Yes     No  X




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<PAGE>



                  PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
See attached Consolidated Financial Statements for August 31, 1997.


































                                       2


<PAGE>











                              NACO Industries, Inc.

                        CONSOLIDATED FINANCIAL STATEMENTS


                                 August 31, 1997

























                                       3



<PAGE>


PART 1 - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>

NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
                                                      Aug. 31                        November 30
                                                 ------------------               ------------------
ASSETS                                                 1997                             1996
------                                           ------------------               ------------------
Current assets:
<S>                                            <C>                                           <C>   
  Cash                                         $          153,010                           198,306
  Accounts receivable, net of allowances
    of $45,102 / $72,075                                  801,145                           615,775
  Inventory                                               688,391                           668,501
  Prepaid income taxes                                      9,300                            48,600
  Other current assets                                    141,438                            72,202
                                                 ------------------               ------------------
       Total current assets                             1,793,284                         1,603,384
                                                 ------------------               ------------------

Property and equipment:
  Land                                                     40,700                            40,700
  Buildings and improvements                              591,343                           526,329
  Equipment and vehicles                                2,341,362                         2,033,174
  Equipment construction in progress                      140,363                            93,130
                                                 ------------------               ------------------
       Total property and equipment                     3,113,768                         2,693,333

  Accumulated depreciation                             (1,378,923)                       (1,195,036)
                                                 ------------------               ------------------
       Net property and equipment                       1,734,845                         1,498,297
                                                 ------------------               ------------------

Other assets:
  Intangible and other assets                             107,055                           105,907
                                                 ------------------               ------------------
       Total other assets                                 107,055                           105,907
                                                 ------------------               ------------------
       Total assets                            $        3,635,184                         3,207,588
                                                 ==================               ==================


</TABLE>








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<PAGE>
<TABLE>


NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
                                                                Aug. 31                November 30
                                                           ------------------       ------------------
LIABILITIES:                                                     1997                     1996
------------                                                                                  
                                                           ------------------       ------------------

Current liabilities:
<S>                                                      <C>                                  <C>    
  Accounts payable                                       $          324,831                   544,074
  Accrued expenses                                                  158,430                   188,076
  Line of credit                                                    824,326                   664,326
  Current portion of long-term obligations                          279,083                   316,215
  Payable to related party                                          (14,321)                   34,382
                                                           ------------------       ------------------
       Total current liabilities                                  1,572,349                 1,747,073

Long-term liabilities:
  Long-term obligations, less current portion                       783,734                   896,379
  Deferred income taxes                                              79,100                    79,100
                                                           ------------------       ------------------
       Total long-term liabilities                                  862,834                   975,479
                                                           ------------------       ------------------
       Total liabilities                                          2,435,183                 2,722,552

Stockholders' equity:
  Common stock, $.01 par value; 10,000,000
    shares authorized; 2,262,301 issued
    (including 418,551 shares in treasury)                           22,624                    19,186
  Preferred Stock, 7% Cumulative, convertible
    $3.00 par value Shares authorized; 330,000.
    shares issued 165,412 and 132,412,  
    respectively  (including 1,667 shares in
    treasury) (Aggregate liquidation preference 
    $992,472 andspectively)                                         496,236                   397,236
  Additional paid-in capital                                        990,853                   152,819
  Retained earnings                                                (158,143)                   57,364
                                                           ------------------       ------------------
                                                                  1,351,570                   626,605
  Less: treasury stock - at cost                                   (151,569)                 (141,569)
                                                           ------------------       ------------------
       Total stockholders' equity                                 1,200,001                   485,036
                                                           ------------------       ------------------

       Total liabilities and
         stockholders' equity                            $        3,635,184                 3,207,588
                                                           ==================       ==================
</TABLE>


See Notes to Consolidated Financial Statements.

