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 31,1999

        [ ] 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 Number)

                     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, 1999,  the  Registrant  had  1,876,227  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


                                       2

<PAGE>


                              NACO Industries, Inc.
                        CONSOLIDATED FINANCIAL STATEMENTS
                                  May 31, 1999


                                       3

<PAGE>

                         PART 1 - FINANCIAL INFORMATION

                         ITEM 1. CONSOLIDATED FINANCIAL
                             STATEMENTS (UNAUDITED)

                             NACO INDUSTRIES, INC.
                          CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)


                                                May 31        November 30
                                             -----------      -----------
ASSETS                                           1999             1998
------                                       -----------      -----------
Current assets:
  Cash                                       $    41,719      $   112,362
  Accounts receivable, net of allowances
    of $105,231 / $100,193                     1,079,767          803,165
  Inventory                                      575,870          656,134
  Other current assets                           333,704          220,378
                                             -----------      -----------
       Total current assets                    2,030,460        1,792,039
                                             -----------      -----------

Property and equipment:
  Land                                            40,700           40,700
  Buildings and improvements                     680,521          675,316
  Equipment and vehicles                       2,829,370        2,771,889
  Equipment construction in progress               9,018           29,461
                                             -----------      -----------
       Total property and equipment            3,559,609        3,517,366

  Accumulated depreciation                    (1,965,501)      (1,779,688)
                                             -----------      -----------
       Net property and equipment              1,594,108        1,737,678
                                             -----------      -----------

Other assets:
  Intangible and other assets                    364,847          264,818
                                             -----------      -----------
       Total other assets                        364,847          264,818
                                             -----------      -----------
       Total assets                          $ 3,989,415      $ 3,794,535
                                             ===========      ===========


                 See Notes to Consolidated Financial Statements


                                       4

<PAGE>

<TABLE>
                             NACO INDUSTRIES, INC.
                    CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>


                                                                       May 31        November 30
                                                                    -----------      -----------
LIABILITIES:                                                            1999             1998
------------                                                        -----------      -----------
<S>                                                                 <C>              <C>
Current liabilities:
  Accounts payable                                                  $ 1,124,924      $   650,305
  Accrued expenses                                                      157,827          283,900
  Income taxes payable                                                     (100)               0
  Line of credit                                                        480,479          849,326
  Current portion of long-term obligations                               72,270          300,582

                                                                    -----------      -----------
       Total current liabilities                                      1,835,400        2,084,113

Long-term liabilities:
  Long-term obligations, less current portion                         1,181,853          673,922
  Deferred income taxes                                                 102,200            9,800
                                                                    -----------      -----------
       Total long-term liabilities                                    1,284,053          683,722
                                                                    -----------      -----------
       Total liabilities                                              3,119,453        2,767,835

Stockholders' equity:

  Common stock, $.01 par value, 10,000,000 shares authorized;            18,762           21,472
1,876,227 shares and 2,147,102 shares issued respectively
(including 0 shares and 270,875 share respectively in treasury)
  Preferred Stock,  7% Cumulative, convertible  $3.00 par               496,236          496,236
value, 330,000 shares authorized, 165,412 and 165,412 shares
issued respectively (Aggregate liquidation preference
$1,096,195 and $1,061,744 respectively)
  Additional paid-in capital                                            996,045        1,084,959
  Retained earnings (deficit)                                          (641,081)        (484,342)
                                                                    -----------      -----------
                                                                        869,962        1,118,325
  Less: treasury stock - at cost                                              0          (91,625)
                                                                    -----------      -----------
       Total stockholders' equity                                       869,962        1,026,700
                                                                    -----------      -----------

       Total liabilities and
         stockholders' equity                                       $ 3,989,415      $ 3,794,535
                                                                    ===========      ===========
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       5

<PAGE>

<TABLE>
                             NACO INDUSTRIES, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                  (UNAUDITED)
<CAPTION>

