- 1 - - 1 -

UNITED STATES>

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

[ ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-10120

FAFCO, Inc.

(Exact name of Registrant as specified in its charter)

California 94-2159547

(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

435 Otterson Drive, Chico,California 95928

(Address, including zip code, of Registrants principal executive offices)

(530) 332-2100

(Companys telephone number, including area code)

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesXNo

Indicate by check mark whether the registrant is on accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YesNoX

At May 8, 2003, 3,855,591 shares of the Companys Common Stock, $.125 par value were issued and outstanding.

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

FAFCO, Inc.

CONSOLIDATED BALANCE SHEET

	March 31, 2003 (unaudited)			December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$	75,100		$	100,400
Accounts receivable, less allowance for doubtful accounts of $301,800 in 2003 and $292,000 in 2002		2,531,600			1,974,200
Current portion of long term notes receivable		11,400			11,400
Inventories		1,284,400			1,331,900
Prepaid expenses and other current assets		352,100			264,200
Other accounts receivable, net of allowance		20,400			9,600
Deferred tax asset		206,200			206,200
Total current assets	$	4,481,200			3,897,900
Property, plant and equipment, at cost		8,356,100			8,290,200
Less accumulated depreciation and amortization		(2,611,200	)		(2,490,800	)
		5,744,900			5,799,400
Notes receivable less current portion and other assets (net)		69,600			72,000
Deferred tax asset, net of allowance		172,000			272,400
Total assets	$	10,467,700		$	10,041,700
Liabilities and shareholders equity
Current Liabilities:
Bank line of credit	$	324,200		$
Notes payable to bank current portion		188,600			229,300
Accounts payable and other accrued expenses		1,369,200			1,292,300
Accrued compensation and benefits		324,800			338,400
Accrued warranty expense		292,500			291,700
Total current liabilities		2,499,300			2,151,700
Mortgage		3,267,400			3,284,600
Notes payable to bank less current portion		223,500			250,900
Subordinated debt		500,000			500,000
Other non-current liabilities		19,800			26,400
Total liabilities	$	6,510,000		$	6,213,600
Commitments and contingent liabilities
Shareholders equity:
Preferred Stock-authorized 1,000,000 shares of $1.00 par value, none of which has been issued
Common Stock-authorized 10,000,000 shares of $0.125 par value; 3,855,591 issued and outstanding as of March 31, 2003 and December 31, 2002.	$	481,900		$	481,900
Capital in excess of par value		5,137,300			5,137,300
Notes receivable secured by common stock		(75,100	)		(75,100	)
Accumulated deficit		(1,586,400	)		(1,716,000	)
Total shareholders equity	$	3,957,700		$	3,828,100
Total liabilities and shareholders equity	$	10,467,700		$	10,041,700
The accompanying notes are an integral part of this statement.

Part I - FINANCIAL INFORMATION (continued)

FAFCO, Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

		Three Months Ended March 31,
		2003		2002

Net sales	$	3,786,600	$	3,752,600
Other income (net)		(10,100)		(17,100)

Total revenues		3,776,500		3,735,500

Cost of goods sold		2,106,000		2,237,900
Marketing & selling expense		778,600		702,400
General & administrative expense		489,200		408,000
Research & development expense		80,300		69,200
Net interest expense		85,400		115,200

Total costs and expenses		3,539,500		3,532,700

Income before income taxes		237,000		202,800
Provision for income taxes		107,400		53,300

Net income	$	129,600	$	149,500

Basic earnings net income per share	$ 0.03	$0.04
Diluted net income per share	$ 0.03	$ 0.04

The accompanying notes are an integral part of this statement.
Part I - FINANCIAL INFORMATION (continued)

FAFCO, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

			Three Months Ended March 31,
		2003			2002
Cash flow from operating activities:
Net income (loss)	$	129,600		$	149,500
Adjustments to reconcile net income to net cash provided by (used in operating activities:
(used in) operating activities:
Depreciation		120,400			130,000
Write offs and allowance for doubtful accounts Provision for inventory reserve		9,900			24,100
Change in assets and liabilities:
Accounts receivable		(578,100)			(1,005,300)
Inventories		47,500			2,700
Prepaid expenses and other assets		(87,900)			(83,400)
Deferred tax assets		100,400			---
Other assets (net)		2,400			---
Payables, accrued expenses and other current liabilities		64,100			552,000
Other non-current liabilities		(6,600)			8,200
Net cash used in operating activities		(198,300)			(222,200)

Cash flow from investing activities:
Purchase of fixed assets		(65,900)			(189,300)
Net cash used in investing activities		(65,900)			(189,300)

Cash flow from financing activities:
Proceeds of subordinated debt issuance		---			500,000
Proceeds from bank line of credit		499,200			834,400
Repayment of bank line of credit		(175,000)			(955,000)
Repayment of notes payable to bank		(68,100)			(59,800)
Repayment of mortgage		(17,200)			(8,000)
Net cash provided by financing activities		238,900			311,600
Net decrease in cash and cash equivalents		(25,300)			(99,900)
Cash and cash equivalents, beginning of period		100,400			121,200
Cash and cash equivalents, end of period	$	75,100		$	21,300

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	89,700		$	103,000
Cash paid during the period for income taxes	$	4,000		$	300

Non-Cash Financing Activity

In January 2002, the Company recorded $28,800, the deemed fair value of the warrants to purchase

common shares with the issuance of the subordinated notes. See Note 4.