                                        5














<PAGE>


<TABLE>

NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
                                                        Three months ended                      Nine months ended
                                                           August 31                              August 31
                                               ----------------------------------     ----------------------------------
                                                   1997                1996                1997               1996
                                               --------------      --------------     ---------------     --------------

<S>                                          <C>                       <C>                 <C>                <C>      
Sales, net                                   $     1,815,298           1,488,340           5,796,356          4,943,961

Cost of goods sold                                 1,236,670             866,258           3,724,261          2,847,281
                                               --------------      --------------     ---------------     --------------

       Gross profit                                  578,628             622,082           2,072,095          2,096,680

Operating expenses:
  Selling expenses                                   362,606             400,947           1,117,607          1,016,138
  General and administrative expenses                340,091             276,178             986,968            827,018
                                               --------------      --------------     ---------------     --------------

       Total operating expenses                      702,697             677,125           2,104,575          1,843,156
                                               --------------      --------------     ---------------     --------------

       Income (loss) from operations                (124,069)            (55,043)            (32,480)           253,524

Other income (expense):
  Interest income                                        603                 491               1,322              1,997
  Interest expense                                   (46,705)            (45,229)           (156,512)          (157,592)
                                               --------------      --------------     ---------------     --------------

       Total other income (expense)                  (46,102)            (44,738)           (155,190)          (155,595)
                                               --------------      --------------     ---------------     --------------

Income (loss) before income taxes                   (170,171)            (99,781)           (187,670)            97,929

Income tax expense (benefit)                            (900)            (42,159)                  0             27,000
                                               --------------      --------------     ---------------     --------------

       Net income (loss)                     $      (169,271)            (57,622)           (187,670)            70,929

Adjustment for preferred dividends                   (17,335)            (12,006)            (34,468)           (34,478)
                                               --------------      --------------     ---------------     --------------

Adjusted net to Common Stockholders                 (186,606)            (69,628)           (222,138)            36,451
                                               --------------      --------------     ---------------     --------------

Earnings (loss) per common share:
  Primary:
      Earnings (loss) from net income                  (0.10)              (0.04)              (0.11)              0.05
      Dividends in arrears                             (0.01)              (0.01)              (0.02)             (0.02)
                                               ==============      ==============     ===============     ==============
  Net Earnings (loss)                        $        ($0.11)             ($0.05)             ($0.13)             $0.02
                                               ==============      ==============     ===============     ==============

Fully Diluted:
     Earnings (loss) from net income         $         (0.11)              (0.05)              (0.13)              0.04
                                               ==============      ==============     ===============     ==============

Weighted average number of common
  shares outstanding:
    Primary                                        1,722,057           1,500,000           1,722,057          1,500,000
                                               ==============      ==============     ===============     ==============
    Fully Diluted                                  2,033,723           1,752,824           2,033,723          1,752,824
                                               ==============      ==============     ===============     ==============

</TABLE>

See Notes to Consolidated Financial Statements

                                        6
<PAGE>

<TABLE>

NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
                                                                            Nine months ended
                                                                     August 31              August 31
                                                                 -----------------------------------------
                                                                        1997                   1996
                                                                 -------------------     -----------------
Cash flows from operating activities
<S>                                                            <C>                                 <C>   
  Net income (loss)                                            $           (187,670)               70,929
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating activities:
     Depreciation                                                           183,887               161,441
     Amortization                                                             1,479                     0
     Deferred income taxes                                                        0               (23,690)
   (Increase) decrease in:
     Accounts receivable, net                                              (185,370)              (54,911)
     Inventory                                                              (19,890)               48,399
     Taxes Receivable                                                        39,300               120,226
     Other                                                                  (70,715)              (87,186)
   Increase (decrease) in:
     Accounts payable                                                      (219,243)              266,121
     Accrued expenses                                                       (29,646)              (38,596)
     Income taxes payable                                                         0                   200
                                                                 -------------------     -----------------
        Net cash provided by (used in)
         operating activities                                              (487,868)              462,933
                                                                 -------------------     -----------------

Cash flows from investing activities
  Net change  property and equipment                                       (420,435)             (177,687)
  Investment in intangible and other assets                                  (1,148)              191,930
                                                                 -------------------     -----------------
        Net cash provided by (used in) investing activities                (421,583)               14,243

