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 February 28,1999

        [ ] 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

                     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 February 28, 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
                                February 28, 1999



                                       3
<PAGE>

                         PART 1 - FINANCIAL INFORMATION

              ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                              NACO INDUSTRIES, INC.
                     CONSOLIDATED BALANCE SHEETS (UNAUDITED)

                                                  February 28        November 30
                                                 ------------       ------------
ASSETS                                               1999               1998
------                                           ------------       ------------
Current assets:
  Cash                                            $    53,488       $   112,362
  Accounts receivable, net of allowances
    of $71,593 / $69,750                            1,146,000           803,165
  Inventory                                           548,866           656,134
  Other current assets                                203,096           220,378
                                                 ------------       -----------
       Total current assets                         1,951,450         1,792,039
                                                 ------------       -----------

Property and equipment:
  Land                                                 40,700            40,700
  Buildings and improvements                          679,751           675,316
  Equipment and vehicles                            2,818,486         2,771,889
  Equipment construction in progress                    9,018            29,461
                                                 ------------       -----------
       Total property and equipment                 3,547,955         3,517,366

  Accumulated depreciation                         (1,874,586)       (1,779,688)
                                                 ------------       -----------
       Net property and equipment                   1,673,369         1,737,678
                                                 ------------       -----------

Other assets:
  Intangible and other assets                         258,839           264,818
                                                 ------------       -----------
       Total other assets                             258,839           264,818
                                                 ------------       -----------
       Total assets                               $ 3,883,658       $ 3,794,535
                                                 ============       ===========

                 See Notes to Consolidated Financial Statements



                                       4
<PAGE>

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

                                                                              February 28      November 30
                                                                              -----------      -----------
LIABILITIES:                                                                     1999              1998
------------                                                                  -----------      -----------
<S>                                                                           <C>              <C>        
Current liabilities:
  Accounts payable                                                            $ 1,130,032      $   650,305
  Accrued expenses                                                                243,656          283,900
  Income taxes payable                                                               (100)               0
  Line of credit                                                                  849,326          849,326
  Current portion of long-term obligations                                        300,582          300,582
  Payable to related party                                                            401                0
                                                                              -----------      -----------
       Total current liabilities                                                2,523,897        2,084,113

Long-term liabilities:
  Long-term obligations, less current portion                                     605,069          673,922
  Deferred income taxes                                                             9,800            9,800
                                                                              -----------      -----------
       Total long-term liabilities                                                614,869          683,722
                                                                              -----------      -----------
       Total liabilities                                                        3,138,766        2,767,835

Stockholders' equity:

  Common stock, $.01 par value, 10,000,000 shares authorized; 2,147,102            21,472           21,472
shares and 2,147,102 shares issued respectively (including 270,875 shares
and 270,875 share respectively in treasury)
  Preferred Stock,  7% Cumulative, convertible  $3.00 par value, 330,000          496,236          496,236
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                                                    1,084,959        1,084,959
  Retained earnings (deficit)                                                    (766,151)        (484,342)
                                                                              -----------      -----------
                                                                                  836,516        1,118,325
  Less: treasury stock - at cost                                                  (91,624)         (91,625)
                                                                              -----------      -----------
       Total stockholders' equity                                                 744,892        1,026,700
                                                                              -----------      -----------

       Total liabilities and
         stockholders' equity                                                 $ 3,883,658      $ 3,794,535
                                                                              ===========      ===========
</TABLE>

                 See Notes to Consolidated Financial Statements



                                       5
<PAGE>

                             NACO INDUSTRIES, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                  (UNAUDITED)

                                                       Three months ended
                                                           February 28
                                                  ----------------------------
                                                     1999              1998
                                                  -----------      -----------

Sales, net                                        $ 1,853,020      $ 1,511,156

Cost of goods sold                                  1,382,675        1,026,916
                                                  -----------      -----------

       Gross profit                                   470,345          484,240

Operating expenses:
  Selling expenses                                    345,952          352,665
  General and administrative expenses                 333,004          340,395
                                                  -----------      -----------

