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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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


For the quarterly period ended September 30, 2003

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


For
the transition period from
                 to

Commission file number 0-10120

(FAFCO GRAPHIC)

FAFCO, Inc.

(Exact name of Registrant as specified in its charter)


California
    
    94-2159547(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)


435 Otterson Drive, Chico, California 95928
(Address, including zip code, of Registrants principal executive offices)

(530) 332-2100
(Companys telephone number, including area code)

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

Yes   [X]   No [   ]

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

Yes   [   ]   No [X]

At September 30, 2003, 3,891,529 shares of the Companys Common Stock, $.125
par value were issued and outstanding.



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TABLE OF CONTENTS



|                             |                                                                                       |  |  |  |  |  |  | 
|---------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Pt I  FINANCIAL INFORMATION
|                             | Item 1  Financial Statements                                                        
|                             | Item 2                                                                               
|                             | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                             | Item 3  Quantitative and Qualitative Disclosures About Market Risk                  
|                             | Item 4  Controls and Procedures                                                     
|Part II  OTHER INFORMATION 
|                             | Item 2  Changes in Securities and Use of Proceeds                                   
|                             | Item 5  Other Information                                                           
|                             | Item 6  Exhibits and Reports on Form 8-K                                            
|SIGNATURE                   
|EXHIBIT INDEX               
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32                  



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Pt I  FINANCIAL INFORMATION




Item 1  Financial Statements

FAFCO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET

September 30, 2003
    
    December 31, 2002(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    586,400
    
    
    $
    100,400Accounts receivable, less allowance for doubtful accounts of
$508,800 in 2003 and $292,000 in 2002
    
    
    1,712,100
    
    
    
    1,974,200Current portion of long term notes receivable
    
    
    11,400
    
    
    
    11,400Inventories
    
    
    1,104,400
    
    
    
    1,331,900Prepaid expenses and other current assets
    
    
    250,300
    
    
    
    264,200Other accounts receivable, net of allowance
    
    
    76,900
    
    
    
    9,600Deferred tax asset
    
    
    206,200
    
    
    
    206,200Total current assets
    
    $
    3,947,700
    
    
    
    3,897,900Property, plant and equipment, at cost
    
    
    8,415,300
    
    
    
    8,290,200Less accumulated depreciation and amortization
    
    
    (2,845,400
    )
    
    
    (2,490,800
    )5,569,900
    
    
    
    5,799,400Notes receivable less current portion and other assets (net)
    
    
    64,800
    
    
    
    72,000Deferred tax asset, net of allowance
    
    
    181,200
    
    
    
    272,400Total assets
    
    $
    9,763,600
    
    
    $
    10,041,700Liabilities and shareholders equityCurrent Liabilities:Notes payable to bank  current portion
    
    $
    151,500
    
    
    $
    229,300Accounts payable and other accrued expenses
    
    
    1,063,700
    
    
    
    1,292,300Accrued compensation and benefits
    
    
    295,400
    
    
    
    338,400Accrued warranty expense
    
    
    309,800
    
    
    
    291,700Total current liabilities
    
    
    1,820,400
    
    
    
    2,151,700Mortgage
    
    
    3,273,900
    
    
    
    3,284,600Notes payable to bank  less current portion
    
    
    167,900
    
    
    
    250,900Subordinated debt
    
    
    500,000
    
    
    
    500,000Other non-current liabilities
    
    
    9,000
    
    
    
    26,400Total liabilities
    
    $
    5,771,200
    
    
    $
    6,213,600Commitments and contingent liabilities
Shareholders equity:Preferred Stock-authorized 1,000,000 shares of $1.00 par
value, none of which has been issuedCommon Stock-authorized 10,000,000 shares of $0.125 par
value; 3,891,529 issued and outstanding as of September
30, 2003 and 3,855,591 issued and outstanding as of
December 31, 2002
    
    $
    486,400
    
    
    $
    481,900Capital in excess of par value
    
    
    5,139,100
    
    
    
    5,137,300Notes receivable secured by common stock
    
    
    (75,100
    )
    
    
    (75,100
    )Accumulated deficit
    
    
    (1,558,000
    )
    
    
    (1,716,000
    )Total shareholders equity
    
    $
    3,992,400
    
    
    $
    3,828,100Total liabilities and shareholders equity
    
    $
    9,763,600
    
    
    $
    10,041,700


The accompanying notes are an integral part of this statement.

