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, 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 August  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

                                                   August       November
                                                     31,           30,
ASSETS                                              2004          2003
------                                           ----------   -----------
                                                 (Unaudited)    (Audited)
Current assets:
  Cash                                           $1,216,148   $  569,445
  Accounts receivable, net of allowances
    Of $44,877 / $20,643                            813,106      933,038
  Current portion of related party receivables       30,000       30,000
  Inventories                                       734,803      802,888
  Other current assets                               44,181       32,714
  Deferred income tax asset                          69,000       69,000
                                                 ----------   ----------
       Total current assets                       2,907,238    2,437,085

Property and equipment, net                         747,040      833,531
Related party receivables                           236,083      258,583
Other assets, net                                   218,450      216,410
                                                 ----------   ----------
Total assets                                     $4,108,811   $3,745,609
                                                 ==========   ==========


See notes to Financial Statements


                                       2
<PAGE>
<TABLE>
<CAPTION>

NACO INDUSTRIES, INC.
BALANCE SHEETS

                                                                           August       November
                                                                             31,           30,
LIABILITIES:                                                                2004          2003
------------                                                             ----------   -----------
                                                                         (Unaudited)    (Audited)
<S>                                                                       <C>          <C>
Current liabilities:
  Accounts payable                                                        $  307,045   $  346,691
  Accrued expenses                                                           326,762      341,968
  Income Taxes Payable                                                       160,393      157,000
  Current portion of long-term obligations                                    95,713       89,000
                                                                          ----------   ----------
       Total current liabilities                                             889,913      934,659
                                                                          ----------   ----------

Long-term liabilities:
  Long-term obligations, less current portion                                806,327      878,934
  Deferred income tax liability                                               55,000       55,000
                                                                          ----------   ----------
       Total long-term liabilities                                           861,327      933,934
                                                                          ----------   ----------
       Total liabilities                                                   1,751,240    1,868,593
                                                                          ----------   ----------

Stockholders' equity:
   Preferred Stock, 7% Cumulative, convertible $3.00 par value, 330,000      496,236      496,236
shares authorized and 165,412 shares issued and outstanding. (Aggregate
liquidation preference $1,339,837 and $1,270,364 respectively)
  Common stock, $.01 par value, 10,000,000 shares authorized; 1,998,517       19,986       19,986
shares issued and outstanding
  Additional paid-in capital                                               1,017,321    1,017,321
  Retained Earnings                                                          824,028      343,473
                                                                          ----------   ----------
       Total stockholders' equity                                          2,357,571    1,877,016
                                                                          ----------   ----------

       Total liabilities and
         Stockholders' equity                                             $4,108,811   $3,745,609
                                                                          ==========   ==========
</TABLE>

See Notes to Financial Statements



                                       3
<PAGE>

<TABLE>
<CAPTION>
NACO INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
                                                     Three months ended            Nine months ended
                                                 August 31,     August 31,     August 31,     August 31,
                                                --------------------------    --------------------------
                                                   2004           2003           2004           2003
                                                -----------    -----------    -----------    -----------
<S>                                             <C>              <C>            <C>            <C>
Sales, net                                      $ 2,035,279      1,727,626      7,240,509      6,348,978

Cost of goods sold                                1,164,443      1,007,397      4,064,429      3,680,464
                                                -----------    -----------    -----------    -----------
       Gross profit                                 870,836        720,229      3,176,080      2,668,514

Operating expenses:
  Selling expenses                                  465,240        420,558      1,513,310      1,324,710
  General and administrative expenses               256,487        254,417        824,059        743,760
                                                -----------    -----------    -----------    -----------
       Total operating expenses                     721,727        674,975      2,337,369      2,068,470
                                                -----------    -----------    -----------    -----------

       Income from operations                       149,109         45,254        838,711        600,044

Other income (expense):
  Interest income                                     3,891            629          6,147          2,354
  Other Income                                            0         39,565              0         39,565
   Interest expense                                 (22,497)       (26,121)       (69,303)       (79,203)
                                                -----------    -----------    -----------    -----------
       Total other income (expense)                 (18,606)        14,073        (63,156)       (37,284)
                                                -----------    -----------    -----------    -----------

