FAFCO INC - 10-K Annual Report

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THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 10-K FILED ON APRIL 1ST,
1999 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1998 or

[ ] 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
(State or other jurisdiction of incorporation or organization)

94-2159547
(IRS Employer Identification No.)

2690 Middlefield Road, Redwood City, California 94063
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 650/363-2690

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.125 par value
(Title of Class)

Indicate by check mark whether the registrant (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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No ____

Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X ]

The aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of March 12, 1999 was $2,216,100 , based
upon the average of the bid and ask prices reported for such date by the
National Quotation Bureau. For purposes of this disclosure, shares of Common
Stock held by persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by executive officers and directors of the
registrant have been excluded in that such persons may be deemed to be
"affiliates" as that term is defined under the rules and regulations
promulgated under the Securities Act of 1933. This determination is not
necessarily conclusive for other purposes.

The number of shares of the registrant's Common Stock outstanding as of
December 31, 1998, was 3,303,311.

Documents Incorporated by Reference

Document Description Form 10-K Part
Portions of Exhibit 13.1 (the Company's 1998 Annual Report to Shareholders)
(the "Annual Report") .............................................I, II, IV

The Company's Definitive Proxy Statement (the "Proxy Statement") for the
1999 Annual Meeting of Stockholders to be held on May 6, 1999 (the Proxy
Statement is expected to be filed pursuant to Regulation 14A on or before
April 30, 1999)................................... .................... III

_____________________________

With the exception of the information specifically incorporated by reference
in Parts I, II, III and IV of this Form 10-K, neither the Company's Annual
Report nor the Company's Proxy Statement is to be deemed filed as part of
this report.

PART I

Item 1. Business

Introduction

FAFCO, Inc. ("FAFCO," the "Company" or "Registrant") designs, develops,
manufactures, and markets solar heating systems for swimming pools and
thermal energy storage systems for commercial and industrial cooling. Pool
product sales amounted to 53% of net sales in 1998 compared to 56% of net
sales in 1997 and 58% of net sales in 1996. Thermal energy storage sales
amounted to 47% of net sales in 1998 compared to 44% of net sales in 1997 and
42% of net sales in 1996.

The Company manufactures products for the solar heating of water for low and
medium temperature applications. From the inception of the Company's
predecessor as a sole proprietorship in 1969 until 1976, efforts were largely
devoted to the refinement of the Company's initial product, a solar heating
system for swimming pools - a low temperature solar application. Since that
time, the Company has focused on increasing its share of the pool heating
market by extending its network of independent distributors, decreasing its
manufacturing costs, and improving its initial product. In 1983, a passive
domestic hot water heating system, the 444, was introduced (this product was
discontinued in early 1994). In 1987, the Company introduced a thermal
energy storage system based on the same heat exchanger technology as is used
in its swimming pool heating systems. In 1993, the Company introduced a
state-of-the-art control system for swimming pool solar heating systems (this
product was discontinued in December 1996).

FAFCO, Inc. was incorporated under the laws of the State of California in
1972. Its principal executive offices are located at 2690 Middlefield Road,
Redwood City, California. Its telephone number at that address is
(650) 363-2690.

Safe Harbor Statement

This Annual Report on Form 10-K 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. Actual results could differ materially
from those projected in the forward-looking statements as a result of the
risk factors set forth on page 16 of the Annual Report under the heading
"Factors Affecting Future Results" which is incorporated herein by reference
and elsewhere in this Form 10-K.

Markets

Swimming Pool Heating

Low temperature solar applications developed because of the cost effectiveness
of solar systems in heating a large volume of water to produce a small
temperature change. The market for swimming pool heating developed for
several reasons. First, pool owners normally use their pools when solar
energy is abundant (during daylight hours and the summer swimming season).
Second, pools already have two elements needed for low temperature water
heating: storage (the pool water) and circulation (the existing pool pump
and associated plumbing). Third, pool owners are an easily identifiable
market.

Thermal Energy Storage

FAFCO also designs, develops, manufactures, and markets a static, glycol ice
builder for the thermal storage market. Since the product's introduction,
FAFCO has sold "ice banks" primarily to the commercial air conditioning
market for use in off-peak air conditioning systems.

Products

Swimming Pool Heating

The FAFCO solar pool heating system is composed of six to twelve solar
collectors, a sun sensor, an automatic control, and associated accessories.
The collectors and sensor are typically mounted on the roof of a pool owner's
home and connected to the pool pump and automatic control.