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Part I  FINANCIAL INFORMATION  (continued)

FAFCO, Inc.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)

Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Net sales
    
    $
    2,679,100
    
    
    $
    3,495,200
    
    
    $
    10,650,700
    
    
    $
    11,768,000Other income (net)
    
    
    77,800
    
    
    
    49,800
    
    
    
    36,900
    
    
    
    25,900Total revenues
    
    
    2,756,900
    
    
    
    3,545,000
    
    
    
    10,687,600
    
    
    
    11,793,900Cost of goods sold
    
    
    1,706,600
    
    
    
    2,197,800
    
    
    
    6,146,500
    
    
    
    6,951,600Marketing and selling expense
    
    
    605,400
    
    
    
    577,500
    
    
    
    2,078,500
    
    
    
    1,950,800General and administrative expense
    
    
    507,400
    
    
    
    443,900
    
    
    
    1,759,100
    
    
    
    1,369,500Research and development expense
    
    
    65,900
    
    
    
    80,600
    
    
    
    214,700
    
    
    
    244,900Net interest expense
    
    
    73,600
    
    
    
    111,400
    
    
    
    230,600
    
    
    
    344,700Total costs and expenses
    
    
    2,958,900
    
    
    
    3,411,200
    
    
    
    10,429,400
    
    
    
    10,861,500Income before income taxes
    
    
    (202,000
    )
    
    
    133,800
    
    
    
    258,200
    
    
    
    932,400Provision for income taxes
    
    
    (70,000
    )
    
    
    45,800
    
    
    
    100,200
    
    
    
    350,800Net
income (loss)
    
    $
    (132,000
    )
    
    $
    88,000
    
    
    $
    158,000
    
    
    $
    581,600Basic net income (loss) per share
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.15Diluted net income (loss) per share
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.14


The accompanying notes are an integral part of this statement.

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Part I  FINANCIAL INFORMATION (continued)

FAFCO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Nine Months EndedSeptember 302003
    
    2002Cash flow from operating activities:Net income
    
    $
    158,000
    
    
    $
    581,600Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    382,100
    
    
    
    421,600Write offs and allowance for doubtful accounts
    
    
    217,000
    
    
    
    92,468Gain on disposition of fixed assets
    
    
    (5,600
    )
    
    
    (600
    )Change in assets and liabilities:Accounts receivable
    
    
    (22,200
    )
    
    
    (536,068
    )Inventories
    
    
    227,500
    
    
    
    (267,400
    )Prepaid expenses and other assets
    
    
    13,900
    
    
    
    (68,300
    )Deferred tax assets
    
    
    91,200
    
    
    
    291,400Payables and accrued expenses and other current liabilities
    
    
    (253,500
    )
    
    
    6,400Other non-current liabilities
    
    
    (17,400
    )
    
    
    (2,800
    )Net cash provided by operating activities
    
    
    791,000
    
    
    
    518,300Cash flow from investing activities:Purchase of fixed assets
    
    
    (153,000
    )
    
    
    (286,700
    )Proceeds from sale of fixed assets
    
    
    13,200
    
    
    
    600Net cash used in investing activities
    
    
    (139,800
    )
    
    
    (286,100
    )Cash flow from financing activities:Proceeds from exercise of stock options
    
    
    6,300Proceeds of subordinated debt issuance
    
    
    
    
    
    
    500,000Proceeds from bank line of credit
    
    
    977,700
    
    
    
    3,032,200Repayment of bank line of credit
    
    
    (977,700
    )
    
    
    (3,666,300
    )Repayment of notes payable to bank
    
    
    (160,800
    )
    
    
    (181,800
    )Repayment of mortgage
    
    
    (10,700
    )
    
    
    (21,300
    )Net cash used in financing activities
    
    
    (165,200
    )
    
    
    (337,200
    )Net decrease in cash and cash equivalents
    
    
    486,000
    
    
    
    (105,000
    )Cash and cash equivalents, beginning of period
    
    
    100,400
    
    
    
    121,200Cash and cash equivalents, end of period
    
    $
    586,400
    
    
    $
    16,200Supplemental disclosures of cash flow information:Cash paid during the period for interest
    
    $
    253,600
    
    
    $
    334,600Cash paid during the period for income taxes
    
    $
    4,000


Non-Cash Financing Activity

In January 2002, the Company recorded $28,800, the deemed fair value of the
warrants, to purchase common shares with the issuance of the subordinated
notes. See Note 4.

The accompanying notes are an integral part of this statement.