       Total operating expenses                       678,956          693,060
                                                  -----------      -----------

       Income (loss) from operations                 (208,611)        (208,820)

Other income (expense):
  Interest income                                         435              871
  Interest expense                                    (73,633)         (51,471)
                                                  -----------      -----------

       Total other income (expense)                   (73,198)         (50,600)
                                                  -----------      -----------

Income (loss) before income taxes                 $  (281,809)     $  (259,420)

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

       Net income (loss)                          $  (281,809)     $  (259,420)

Adjustment for preferred dividends in arrears        (103,723)         (68,773)
                                                  -----------      -----------

Adjusted net to Common Stockholders               $  (385,532)     $  (328,193)
                                                  -----------      -----------

Earnings (loss) per common share:
  Basic:
      Earnings (loss) from net income             $     (0.15)     $     (0.14)
      Dividends in arrears                              (0.06)           (0.04)
                                                  ===========      ===========
  Net Earnings (loss)                             $     (0.21)     $     (0.18)
                                                  ===========      ===========

 Diluted:
     Earnings (loss) from net income              $     (0.21)     $     (0.18)
                                                  ===========      ===========

Weighted average number of common
  shares outstanding:
    Basic                                           1,876,227        1,849,083
                                                  ===========      ===========
    Diluted                                         2,207,051        2,176,573
                                                  ===========      ===========


                 See Notes to Consolidated Financial Statements



                                       6
<PAGE>

<TABLE>
                              NACO INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<CAPTION>
                                                                   Three months ended
                                                              February 28       February 28
                                                              -----------------------------
                                                                  1999             1998
<S>                                                             <C>            <C>       
Cash flows from operating activities
  Net income (loss)                                             $(281,809)     $(259,420)
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating activities:
     Depreciation                                                 100,857         81,751
     Amortization                                                   1,479          1,479
   (Increase) decrease in:
     Accounts receivable, net                                    (342,835)      (196,483)
     Inventory                                                    107,268       (147,311)
     Other                                                         17,282         25,826
   Increase (decrease) in:
     Accounts payable                                             479,727        485,848
     Accrued expenses                                             (40,244)       (29,258)
     Income taxes payable                                            (100)             0
                                                                               ---------
                                                                               ---------
        Net cash provided by (used in)
         Operating activities                                      41,625        (37,568)
                                                                ---------      ---------

Cash flows from investing activities
  Net change  property and equipment                              (36,548)       (90,827)
  Investment in intangible and other assets                         4,500              0
                                                                ---------      ---------
        Net cash provided by (used in) investing activities       (32,048)       (90,827)

Cash flows from financing activities
  Net change in line of credit                                          0        175,000
  Payments on related party loan                                      401         (2,111)
  Payments on long-term debt                                      (68,852)       (76,538)
  Payment of Preferred Stock Dividends                                  0              0
  Proceeds from long-term loans                                    48,239
  Proceeds from issuance of common stock                                0              0
  Proceeds from issuance of preferred stock                             0              0
  Purchase of treasury stock                                            0              0
                                                                ---------      ---------
        Net cash provided by (used in) financing activities       (68,451)       144,590

                                                                ---------      ---------
Increase (decrease) in cash                                       (58,874)        16,195

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

        Cash, end of period                                     $  53,488      $  91,573
                                                                =========      =========

See Notes to Consolidated Financial Statements
Supplemental disclosures:
    Income taxes paid                                           $       0      $       0
    Interest Paid                                               $  44,939      $  37,926
</TABLE>


                 See Notes to Consolidated Financial Statements



                                       7
<PAGE>

                              NACO INDUSTRIES, INC.
             Notes to Consolidated Financial Statements (Unaudited)
                                February 28, 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
three-month period ended February 28, 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:


                                                February 28,       Nov. 30,
                                                   1999              1998
                                                -----------      -------------
Raw Materials                                   $  176,511       $  231,895
Work in Process                                     17,703           13,598
Finished Goods                                     354,652          360,656
                                                -----------      -------------