Income before income taxes                      $   130,503         59,327        775,555        562,760

Income tax expense                                   50,000         23,000        295,000        214,000
                                                -----------    -----------    -----------    -----------

       Net income                               $    80,503         36,327        480,555        348,760
                                                ===========    ===========    ===========    ===========

Adjustment for preferred dividends in arrears       (35,022)       (35,022)       (69,473)       (69,473)
                                                -----------    -----------    -----------    -----------
Adjusted net income to common stockholders      $    45,481          1,305        411,082        279,287
                                                ===========    ===========    ===========    ===========

Earnings per common share:
 Basic:                                         $       .02            .00            .21            .14
                                                ===========    ===========    ===========    ===========


 Diluted:                                       $       .02            .00            .21            .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>

<TABLE>
<CAPTION>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
                                                              Nine months ended
                                                          --------------------------
                                                           August 31,     August 31
                                                          -----------    -----------
                                                             2004           2003
Cash flows from operating activities
<S>                                                       <C>            <C>
  Net income                                              $   480,555    $   348,760
  Adjustments to reconcile net income to
   net cash provided by (used in) operating activities:
     Depreciation                                             122,854        130,844
     Amortization                                               5,560          6,227
     Deferred income taxes                                          0        (16,000)
   (Increase) decrease in:
     Accounts receivable, net                                 119,932          9,054
     Receivable from related parties                           22,500         22,500
     Inventory                                                 68,085         19,803
     Other                                                    (11,467)        28,911
   Increase (decrease) in:
     Accounts payable                                         (39,646)        56,731
     Taxes Payable                                              3,393        140,040
     Accrued expenses                                         (15,206)       (82,030)

                                                          -----------    -----------
 Net cash provided by operating activities                    756,560        664,840
                                                          -----------    -----------

Cash flows from investing activities
  Purchase of  property and equipment                         (36,363)       (74,195)
  Other Assets                                                 (7,600)       (18,997)

                                                          -----------    -----------
        Net cash used in investing activities                 (43,963)       (93,192)
                                                          -----------    -----------

Cash flows from financing activities
  Net change in line of credit                                      0              0
  Payments on long-term debt                                  (65,894)       (54,348)
  Dividend Payment                                                  0        (69,474)
                                                          -----------    -----------

        Net cash used in financing activities                 (65,894)      (123,822)
                                                          -----------    -----------

Increase in cash                                              646,703        447,826

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

        Cash, end of period                               $ 1,216,148    $   682,790
                                                          ===========    ===========

See Notes to Financial Statements
Supplemental disclosures:
    Income taxes paid                                     $   291,607    $    88,479
    Interest Paid                                         $    66,730    $    73,777
</TABLE>

                                       5
<PAGE>

NACO INDUSTRIES, INC.
Notes to Financial Statements (Unaudited)
August 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 nine-month
period ended August 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 August 31,
2004, dividends in the amount of $347,365 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 August 31, 2004 and November
30, 2003, the  outstanding  mortgage  balances were  approximately  $615,000 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 August 31, 2004 and November 30, 2003,  Verne Bray and related  entities owed
the Company $266,083 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 nine months ended August 31, 2004 and
2003 would have been reduced to the pro forma amounts indicated below.

                                       6
<PAGE>

                                               2004                    2003
                                               ----                    ----
Net income - as reported                     $480,555                $348,760
Net income - pro forma                       $467,251                $355,456
Earnings per share - as reported              $0.24                    $.18
Earnings per share - pro forma                $0.23                    $.17