The accompanying notes are an integral part of this statement.

Part I - FINANCIAL INFORMATION (continued)

FAFCO, Inc.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. The accompanying financial statements of FAFCO, Inc. (the Company) have been prepared in accordance with accounting principals generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.However, in the opinion of the Companys management, all adjustments necessary for a fair statement of results for the periods presented have been included. The results for the period ended March 31, 2003 are not necessarily indicative of results to be expected for the entire year.These financial statements, notes, and analyses should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2002.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses the timing and amount of costs recognized as a result of restructuring and similar activities.The Company will apply SFAS No.146 to activities initiated after December 31, 2002.The adoption of SFAS No.146 is not expected to have a material impact on the Companys consolidated statements of income or financial position.

We apply the intrinsic value method or variable accounting treatment to our stock awards, depending on the nature of the award.The following table summarizes relevant information as if the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation, had been applied to all stock-based awards (in thousands, except per share data):

			Three Months Ended
			March 31,
		2003			2002

Net income, as reported	$	129,600		$	149,500
Add: Stock-based compensation, as reported		N/A			N/A
Deduct: Total stock-based compensation determined under fair
value based method for all awards		N/A			N/A

Adjusted net loss, fair value method for all stock-based awards	$	129,600		$	149,500

Basic and diluted income per share as reported	$	0.03		$	0.04
Basic and diluted income per share SFAS No. 123 adjusted	$	0.03		$	0.04

Part I - FINANCIAL INFORMATION Item 1 (continued)

3. Inventories are valued at the lower of cost, determined on a first in, first out (FIFO) basis, or market, and consist of the following.

		March 31, 2003		December 31, 2002
Raw materials	$	603,500	$	636,600
Work in process		305,200		329,900
Finished goods		375,700		365,400
	$	1,284,400	$	1,331,900

4. The Company has a line of credit agreement with Butte Community Bank, which allows the Company to borrow the lesser of $1,000,000 or an amount determined by a formula applied to accounts receivable.Unused borrowing capacity was $675,800 at March 31,2003.Amounts borrowed bear interest at prime rate plus 1.5% (5.75% at March 31, 2003) per annum and are secured by substantially all the assets of the Company.This line of credit expires on August 10, 2003.At March 31,2003,the Company had complied with or obtained waivers for compliance with the loan covenants.

In addition to the line of credit, the Company has a 36-month term loan facility in the amount of $445,000 bearing interest at prime plus 1.5% (5.75% at March 31, 2003). At March 31, 2003, the Company had an outstanding balance of $16,200 on this loan facility.The Company also has a 60-month term loan available in the amount of $500,000 bearing interest at prime plus 1.5% (5.75% at March 31, 2003). At March 31, 2003, the Company had an outstanding balance of $330,400 on this loan facility.

The Company also has a $3,400,000 mortgage loan with a maturity date of June 10, 2030. Principal is amortized over a 29 year term from January 10, 2001. The initial interest rate on this mortgage loan was 9.05%.In November 2002, the interest rate was renegotiated and adjusted to 8%.In March 2003,the interest rate was again renegotiated downward and is currently fixed at 6.75%.The interest rate will be changed on April 10^thof each fifth year to the then current prime rate plus .35%. The balance on this mortgage at March 31, 2003, was $3,332,900.

In January 2002, the Company issued $500,000 in principal amount of subordinated notes, accompanied by warrants to purchase up to 200,000 shares of the common stock of the Company.The warrants have an exercise price of $0.125 per share.The Company recorded $28,800 as a discount and additional paid in capital for the deemed fair value of the warrants.The discount is being amortized over the term of the notes.The three-year notes bear interest, payable quarterly, at an initial annual rate of 10%, increasing to 12% for all periods after the first anniversary of the date of the notes.The notes are subordinated to bank borrowings and other secured indebtedness for money borrowed.The Company may at its option call the notes for redemption at any time with ten (10) days notice.Holders of the notes are entitled to certain rights with respect to registration of the common stock issuable upon exercise of the warrants. The Chairman and Chief Executive Officer of the Company and his spouse purchased notes with a principal amount of $150,000 in this offering, and received warrants to purchase 30,000 shares of common stock.