The customer sets the automatic control for the desired water temperature and,
when the sensor detects that there is sufficient solar energy for the system
to function efficiently, the automatic control directs the flow of water from
the pool to the collectors. The water absorbs heat as it passes through the
collectors and then flows back to the pool. When the desired water
temperature is achieved or when there is insufficient solar energy, the
automatic control redirects the flow of water back to the pool and water is
drained from the collectors. When the water temperature drops and there is
sufficient solar energy, the system is reactivated automatically.

In February 1996, the Company introduced a version of its solar pool heating
system specifically designed for above-ground swimming pools. This system is
composed of one or two solar collectors optimized for use in heating
above-ground swimming pools and designed to lie flat on the ground or to be
mounted on a rack on the ground.

In May 1996, the Company introduced a new and improved version of its solar
collector that has a higher thermal performance due to its unique heat
exchanger tube design. The tube design incorporates molded indentations,
which enhance the heat transfer coefficient by increasing fluid turbulence.

The Company's solar collectors are composed entirely of a polyolefin material
(a high molecular weight polymer compound) and made up of small round tubes
formed side by side in a rectangular shape either one-by-two meters,
four-by-eight feet, four-by-ten feet, four-by-twelve feet or four-by-twenty
feet in size, with submanifolds and header pipes thermoformed on each end.
This design provides for a maximum heating surface and even water flow in
order to transfer 75% to 90% of the available solar energy to the pool water.
The polyolefin material, which has been specially formulated by the Company,
is black in color (to optimize solar energy absorption) and has the inherent
advantages over other possible materials of lower cost, lighter weight, and
higher resistance to the corrosive effects of pool chemicals and degradation
resulting from ultraviolet radiation, heat, and other environmental effects.

In May 1993, the Company introduced a proprietary microprocessor-based
control (AutoPool) for its solar pool heating systems. Prior to May 1993,
the Company had a private label arrangement with an automatic control
manufacturer. AutoPool has built-in "intelligence" that allows it to
optimize the heating and filtration time for the swimming pool and can also
control non-conventional solar swimming pool heaters. Because of lack of
demand for the Company's AutoPool Control, this product was discontinued
effective January 1, 1997. The Company has ongoing obligations to service
and provide spare parts for AutoPool controls sold prior to that time.

Thermal Energy Storage

The Company's thermal energy storage ("IceStor?") systems utilize nighttime
electric capacity to create stored cooling energy. This is normally done by
storing inexpensive "off-peak" energy in the form of either chilled water or
ice. The next day this stored cooling capacity is used in conjunction with a
building's air conditioning equipment to significantly reduce electrical power
requirements for cooling during times of high power demand and high
electrical cost.

Cool storage systems offer power utilities a solution to a fundamental,
long-term problem: increased peak demand for power during periods of limited
available capacity (i.e., during business hours). IceStor? technology shifts
power consumption to off-peak periods when there is available capacity and
lower demand.

Marketing and Sales

Solar Systems

FAFCO markets its solar systems and controls in the United States through
independent distributors who sell directly to end users. Distributors
generally have sales, installation, and service personnel who are supported
by extensive FAFCO marketing and technical materials as well as in-depth
factory and field training programs.

The majority of sales personnel employed by the typical distributor are
assigned to retrofit sales, which are sales to existing pool owners.
Retrofit sales are generated through direct mail, customer referrals,
canvassing, and, to a lesser extent, selected media advertising. The balance
of the typical distributor's sales personnel are generally assigned to
contractor accounts and seek referrals for new construction sales.

FAFCO usually provides direct mail literature and other advertising materials to
distributors and mails or places these materials with local advertisers on
the distributors' behalf and partially at the distributors' expense. In
certain instances, distributors will also engage in direct mailing and
advertising.

In the past, the Company has canceled several distributor agreements for
reasons of inadequate performance by the distributor, primarily for failure
to provide adequate sales, installation and service support for the Company's
products. In such instances, the Company has generally been able to find
qualified replacements.

All work relating to the installation of FAFCO solar systems is covered by a
full one-year warranty provided by the distributor. The Company's solar
collectors used to be covered by a ten-year limited warranty, which was
changed to a ten-year full warranty beginning in 1991. Its automatic
controls, pumps, and drain-down valves are covered by a three-year limited
warranty. FAFCO warranties cover defects in materials and workmanship provided
that the related products are used for their intended purpose.

