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 31,1998

                 [ ] 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)                   (Federal IRS No.)

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

                   Registrant'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, 1998, the Registrant had 1,861,852 shares of Common Stock
and 165,412 shares of Preferred Stock outstanding.


         Transitional Small Business Disclosure Format        Yes     No  X
                                                                         ---




<PAGE>



                         PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
See attached Consolidated Financial Statements for May 31, 1998



                                       2
<PAGE>




NACO Industries, Inc.

                        CONSOLIDATED FINANCIAL STATEMENTS


                                  May 31, 1998




                                       3

<PAGE>

PART 1 - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                   May 31                    November 30
                                                               ----------------            ----------------
ASSETS                                                              1998                         1997
------                                                         ----------------            ----------------
Current assets:
<S>                                                          <C>                                    <C>   
  Cash                                                       $         242,226                      75,378
  Accounts receivable, net of allowances
    of $70,316 / $69,750                                               965,132                     671,562
  Inventory                                                            677,447                     772,752
  Income Taxes Receivable                                                5,100                       5,100
  Other current assets                                                  61,709                      97,561
                                                               ----------------            ----------------
       Total current assets                                          1,951,614                   1,622,353
                                                               ----------------            ----------------

Property and equipment:
  Land                                                                  40,700                      40,700
  Buildings and improvements                                           658,691                     600,786
  Equipment and vehicles                                             2,612,630                   2,449,997
  Equipment construction in progress                                    28,049                      89,980
                                                               ----------------            ----------------
       Total property and equipment                                  3,340,070                   3,181,463

  Accumulated depreciation                                          (1,624,009)                 (1,456,133)
                                                               ----------------            ----------------
       Net property and equipment                                    1,716,061                   1,725,330
                                                               ----------------            ----------------

Other assets:
  Intangible and other assets                                          107,120                     106,776
                                                               ----------------            ----------------
       Total other assets                                              107,120                     106,776
                                                               ----------------            ----------------
       Total assets                                          $       3,774,795                   3,454,459
                                                               ================            ================
</TABLE>


                                        4
<PAGE>


NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                   May 31                    November 30
                                                               ----------------            ----------------
LIABILITIES:                                                        1998                         1997
-----------                                                    ----------------            ----------------
<S>                                                          <C>                                   <C>    

Current liabilities:
  Accounts payable                                           $         462,625                     251,122
  Accrued expenses                                                     150,267                     198,046
  Line of credit                                                     1,049,326                     824,326
  Current portion of long-term obligations                             292,033                     321,801
  Payable to related party                                             (20,208)                    (15,704)
                                                               ----------------            ----------------
       Total current liabilities                                     1,934,043                   1,579,591

Long-term liabilities:
  Long-term obligations, less current portion                          686,896                     664,001
  Deferred income taxes                                                 94,200                      94,200
                                                               ----------------            ----------------
       Total long-term liabilities                                     781,096                     758,201
                                                               ----------------            ----------------
       Total liabilities                                             2,715,139                   2,337,792
 
Stockholders' equity:
  Common stock, $.01 par value; 10,000,000
    shares authorized; 2,206,565 shares and 
    2,193,796 shares issued, repectively
   (including 344,713 shares in treasury)                              22,067                      21,939
  Preferred Stock,  7% Cumulative, convertible  $3.00 par value
    330,000 shares authorized; 165,412 shares issued 
    (Aggregate liquidation preference $1,061,245 and
    $1,037,965, respectively)                                          496,236                     496,236
  Additional paid-in capital                                         1,051,979                   1,003,800
  Retained earnings (deficit)                                         (384,029)                   (278,711)
                                                               ----------------            ----------------
                                                                     1,186,253                   1,243,264
  Less: treasury stock - at cost                                      (126,597)                   (126,597)
                                                               ----------------            ----------------
       Total stockholders' equity                                    1,059,656                   1,116,667
                                                               ----------------            ----------------

       Total liabilities and
         stockholders' equity                                $       3,774,795                   3,454,459
                                                               ================            ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                        5