                  Total                         $  548,869       $  606,149



NOTE C - DIVIDENDS
         Dividends on the preferred  stock are cumulative at 7%. At February 28,
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 first 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 Naco Composites,  Inc. The Company's  reportable
business segments are strategic business units that offer different products and



                                       8
<PAGE>

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 2/28/99                       PVC Products   Composite Product      Other           Total
----------------------------------------     -----------      -----------      -----------     -----------
<S>                                          <C>              <C>                        <C>   <C>        
Sales to unaffiliated customers              $ 1,629,027      $   223,993                0     $ 1,853,020
----------------------------------------     -----------      -----------      -----------     -----------
Intersegment Sales                                     0                0                0               0
----------------------------------------     -----------      -----------      -----------     -----------
Depreciation Expense                              82,928           13,448                0          96,396
----------------------------------------     -----------      -----------      -----------     -----------
Interest Income                                      435                0                0             435
----------------------------------------     -----------      -----------      -----------     -----------
Interest Expense                                  43,892            1,047                0          44,939
----------------------------------------     -----------      -----------      -----------     -----------
Profit (Loss)                                $   (16,566)     $  (265,243)               0     $  (281,809)
----------------------------------------     -----------      -----------      -----------     -----------
Identifiable Assets                          $ 2,998,930      $   655,872      $    53,489     $ 3,708,291
----------------------------------------     -----------      -----------      -----------     -----------

----------------------------------------     -----------      -----------      -----------     -----------
Prior Year Quarter Ended 2/28/98
----------------------------------------     -----------      -----------      -----------     -----------
Sales to unaffiliated customers              $ 1,323,858      $   187,299                0     $ 1,511,156
----------------------------------------     -----------      -----------      -----------     -----------
Intersegment Sales                                     0            6,845                0           6,845
----------------------------------------     -----------      -----------      -----------     -----------
Depreciation Expense                              75,192            8,036                0          83,228
----------------------------------------     -----------      -----------      -----------     -----------
Interest Income                                      834               37                0             871
----------------------------------------     -----------      -----------      -----------     -----------
Interest Expense                                  45,277            3,115                0          48,391
----------------------------------------     -----------      -----------      -----------     -----------
Profit (Loss)                                $  (193,352)     $   (66,113)               0     $  (259,466)
----------------------------------------     -----------      -----------      -----------     -----------
Identifiable Assets                          $ 3,199,253      $   501,294      $    91,574     $ 3,792,121
----------------------------------------     -----------      -----------      -----------     -----------
</TABLE>


NOTE G - DEBT AND LOAN AGREEMENTS


         At  February  28,  1999,  the  outstanding  balance  of  the  Company's
revolving line of credit was $849,326.  This line of credit expired as of August
31, 1998 and has not been  renewed.  The Company is in the process of securing a
new line of credit and restructuring  its term debt.  Approval has been received
from another lending  institution for the new revolving line of credit. Also the
Company  has  obtained  the  approval  from  a  second  lending  institution  to
restructure the term debt. The Company  presently  anticipates that execution of
the new line of credit and  restructuring  of the term debt will be completed by
the middle of April 1999;  however,  both  transactions  are subject to numerous
conditions, which, if not satisfied, could preclude funding. Pending replacement
of the Company's revolving line of credit and term debt, the Company and Nations
Bank, the lender under the Company's existing line of credit,  have entered into
a Forbearance Agreement,  which, among other things, provides for an increase in
the interest rate to the prime rate  established  by Nations Bank as of April 1,
1999,  plus 3.5% and contains  waivers by Nations Bank of all defaults under the
line of credit.



                                       9
<PAGE>

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

Introduction

NACO  Industries,  Inc.  ("NACO" or the "Company") is a  manufacturing  company,
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,  Inc., a wholly owned  subsidiary,  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 ended February 28, 1999 and
February 28, 1998, respectively.  For comparison purposes,  percentages of sales
will be used rather than dollars. In the following discussion,  the three months
ended  February 28, 1999 and February 28, 1998 are referred to as 1Q99 and 1Q98,
respectively.