FAFCO solar systems are designed to require only minimal maintenance, which
can be performed either by the consumer using an owner's manual or by the
distributor's service personnel.

Thermal Energy Storage Systems

The Company markets its IceStor? products through independent contractors who
design and build heating and cooling systems for commercial and industrial
applications. The Company has also licensed its IceStor? products for sale
overseas, to design-and-build, heating, ventilating, and air-conditioning
companies in Taiwan, Korea, Japan, and The Peoples Republic of China. These
licensing agreements provide for licensees' assembly, sales, support, and
maintenance of IceStor? products in those countries.

Sales by Geographic Area

The Company's net sales during 1998, 1997, and 1996 were geographically
distributed approximately as follows:

1998 1997 1996

California 19% 22% 17%
Florida 31% 31% 34%
Other U.S. 14% 19% 35%
Foreign Countries 36% 28% 14%

100% 100% 100%

One of the Company's customers, Ebara Corporation, accounted for 23.4% of the
Company's fiscal 1998 net sales and 18.6% of the Company's fiscal 1997 net
sales. Kailay International (now known as FAPCO), Ebara Corporation, and
Florida Solar are accounted for 14.0%, 12.1%, and 11.8% of the Company's
fiscal 1996 net sales, respectively. During 1996, 1997 and 1998 Kailay
International and Ebara Corporation were the licensees for the Company's
IceStorT products in Taiwan and Japan, respectively, and, as such, purchased
IceStorT products and components for assembly into products for resale to end
users in Taiwan and Japan, respectively. During 1996, Florida Solar was a
distributor of the Company's pool products and, as such, purchased pool panels
and components for resale to end users in Florida. No other customer
accounted for 10% or more of the Company's net sales in fiscal 1996, 1997 or
1998. Any material cancellation, reduction or rescheduling of orders from a
major customer, particularly Ebara Corporation, or the loss of any such
customer would have a material adverse effect in the Company's financial
condition and operation results.

Foreign sales of the Company's products are made through independent foreign
distributors and licensees. Sales to foreign distributors and licensees are
shipped directly from the Company's facilities in California and invoiced in
U.S. dollars. Export sales are subject to certain controls and restrictions,
including tariffs and import duties, and are subject to certain risks,
including changing regulatory requirements of foreign jurisdictions and
transportation delays and interruptions; however, the Company has not
experienced any material difficulties in the past relating to such
limitations. The financial crisis in Southeast Asia has not had any
noticeable negative effect on sales; however, there is no assurance that
sales will not be negatively affected if the crisis worsens or is
prolonged.

Backlog

Sales to solar distributors are made against individual purchase orders
rather than through volume purchase arrangements. The Company typically
ships its products within one to five days of receipt of an order; therefore,
the Company's backlog at any date is usually insignificant and is not a
meaningful indicator of future sales. FAFCO distributors tend to order
frequently in small quantities in order to minimize their inventory levels and
match inventory levels with current installation schedules.

Sales of IceStor? products are made against individual purchase orders to
general contractors or Heating, Ventilating, and Air conditioning (HVAC)
contractors for specific new construction projects or for retrofit in
existing buildings. The Company typically ships these products within six
weeks or less of receipt of an order; therefore, the Company's backlog with
respect to IceStor? products at any date is also usually insignificant and
not a meaningful indicator of future sales.

Government Tax Incentives

Although the Company's operations are not directly subject to extensive
governmental regulations, the existence or lack of federal, state, and local
tax incentives for the sale and installation of solar systems would have a
substantial impact on the Company's business. There is currently no federal
tax credit for solar heating systems and state solar tax credits are
available only in a few states. The Company does not anticipate that solar
tax credits will become available for solar heating systems in any additional
states, nor does it anticipate a significant increase in sales due to
existing or future tax credits.

Manufacturing

FAFCO's manufacturing activities consist primarily of the production of
polyolefin heat exchangers used in solar heating applications and off-peak
cooling applications and associated accessories. A total system approach is
emphasized in order to ensure the effectiveness and reliability of the
Company's products after they have been installed, eliminating the need for
distributors to rely upon materials from other suppliers.

The Company's heat exchangers are produced from polyolefin resins using a
patented extrusion and thermoforming process. Substantially all equipment
used in these processes has been designed and built by the Company's research
and development engineers.