                                                       Three months ended                 Six months ended
                                                             May 31                             May 31
                                                  ----------------------------     -------------------------------
                                                      1999             1998             1999             1998
                                                  -----------      -----------      -----------      -----------
<S>                                               <C>                <C>              <C>              <C>
Sales, net                                        $ 2,674,604        2,175,256        4,527,624        3,686,412

Cost of goods sold                                  1,619,853        1,260,547        3,002,528        2,287,463
                                                  -----------      -----------      -----------      -----------

       Gross profit                                 1,054,751          914,709        1,525,096        1,398,949

Operating expenses:
  Selling expenses                                    508,202          393,192          854,154          745,857
  General and administrative expenses                 317,811          318,165          650,815          658,560
                                                  -----------      -----------      -----------      -----------

       Total operating expenses                       826,013          711,357        1,504,969        1,404,417
                                                  -----------      -----------      -----------      -----------

       Income (loss) from operations                  228,738          203,352           20,127           (5,468)

Other income (expense):
  Interest income                                         381            6,741              816            7,612
  Interest expense                                   (104,049)         (55,991)        (177,682)        (107,462)
                                                  -----------      -----------      -----------      -----------

       Total other income (expense)                  (103,668)         (49,250)        (176,866)         (99,850)
                                                  -----------      -----------      -----------      -----------

Income (loss) before income taxes                     125,070          154,102         (156,739)        (105,318)
Income tax expense (benefit)                                0                0                0                0
       Net income (loss)                          $   125,070          154,102         (156,739)        (105,318)

Adjustment for preferred dividends in arrears        (103,723)         (68,773)        (103,723)         (68,773)
                                                  -----------      -----------      -----------      -----------
Adjusted net to Common Stockholders               $    21,347           85,329         (260,462)        (174,091)
                                                  -----------      -----------      -----------      -----------
Earnings (loss) per common share:
  Basic:
      Earnings (loss) from net income             $      0.07             0.08            (0.08)           (0.06)
      Dividends in arrears                              (0.06)           (0.04)           (0.06)           (0.04)
                                                  -----------      -----------      -----------      -----------
  Net Earnings (loss)                             $      0.01             0.05            (0.14)           (0.09)
                                                  ===========      ===========      ===========      ===========
 Diluted:
     Earnings (loss) from net income              $      0.01             0.04            (0.14)           (0.09)
                                                  ===========      ===========      ===========      ===========
Weighted average number of common shares
outstanding:
    Basic                                           1,876,227        1,861,852        1,876,227        1,861,852
                                                  ===========      ===========      ===========      ===========
    Diluted                                         2,207,051        2,196,676        2,207,051        2,196,676
                                                  ===========      ===========      ===========      ===========
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       6

<PAGE>

<TABLE>
                             NACO INDUSTRIES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<CAPTION>

                                                                      Three months ended
                                                                    May 31          May 31
                                                                ----------------------------
                                                                     1999            1998
<S>                                                             <C>              <C>
Cash flows from operating activities
  Net income (loss)                                             $  (156,739)     $  (105,318)
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating activities:
     Depreciation                                                   185,813          167,875
     Amortization                                                     6,165            1,478
   (Increase) decrease in:
     Accounts receivable, net                                      (276,602)        (293,570)
     Inventory                                                       80,264           95,305
     Other                                                          (26,491)          34,374
   Increase (decrease) in:
     Accounts payable                                               474,619          211,503
     Accrued expenses                                              (126,073)         (47,779)
     Income taxes payable                                              (100)               0
                                                                -----------      -----------
        Net cash provided by (used in)
         Operating activities                                       160,856           63,868
                                                                -----------      -----------

Cash flows from investing activities
  Net change  property and equipment                                (42,243)        (158,606)
  Investment in intangible and other assets                        (100,029)            (344)
                                                                -----------      -----------
        Net cash provided by (used in) investing activities        (142,272)        (158,950)