Cash flows from financing activities
  Net change in line of credit                                              160,000              (120,244)
  Payments on related party loan                                            (48,703)               (4,557)
  Payments on long-term debt                                               (214,301)             (815,452)
  Payment of Preferred Stock Dividends                                      (27,837)                    0
  Proceeds from long-term loans                                              64,524               113,725
  Proceeds from issuance of common stock                                    742,500                     0
  Proceeds from issuance of preferred stock                                 197,972               464,273
  Purchase of treasury stock                                                (10,000)                    0
                                                                 -------------------     -----------------
        Net cash provided by (used in) financing activities                 864,155              (362,255)

                                                                 -------------------     -----------------
Increase (decrease) in cash                                                 (45,296)              114,921

        Cash, beginning of period                                           198,306               133,481
                                                                 -------------------     -----------------

        Cash, end of period                                    $            153,010               248,402
                                                                 ===================     =================

See Notes to Consolidated Financial Statements
Supplemental disclosures:
    Income taxes paid                                          $                  0                     0
    Interest Paid                                              $            148,153               162,252

                                        7
</TABLE>

<PAGE>



                              NACO INDUSTRIES, INC.
             Notes to Consolidated Financial Statements (Unaudited)
                                 August 31, 1997


NOTE A - BASIS OF PRESENTATION


Management has elected to omit  substantially  all footnotes to these  unaudited
consolidated quarterly financial statements.  In the opinion of management,  all
adjustments  (consisting only of normal recurring accruals) considered necessary
for a fair  presentation  have been  included.  Operating  results for the three
month  and nine  month  periods  ended  August  31,  1997,  are not  necessarily
indicative  of the  results  that may be  expected  for the fiscal  year  ending
November 30,  1997.  These  statements  should be read in  conjunction  with the
consolidated  financial  statements  and related notes in the  Company's  Annual
Report on Form 10-KSB for the year ended November 30, 1996.

NOTE B - INVENTORY

Inventory consists of the following:
                           Aug. 31,         Nov. 30,
                             1997            1996
                           --------         -------
         Raw Materials     $270,906         242,388
         Work In Process      9,549           3,750
         Finished goods     407,936         422,363
                           --------         -------
                  Total    $688,391         668,501

NOTE C - DIVIDENDS

Dividends on the preferred  stock are  cumulative  at 7%. At Aug. 31, 1997,  the
cumulative amount of dividends  accrued was $34,468.  Of this amount $34,468 was
in arrears.

NOTE D - EARNINGS PER SHARE

Primary earnings per common share are calculated by dividing adjusted net income
by  the  average  shares  of  Common  Stock  of the  Company  and  Common  Stock
equivalents  outstanding  during the period.  Net income has been  adjusted  for



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<PAGE>

dividends  in arrears as of Aug. 31, 1997.  Common Stock  equivalents  represent
certain  outstanding  stock options and  warrants.  During the period the market
price did not exceed the option price for the  outstanding  options and warrants
and therefore no dilution occurred.

The calculation of fully diluted  earnings per share of Common Stock assumes the
diluting effect of the Company's Cumulative Preferred Stock.

NOTE E - CONSULTING AGREEMENTS, WARRANTS AND OPTIONS

In September 1996 the Company entered into an agreement with Extol International
Corporation  ("Extol") to provide  investor  relations and financial  consulting
services  to the  Company.  As part of this  agreement,  Extol  has the right to
purchase for $100, a warrant to purchase  50,000 shares of the Company's  Common
Stock at $3.50 per share.  This warrant is  exercisable  for five (5) years from
the date of issuance, and will carry "piggyback"  registration rights. Extol has
agreed  to take  common  stock  in lieu of cash  payments  for  services.  These
services  have been  accrued  for, but shares have not been issued at the period
end.

NOTE F - COMMON STOCK

On March 5, 1997, the Company entered into an offshore  securities  subscription
agreement  with  Britannia  Holdings  Ltd. of England and on March 5, 1997,  the
Company sold 343,750 Units for an aggregate purchase price of $825,000. The sale
was made without  registration under the Securities Act of 1933 in reliance upon
Regulation S. Each Unit consists of one share of Common Stock and forty-four one
hundredth (.44) of a warrant to purchase an additional  share of Common Stock at
an exercise  price of $3.50 per share.  The Warrant  will expire in three years,
subject to extension as described below. The Warrants are currently  callable by
the Registrant anytime after its Common Stock trades for a bid price of $7.50 or
higher for 30 trading days in a row.