     Overview.  The Company  sustained an operating  loss of $(281,809) for 1Q99
compared to an operating  loss of $(259,420)  for 1Q98.  The  Company's  plastic
products  operations  generated a operating loss of $(16,566) for 1Q99, compared
to a loss of $(193,352) for 1Q98.  The Company's  composite  products  operation
generated  an  operating  loss of  $(265,243)  for 1Q99,  compared  to a loss of
$(66,068) for 1Q98. The improvement in the Company's plastic products operations
was mainly due to a 22.6%  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 up $36,694 from 1Q98 to 1Q99, but increased costs
(explained  below) 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 10.4% of
total revenues in 1Q98 to 12.2% in 1Q99.

Net Sales: Net sales for 1Q99 increased by 22.6% to $1,853,020,  compared to net
sales of $1,511,156  for 1Q98. Net sales for the plastics  segment  increased by
23.0% to $1,629,027 in 1Q99,  compared to net sales of $1,323,858  for 1Q98. Net
sales for the composite segment increased by 19.6% to $223,994 in 1Q99, compared
to net sales of $187,299 for 1Q98.

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

Agricultural & Industrial Market:

         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 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.



                                       10
<PAGE>

         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.

         As a result of these changes along with other changes, agricultural and
industrial sales increased to approximately  19% for the first quarter of fiscal
year 1999. Other improvements are scheduled for the current fiscal year.

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 42% for the first quarter of fiscal year
1999.

         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 1Q99 and 1Q98 was 25.4%
and  32.0%,  respectively.  Gross  margin  for  plastics  and  composites  as  a
percentage  of sales for 1Q99 was 38.8% and (72.2)%,  respectively,  compared to
35.1% and 10.2%,  respectively,  for 1Q98. As the Company's 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 reflect the Company's
low volume of composite product sales and inexperienced  labor.  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. Management is addressing the loss in two 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 has hired a new production manager with
more  than  25  years  of   experience   in  the  field  of  composite   product
manufacturing.  The Company hopes that the new manager will be able to train and
bring new personnel up to the  competency  levels  required by the Company.  The
Company also hopes the new manager will be able to address  production  problems
and assist the  Company's  employees  in meeting  the  Company's  standards  for
product quality and delivery deadlines. Management believes that increased sales
volumes of composite  products will improve the Company's ability to cover fixed
costs and generate satisfactory margins. Currently, the Company has a backlog of
composite orders of approximately $300,000.  Management believes the Company can
fill these orders during the second quarter of fiscal 1999, which, together with
improving  throughput,  and  controlling  labor and material cost should improve
gross  margins.  Labor and related  expenses  increased  from $92,470 in 1Q98 to
$214,239  in 1Q99 for  several  reasons.  One was the  inexperience  of  Company
personnel discussed above. Two, because of inexperienced  people in tool making,
the tools or molds for one major product were prepared  improperly.  As a result
there was an extraordinary amount of scrap and what wasn't scraped had to have a
large amount of labor expended to finish the product to quality standards.  This
problem is being  addressed by  reworking  the molds for these  products,  which
management  hopes will reduce both scrap and labor to an acceptable  level.  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 18.7% of net sales for 1Q99,  compared to
23.3% for 3Q98.  The decrease in selling  expenses as a percentage  of sales was
mainly due to  increased  sales  volume.  In actual  dollars,  selling  expenses
decreased $6,759, or 1.9%, from 1Q98 to 1Q99.  Freight expense remained constant
as a  percentage  of  sales  at 6.0%  in 1Q98  and  1Q99.  Advertising  expenses
decreased  $12,436,  mainly due to the printing of product  catalogs during 1Q98
for which there was no matching expense in 1Q99.