Cash flows from financing activities
  Net change in line of credit                                     (368,847)         225,000
  Payments on related party loan                                          0           (4,504)
  Payments on long-term debt                                       (681,986)        (147,631)
  Payment of Preferred Stock Dividends                                    0                0
  Proceeds from long-term loans                                   1,134,872          140,758
  Proceeds from issuance of common stock                                  0           38,305
  Proceeds from issuance of preferred stock                               0           10,002
  Purchase of treasury stock                                       (173,266)               0
                                                                -----------      -----------
        Net cash provided by (used in) financing activities         (89,227)         261,930

                                                                -----------      -----------
Increase (decrease) in cash                                         (70,643)         166,848

        Cash, beginning of period                                   112,362           75,378
                                                                -----------      -----------

        Cash, end of period                                     $    41,719      $   242,226
                                                                ===========      ===========

See Notes to Consolidated Financial Statements
Supplemental disclosures:
    Income taxes paid                                           $         0      $         0
    Interest Paid                                               $   126,912      $    99,456
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       7

<PAGE>

                              NACO INDUSTRIES, INC.
             Notes to Consolidated Financial Statements (Unaudited)
                                  May 31, 1999


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, 1999 are not necessarily indicative of the results that may
be expected  for the fiscal year ending  November  30,  1999.  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, 1998.


NOTE B - INVENTORY

     Inventory consists of the following:


                                                  May 31,           Nov. 30,
                                                   1999              1998
                                                -----------      -------------
Raw Materials                                   $  223,419       $  231,895
Work in Process                                     22,154           13,598
Finished Goods                                     330,297          360,656
                                                -----------      -------------

                  Total                         $  575,870       $  606,149



NOTE C - DIVIDENDS

         Dividends on the preferred stock are cumulative at 7%. At May 31, 1999,
the  cumulative  amount of  dividends  accrued  was  $103,723.  Of this  amount,
$103,723 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.


NOTE E - PREFERRED STOCK AND WARRANTS

         There were no shares of capital stock sold or warrants exercised during
the second quarter of 1999.


NOTE F - SEGMENT INFORMATION

         The Company's  operations  are classified  into two principal  industry
segments,  PVC  fitting  and valves  sold  through  Naco  Industries,  Inc.  and
composite  products  sold through the Naco  Composites  division.  The Company's
reportable  business segments are strategic  business units that offer different


                                       8

<PAGE>

products and services.  Each segment is managed  separately because they require
different technologies and market to distinct classes of customers. No customers
in either segment accounted for 10% or more of consolidated revenue.

         The segment accounting  policies are the same as those described in the
Annual Report on Form 10-KSB in the summary of significant  accounting policies.
Cost plus an  estimated  profit  margin is used to  report  intersegment  sales.
Profit for segment reporting  includes  allocated  general  corporate  expenses,
other income and expense and income tax expense or benefit.  Identifiable assets
are those used by each segment of the  Company's  operations.  Corporate  assets
primarily  represent  cash and are  identified in the other column in the tables
below.


<TABLE>
<CAPTION>
-----------------------------------------     ----------     ----------      ----------     ----------
Quarter Ended 5/31/99                        PVC Products Composite Products   Other           Total
-----------------------------------------     ----------     ----------      ----------     ----------
<S>                                           <C>            <C>             <C>            <C>
Sales to unaffiliated customers               $2,415,231     $  259,373               0     $2,674,604
-----------------------------------------     ----------     ----------      ----------     ----------
Intersegment Sales                                     0              0               0              0
-----------------------------------------     ----------     ----------      ----------     ----------
Depreciation Expense                              71,524         13,432               0         84,956
-----------------------------------------     ----------     ----------      ----------     ----------
Interest Income                                      381              0               0            381
-----------------------------------------     ----------     ----------      ----------     ----------
Interest Expense                                  99,035          5,014               0        104,049
-----------------------------------------     ----------     ----------      ----------     ----------
Profit (Loss)                                 $  454,679     $ (329,609)              0     $  125,070
-----------------------------------------     ----------     ----------      ----------     ----------
Identifiable Assets                           $3,220,907     $  726,789      $   41,719     $3,989,415
-----------------------------------------     ----------     ----------      ----------     ----------