5. Net Income Per Share

Basic earnings per share were calculated as follows:

			Quarter Ended March 31
		2003			2002

Net income	$	129,600 3,855,591		$	149,500 3,855,591
Average common shares outstanding		129,600 3,855,591			149,500 3,855,591
Basic earnings per share	$	0.03		$	0.04

Part I - FINANCIAL INFORMATION (continued)

Diluted earnings per share are calculated by dividing net income by the weighted average number of shares issued and outstanding.

Diluted earnings per share were calculated as follows:

			Quarter Ended March 31
		2003			2002

Adjusted net income	$	129,600		$	149,500
Average common shares outstanding		3,855,591			3,855,591
Add: Exercise of options reduced by the number of shares purchased with proceeds		53,538			131,966
Add:Exercise of warrants reduced by the number of shares purchased with proceeds		52,356			65,742
Add:Exercise of warrants attached to debt reduced by the number of shares purchased with proceeds		123,077			68,750
Adjusted weighted average shares outstanding		4,084,562			4,122,049
Earnings per common share assuming dilution	$	0.03		$	0.04

At March 31, 2003, options and warrants for the purchase of 125,500 shares of common stock at prices ranging from $0.50 to $0.56 were antidilutive and therefore not included in the computation of diluted earnings per share.At March 31,2002,options and warrants for the purchase of 236,000 shares of common stock at prices ranging from $0.50 to $0.625 were antidilutive and therefore not included in the computations of diluted earnings per share.

6.Business Segment and Concentration of Credit Risk

Business Segment. The Company operates in one business segment, the development, production and marketing of polymer heat exchangers for the solar and thermal energy storage markets worldwide.

			Quarter Ended March 31
		2003		2002
Product Line
Net Sales
Pool Products	$	2,675,900		2,895,600
Thermal Energy Storage Products		1,110,700		857,000
	$	3,786,600		3,752,600

Geographic information for revenues and long-lived assets are as follows:

			Quarter Ended March 31
		2003			2002
Net Sales
Domestic	$	2,922,100		$	3,226,900
Foreign
Japan		736,500			309,200
Other		128,000			216,500
	$	3,786,600		$	3,752,600

Part I - FINANCIAL INFORMATION (continued)

Long-lived assets		March 31, 2003		December 31, 2002
Domestic	$	5,744,900	$	5,799,400

For the three months ended March 31, 2003, the Company had one major customer who accounted for 10% or more of sales totaling $736,500.

For the three months ended March 31, 2002, the Company had no major customers who accounted for 10% or more of sales.

Concentration of Credit Risk:Most of the Companys business activity is with customers located in California, Florida and foreign countries. As of March 31, 2003, unsecured trade accounts receivable for customers in California, Florida, and foreign countries were $514,000, $1,192,400, and $323,500.

7.Property, Plant and Equipment

Property, plant and equipment consist of the following:

		March 31, 2003		December 31, 2002
Building	$	3,679,100	$	3,679,100
Land		550,400		550,400
Machinery and equipment		2,685,000		2,649,500
Office and computer equipment		508,200		477,800
Leasehold improvements		599,800		599,800
Vehicles		333,600		333,600
	$	8,356,100	$	8,290,200
Less accumulated depreciation and amortization		(2,611,200)		(2,490,800)
	$	5,744,900	$	5,799,400

Item 2

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

This Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.The forward-looking statements involve risks and uncertainties, including, among other things, the uncertainties associated with forecasting future revenues, costs and expenses. Our actual results may differ materially from the results discussed in the forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. Factors that might cause such a difference include, but are not limited to, those discussed below and under Factors Affecting Future Results.We assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

You should read the following discussion in conjunction with the interim condensed consolidated financial statements and notes included elsewhere in this report and in other reports and documents filed from time to time with the Securities and Exchange Commission.

Results of Operations

Net sales for the quarter ended March 31 experienced a slight overall increase to $3,786,600 in 2003 from $3,752,600 in 2002. This increase was due to increased unit sales of the Company's IceStor products offset in part by decreased unit sales of the Company's pool products.

Net sales of the Company's IceStor products were 29.6% higher in the first quarter of 2003 than in the corresponding quarter in 2002 due to increased sales to the Company's licensee in Japan.The Company does not expect this trend to continue throughout the year.The Company's pool product sales decreased by 7.6% primarily due to decreased sales of its Above Ground Pool Systems. The Company attributes this decrease to winter-like conditions in the primary market area and expects sales to increase later in the season.

Cost of goods sold decreased to $2,106,000 (55.6% of net sales) in the first quarter of 2003 compared with $2,237,900 (59.6% of net sales) in the first quarter of 2002. This 5.9% decrease in absolute dollars was due to increased production efficiencies, while the decrease as a percent of sales was due to higher sales of the Company's higher margin products.