The resins employed by the Company are a petroleum by-product. The market
price of these resins has fluctuated over the years with an increase in 1990
and early 1991 due to tensions in the Middle East, followed by a
stabilization after the completion of Desert Storm. It is expected that the
price of the resins will continue to fluctuate as a result of domestic and
international political and economic conditions.

FAFCO has qualified multiple sources of supply for all of its resins,
materials, and subassemblies. However, certain materials and subassemblies
are currently obtained from single sources. The Company believes these items
could be supplied by the Company's other qualified sources if sufficient
lead-time were provided. The Company attempts to maintain additional inventory
of such materials to mitigate the risk of supply shortages; however, any
prolonged inability to obtain such items would have a material adverse effect on
the Company's results of operations. To date, the Company has not
experienced any significant manufacturing problems or delays due to shortages of
materials.

Quality assurance is performed by FAFCO at its manufacturing facility. Test
and inspection procedures are a part of substantially all production and
assembly operations. In addition, the Company uses it own diagnostic
equipment and laboratory to continually test and inspect raw materials, work in
process, and finished goods.

Competition

The Company's solar heating products currently compete directly with solar
heating products offered by other domestic and international manufacturers of
solar heating systems, and indirectly with conventional heating systems.

The Company believes that the principal competitive factors in the markets
for FAFCO solar products are (i) product performance and reliability; (ii)
marketing and technical support from the manufacturer for distribution
channels; (iii) selling, installation, and service capabilities of
distribution channels; and (iv) price. The Company believes that it competes
favorably with respect to all of these factors. However, certain of its
competitors may have greater financial, marketing, and technological
resources than those of the Company.

A number of companies in the United States manufacture thermal energy storage
systems of various types similar to the Company's IceStor? product. The
industry is in the early stages of development and additional competitors are
expected to enter the market over time.

At the present time, the Company believes that the main competitive factors
in the thermal energy storage market are performance, reliability, and price.
The Company believes that it competes favorably with respect to these factors.
However, several of its competitors have greater financial, marketing, and
technological resources than those of the Company.

Research and Development

For the years ended December 31, 1998, 1997, and 1996, the Company's research
and development expenses were $194,100, $202,800, and $116,000, respectively.

The Company currently uses consulting engineers, in addition to staff
engineers, who are responsible for existing product improvement, applications
engineering, and new product research and development. The Company is
exploring other potential revenue-producing uses for its polyolefin extrusions.

Patents, Trademarks and Licenses

FAFCO currently holds two United States patents and one foreign patent
relating to certain aspects of its products and manufacturing technology.
These patents expire at various times between March 2000 and July 2003.
However, the Company believes that patent protection is secondary to such
factors as ongoing product development and refinement, the knowledge and
experience of its personnel, and their ability to design, manufacture, and
successfully market the Company's products.

From time to time, the Company has registered as trademarks certain product
names and marks in order to preserve its right to those product names and marks.

The Company has granted licenses to assemble and sell IceStor? systems in
Taiwan, Korea, Japan, and the Peoples Republic of China to local
manufacturers. See "Marketing and Sales" above.

Employees

At December 31, 1998, the Company had a total of 61 full-time employees,
including eight in marketing, five in research and development, 37 in
manufacturing, and 11 in general management and administration. The Company
also uses temporary employees from agencies to fill seasonal needs. The
Company has never had a work stoppage. To the Company's knowledge, no
employees are represented by a labor organization.

Seasonality

Information regarding the seasonality of the Company's business is set forth
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality" on page 16 of the Annual Report, which information
isincorporated herein by reference.

Segment Information

Following the sale of the business of the Company's subsidiary, The Gregory
Company, in 1988, the Company has only had continuing operations in the
energy products segment.

Environmental Regulations

The Company is subject to a number of environmental regulations concerning
potential air and water pollution. However, such regulations have not in the
past had, and are not expected to have, any material adverse effect on the
Company's business. However, there can be no assurance that compliance with
existing or future regulations will not require the expenditure of funds
or the modification of the Company's manufacturing process, which could have a
material adverse effect on the Company's business or financial condition.

Item 2. Properties

The Company's principal executive offices and manufacturing facilities for
its products are located in a single 42,500 square foot facility in
Redwood City, California. A lease expiring in the year 2000 covers this
facility. This lease has an option to extend through 2005. See Note 10 of
Notes to Consolidated Financial Statements on page 13 of the Annual Report,
which information is incorporated herein by reference.