The Company also granted  Britannia  Holdings Ltd. a 12 month option to purchase
an additional  343,750 Units in connection  with the sale of the above Units. If
the Purchaser  purchases all of the Units subject to the Option,  the Registrant
will extend the exercise  period of all of the Warrants  issued as part of Units
(including  the Units  issued  on March 5,  1997)  from 3 years to 7 years,  and
increase the call price on such Warrants from $7.50 to $15.00.

As part of the consideration for the stock agreement,  the Company has agreed to
credit additional shares of common stock to Britannia Holdings LTD of England if
the Company does not establish a market for NACO Common Stock that trades for at
least  $6.00 per share for any 10  consecutive  days within  twenty-four  months
after March 5, 1997.

A finders  fee of 10% was paid to James Czirr who is an employee of Extol and is
a member of the board of directors of the Company.

                                       9
<PAGE>


NOTE G - PREFERRED STOCK

On March 7, 1996,  the  Company  initiated  an  offering  of Units  exempt  from
registration under the Securities Act of 1933. The offering consisted of 175,000
Units at an offering price of $6.00 per Unit. Each Unit consists of one share of
Series 1 Class A 7% Cumulative Convertible Preferred Stock a Warrant to purchase
one share of Common Stock at an exercise  price of $3.75 per common  share.  The
offering was made on a "best efforts"  basis and continued  until June 30, 1997.
Selling  commissions equal to 10% of the offering price of the Units was paid to
placement agents participating in the offering.

Through June 30,  1997,  the Company sold 52,000 units and received net proceeds
of $280,800.

During the quarter the Company  purchased 1,667 shares of preferred stock from a
former employee that has been recorded as treasury stock.

NOTE H - New Accounting Standards

In February 1997, the Financial  Accounting  Standards Board issued SFAS No. 128
"Earnings Per Share",  and SFAS No. 129 "Disclosure of Information about Capital
Structure".  Both statements are effective for financial  statements for periods
ending  after  December  15,  1997.  SFAS No.  128  specifies  the  computation,
presentation  and  disclosure  requirements  for earnings per share for entities
with  publicly-held  common stock or potential  common stock.  Early adoption of
SFAS No. 128 is not  permitted.  SFAS No. 129  requires an entity to explain the
permanent rights and privileges of outstanding securities.  The Company believes
that  adoption  of  these  statements  will not have a  material  affect  on its
earnings per share disclosures.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income.
The Statement is effective for fiscal years  beginning  after December 15, 1997.
The adoption of SFAS No. 130 will require reporting  unrealized gains and losses
on future investments in debt and equity securities in comprehensive income.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information".  SFAS No.  131  establishes  standards for
reporting information about segments in annual financial statements and requires
selected  information  about  operating  segments in interim  financial  reports
issued to stockholders.  It also establishes  standards for related  disclosures
about products and services,  geographic  areas and major  customers.  Operating
segments  are  defined as  components  of an  enterprise  about  which  separate


                                       10

<PAGE>

financial  information  is available  that is  evaluated  regularly by the chief
operating  decision maker in deciding how to allocate resources and in assessing
performance.  SFAS No. 131  requires  reporting  segment  profit or loss certain
specific  revenue  and  expense  items  and  segment  assets.  It also  requires
reconciliation  of total segment  revenues,  total segment profit or loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
reported in the  financial  statements.  This  Statement is effective for fiscal
years  beginning  after  December 15, 1997. The Company=s  reportable  operating
segments are not expected to change as a result of the adoption of SFAS No. 131.














                                       11

<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

NACO  Industries,  Inc.,  (NACO or the Company) is a manufacturing  company that
produces and sells polyvinyl chloride (PVC) products. The Company's primary line
of business consists of 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 36" in diameter), as well as molded fittings (4"
though 10" in  diameter).  Pipe fittings  produced by the Company  include tees,
reducers,  elbows,  couplers,  end caps, and bolted repair  couplers.  NACO also
manufacturers  and  sells  PVC  valves  (4"  through  12"  in  diameter).   NACO
Composites,  Inc.,  a wholly  owned  subsidiary  of NACO  produces  related  and
non-related composite products.