<PAGE>
<TABLE>
<CAPTION>


NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
                                                               Three months ended                      Six months ended
                                                                   May 31                                 May 31
                                                      ----------------------------------     ----------------------------------
                                                           1998               1997               1998                1997
                                                      ---------------     --------------     --------------     ---------------

<S>                                                 <C>                       <C>                <C>                 <C>      
Sales, net                                          $      2,175,256          2,449,863          3,686,412           3,981,058

Cost of goods sold                                         1,260,547          1,528,285          2,287,463           2,487,591
                                                      ---------------     --------------     --------------     ---------------

       Gross profit                                          914,709            921,578          1,398,949           1,493,467

Operating expenses:
  Selling expenses                                           393,192            408,828            745,857             755,001
  General and administrative expenses                        318,165            304,675            658,560             646,877
                                                      ---------------     --------------     --------------     ---------------

       Total operating expenses                              711,357            713,503          1,404,417           1,401,878
                                                      ---------------     --------------     --------------     ---------------

       Income (loss) from operations                         203,352            208,075            (5,468)              91,589

Other income (expense):
  Interest income                                              6,741                283              7,612                 719
  Interest expense                                           (55,991)           (54,025)          (107,462)           (109,807)
                                                      ---------------     --------------     --------------     ---------------

       Total other income (expense)                          (49,250)           (53,742)           (99,850)           (109,088)
                                                      ---------------     --------------     --------------     ---------------

Income (loss) before income taxes                            154,102            154,333          (105,318)            (17,499)

Income tax expense (benefit)                                       0                900                  0                 900
                                                      ---------------     --------------     --------------     ---------------

       Net income (loss)                            $        154,102            153,433          (105,318)            (18,399)

Adjustment for preferred dividends in arrears                (68,773)           (17,310)           (68,773)            (45,493)
                                                      ---------------     --------------     --------------     ---------------

Adjusted net to Common Stockholders                 $         85,329            136,123          (174,091)            (63,892)
                                                      ---------------     --------------     --------------     ---------------

Earnings (loss) per common share:
  Basic:
      Earnings (loss) from net income               $           0.08               0.09             (0.06)              (0.01)
      Dividends in arrears                                     (0.04)             (0.01)             (0.04)              (0.03)
                                                      ===============     ==============     ==============     ===============
  Net Earnings (loss)                               $           0.05               0.08             (0.09)              (0.04)
                                                      ===============     ==============     ==============     ===============
                                                      ---------------     --------------     --------------     ---------------

 Diluted:
     Earnings (loss) from net income                $           0.04               0.07             (0.09)              (0.04)
                                                      ===============     ==============     ==============     ===============

Weighted average number of common
  shares outstanding:
    Basic                                                  1,861,852          1,699,196          1,861,852           1,699,196
                                                      ===============     ==============     ==============     ===============
    Diluted                                                2,196,676          1,984,805          2,196,676           1,984,805
                                                      ===============     ==============     ==============     ===============
</TABLE>


   See Notes to Consolidated Financial Statements
                                        6

<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
                                                                                         Six months ended
                                                                                 May 31                      May 31
                                                                            -------------------------------------------
                                                                                  1998                        1997
                                                                            -----------------             -------------
<S>                                                                       <C>                                  <C>     

Cash flows from operating activities
  Net income (loss)                                                       $         (105,318)                  (18,399)
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating activities:
     Depreciation                                                                    167,875                   109,470
     Amortization                                                                      1,478                     2,957
     Deferred income taxes                                                                 0                         0
   (Increase) decrease in:
     Accounts receivable, net                                                       (293,570)                 (371,234)
     Inventory                                                                        95,305                   (89,906)
     Taxes Receivable                                                                      0                       200
     Other                                                                            34,374                     7,660
   Increase (decrease) in:
     Accounts payable                                                                211,503                    (6,789)
     Accrued expenses                                                                (47,779)                  (33,342)
     Income taxes payable                                                                  0                         0
                                                                            -----------------
                                                                                                          -------------
        Net cash provided by (used in)
         operating activities                                                         63,868                  (399,383)
                                                                            -----------------             -------------