The Company believes that its current facilities are adequate to meet its
requirements for space in the near future. Manufacturing space is being
fully utilized at the present time. However, additional demand can be
accommodated by adding additional employee shifts.

Item 3. Legal Proceedings

There are presently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject, except for
ordinary routine legal proceedings incidental to the Company's business.

Item 4. Submission of Matters to a Vote of Security Holders

The Company did not submit any matter to a vote of security holders during
the fourth quarter of its fiscal year ended December 31, 1998.

The executive officers of the Company are set forth below. All officers
serve at the pleasure of the Board of Directors. There are no family
relationships between any executive officers or directors.

Freeman A. Ford, age 58, serves as Chairman of the Board, President, and
Chief Executive Officer. Mr. Ford, a co-founder of the Company, has served
as Chairman of the Board since 1972, as Chief Executive Officer of the
Company since May 1979, and as President since September 1984. Mr. Ford is
also a Director of H.B. Fuller Company.

Alex N. Watt, age 57, serves as Vice President of Finance and Administration,
Chief Financial Officer, and Secretary. Mr. Watt joined the Company as its
Vice President-Finance and Chief Financial Officer in July 1984, and has
served as Secretary since March 1985.

David Harris, age 43, serves as Vice President, Sales. Mr. Harris joined the
Company in August 1981 as a sales representative and has held the positions
of Pool Builder Manager, National Sales Manager-Pool Products, Pacific
Northwestern Region Sales Manager, National Sales Manager-Solar Division,
National Sales Manager, Vice President-Sales and Marketing (from June 1988
until April 1993) and President-Pool Products Division (from May 1993 until
May 1995).

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters

Information regarding the market for and market prices of the Company's
Common Stock, the number of shareholders of record, and information regarding
dividends is set forth under the heading "Common Stock Data" on page 15 of
the Annual Report, which information is incorporated herein by reference.

Item 6. Selected Financial Data

Selected financial data for the Company is set forth in the table entitled
"Five-Year Summary of Operations" on page 15 and in the last sentence of the
text under the table entitled "Common Stock Data" on page 15 of the Annual
Report, which information is incorporated herein by reference.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations is set forth under the heading
"Management's Discussion and Analysis," on pages 16 through 18 of the Annual
Report, which information is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The following discussion about the Company's market risk exposure involves
forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates, foreign currency exchange
rates and equity security price risk. The Company does not use derivative
financial instruments for any purpose, including hedging interest and foreign
exchange risks.

The Company is exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates. The Company attempts to
minimize its currency fluctuation risk by pricing its overseas product sales
and license fees in United States dollars. A 10% change in the foreign
currency exchange rates would not have a material impact on the Company's
results of operations.

The Company maintains short-term investments consisting of variable interest
accounts. However, due to the short-term nature of the Company's debt
investments, the impact of interest rate changes would not have a material
impact on the value of such investments.

The Company is also exposed to interest rate risk on outstanding fixed rate
promissory notes. However, the balance of fixed rate debt obligations of the
Company is currently relatively insignificant. As a result, the Company does
not actively manage the risk associated with these obligations. The impact of
interest rate changes would not have a material impact on the Company's
results of operations.

The Company currently holds no marketable equity securities of other issuers
that are subject to market price volatility.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Company are set forth on pages 3
through 12 of the Annual Report, which information is incorporated herein by
reference. The supplementary financial information requirements of Regulation
S-K Item 302 do not apply to the Company, because the Company does not meet
the tests set forth therein.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding directors and nominees for directors is to be set forth
under the heading "Election of Directors - Nominees" in the Company's Proxy
Statement, which information is incorporated herein by reference.

Information regarding the filing of reports by insiders under Section 16(a) of
the Exchange Act is to be set forth under the heading "Election of Directors -
Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement, which information is incorporated herein by reference.