RESULTS OF OPERATIONS

The Company's  fiscal year ends on November 30. In the following  discussion the
quarters  ended  August 31, 1997,  and August 31,  1996,  are the 3rd quarter of
fiscal years ending  November 30, 1997,  and November 30, 1996, and are referred
to herein as 3Q97 and 3Q96, respectively. The nine months ended August 31, 1997,
and August 31, 1996, are referred to herein as 9M97 and 9M96 respectively.

GENERAL DISCUSSION OF QUARTERS OPERATING RESULTS.

During the 3Q97,  the Company  had an  operating  loss before tax of  $(162,307)
compared to operating loss before tax of $(99,781) for 3Q96. The quarter of June
to August is typically a slow quarter during the year due to the  seasonality of
the  agricultural  market.  The first and third quarters of the Company's fiscal
year are typically the slowest quarters for the Company,  and the fourth quarter
can be slow  depending on weather  conditions.  For the nine months ended August
31,  1997,  (9M97),  the  Company  sustained  an  operating  loss  before tax of
$(179,806)  compared to an operating  profit before tax of $70,929 for 9M96. The
decline  in  profitability  between  the two  periods is  primarily  a result of
continuing  low margins on  composite  products  during the 3Q97 and 9M97.  Also
during 3Q97, a larger  percentage  of total sales were in the sewer product line
which has an overall lower margin than the rest of the plastic product lines.

SALES

Net sales  increased by 21.9% to  $1,815,298  for 3Q97  compared to net sales of
$1,488,340  in 3Q96  due  mainly  to  increased  volume.  Plastic  sales in 3Q97
increased  $86,041 or 6.0% compared to 3Q96. The increased volume was due mainly
to increased sales in the sewer product line during 3Q96. An increased effort to



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<PAGE>

market the sewer product line has been made to level out  production  during the
seasonally off months of other product lines.  Also the increased volume was due
partly  to the  addition  of  large  diameter  fittings  from  27" to 36" to the
Company's product line.  Composite  products sales in 3Q97 increased $240,916 or
363% over 3Q96 primarily as a result of the acquisition of the assets of Draeger
Manufacturing  and  the  Company's  new  facilities  for  NACO  Composites  Inc.
Composite sales increased to 16.9% of total revenues in 3Q97 compared to 4.5% in
3Q96. Net sales  increased  $852,395 or 17.2% to $5,796,356 for 9M97 compared to
net sales of  $4,943,961  for 9M96 due mainly to the addition of large  diameter
fittings to the  product  line and to  increased  composite  sales as  explained
above.

GROSS MARGIN

Gross margin as a percentage  of sales for 3Q97 was 31.9%  compared to 41.8% for
3Q96. Gross margin as a percentage of sales for 9M97 was 35.8% compared to 42.4%
for 9M97. The decrease in gross margin is mainly due to the higher percentage of
sales from the composite product lines.  Gross margin on composites was 16.8% or
$51,754  for 3Q97 and .8% or $6,963  for 9M97  primarily  as a result of startup
costs,  increased  manufacturing  overhead  expenses  associated  with  the  new
facilities, and a large contract that was acquired as part of the acquisition of
Draeger  Manufacturing  that was bid at a price below the Company's actual costs
to produce the products. The new facilities were acquired to provide the Company
with sufficient  manufacturing facilities for the planned growth in this segment
of its business.  The contract  acquired in connection  with the acquisition was
completed  in 2Q97 and bidding  procedures  with checks and  balances  have been
updated to improve operations which management believes has and will continue to
improve  margins on  composite  products in future  quarters.  Gross  margins on
composite  products  have improved from 5.7% and (18.8%) in the first and second
quarter,  respectively,  to 16.8% for 3Q97. There can be no assurance,  however,
that gross margins will  continue to improve.  The gross margin on plastic sales
for 3Q97 was 34.9%  compared to 43.4% for 3Q96.  The  decrease in part is due to
the increase in sales of product within the sewer product line which  inherently
has a lower gross margin than most of the other product lines.  The company also
experienced  lower margins on these sales  because of costs  incurred to gear up
for higher  volumes of sewer line  products.  The  Company  believes  that gross
margin as a percentage of sales will improve as sales of composites  increase in
the future and as  production  moves up the learning  curve on the sewer product
line.  There can be no  assurance,  however,  that gross margins will improve or
that they will return to levels previously  obtained by the Company in the past.
Gross  margins  could be adversely  affected by lower than  anticipated  growth,
increased overhead expenses,  increased  competition,  a decline in sales, lower
than anticipated  sales prices,  and higher than anticipated  costs of labor and
materials.