                                       11
<PAGE>

     General and administrative: General and administrative expenses represented
17.2% of net sales for 1Q99,  compared to 22.3% for 1Q98.  Overall,  general and
administrative  expenses  decreased $7,391 from 1Q98 to 1Q99. As a percentage of
sales,  salaries and related benefits  decreased from 13.4% of net sales in 1Q98
to 11.0%  in 1Q99  mainly  due to  increased  sales  volume.  Professional  fees
decreased $16,104,  or 59%, from 1Q98 to 1Q99, mainly due to timing of the audit
during 98 and 99.  Insurance  expenses  decreased  $9,287  mainly due to reduced
rates on the Company's general liability and property polices.

     Other:  Other  expenses/revenues  were 4.7% for 1Q99,  compared to 3.7% for
3Q98.  Interest  expense went from 3.4% in 1Q98 to 4.0% in 1Q99.  The  effective
interest  rates  (interest  expense  divided by the average debt balance for the
period) for 1Q99 and 1Q98 were 9.72% and 10.89%, respectively.

Liquidity and Capital Resources

         The  Company's  principal  sources  of  liquidity  have  been cash from
operations,  credit facilities and equity financing.  Cash provided by operating
activities was $41,625 in 1Q99.  Cash as of February 28, 1999 was $53,488,  down
$58,874 from  November 30, 1998.  Because of the  continued  losses and need for
capital,  the Company is facing a cash flow shortage.  The Company is addressing
the cash flow  shortage by managing  inventories,  increasing  the sales effort,
working to reduce expenses and working to secure additional financing.

         The Company continues to struggle with its liquidity position. With the
Company's  continued  losses over the past four years and the  expansion  of the
Company's  operations,  the Company's  working capital position has been reduced
significantly.  During the Company's  expansion,  a  substantial  portion of the
capital  improvements  and new equipment  were funded  through draws against the
Company's  line of  credit  and  internal  financing.  The  total  cash paid for
property and equipment  totaled $68,237 in Y98,  $514,408 in Y97 and $302,991 in
Y96. The Company  increased trade payables by $479,727 from November 30, 1998 to
February  28, 1999.  At November  30, 1998,  the Company was out over 60 days on
trade payables,  due principally to lack of operating  funds. As of February 28,
1999,  the Company is generally out over 90 days on trade  payables.  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.  During January
and February 1999, the Company  typically  ships early orders to customers.  The
Company generally  receives payment for January and February shipments in March,
therefore  cash flow has been good in March and should be good for the remainder
of the Company's normal busy season which is typically from March to June.

         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  potential  growth.  At February 28, 1999, the
outstanding balance of the Company's revolving line of credit was $849,326. This
line of credit  expired  as of August  31,  1998 and has not been  renewed.  The
Company is in the process of securing a new line of credit and restructuring its
term debt.  Approval has been received from another lending  institution for the
new revolving line of credit.  Also the Company has obtained the approval from a
second lending  institution to restructure the term debt. The Company  presently
anticipates  that execution of the new line of credit and  restructuring  of the
term  debt  will be  completed  by the  middle of  April,  1999;  however,  both
transactions are subject to conditions,  which, if not satisfied, could preclude
funding.  Pending replacement of the Company's revolving line of credit and term
debt, the Company and Nations Bank, the lender under the Company's existing line
of credit, have entered into a Forbearance Agreement, which, among other things,
provides for an increase in the interest rate to the prime rate  established  by
Nations  Bank,  plus 3.5% and  contains  waivers by Nations Bank of all defaults
under the line of credit.



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<PAGE>

         The  Company  currently  has plans to spend up to  $150,000  in capital
expenditures  to update and expand its operations on the condition of securing a
new line of credit and restructuring its term debt as described above.

         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 February 28, 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.



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<PAGE>

                           PART II - OTHER INFORMATION

Item 2 - Changes in Securities and Use of Proceeds

         none

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



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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                                     April 13, 1999
   -----------------------------------------                  ---------------
         Verne E. Bray                                        Date
         President


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



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