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Part I  FINANCIAL INFORMATION (continued)

FAFCO, Inc.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. The accompanying financial statements of FAFCO, Inc. (the Company) have
been prepared in accordance with accounting principals generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
However, in the opinion of the Companys management, all adjustments necessary
for a fair statement of results for the periods presented have been included.
The results for the period ended September 30, 2003 are not necessarily
indicative of results to be expected for the entire year. These financial
statements, notes, and analyses should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2002.

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

Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Net income (loss), as reported
    
    $
    (132,000
    )
    
    $
    88,000
    
    
    $
    158,000
    
    
    $
    581,600Add: Stock-based
compensation, as reported
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ADeduct: Total stock-based
compensation determined under
fair value based method for
all awards
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAdjusted net income (loss),
fair value method for all
stock-based awards
    
    $
    (132,000
    )
    
    $
    88,000
    
    
    $
    158,000
    
    
    $
    581,600Adjusted and diluted income
(loss) per share, as reported
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.15Basic and diluted income
(loss) per share, SFAS No
123 adjusted
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.14


2. Basic and diluted net income (loss) per share is calculated using the
weighted average number of common and common equivalent shares outstanding
during the periods presented. [See Note 5]

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

September 30, 2003
    
    December 31, 2002Raw materials
    
    $
    560,300
    
    
    $
    636,600Work in process
    
    
    243,500
    
    
    
    329,900Finished goods
    
    
    300,600
    
    
    
    365,400$
    1,104,400
    
    
    $
    1,331,900


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Part I  FINANCIAL INFORMATION  (continued)

4. The Company has a line of credit agreement with Butte Community Bank, which
allows the Company to borrow the lesser of $1,000,000 or an amount determined
by a formula applied to accounts receivable. Unused borrowing capacity was
$1,000,000 at September 30, 2003. Amounts borrowed bear interest at prime rate
plus 1.5% (5.5% at September 30, 2003) per annum and are secured by
substantially all the assets of the Company. This line of credit expires on
August 10, 2004.

In addition to the line of credit, the Company has a 60-month term loan in the
amount of $500,000 bearing interest at prime plus 1.5% (5.5% at September 30,
2003). At September 30, 2003, the Company had an outstanding balance of
$277,800 on this loan facility.

The Company had a 36-month term loan in the amount of $445,000, bearing
interest at prime plus 1.5 %. This loan was paid off in May 2003.

The Company has a $3,400,00 mortgage loan with a maturity date of June 10,
2030. Principal is amortized over a 29 1/2 year term from January 10,
2001. The initial interest rate on this mortgage loan was 9.05%. In November
2002, the interest rate was renegotiated and adjusted to 8%. In March 2003,
the interest rate was again renegotiated downward and is currently fixed at
6.75%. The interest rate will be changed on April 10th of each fifth year to
the then current prime rate plus .35%. The balance on this mortgage at
September 30, 2003, was $3,315,500.

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

5. Net Income Per Share

Basic earnings per share were calculated as follows:

Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Net income (loss)
    
    $
    (132,000
    )
    
    $
    88,000
    
    
    $
    158,000
    
    
    $
    581,600Average common shares outstanding
    
    
    3,891,529
    
    
    
    3,855,591
    
    
    
    3,870,168
    
    
    
    3,855,591Earnings (loss) per share
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.15


Basic earnings (loss) per share are calculated by dividing net income by the
weighted average number of shares issued and outstanding.

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Part I  FINANCIAL INFORMATION (continued)

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

Diluted earnings (loss) per share were calculated as follows:

Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Adjusted net income (loss)
    
    $
    (132,000
    )
    
    $
    88,000
    
    
    $
    158,000
    
    
    $
    581,600Average common shares outstanding
    
    
    3,891,529
    
    
    
    3,855,591
    
    
    
    3,870,168
    
    
    
    3,855,591Add: Exercise of options reduced by the number of
shares purchasable with proceeds
    
    
    N/A
    
    
    
    134,655
    
    
    
    133,376
    
    
    
    137,605Add: Exercise of warrants reduced by the number of
shares purchasable with proceeds
    
    
    N/A
    
    
    
    70,409
    
    
    
    69,154
    
    
    
    73,308Add: Exercise of warrants attached to debt reduced by
the number of shares purchasable with proceeds
    
    
    N/A
    
    
    
    71,264
    
    
    
    70,588
    
    
    
    72,826Adjusted weighted average shares outstanding
    
    
    3,891,529
    
    
    
    4,131,919
    
    
    
    4,143,286
    
    
    
    4,139,330Earnings (loss) per common share assuming full dilution
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.14


At September 30, 2003, options and warrants for the purchase of 125,500 shares
of common stock at prices ranging from $0.50 to $0.55 were antidilutive and
therefore not included in the computation of diluted earnings per share. At
September 30, 2002, options and warrants for the purchase of 145,500 shares of
common stock at prices ranging from $0.50 to $0.56 were antidilutive and
therefore not included in the computations of diluted earnings per share.