                                       13
<PAGE>

SELLING

Selling  expenses  were  $362,606  or 20.0% of net  sales for 3Q97  compared  to
$400,947 or 26.9% for 3Q96. Salaries increased $8,151 mainly due to the addition
of a salesman for composite products, and an approximate 5% increase in salaries
in  September of 1996.  Commissions  increased  $16,703  mainly due to increased
sales.  Advertising  expense  decreased $28,511 mainly to catalogs being printed
and  distributed  in 3Q96  and no  similar  expense  in 3Q97.  Warranty  expense
decreased  $10,874 due mainly to  improvements  in products  with high  warranty
expense.  Selling  expenses  were  $1,117,607  or  19.3% of net  sales  for 9M97
compared to $1,016,138 or 20.6% for 9M96.  For 9M97 salaries  increased  $61,726
mainly for the same  reasons as above.  Freight  expense  increased  $48,696 due
mainly to increased sales and the mix of sales on which a portion of the freight
is typically  paid by the Company.  Commission  increased  $26,868 mainly due to
increased sales.

GENERAL AND ADMINISTRATIVE

General and administrative expenses were $330,091 or 18.2% of net sales for 3Q97
compared to $276,178 or 18.6% of net sales for 3Q96.  Salaries increased $13,783
or 11.2% from 3Q96 to 3Q97 mainly due to annual pay increases given in September
1996  and to the  addition  of one  accounting  clerk  in  2Q97.  Outside  labor
increased $9,421 from $32,333 to $41,754 due mainly to NSF qualifying costs, SEC
filings and sales of stock.  Employee benefits were up 43.8% or $4,564 from 3Q96
to 3Q97 mainly due to several  management  personnel  having completed a year of
employment  during 1996 making them  eligible for benefits.  Insurance  expenses
were up $12,395  mainly due to the addition of the composite  facility.  General
and  administrative  expenses  were  $976,968  or  16.9% of net  sales  for 9M97
compared to $827,018 or 16.7% for 9M96.  Salaries increased $51,189 from 9M96 to
9M97  mainly  due to annual pay  increases  given in  September  1996 and to the
addition of one accounting clerk in 2Q97.  Outside labor,  employee benefits and
insurance also increased as explained above.

INTEREST EXPENSE

Interest  expense for 3Q97 was $48,841 or 2.7% of net sales  compared to $45,229
or 3.0% of net sales for 3Q96. Interest expense for 9M97 was $158,648 or 2.7% of
net sales  compared  to  $157,592  or 3.2% of sales for 9M96.  Interest  expense
decreased as a percentage of revenues mainly due to increased sales volume.  The
effective  interest rate (interest  expense  divided by the average debt balance
for the period) for 9M97 and 9M96 were 11.45% and 11.79% respectively.

FACTORS AFFECTING FUTURE RESULTS

The Company's operating results are subject to certain inherent risks that could
adversely  affect the  Company's  operating  results  and its ability to operate
profitably.  If cash generated by operations, or available from current debt and



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<PAGE>

equity financing sources is not sufficient to meet the Company's working capital
and operational requirements, this will likely have a material adverse effect on
the Company's  operating results.  In addition,  the Company's operating results
also could be  adversely  affected  by  increased  competition  in the  markets,
competitors   offering   products  at  prices   below  the   Company's   prices,
manufacturing delays and inefficiencies  associated with expanding the Company's
manufacturing  capacity,   adverse  weather  conditions,   changes  in  economic
conditions  in its markets,  unanticipated  expenses or events and other factors
discussed in this report.