-----------------------------------------     ----------     ----------      ----------     ----------
Prior Year Quarter Ended 5/31/98
-----------------------------------------     ----------     ----------      ----------     ----------
Sales to unaffiliated customers               $1,906,826     $  268,430               0     $2,175,256
-----------------------------------------     ----------     ----------      ----------     ----------
Intersegment Sales                                     0              0               0              0
-----------------------------------------     ----------     ----------      ----------     ----------
Depreciation Expense                              79,166          6,958               0         86,124
-----------------------------------------     ----------     ----------      ----------     ----------
Interest Income                                        0          6,741               0          6,741
-----------------------------------------     ----------     ----------      ----------     ----------
Interest Expense                                  54,502          1,489               0         55,991
-----------------------------------------     ----------     ----------      ----------     ----------
Profit (Loss)                                 $  189,679     $  (35,577)              0     $  154,102
-----------------------------------------     ----------     ----------      ----------     ----------
Identifiable Assets                           $2,896,569     $  630,900      $  242,226     $3,769,695
-----------------------------------------     ----------     ----------      ----------     ----------
</TABLE>


NOTE G - DEBT AND LOAN AGREEMENTS

         At May 31, 1999,  the  outstanding  balance of the Company's  revolving
line of credit was  $480,479.  This line of credit was entered into on April 22,
1999 with Wells Fargo Credit. This facility is based on a percentage of accounts
receivable and  inventories.  The maximum line is $1,500,000 of which,  based on
the "Collateral Report" there was $759,245 was available to borrow as of May 31,
1999.  The  original  draw on this line was used to pay off most of the previous
revolving line of credit with Nations Bank.

         Also on April  22,  1999 a second  facility  was  closed  with  WebBank
Corporation  to restructure  the term-debt.  This facility is for $1,100,000 and
was used to pay off long-term  debt of the Company with Nations Bank and several
other small lenders.  A portion of the revolving  line that was previously  with
Nations Bank was also paid off by this facility.

         The line of credit with Wells Fargo and the long-term note with WebBank
Corporation  contain  covenants  pertaining to current ratio,  working  capital,
debt, dividends and capital purchases.


                                       9

<PAGE>

NOTE H - STOCK PERFORMANCE AGREMENT

         Under a stock  purchase  agreement  date  March 5, 1997 with  Britannia
Holding  Limited,  NACO  Industries,   Inc.  agreed  as  part  of  the  original
consideration  for the stock  purchase  agreement,  and in the  event  that NACO
Industries,  Inc. did not during the first twenty four months of the  agreement,
establish a market for NACO  Industries,  Inc.  Common  Stock that traded for at
least $6.00 per share for any 10 consecutive day, to credit additional shares of

its $.01 par value common  stock to Britannia  starting at the end of the twenty
fifth  month  following  the  closing  date of the  agreement,  and  until  NACO
Industries,  Inc. has an established  public market for its common stock trading
for $6.00 or more for at least 10  consecutive  trading days.  NACO  Industries,
Inc.  agreed to issue all credited and  unissued  shares to Britannia  within 30
days  following  the yearly  anniversary  of the  agreement.  The  crediting  of
additional shares under this agreement started in the month of April 1999.


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 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 manufacturers and sells PVC valves (4" through 12" in
diameter).

The Company, through NACO Composites, an operating division which was formerly a
wholly owned  subsidiary of the Company and was merged into the Company in 1999,
also  manufactures  and  sells  composite   products  for  the   transportation,
amusement,  recreation and  architectural  industries.  These  products  include
transportation  parts,  decorative  building parts,  after-market auto parts 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 months and six months ended May
31, 1999 and May 31, 1998, respectively. For comparison purposes, percentages of
sales will be used rather than dollars. In the following  discussion,  the three
months  ended May 31,  1999 and May 31,  1998 are  referred to as 2Q99 and 2Q98,
respectively,  and the six  months  ended  May 31,  1999  and May 31,  1998  are
referred to as 6M99 and 6M98, respectively.