Item 11. Executive Compensation

Information regarding the Company's remuneration of its executive officers and
directors is to be set forth under the headings "Election of Directors -
Executive Compensation" and "Election of Directors - Director Compensation" in
the Company's Proxy Statement, which information is incorporated herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding the security ownership of certain beneficial owners and
management is to be set forth under the headings "Election of Directors -
Security Ownership" and "Information Concerning Solicitation and Voting -
Record Date and Outstanding Shares" in the Company's Proxy Statement, which
information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions is to be
set forth under the headings "Election of Directors - Nominees" and "Election
of Directors - Certain Transactions" in the Company's Proxy Statement, which
information is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Documents filed as part of this report:

1. Financial Statements

The consolidated balance sheets for the years ended December 31, 1998 and .
1997, the Consolidated Statement of Operations, of Shareholders' Equity and
Cash Flows for each of the three years in the period ended December 31, 1998,
and the notes thereto appear on pages 4 through 14 of the Annual Report.

2. Financial Statement Schedules

The following schedule for the years ended December 31, 1998, 1997, and
1996 is included in this report. Such schedule should be read in
conjunction with the consolidated financial statements in the Annual Report.

Report of Independent Accountants on Financial Statement Schedule
(see page 17).

Schedule II - Valuation and Qualifying Accounts and Reserves (see page 18).

Schedules not included in these financial statement schedules have been
omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.

3. Index to Exhibits

The following exhibits are filed as part of or incorporated by reference,
to the extent indicated herein, in this Annual Report on Form 10-K.

Exhibit No. Description (footnotes appear at the end of the exhibit list)

3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
3.2(a)
4.1(1) Stock Purchase Agreement dated April 14, 1977, between Registrant
and certain investors.
4.2(3) 10% Convertible Subordinated Notes Purchase Agreement dated
March 27, 1984, between Registrant and certain investors.
4.2(a)(2) Amendment to Subordinated Note Purchase Agreement dated March 27,
1990.
4.2(b)(9) Amendment to 10% Subordinated Note Agreement dated March 25, 1991.
4.3(4)* Security and Guaranty Agreement and Common Stock Purchase Warrant
between the Registrant and Freeman A. Ford dated
February 16, 1987.
4.3(a)(5)* Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated December 8, 1987.
4.3(b)(6)* Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated February 1, 1988.
4.3(c)(7)* Second Amendment to the Promissory Notes between the Registrant
and Freeman A. Ford dated March 26, 1991.
4.3(d)(9)* Form of Common Stock Purchase Warrant issued March 25,
1993 by the Registrant to Freeman A. Ford.
4.3(e)(9) Amendment to the Promissory Notes between the
Registrant and Freeman A. Ford dated March 25, 1993.
4.4(10) Common Stock Warrant issued January 19, 1994 to B. Severns.
4.5 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2 Reference Exhibit 4.2, 4.2(a), and 4.2(b).
10.3(7)* 1981 Incentive Stock Option Plan.
10.4(7)* Form of 1981 Incentive Stock Option Agreement.
10.8(1) Standard Form of Distributor Agreement.
10.9(7) Lease Agreement and Addenda for 2690 Middlefield Road,
Redwood City, California, between Registrant, as Lessee, and
Beals Martin and Associates, as Lessor, dated January 18, 1990.
10.10(3) FAFCO Solar Partners II Certificate of Limited Partnership and
Limited Partnership Agreement.
10.11 Reference Exhibits 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and
4.3(e).
10.12(6) Licensing Agreement between the Registrant, as Licensor, and
Enercon Engineering, as Licensee, dated May 20, 1988.
10.13(6)* Form of Director's Warrant issued February 1988 to directors
Berry and Selig.
10.14(11)* 1991 Stock Option Plan, as amended.
10.14(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option
Plan.
10.15(8)* 1991 Directors' Stock Option Plan.
10.15(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991
Director's Stock Option Plan.
10.16(8)* Employee Stock Purchase Plan.
10.16(a)(8)* Form of Subscription Agreement used under Employee Stock
Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the Registrant, as
Licensor, and Jang-Han Systems Engineering, as Licensee, dated
January 1, 1993.
10.18(10) Export - Import and Technical License Agreement between the
Registrant, as Licensor, and Ebara Corporation, as Licensee,
dated October 22, 1993.
10.19(10) Business Loan Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated June 10, 1992.
10.19(a)(10) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated March 8, 1994.
10.19(b)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated June 5, 1995.
10.19(c)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated August 7, 1995.
10.19(d)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated September 22, 1995.
10.19(e)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated February 8, 1996.
10.19(f)(13) Loan Modification agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated October 30, 1996.
10.19(g)(13) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated December 11, 1996.
10.19(h)(13) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 6, 1997.
10.19(i)(13) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 21, 1997.
10.19(j)(14) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, a Lender, dated April 1, 1998.
10.19(k) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, a Lender, dated March 22, 1999.
10.20(11) Agency/Distributorship Agreement between Registrant as
Manufacturer and Jabria Establishment, as Agent/Distributorship,
dated December 10, 1994.
11.1 Computation of Earnings Per Share (see Note 12 of Notes to
Consolidated Financial Statements on the 1997 Annual Report).
13.1 Registrant's 1998 Annual Report to Shareholders.
18.1(14) Letter re change in Accounting Principle from Burr, Pilger &
Meyer dated November 5, 1997.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 20)
24.1 Power of Attorney (see page 19).
27.1 Financial Data Schedule.