Cash flows from investing activities
  Net change  property and equipment                                                (158,606)                 (255,548)
  Investment in intangible and other assets                                             (344)                   (1,151)
                                                                            -----------------             -------------
        Net cash provided by (used in) investing activities                         (158,950)                 (256,699)

Cash flows from financing activities
  Net change in line of credit                                                       225,000                   (10,000)
  Payments on related party loan                                                      (4,504)                  (35,636)
  Payments on long-term debt                                                        (147,631)                 (146,699)
  Payment of Preferred Stock Dividends                                                     0                         0
  Proceeds from long-term loans                                                      140,758                    18,468
  Proceeds from issuance of common stock                                              38,305                   742,500
  Proceeds from issuance of preferred stock                                           10,002                   195,000
  Purchase of treasury stock                                                               0                         0
                                                                            -----------------             -------------
        Net cash provided by (used in) financing activities                          261,930                   763,633

                                                                            -----------------             -------------
Increase (decrease) in cash                                                          166,848                   107,551

        Cash, beginning of period                                                     75,378                   198,306
                                                                            -----------------             -------------

        Cash, end of period                                               $          242,226                   305,857
                                                                            =================             =============

See Notes to Consolidated Financial Statements
Supplemental disclosures:
    Income taxes paid                                                     $                0                         0
    Interest Paid                                                         $           99,456                    93,599
</TABLE>



                                        7

<PAGE>

                              NACO INDUSTRIES, INC.
             Notes to Consolidated Financial Statements (Unaudited)
                                  May 31, 1998


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 six  month  period  ended  May 31,  1998,  are not  necessarily
indicative  of the  results  that may be  expected  for the fiscal  year  ending
November 30,  1998.  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, 1997.

NOTE B - INVENTORY

         Inventory consists of the following:

                                                   May 31,           Nov. 30,
                                                    1998               1997
                                                ------------       ------------

Raw Materials                                   $    255,824       $    309,193

Work in Process                                        9,735             12,276

Finished Goods                                       411,988            451,283
                                                ------------       ------------


         Total                                  $    677,447       $    772,752


NOTE C - DIVIDENDS

         Dividends on the preferred stock are cumulative at 7%. At May 31, 1998,
the cumulative amount of dividends  accrued was $68,773.  Of this amount $68,773
was in arrears.

NOTE D - EARNINGS PER SHARE

         Effective February 28, 1998 the Company adopted SFAS No. 128, "Earnings
Per Share",  which  establishes  new  standards  for  computing  and  presenting
earnings per share.  No restatement  was required for prior year's  earnings per
share  figures to conform to the new standard.  Basic  earnings per common share
are  calculated by dividing  adjusted net income by the average shares of common
stock  outstanding  during the period.  The calculation of diluted  earnings per
share of common stock assumes the diluting  effect of the  Company's  cumulative
preferred  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.  When conversion of potential common shares has
an  anti-dilutive  effect no conversion  is assumed in the diluted  earnings per
share calculation.


                                       8
<PAGE>


NOTE E - PREFERRED STOCK AND WARRANTS

         The Company raised $38,305 from warrants exercised for 12,769 shares of
common stock and the Company sold 1,667 shares of treasury  preferred  stock for
$10,002 during the quarter ended May 31, 1998.

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,  which  produces  and sells  polyvinyl  chloride  (PVC)  and  composite
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
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).

         The  Company,  through its  subsidiary,  also  manufacturers  and sells
composite   products  for  the   transportation,   amusement,   recreation   and
architectural industries. These products include trailer tops and amusement ride
materials.  The Company also produces  tooling and molds for other  companies in
various industries.