6. Business Segment and Concentration of Credit Risk

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

Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Product LineNet SalesPool Products
    
    $
    1,888,400
    
    
    $
    1,936,000
    
    
    $
    7,832,700
    
    
    $
    8,069,100Thermal Energy Products
    
    
    790,700
    
    
    
    1,559,200
    
    
    
    2,818,000
    
    
    
    3,698,900$
    2,679,100
    
    
    $
    3,495,200
    
    
    $
    10,650,700
    
    
    $
    11,768,000


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Part I  FINANCIAL INFORMATION  (continued)

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

Quarter Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Net SalesDomestic
    
    $
    2,325,300
    
    
    $
    2,501,500
    
    
    $
    8,995,400
    
    
    $
    9,246,800ForeignJapan
    
    
    50,100
    
    
    
    897,400
    
    
    
    1,091,500
    
    
    
    1,910,500Other
    
    
    303,700
    
    
    
    96,300
    
    
    
    563,800
    
    
    
    610,700$
    2,679,100
    
    
    $
    3,495,200
    
    
    $
    10,650,700
    
    
    $
    11,768,000


Long-lived assets:

September 30, 2003
    
    December 31, 2002Domestic
    
    $
    5,569,900
    
    
    $
    5,799,400


For the nine months ended September 30, 2003, the Company had one major
customer who accounted for 10% or more of sales totaling $1,091,500. For the
quarter ended September 30, 2003, the Company had one major customer who
accounted for 10% or more of sales totaling $289,800.

For the nine months ended September 30, 2002, the Company had one major
customer who accounted for 10% or more of sales, totaling $1,910,500. For the
quarter ended September 30, 2002, the Company had one major customer who
accounted for 10% or more of sales totaling $897,400.

Concentration of Credit Risk: Most of the Companys business activity is with
customers located in California, Florida and foreign countries. As of
September 30, 2003, unsecured trade accounts receivable for customers in
California, Florida, and foreign countries were $282,400, $1,371,600, and
$350,800.

7. Property, Plant and Equipment

Property, plant and equipment consist of the following:

September 30, 2003
    
    December 31, 2002Building
    
    $
    3,679,100
    
    
    $
    3,679,100Land
    
    
    550,400
    
    
    
    550,400Machinery and equipment
    
    
    2,706,100
    
    
    
    2,649,500Office and computer equipment
    
    
    567,200
    
    
    
    477,800Leasehold improvements
    
    
    599,800
    
    
    
    599,800Vehicles
    
    
    312,700
    
    
    
    333,600$
    8,415,300
    
    
    $
    8,290,200Less accumulated depreciation
and amortization
    
    
    (2,845,400
    )
    
    
    (2,490,800
    )$
    5,569,900
    
    
    $
    5,799,400


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Part I  FINANCIAL INFORMATION  (continued)




Item 2




MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)


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

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

Results of Operations

Net sales for the quarter ended September 30 decreased by 23.3 % to $2,679,100
in 2003 from $3,495,200 in 2002 and decreased by 9.5% to $10,650,700 in the
first nine months of 2003 from $11,768,000 in the corresponding period in 2002.

Net sales of the Companys pool products were 4.0% lower in the first nine
months of 2003 than in the corresponding period in 2002 due mainly to decreased
sales of its Above Ground Pool heating systems. The Company attributes this
decrease to poor weather conditions in the primary Above Ground Pool market.
IceStor sales were 25.6% lower in the first nine months of 2003 than in the
corresponding period in 2002 primarily due to decreased orders from the
Companys major customer in Japan.

Cost of goods sold decreased to $1,706,600 (63.7% of net sales) in the quarter
ended September 30, 2003 from $2,197,800 (62.9% of net sales) in the
corresponding period in 2002. This 22.3% decrease in absolute dollars was due
primarily to decreased sales. For the first nine months of 2003 cost of goods
sold decreased to $6,146,500 (57.7% of net sales) from $6,951,600 (59.1% of net
sales). This 11.6% decrease in absolute dollars was due to decreased sales
during the 2nd and 3rd quarters combined with increased production efficiencies
implemented during the 1st quarter.