LIQUIDITY AND CAPITAL RESOURCES

The  Company's  sources  of  liquidity  have been cash from  operations,  credit
facilities and equity financing.  Cash used in operating activities was $497,868
in 9M97.  Accounts receivable were up $196,734 due to increased sales and   some
delay in payment by customers in connection  with the Company's  initial sale of
sewer line products.  Accounts payable are down $229,243 mainly because payables
are mostly  current at the present  time and were  extended at year end Nov. 30,
1996 due to cash flow shortages.

Cash  as of the end of 3Q97  was  $153,010,  down  $45,296  from  the end of the
Company's previous fiscal year.

The Company at quarter end was current in all of its  financial  obligations  to
lending  institutions  and near current to its trade vendors.  Subsequent to the
quarter end the Company's  bank line of credit was renewed by the Company's bank
for $1.1 million  dollars.  The Company has  available  $275,000 on the line. In
addition,  the Company continues to address cash flows by controlling  inventory
levels, increasing the sales effort, and reducing expenses.

The Company  believes  that its capital  resources  on hand at August 31,  1997,
together  with   anticipated   revenues  from  sales  and  its  current  lending
arrangements will be sufficient to satisfy its working capital  requirements for
the remainder of the fiscal year.  However,  the Company may require  additional
debt or equity  financing  in the first part of its next fiscal year to meet its
working  capital  requirements  during  the  first  quarter  when its  sales are
typically low because of the  seasonality of the business and to fund the growth
of its business.  In addition the Company may require such additional  financing
if the Company's  operating  results are lower than currently  anticipated.  The
Company is currently reviewing various options for obtaining  additional debt or
equity financing.  There can be no assurance,  however, that the Company will be
able to obtain any required  financing on terms favorable to the Company,  if at
all.



                                       15
<PAGE>

FORWARD LOOKING STATEMENTS

Information  contained  in this  Report  contains  "forward-looking  statements"
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995,
which can be identified by the use of forward-looking terminology such as "may,"
"will,"  "should,"  "expect,"  "anticipate,"  "estimate,"  or  "continue" or the
negative thereof or other variations  thereon or comparable  terminology.  These
forward-looking  statements are subject to risk and uncertainties  that include,
but are not limited to, those identified in this report,  described from time to
time in the Company's  other  Securities  and Exchange  Commission  filings,  or
discussed in the Company's  press  releases.  Actual results may vary materially
from expectations.













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<PAGE>


                           PART II - OTHER INFORMATION

ITEM 4.  Submission of Matters to a Vote of Security Holders

         The  Company  held its Annual  Meeting  of  Shareholders  (the  "Annual
Meeting") on August 27, 1997. The following items of business were considered at
the Annual Meeting:

                  A.  Election of Directors            
                                                        Shares
                      Name                             Voted For
                      ----                             ---------

                      Verne Bray                       1,468,829
                      James C. Czirr                   1,468,829
                      Dr. Peter Heilmary               1,468,829
                      Jeffrey J. Kirby                 1,468,829
                      Kenneth Nordlund                 1,468,829

                  B.  Proposal to Adopt the NACO Industries Stock Incentive Plan

                  A proposal to approve the Company's  Stock  Incentive Plan was
         presented at the annual  meeting and such  proposal was approved by the
         shareholders  of the  Company.  The  number  of  shares  voted  for the
         proposal was  1,468,829.  There were no votes cast against the proposal
         or any abstentions.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         a)       Exhibits
                  27.1     Financial Data Schedule

         b)       Reports for Form 8-K
                  None









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<PAGE>




                                   SIGNATURES

The unaudited interim consolidated  financial statements furnished by management
reflect all adjustments that are, in the position of management, necessary for a
fair presentation of financial position and results of operation.

In  accordance  with to the  requirements  of the  Securities  Exchange Act, 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                                       October 8, 1997
      --- ----- -- ----                                       ------- -- ----
      Verne E. Bray                                           Date
      President



By   /s/ Jeffrey J. Kirby                                    October 8, 1997
     --- ------- -- -----                                    ------- -- ----   
     Jeffrey J. Kirby                                        Date
     Principal Financial Officer

  




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