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.