* Denotes a management contract or compensatory plan or arrangement.

(1) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form S-1 (File No. 2-72297) filed May 14, 1981.
(2) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989.
(3) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1983.
(4) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.
(5) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.
(6) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988.
(7) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990.
(8) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.
(9) Incorporated by reference to exhibit filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.
(10) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(11) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(12) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(13) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(14) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10K for the fiscal year ended December 31, 1998.

(b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company
during the fourth quarter of 1998 .

(c) Exhibits: See subsection (a) (3) above.

(d) Financial Statement Schedules: See subsection (a) (2) above.

Report of Independent Accountants on
Financial Statement Schedule

To the Board of Directors of FAFCO, Inc.

Our audits of the consolidated financial statements referred to in our report
dated March 1,1999 appearing on page 13 of the 1998 Annual Report to
Shareholders of FAFCO, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

Burr, Pilger & Mayer
Palo Alto, California

March 29, 1999

FAFCO, Inc.

Schedule
II
Valuation and Qualifying Accounts and Reserves

Balance at Additions Charged
Beginning of to Cost and Balance at End of
Description Period Expenses Deductions Period

1998:
Allowance for
doubtful accounts
current accounts
receivable $540,100 $53,900 $57,700 (1) $536,300
short-term
receivable 126,400 126,400(1)
long-term
receivable 29,300 29,300
Warranty reserve 211,000 190,600 169,400 232,200
Deferred tax
asset valuation
allowance 708,000 534,800 173,200

1997:
Allowance for
doubtful accounts
current accounts
receivable $512,600 $172,600 $145,100 (1) $540,100
short-term
receivable 28,800 97,600 126,400
long-term
receivable 34,000 4,700 (3) 29,300
warranty reserve 234,100 85,600 108,700 (2) 211,000
Deferred tax
asset valuation
allowance 1,191,800 483,800 708,000

1996:
Allowance for
doubtful accounts
current accounts
receivable $463,900 $50,400 $1,700 (1) $512,600
short-term
receivable 28,800 28,800
long-term
receivable 39,100 5,100 (3) 34,000
Warranty reserve 216,000 94,100 76,000 (2) 234,100
Deferred tax
asset valuation
allowance 1,383,800 192,000 1,191,800

(1) Write-off of uncollectible accounts.
(2) Cost of warranty claims processed.
(3) Reclassification to allowance for short-term notes receivable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 29, 1999 FAFCO, Inc.

/s/Freeman A. Ford
Freeman A. Ford,
Chairman of the Board, President
and Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints
Freeman A. Ford and Alex N. Watt, or either of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

Chairman of the Board,
President and
March 29, 1999
/s/Freeman A. Ford Chief Executive Officer
Freeman A. Ford (Principal Executive
Officer) and Director

Vice President, Finance &
Administration March 29, 1999
/s/Alex N. Watt and Chief Financial Officer
Alex N. Watt (Principal Finacial
and Accounting Officer)

/s/William A. Berry Director March 29, 1999
William A. Berry

/s/Robert W. Selig, Jr. Director March 29, 1999
Robert W. Selig, Jr.

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-75201, 2-86299, 2-95390 and 33-76220) and
related prospectuses of FAFCO, Inc. of our report dated March 1, 1999,
appearing on page 13 of the 1998 Annual Report to Shareholders, which is
incorporated by reference in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 17 of this Form 10-K.