     Overview.  The Company  sustained an operating  profit of $125,070 for 2Q99
compared to an operating  profit of $154,102  for 2Q98.  The  Company's  plastic
products operations generated an operating profit of $454,679 for 2Q99, compared
to an operating  profit of $189,679 for 2Q98. The Company's  composite  products
operation generated an operating loss of $(329,609) for 2Q99, compared to a loss
of  $(35,577)  for 2Q98.  The  improvement  in the  Company's  plastic  products
operations  was mainly due to a 26.7%  increase  in net sales and an increase in
gross margin due primarily to improvements in manufacturing  (explained  below).
The Company's  composite  products  sales were down 3.4% from 2Q98 to 2Q99,  and
costs  (explained  below) were up 130%,  which caused a major  deterioration  in
gross  margins  and profits in the  Company's  composite  products.  The Company
continues to expand into the industrial and commercial plastic markets. Although
these markets tend to generate lower sales during winter  months,  they are less
seasonal  than the  Company's  agricultural  markets.  Sales  in  these  markets
increased from 9.8% of total revenues in 2Q98 to 15.4% in 2Q99.

Net Sales: Net sales for 2Q99 increased by 23.0% to $2,674,604,  compared to net
sales of $2,175,256  for 2Q98. Net sales for the plastics  segment  increased by
26.7% to $2,415,231 in 2Q99,  compared to net sales of $1,906,826  for 2Q98. Net
sales for the composite segment decreased by 3.4% to $259,373 in 2Q99,  compared
to net sales of $268,430 for 2Q98.

There are several  factors  that  contributed  to the  increase in the  plastics
segment:

Agricultural & Industrial Market:


                                       10

<PAGE>
         Increased   manufacturing   capacities  and  throughput  has  decreased
delivery time resulting in a quicker  turnaround to the distributor than many of
the Company's competitors have been able to offer. In addition, the formation of
an sales  offering  to the  distributor,  which  allows us to help  solve  their
problems with product distribution, has also contributed to increase sales.

         During the last  quarter  of fiscal  year  1998,  one of the  Company's
warehouses   located  in  Washington  was   re-evaluated  to  better  serve  the
distributors of the Company in that area.  Non-moving  inventory was removed and
an  improved  product  mix was  introduced  into  the  warehouse,  allowing  for
increased distribution from the warehouse.

         A salesperson  covering a key agricultural  market in the intermountain
region was replaced  with an  individual  who has  substantially  increased  the
coverage of the territory.  Substantial improvements were noticed immediately as
relationships with distributors within the territory were improved.

         An independent  manufacturer's  representative  covering a territory in
the Southern  States region was terminated and replaced with a NACO  salesperson
and company-run  warehouse.  This was a region in which sales have been stagnant
for several years.

Utility Market:

         Towards the end of fiscal year 1998,  eighteen new independent  utility
representatives  were established to expand sales into the utility market (sewer
and drainage).  These  representatives are strategically  located throughout the
country, allowing for more effective coverage of the utility market.

         Management  feels that the major  expansion  into the  utility  market,
including the addition of these new  representatives  has enabled the Company to
increase utility sales by approximately 100% for the 2Q99.

         Management anticipates that a few more utility  representatives will be
added during the current fiscal year.