Results of Operations

         The following  discussion relates to the three and six months ended May
31, 1998 and May 31, 1997, respectively. For comparison purposes, percentages of
sales will be used rather than dollars. In the following  discussion,  the three
months  ended May 31,  1998 and May 31,  1997 are  referred to as 2Q98 and 2Q97,
respectively,  and the six  months  ended  May 31,  1998  and May 31,  1997  are
referred to as 6M98 and 6M97, respectively.

         Overview.  The Company  sustained an  operating  profit of $154,102 for
2Q98 and an  operating  loss of  $(105,318)  for 6M98,  compared to an operating
profit of $154,333 for 2Q97 and an operating  loss of  $(17,499)  for 6M97.  The
Company's  plastic  products  operations  generated  a profit  of  $189,679  and
$299,060  for 2Q98 and 2Q97,  respectively.  The  Company's  composite  products
operation  generated an operating  loss of $(35,577) and $(145,627) for 2Q98 and
2Q97  respectively.  Management  believes  lower than expected  results for 2Q98
resulted primarily from poor weather conditions and increased  competition.  The
unusually  wet  weather in the West  Coast and  Midwest  regions  was a material
factor  in  lower  sales  of  the  Company's   agricultural  fittings  products.
Installation  of an  irrigation  system is very  difficult if not  impossible in
extremely  wet  weather.  In the East and  Midwest,  the  weather has also had a
negative  impact  on sales  of the  Company's  industrial  sewer  products.  The
composites  segment  relies  heavily  on the  construction  industry,  which  is
adversely affected by cold winter weather.  With sales in the industry being off
because of weather the Company has experienced  increased  competition  from its
competitors as they try to make up for lost sales.  The Company is continuing to
diversify and expand into the industrial and commercial markets.  Although these
markets tend to have lower sales during  winter  months,  they are less seasonal
than the Company's current markets. Sales in these markets increased from .9% of
total revenues in 6M97 to 9.6% in 6M98. The Company also continues to review its
operations to try and reduce expenses without  affecting  quality and service to
its customers.

         Sales. Net sales for 2Q98 decreased by 11.2% to $2,175,256, compared to
net sales of $2,449,863 for 2Q97. Net sales for the plastics  segment  decreased
by 11.1% to  $1,906,826 in 2Q98,  compared to net sales of $2,145,486  for 2Q97.
Net sales for the  composite  segment  decreased  by 11.8% to  $268,430 in 2Q98,
compared


                                       9
<PAGE>


to net sales of  $304,377  for 2Q97.  These  decreases  resulted  mainly  from a
decrease in volume  primarily due to the unusually wet weather on the West Coast
and Midwest regions. Weather traditionally can move sales a month or two earlier
or later in the  season  depending  whether  the  weather  is harsh or mild.  If
weather  continues to be unseasonably  wet, some irrigation  projects may be put
off until  fall,  which  affects  the 2nd  quarter  sales in  plastic  fittings.
Management believes this is what has happened in 2Q98. Sales decreased mostly in
the agricultural line of fittings.

         Gross Margin.  Gross margin, as a percentage of sales for 2Q98 and 2Q97
was 42.1% and 37.6%, respectively,  and for 6M98 and 6M97 gross margin was 38.0%
and  37.5%,  respectively.  Gross  margin  for  plastics  and  composites  as  a
percentage  of sales for 2Q98 was 44.8% and  17.8%,  respectively,  compared  to
44.4% and  (8.6)%  for 2Q97.  Sewer  fittings  as a  percentage  of total  sales
increased  from 1.1% in 2Q97 to 10.1% in 2Q98.  Gross margins on sewer  fittings
are generally lower than on the other fittings made by the Company due to market
pricing in the industry. The composites gross margin continues to be low because
of low volumes and fixed overhead costs.  Management  believes that increases in
volume along with  improving  throughput  should  improve  gross margins in both
areas.  The  Company  takes a  complete  physical  inventory  once a year  and a
physical  inventory  of the top 80% of the dollars in inventory  every  quarter.
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.