Marketing and selling expenses increased to $778,600 (20.6% of net sales) in the first quarter of 2003 compared with $702,400 (18.7% of net sales) in the first quarter of 2002. This 10.8% increase was due mainly to costs associated with market research projects and trade shows, along with increased lead generation and personnel related costs pertaining to the Company's retail office in Tampa, Florida.

General and administrative expenses increased to $489,200 (12.9% of net sales) in the first quarter of 2003 compared with $408,000 (10.9% of net sales) in the first quarter of 2002. This 19.9% increase was due to a variety of business expenses such as insurance, credit card processing fees, and small equipment purchases along with personnel related costs pertaining to the Company's retail office in Tampa, Florida.

Research and development expenses increased to $80,300 (2.1% of net sales) in the first quarter of 2003 compared with $69,200 (1.8% of net sales ) in the first quarter of 2002.

Net interest expense decreased to $85,400 (2.3% of net sales) in the first quarter of 2003 compared with $115,200 (3.1% of net sales) in the first quarter of 2002.This decrease was primarily the result of a reduction in the interest rate on the Company's mortgage on it's facility in Chico, California along with decreased borrowings against the Company's line of credit.

Total costs and expenses increased slightly to $3,539,500 in the first quarter of 2003 compared to $3,532,700 for the same period of 2002.

Operating profit for the first quarter of 2003 increased 16.9% from $202,800 for the quarter ended March 31, 2002 to $237,000 for the first quarter of 2003.Net income for the quarter ended March 31, 2003 declined to $129,600 from $149,500 in 2002. This 13.3% decrease was due to a doubling of income taxes accrued in the first quarter of 2003 compared to 2002.

Liquidity and Capital Resources

The Company's cash position decreased to $75,100 at March 31, 2003 from $100,400 at December 31, 2002.

At March 31, 2003, the Company's accounts payable and other accrued expenses had increased to $1,369,200 from $1,292,300 at December 31, 2002.This increase was primarily due to increased purchases to support the increase in sales.

At March 31, 2003, the Company's inventories had decreased to $1,284,400 from $1,331,900 at December 31, 2002.

At March 31, 2003, the Company's current ratio was 1.79:1.00 compared to 1.81:1.00 at December 31,2002. The Company had working capital of $1,981,900 at March 31, 2003 compared with $1,746,200 at December 31,2002. Total assets exceeded total liabilities by $3,957,700 at March 31, 2003 compared with $3,828,100 at December 31, 2002.

Part I-FINANCIAL INFORMATION Item 2(continued)

The Company believes that its cash flow from operations, together with bank borrowing and availability under its bank revolving line of credit, will be sufficient to support operations during the next twelve months.The foregoing statement of how long the Company's capital resources are expected to last is a forward-looking statement involving risks and uncertainties, including the amount of the variability of demand for the Company's products and uncertainty regarding the ability of the Company to control its operating expenses.If sales decline from current levels additional debt or equity financing may be required.There can be no assurance that such additional financing, if required, would be available on favorable terms or at all or that such financing would not significantly dilute the ownership interests and rights of existing shareholders.

The Company has a line of credit, of which $324,200 had been utilized, and $675,800 remained available at March 31, 2003.This line of credit expires on August 10, 2003.

In addition to the line of credit, the Company has a 36-month term loan facility in the amount of $445,000 bearing interest at prime plus 1.5%.At March 31,2003, the Company had an outstanding balance of $16,200 on this loan facility.

The Company also has a 60-month term loan facility available in the amount of $500,000 bearing interest at prime plus 1.5%.At March 31, 2003, the Company had an outstanding balance of $330,400 on this loan facility.

The Company has outstanding promissory notes with an aggregate principle amount of $500,000 ("the Notes"). The principle amount of the Notes is due and payable in January 2005.Interest is payable quarterly at an initial rate of 10% per annum, increasing to 12% starting January 2003.

At March 31, 2003, the Company owed an aggregate of $4,003,700 under various bank credit facilities and $500,000 of subordinated notes.Payments due under these credit facilities are as follows:

	Total amounts committed	Amount of commitment expiration per period
		Less than year	1-3 years	4-5 years	Over 5 years
Line of credit	$ 324,200	$ 324,200
Bank term loans	346,600	123,000	$ 223,600
Mortgage	3,332,900	65,600	156,100	$ 59,400	$ 3,051,800
Notes	500,000		500,000
Total	$ 4,503,700	$ 512,800	$ 879,700	$ 59,400	$ 3,051,800

Item 2

Liquidity and Capital Resources

Factors Affecting Future Results

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Item 4 - Controls and Procedures