Burr, Pilger & Mayer
San Francisco, California

March 29, 1999

INDEX TO EXHIBITS
Exhibit No. Description

3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
3.2(a) Bylaws Certificate of Amendment
4.1(1) Stock Purchase Agreement dated April 14, 1977, between
Registrant and certain investors.
4.2(3) 10% Convertible Subordinated Notes Purchase Agreement dated
March 27, 1984, between Registrant and certain investors.
4.2(a)(2) Amendment to Subordinated Note Purchase Agreement dated
March 27, 1990.
4.2(b)(9) Amendment to 10% Subordinated Note Agreement dated March 25, 1991.
4.3(4)* Security and Guaranty Agreement and Common Stock Purchase
Warrant between the Registrant and Freeman A. Ford dated
February 16, 1987.
4.3(a)(5)* Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated December 8, 1987.
4.3(b)(6)* Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated February 1, 1988.
4.3(c)(7)* Second Amendment to the Promissory Notes between the Registrant
and Freeman A. Ford dated March 26, 1991.
4.3(d)(9)* Form of Common Stock Purchase Warrant issued March 25, 1993 by
the Registrant to Freeman A. Ford.
4.3(e)(9) Amendment to the Promissory Notes between the Registrant and
Freeman A. Ford dated March 25, 1993.
4.4(10) Common Stock Warrant issued January 19, 1994 to B. Severns.
4.5 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2 Reference Exhibit 4.2, 4.2(a), and 4.2(b).
10.3(7)* 1981 Incentive Stock Option Plan.
10.4(7)* Form of 1981 Incentive Stock Option Agreement.
10.8(1) Standard Form of Distributor Agreement.
10.9(7) Lease Agreement and Addenda for 2690 Middlefield Road,
Redwood City, California, between Registrant, as Lessee, and
Beals Martin and Associates, as Lessor, dated January 18, 1990.
10.10(3) FAFCO Solar Partners II Certificate of Limited Partnership and
Limited Partnership Agreement.
10.11 Reference Exhibits 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and
4.3(e).
10.12(6) Licensing Agreement between the Registrant, as Licensor, and
Enercon Engineering, as Licensee, dated May 20, 1988.
10.13(6)* Form of Director's Warrant issued February 1988 to directors
Berry and Selig.
10.14(11)* 1991 Stock Option Plan, as amended.
10.14(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option
Plan.
10.15(8)* 1991 Directors' Stock Option Plan.
10.15(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991
Director's Stock Option Plan.
10.16(8)* Employee Stock Purchase Plan.
10.16(a)(8)* Form of Subscription Agreement used under Employee Stock
Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the Registrant, as
Licensor, and Jang-Han Systems Engineering, as Licensee, dated
January 1, 1993.
10.18(10) Export - Import and Technical License Agreement between the
Registrant, as Licensor, and Ebara Corporation, as Licensee,
dated October 22, 1993.
10.19(10) Business Loan Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated June 10, 1992.
10.19(a)(10) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated March 8, 1994.
10.19(b)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated June 5, 1995.
10.19(c)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated August 7, 1995.
10.19(d)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated September 22, 1995.
10.19(e)(12) Loan Modification Agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated February 8, 1996.
10.19(f)(13) Loan Modification agreement between Registrant as Borrower, and
Silicon Valley Bank, as Lender, dated October 30, 1996.
10.19(g)(13) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated December 11, 1996.
10.19(h)(13) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 6, 1997.
10.19(i)(13) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 21, 1997.
10.19(j)(14) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, a Lender, dated April 1, 1998.
10.19(k) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, a Lender, dated March 22, 1999.
10.20(11) Agency/Distributorship Agreement between Registrant as
Manufacturer and Jabria Establishment, as Agent/Distributorship,
dated December 10, 1994.
11.1 Computation of Earnings Per Share (see Note 12 of Notes to
Consolidated Financial Statements on the 1997 Annual Report).
13.1 Registrant's 1997 Annual Report to Shareholders.
18.1(14) Letter re change in Accounting Principle from Burr, Pilger &
Meyer dated November 5, 1997.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 20)
24.16 Power of Attorney (see page 19).
27.1 Financial Data Schedule.

* Denotes a management contract or compensatory plan or arrangement.

(1) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form S-1 (File No. 2-72297) filed May 14, 1981.
(2) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
(3) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1983.
(4) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1986.
(5) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
(6) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
(7) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990.
(8) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.
(9) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(10) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(11) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(12) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(13) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(14) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10K for the fiscal year ended December 31, 1998.

(b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company
during the fourth quarter of 1998 .

(c) Exhibits: See subsection (a) (3) above.

(d) Financial Statement Schedules: See subsection (a) (2) above.