<PAGE>

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 nine month periods ended
August 31, 2004 and August 31,  2003,  respectively.  For  comparison  purposes,
percentages  of  sales  will be  used  rather  than  dollars.  In the  following
discussion,  the three  months  ended  August 31,  2004 and August 31,  2003 are
referred to as 3Q04 and 3Q03,  respectively.  The nine months  ended  August 31,
2004 and August 31, 2003 are referred to as 9M04 and 9M03, respectively. Readers
are  cautioned  that results of  operations  for the three and nine months ended
August  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 $130,505 for
3Q04,  compared to a net profit  before  taxes of $59,327 for 3Q03.  The Company
obtained a net profit  before  taxes of  $775,555  for 9M04,  compared  to a net
profit before taxes of $562,760 for 9M03.  Gross margin as a percentage of sales
for  3Q04  and 3Q03  was  42.8%  and  41.7%,  respectively.  Gross  margin  as a
percentage  of sales for 9M04 and 9M03 was 43.9% and  42.0%,  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 3Q04 increased by 17.8% to $2,035,279, compared to
net sales of $1,727,626 for 3Q03.  Management believes the increase in net sales
was mainly due to an improved economy nationwide.  Net sales in the agricultural
market  increased  21.3% from 3Q03 to 3Q04 and net sales in the  utility  market
increased  14.4%  from  3Q03  to  3Q04.  Agricultural  and  utility  sales  as a
percentage of total sales were 62.6% and 37.6% for 3Q04, respectively, and 61.2%
and 38.8%  for 3Q03,  respectively.  Net  sales for 9M04  increased  by 14.0% to
$7,240,509,  compared  to net sales of  $6,348,978  for  9M03.  Net sales in the
agricultural  market  increased  16.5%  from  9M03 to 9M04 and net  sales in the
utility market  increased 7.8% from 9M03 to 9M04.  Management  believes that the
increase in net sales from 9M03 to 9M04 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 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 68.3% and
31.7% for 9M04, respectively, and 66.6% and 33.4% for 9M03, respectively.

     Gross Margin:  Gross margin, as a percentage of sales for 3Q04 and 3Q03 was
42.8% and 41.7%, respectively. Gross margin for 3Q04 increased from 3Q03, 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 62.6%
and 37.6% for 3Q04,  respectively,  and 61.2% and 38.8% for 3Q03,  respectively.
Material  costs  increased  as a  percentage  of net sales from 28.3% in 3Q03 to

                                       7
<PAGE>
30.3%  in  3Q04.  Management  believes  the  increase  in  material  costs  as a
percentage of sales was mainly due to increased prices of gaskets,  glycol,  and
molded parts for resale.  Labor and related expenses  increased $27,931 or 8.7%,
from 3Q03 to 3Q04,  mainly due to an annual wage increase of approximately  2.7%
and an 28.5% increase in Workman's Compensation premium expense. Gross margin as
a percentage of sales for 9M04 and 9M03 was 43.9% and 42.0%, respectively. Gross
margin for 9M04 increased from 9M03,  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 68.3% and 31.7% for 9M04, respectively, and 66.6%
and 33.4% for 9M03,  respectively.  Material costs  decreased as a percentage of
net sales from 32.0% in 9M03 to 31.3% in 9M04.  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.  Material costs of OEM products,  as a percentage of sales,  are
generally  higher than material costs for typical sales in the  agricultural and
utility markets.  Sales to the large OEM customer  decreased 38.3%, or $358,900,
from 9M03 to 9M04. Labor and related expenses increased $142,482, or 13.6%, from
9M03 to 9M04,  mainly due to an annual wage  increase of  approximately  2.7%, a
48.4% increase in workers'  compensation premium expense and a 24.9% increase in
health  insurance  costs.  Prior to  January  1, 2004,  the  Company  "partially
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 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 22.9% of net sales for 3Q04,  compared to
24.3% for 3Q03.  The decrease in selling  expenses as a percentage  of sales was
due mainly to  increased  sales  volume.  In actual  dollars,  selling  expenses
increased  $44,682,  or 10.6%, from 3Q03 to 3Q04.  Salaries and related expenses
increased $23,973,  or 12.7%, from 3Q03 to 3Q04, mainly due to the addition of a
new salesman to the sales force.  Commissions  increased 30.0% from 3Q03 to 3Q04
mainly due to  increased  sales.  Selling  expenses  were 20.9% of net sales for
9M04, compared to 20.9% for 9M03. In actual dollars,  selling expenses increased
$188,600,  or 14.9%,  from 9M03 to 9M04,  mainly due to increased  sales volume.
Salaries and related expenses  increased  $82,179,  or 14.5%, from 9M03 to 9M04,
mainly due to the addition of the new  salesman to the sales force.  Freight out
expense  increased  17.9%,  or $81,821,  from 9Q03 to 9Q04,  and  increased as a
percentage of net sales from 7.2% in 9M03 to 7.4% in 9M04.  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.