     Gross  Margin.  Gross margin as a percentage of sales for 2Q99 and 2Q98 was
39.4% and 42.1%,  respectively.  Gross margin for plastics and  composites  as a
percentage  of sales for 2Q99 was 52.7% and (83.9)%,  respectively,  compared to
44.8% and 22.9%,  respectively,  for 2Q98.  As the  Company's  plastic  products
production  force has  developed  additional  experience  and sales  volumes for
plastic products have increased,  gross margins on these products have improved.
The negative margins  currently  generated by the Company's  composite  products
were do to a large  extent  to a  combination  of the  Company's  low  volume of
composite product sales, inexperienced labor and lack of management knowledge of
how to produce  certain  composite  products  for which the Company had orders..
During  1Q99 the  Company  hired a new  production  manager  to help with  these
problems,  but his employment was terminated in 2Q99 when it was obvious that he
did not have the expertise needed to produce the products the Company was trying
to produce.  Competition for experienced labor is strong and, as a result during
the last six months of last year, the Company lost some experienced employees in
its  composites  operations  that  were  replaced  by less  experienced  people,
resulting in more rework and scrap.  Because of more rework and scrap,  material
costs increased from 25.8% of sales in 2Q98 to 42.6% of sales in 2Q99 and direct
labor  increased  from  32.1%  of  sales  in 2Q98 to  77.9%  of  sales  in 2Q99.
Management is addressing the loss in several ways.  First,  management  believes
that the  Company's  Ogden  facility has capacity that will  accommodate  higher
sales  volumes  and that the  market  for the  Company's  products  is more than
adequate  to fill this  capacity.  Therefore,  management  has  focused  greater
efforts on selling.  Second, the Company's top management has spent the majority
of their time at the facility,  during which time they have reduced direct labor
by an average of 270 hours per week and increased training. They have farmed out
certain products to vendors until the work force is trained  sufficient to bring
them back in house.  They have  implemented  procedures  for measuring  material
usage on a daily  basis  in order to  reduce  usage  and in turn  reduce  costs.
Management believes that increased sales volumes of composite products for which
the Company has the knowledge, experience and training and that the workforce is
trained to produce will improve the  Company's  ability to cover fixed costs and
generate satisfactory margins.

     Selling:  Selling  expenses  were 19.0% of net sales for 2Q99,  compared to
18.1% for 2Q98.  The increase in selling  expenses as a percentage  of sales was
mainly due increased freight and supplies expenses. Freight expenses represented
7.3% of sales  for  2Q99  compared  to 5.5% of sales  for  2Q98,  mainly  due to
increased  sales in the utility  market  where it is standard in the industry to
prepay  freight on orders over $1,000.  Sales supplies  expenses  increased from
2.0% of sales in 2Q98 to 2.5% in 2Q99,  mainly due also to the increase in sales
in the utility market where large wood crates are require to ship product to the
customer.

     General and Administrative: General and administrative expenses represented
11.8% of net sales for 2Q99,  compared to 14.6% for 2Q98.  Overall,  general and
administrative  expenses  remained  level from 2Q98 to 2Q99.  As a percentage of
sales, salaries and related benefits decreased from 7.6% of net sales in 2Q98 to
5.6% in 2Q99, mainly due to increased sales volume.

     Other:  Other  expenses/revenues  were 3.9% for 2Q99,  compared to 2.3% for
2Q98.  Interest  expense went from 2.6% in 2Q98 to 3.9% in 1Q99.  The  effective

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<PAGE>

interest  rates  (interest  expense  divided by the average debt balance for the
period) for 2Q99 and 2Q98 were 15.4% and 11.02%, respectively.

Liquidity and Capital Resources

         The  Company's  principal  sources  of  liquidity  have  been cash from
operations,  credit  facilities.  Cash  provided  by  operating  activities  was
$160,856  in  6M99.  Cash as of May 31,  1999 was  $41,719,  down  $70,643  from
November 30, 1998.  At May 31, 1999,  the  outstanding  balance of the Company's
revolving  line of credit was $480,479.  This line of credit was entered into on
April 22, 1999 with Wells Fargo  Credit.  This facility is based on a percentage
of accounts receivable and inventories. The maximum line is $1,500,000 of which,
based on the "Collateral Report",  prepared by the VP of Finance of the Company,
there was $759,245  available to borrow as of May 31, 1999. The original draw on
this line was used to pay off most of the previous revolving line of credit with
Nations Bank.

         Also on April  22,  1999 a second  facility  was  closed  with  WebBank
Corporation to restructure  the Company's  long-term  debt. This facility is for
$1,100,000  and was used to pay off  long-term  debt of the Company with Nations
Bank and several other small  lenders.  A portion of the revolving line that was
previously with Nations Bank was also paid off by this facility.