Marketing
and selling expenses increased slightly in absolute dollars for the third
quarter to $605,400 (22.6% of net sales) in 2003 from $577,500 (16.5% of net
sales) in the third quarter of 2002. The increase as a percent of sales was
primarily due to the decrease in sales for the quarter. Marketing and selling expenses
increased to $2,078,500 (19.5% of net sales) for the first nine months of 2003
compared with $1,950,800 (16.6% of net sales) for the corresponding period in
2002. This 6.5% increase was due primarily to costs associated with market
research projects and sales incentive programs, along with increased lead
generation and personnel-related costs pertaining to the Companys retail
office in Tampa, Florida.

General and administrative expenses increased to $507,400 (18.9% of net sales)
in the third quarter of 2003 compared with $443,900 (12.7% of net sales) in the
third quarter of 2002, and to $1,759,100 (16.5% of net sales) for the first
nine months of 2003 compared with $1,369,500 (11.6% of net sales) in 2002.
This 28.4% increase in absolute dollars was due primarily to a $188,500
adjustment to the bad debt reserve due to business difficulties experienced by
a single large customer, and to costs associated with a proposed reverse stock
split. Additional contributing costs relate to a variety of business expenses
such as credit card processing fees and small equipment purchases along with
personnel-related costs pertaining to the Companys retail office in Tampa,
Florida.

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Part I  FINANCIAL INFORMATION  (continued)

Research and development expenses decreased to $65,900 (2.5% of net sales) in
the third quarter of 2003 from $80,600 (2.3% of net sales) in 2002 and
decreased to $214,700 (2.0% of net sales) for the first nine months of 2003
compared with $244,900 (2.1% of net sales) for the corresponding period in
2002. This 12.3% decline in absolute dollars was due to a reduction in
personnel resulting from a restructuring of the department.

Net interest expenses decreased to $73,600 (2.7% of net sales) in the third
quarter of 2003 compared with $111,400 (3.2% of net sales) in the third quarter
of 2002 and to $230,600 (2.2% of net sales) in the first nine months of 2003
compared with $344,700 (2.9% of net sales) in the corresponding period in 2002.
These decreases were primarily the result of a reduction in the interest rate
on the Companys mortgage on its facility in Chico, California, along with
decreased borrowings against the Companys line of credit and the pay-off of a
term loan facility.

Liquidity and Capital Resources

The Companys cash position increased to $586,400 at September 30, 2003 from
$100,400 at December 31, 2002. This increase was due to cash provided by
operations offset in part by purchases of fixed assets and pay down of accounts
and notes payable.

At September 30, 2003, the Companys net accounts receivable had decreased
to $1,712,100 from $1,974,200 at December 31, 2002 due to decreased sales along
with an increase to the bad debt reserve. This increase to the reserve was due
to an adjustment resulting from business difficulties experienced by a single
large customer and is not expected to have a significant effect on the
Companys liquidity.

At September 30, 2003, the Companys accounts payable and other accrued
expenses had decreased to $1,063,700 from $1,292,300 at December 31, 2002.
This was due primarily to decreased inventory purchases resulting from a
planned seasonal reduction of the Companys inventories.

At September 30, 2003, the Companys inventories had decreased to $1,104,400
from $1,331,900 at December 31, 2002 due to a planned seasonal reduction of the
Companys inventories.

At September 30, 2003, the Companys accrued compensation and benefits had
decreased to $295,400 from $338,400 at December 31, 2002, due primarily to
decreased payroll-related accruals offset in part by a build-up in the vacation
accrual.

At September 30, 2003, the Companys current ratio was 2.17:1.00 compared to
1.81:1.00 at December 21, 2002. The Company had working capital of $2,127,300
at September 30, 2003 compared with $1,746,200 at December 31, 2002. Total
assets exceeded total liabilities by $3,992,400 at September 30, 2003 compared
with $3,828,100 at December 31, 2002.

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

The Company has a line of credit, of which $0 was outstanding, and $1,000,000
remained available at September 30, 2003. This line of credit expires on
August 10, 2004.

The Company also has a 60-month term loan in the amount of $500,000 bearing
interest at prime plus 1.5%. At September 30, 2003, the Company had an
outstanding balance of $277,800 on this loan.