         Selling. Selling expenses were 18.1% of net sales for 2Q98, compared to
16.7% for 2Q97.  The increase in selling  expenses as a percentage  of sales was
mainly due to  decreased  sales  volume.  In actual  dollars,  selling  expenses
decreased  $15,636  or  3.8%  from  2Q97 to  2Q98.  Advertising  decreased  as a
percentage of sales from .4% in 2Q97 to .1% in 2Q98 primarily  because brochures
were  produced in 2Q97,  which were not needed in 2Q98.  Freight  out  decreased
$5,996 due to decreased  shipments  of product.  Travel  increased  $11,981 from
$11,256 in 2Q97 to $23,646 due to  increased  sales  efforts to offset the lower
sales in the quarter.

         General  and  administrative.   General  and  administrative   expenses
remained  relatively  level in total dollars,  but as a percentage of sales they
were 14.6% of net sales for 2Q98,  compared to 12.4% for 1Q97.  The  increase in
percentage was mainly due to decreased  sales volume.  As a percentage of sales,
salaries  and  related  benefits  increased  8.0%  mainly  due to a average  pay
increase  of 3.2% over 2Q97 and the  addition  of a  production  manager  in the
Company's Logan facility.  Insurance  expense decreased $1,627 from 2Q97 to 2Q98
or 11.0% due to the a decrease in  insurance  premium  over the  previous  year.
Professional fees decreased $5.803 or 48% percent from 2Q97 to 2Q98.

         Other. Other expenses/revenues were 2.3% for 2Q98, compared to 2.2% for
2Q97.  Interest  expense went from 2.2% in 2Q98 to 2.6% in 2Q98 mainly due to an
increase of  $289,566  in the overall  debt load of the Company and due to lower
sales volume.  The effective  interest rates  (interest  expense  divided by the
average  debt  balance for the period) for 6M98 and 6M97 were 11.02% and 11.84%,
respectively.

Liquidity and Capital Resources

         The  Company's  sources of  liquidity  have been cash from  operations,
credit  facilities and equity financing.  Cash provided in operating  activities
was  $63,473 in 6M98.  Cash as of May 31,  1998 was  $242,226,  an  increase  of
$166,848 from November 30, 1997. The increase resulted primarily from a decrease
in inventory  and an increase in payables.  Because of the slower sales and need
for capital,  the Company is facing a potential cash flow shortage.  The Company
raised $38,305 from warrants exercised for 12,769 shares of common stock and the
Company sold 1,667 units (each unit  consisting of one share of preferred  stock
and a warrant to purchase  one-half  share of common  stock) for $10,002  during
2Q98.

         The Company continues to struggle to improve its liquidity position. In
the course of the Company's  expansion,  the Company has incurred losses,  which
have significantly  reduced the Company's available working capital.  The losses
have been  explained  in above  paragraphs.  During the  expansion,  part of the

                                       10
<PAGE>

capital  improvements and new equipment funding has been from the line of credit
and internal financing.  The total cash paid for property and equipment amounted
to $158,606 in 6M98 and  $255,548 in 6M97.  The  Company  also  increased  trade
payables by $211,128  from  November 30, 1997 to May 31,  1998.  At November 30,
1997 the Company was current on trade payables,  but at May 31, 1998 the Company
was out 30 days. Cash flow  traditionally  is always slow during the 1st quarter
and  improves  during the 2nd  quarter and this year was not an  exception.  The
Company is addressing the potential cash flow shortage by managing  inventories,
increasing its sales efforts and working to reduce expenses.

         Management  believes that external  financing or additional  capital is
necessary  to  replenish  working  capital  to permit  the  Company  to meet its
obligations  on a timely  basis and to provide the  additional  working  capital
which will be  required  to sustain  the  expected  growth.  At May 31, 1998 the
Company's  revolving line of credit was $1,100,000 of which  $1,049,326 was used
leaving  only  $50,674  available.  The  availability  of the line is based on a
percentage of accounts  receivable and inventory and the maturity date is August
31, 1998. At May 31, 1998, the Company's  current ratio and debt to equity ratio
were in  breach  of the line of  certain  covenants  set  forth in  credit  loan
agreement.  The Company received a written waiver of this  restrictive  covenant
for the period ending February 28, 1998, and needs to obtain similar waivers for
the  current  period and may need  similar  waivers  in the future if  operating
results do not continue to improve. The Company is working on several options to
improve working capital including private placement of equity.