         The Company  continues to struggle  with its liquidity  position.  Even
with the new line of credit and the  restructuring  of the  Company's  long-term
debt,  the Company has been unable to pay trade  payables  current.  The Company
increased  trade payables by $474,619 from November 30, 1998 to May 31, 1999. At
November 30, 1998,  .8% of the Company's  trade  payables were out over 60 days.
due principally to lack of operating  funds. As of February 28, 1999 and May 31,
1999,  43.7% and 31.4%,  respectively,  of the Company's trade payables were out
over 60 days. Management has been in contact with the Company's vendors and most
are  working  with the  Company  to keep  supplying  needed  raw  materials  for
production.  The continuing  struggle with the Company's liquidity has primarily
been  caused by  continued  and  increased  losses in the  Company's  composites
division. How the Company is addressing these losses is explained in the section
entitled "Gross Margin" above.

         The  Company  currently  has plans to spend up to  $150,000  in capital
expenditures to update and expand its operations.  This will only be done on the
condition  that cash flow is adequate and that such purchases will not adversely
affect the bank  covenants  entered into during the past quarter with regards to
the credit facilities.

         Management  believes that the actions  presently  being taken to revise
the Company's  operating and financial  requirements,  together with its capital
resources on hand at May 31, 1999, revenues from sales and bank resources,  will
be sufficient to satisfy its working  capital  requirements  for the foreseeable
future.  There can be no  assurance,  however,  that  additional  debt or equity
financing may not be required or that, if such financing is required, it will be
available on terms favorable to the 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.


Factors Affecting Future Results

         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.  If the  Company  is not able to  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
operations and financial results.  In addition,  the Company's operating results
could also 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, 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.


Impact of the Year 2000 Issue

         The Year 2000  issue is the  result of  computer  programs,  databases,
operating  systems and hardware  utilizing two digits rather than four to define
the  applicable   year.  Any  of  the  Company's   computer  systems  that  have
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year 2000.  This could  result in a system  failure or  miscalculations
causing  disruptions of operation,  including,  among other things,  a temporary
inability to process  transactions,  send invoices,  or engage in similar normal
business activities.


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<PAGE>

         Beginning in the year 1996,  the Company  undertook an  assessment  and
determined that it would be required to modify or replace  significant  portions
of its software so that its computer  systems will properly utilize dates beyond
December 31, 1999. In 1997, the Company  purchased and received upgrade software
for its major computer programs for  manufacturing  and accounting.  The Company
went "live" on all critical software on December 1, 1998. This software includes
network operating  systems,  workstation  operating systems critical to business
operations,  accounting  and  manufacturing  software.  The Company has received
certification  of Year 2000  compliance  from its accounting  and  manufacturing
providers. All custom software is written internally and is Year 2000 compliant.
The  Company  believes  that  with   modifications  to  existing   software  and
conversions  to new software,  the Year 2000 Issue has been  mitigated.  However
there can be no guarantee that everything has been completely covered.

         In January,  1999,  the Company  sent  surveys to critical  vendors and
customers to ensure smooth  transition to the year 2000.  Survey results will be
reviewed and an assessment will be made on the reliability of suppliers past the
year 1999. On March 20, 1999,  the Company  rolled  computer  clocks forward and
performed  tests on Year  2000  compatibility.  No  problems  were  found in the
software tested.  The Company will also continue to test existing systems though
out the year.  In the event the Company  finds  issues  related to the Year 2000
problem,  corrective  measures will be taken. To date, the Company has incurred,
capitalized or expended approximately $152,000 on Year 2000 compliance. The only
Non-Year 2000 compliant  software  currently being used is the Company's  server
backup  software.  An upgrade will be purchased by July, 1999 for  approximately
$500.

                           PART II - OTHER INFORMATION

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
---------------               -----------------------

    2.1                       Article of Merger

    2.2                       Agreement and Plan of Merger

     27                       Financial Data Schedule



     (b)  Reports on Form 8-K.  None


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<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                                     July 13, 1999
   -----------------------------------------                  ---------------
         Verne E. Bray                                        Date
         President


By       /s/ JEFFREY J. KIRBY                                 July 13, 1999
   -----------------------------------------                  ---------------
         Jeffrey J. Kirby                                     Date
         Principal Financial Officer


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