     General and administrative: General and administrative expenses represented
12.6% of net sales for 3Q04, compared to 14.7% for 3Q03. Management believes the
decrease  as a  percentage  of net sales was mainly due to higher  sales  volume
during 3Q04. Overall,  general and administrative  expenses increased $2,070, or
..8% from 3Q03 to 3Q04.  General and  administrative  expenses as a percentage of
net sales were 11.4% for 9M04, compared to 11.7% for 9M03. Overall,  general and
administrative   expenses   were  $824,059  and  $743,760  for  9M04  and  9M03,
respectively.  Salaries and related expenses  increased  $41,788,  or 8.7%, from
9M03 to 9M04, due mainly to increased health insurance costs as explained in the
section  entitled "Gross Margin" above.  Health  insurance costs for general and
administrative  employees  increased  $16,888,  or 41.2%, from 9M03 to 9M04. 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.
                                       8
<PAGE>

     Other: Other revenues were .2% of net sales for 3Q04,  compared to 2.3% for
3Q03,  mainly due to a refund  received by the Company for an  overpayment  over
several years of utilities  that was  discovered  and repaid during 3Q03.  Other
expenses were 1.1% of net sales for 3Q04  compared to 1.5% for 3Q03,  mainly due
to decreased interest expense. Interest expense decreased from 1.4% of net sales
for 3Q03 to 1.1% of net sales for 3Q04.  Interest expense  decreased $2,888 from
3Q03 to 3Q04,  mainly due to improved cash flow and lower borrowings  during the
quarter.  Other  revenues  were .1% of net sales for 9M04,  compared  to .7% for
9M03,  mainly due to a refund  received by the Company for an  overpayment  over
several years of utilities  that was  discovered  and repaid during 3Q03.  Other
expenses were 1.0% of net sales for 9M04, compared to 1.2% for 9M03, also mainly
due to decreased  interest expense.  Interest expense decreased from 1.2% of net
sales for 9M03 to .9% of net sales for 9M04.  Interest expense  decreased $7,066
from 9M03 to 9M04,  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 9M04 and 9M03 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  $756,560  in 9M04.  Cash as of August  31,  2004 was
$1,216,148,  up $646,703 from November 30, 2003. The Company's  working  capital
increased  $514,899 from November 30, 2003 to August 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 9M04.

     As  of  August  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  bears 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 August 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  $923,936
available to borrow as of August 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 August 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 August 31, 2004, the monthly
payment required was $11,972. On August 31, 2004, the outstanding balance of the
note was $827,015 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 August 31, 2004,
revenues from  operations  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  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.

                                       9
<PAGE>

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
August 31, 2004 was $44,877, 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 August 31, 2004 was $85,000,  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 August 31, 2004 was $10,000, 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 August  31,  2004 was  $85,226,
compared to $72,014 at November 30, 2003.

     Deferred Income Tax Valuation  Allowances:  The Company's current assets at
August 31, 2004  included 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 total asset value at August 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

                                       10
<PAGE>

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 August 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.

                                       11
<PAGE>

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 September 17, 2004,
      the total  dividend in arrears  with  respect to the  Preferred  Stock was
      $347,365.  Through August 31, 2004,  the Company's  Board of Directors had
      not declared a dividend attributable to the fiscal year ended November 30,
      2003.

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



                                       12
<PAGE>



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                                  October 13, 2004
   -----------------------------------------                ----------------
         Verne E. Bray                                            Date
         CEO, Secretary, Chairman
         (Principal Executive Officer)

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


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