         Under  the  terms of the  Company's  line of  credit,  the  Company  is
prohibited  from  making  capital  expenditures  in excess of  $150,000  without
written  authorization  from the bank unless its working capital ratio improves.
The Company has received written  authorization  from the bank for an additional
$87,000 in capital expenditures.

         Management  believes that the actions  presently  being taken to revise
the  Company's  operating  and financial  requirements  and to raise  additional
capital,  together with its capital  resources on hand at May 31,1998,  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 will be available on terms favorable to
the Company, if at all. If the Company is unable to secure additional  financing
or raise additional capital,  this will likely have a material adverse effect on
the Company's  operations,  financial condition,  and its ability to continue to
grow and expand its  operations.  If the Company raises  capital  through equity
financing,  this may result in dilution to existing  holders of common stock and
preferred stock.

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 the Company is not able to successfully secure sufficient
equity  or  debt  financing  to  meet  its  working   capital  and   operational
requirements as discussed above, 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 in
which the Company's  products compete,  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,
increases  in labor or raw  materials,  changes in  economic  conditions  in its
markets,  unanticipated  expenses or events and other factors  discussed in this
report  and the  Company's  other  filings  with  the  Securities  and  Exchange
Commission.


                                       11
<PAGE>

                           PART II - OTHER INFORMATION

Item 2 - Changes in Securities and Use of Proceeds
------   -----------------------------------------

     During March and May,  1998,  the Company sold 12,769  shares of its Common
Stock, $.01 par value (the "Common Stock"), to ten existing  shareholders of the
Company upon the exercise of outstanding  warrants to purchase Common Stock. The
warrant exercise price paid by the  shareholders was $3.00 per share,  resulting
in total  proceeds  to the  Company of  $38,305.  The  Company did not engage an
underwriter in connection with the warrant  exercises.  Based upon the Company's
pre-existing  relationship with each of the purchasing shareholders,  the access
of such  shareholders to information  regarding the Company,  the absence of any
general  solicitation  activities  and  other  factors  deemed  relevant  by the
Company,  the Company relied upon the exemption from  registration  set forth in
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") in
selling the shares of Common Stock described above.

         On May 15, 1998, the Company sold 1,667 units (each unit  consisting of
one share of the Company's Class A 7% Cumulative  Convertible  Preferred  Stock,
$3.00 par value (the  "Preferred  Stock"),  and a warrant to  purchase  one-half
share of Common  Stock)  to an  existing  shareholder.  The  shareholder  paid a
purchase price of $3.00 per unit,  resulting in total proceeds to the Company of
$10,002.  The Company did not engage an underwriter in connection  with the sale
of such  units.  Based upon the  Company's  pre-existing  relationship  with the
purchasing shareholder,  the access of such shareholder to information regarding
the  Company,  the  absence of any  general  solicitation  activities  and other
factors  deemed  relevant by the Company,  the Company relied upon the exemption
set forth in Section 4(2) of the Securities Act in selling such units.

Item 6 - Exhibits and Reports on Form 8-K
------   --------------------------------

     (a)      Exhibits.  The following are filed as exhibits to this Report.


Regulation S-K
  Exhibit No.                                  Description
---------------   --------------------------------------------------------------

      27          Financial Data Schedule



     (b)      Reports on Form 8-K.  None



                                       12
<PAGE>


                                   SIGNATURES

     In accordance  with 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                                            July 1, 1998
   --------------------------------------------------             ------------
     Verne E. Bray                                                Date
     President


By   /s/ JEFFREY J. KIRBY                                         July 1, 1998
   --------------------------------------------------             ------------
     Jeffrey J. Kirby                                             Date
     Principal Financial Officer