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Part I  FINANCIAL INFORMATION  (continued)

The Company has a $3,400,000 mortgage loan with a maturity date of June 10,
2030. Principal is amortized over a 29 1/2 year term from January 10,
2001. The initial interest rate on this mortgage loan was 9.05%. In November
2002, the interest rate was renegotiated and adjusted to 8%. In March 2003,
the interest rate was again renegotiated downward and is currently fixed at
6.75%. The interest rate will be changed on April 10th of each fifth year to
the then current prime rate plus .35%. The balance on this mortgage at
September 30, 2003, was $3,315,500.

The Company had a 36-month term loan facility in the amount of $445,000,
bearing interest at prime plus 1.5 %. This loan was paid off in May 2003.

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

At September 30, 2003, the Company owed an aggregate of $3,593,300 under
various bank credit facilities and $500,000 of subordinated notes. Payments
due under these credit facilities are as follows:

Totalamounts
    
    Amount of commitment expiration per periodcommittedLess than year
    
    1-3 years
    
    4-5 years
    
    Over 5 yearsBank term loans
    
    $
    277,800
    
    
    $
    110,000
    
    
    $
    167,800Mortgage
    
    
    3,315,500
    
    
    
    41,500
    
    
    
    145,100
    
    
    $
    122,900
    
    
    $
    3,006,000Notes
    
    
    500,000
    
    
    
    
    
    
    
    500,000Total
    
    $
    4,093,300
    
    
    $
    151,500
    
    
    $
    812,900
    
    
    $
    122,900
    
    
    $
    3,006,000


The bank may accelerate payment of the amount owed if the Company fails to meet
financial and other covenants set forth in the loan agreements. The Company is
currently in compliance with, or has obtained waivers for compliance with the
loan covenants.

The Company must maintain various loan covenants including a maximum debt to
net worth ratio; minimum current, quick, and cash flow ratios; minimum net
worth and working capital. Failure to meet these covenants could result in the
Companys loans being called or restricted by its bank.

Factors Affecting Future Results

U.S. Economic Conditions:A protracted U.S. recession could adversely impact
new housing and commercial construction in our largest market, which in turn
could cause us to miss our revenue goals.

Asian Economic Conditions:Sales in Japan and other Asian countries account
for virtually all our international sales, and contribute a significant portion
of our overall revenues. In the event that these economies experience
declining growth or contraction, our sales in these areas could be adversely
impacted.

Growth of U.S. Thermal Energy Storage (TES) Market:The Companys ability to
increase sales of its thermal energy storage products is dependent on growth in
the overall market because opportunities for market share growth are limited.
An extended recession in the general economy, a general decline in

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Part I  FINANCIAL INFORMATION  (continued)

construction of commercial properties or a decline in energy prices could all
adversely affect demand for thermal energy storage systems.

Destabilizing Incidents:Additional destabilizing events such as terrorist
attacks or overseas conflicts, if they occur, could disrupt our supply chain,
increase our materials costs, reduce demand for our products, and otherwise
negatively impact our operating results.

Materials Prices:Raw materials including polyolefin resins account for a major
portion of the Companys cost of sales. Any increase in these prices because
of supply shortages or otherwise would reduce its operating margins and
adversely impact its profitability.

Export sales:Products sold outside the United States 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.




Item 3  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk:The Company typically maintains only minimal investments
in interest bearing securities and accounts. As of September 30, 2003, the
Companys cash and cash equivalents and other interest bearing assets were
$586,400. Accordingly, a change in market interest rates would not have
significant impact on the value of the Companys assets or on interest income.

The Company is subject to fluctuating interest rates for variable rate bank
borrowings. These fluctuations may impact, adversely or otherwise, results of
operations or cash flows.

As of September 30, 2003, the Company has a mortgage in the amount of
$3,315,500 with a maturity date of June 10, 2030. The interest rate at
September 30, 2003 was 6.75%. The current interest rate is fixed
through April 10, 2008; the interest rate will be changed on April 10th of each fifth year to
the then current prime rate plus .35%.

Foreign Exchange Risk:The Company operates primarily in the United States,
and all domestic sales to date have been made in U.S. dollars. Although
significant portions of the Companys revenues are contributed by overseas
sales, these sales are always denominated in U.S. dollars. Accordingly, there
has not been any material exposure to foreign currency rate fluctuations.

Equity Market Risk:FAFCO did not hold any equity securities of other
companies as of September 30, 2003. Accordingly, it has not had any material
exposure to equity market fluctuations.




Item 4  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Companys chief executive officer and chief financial officer, after
evaluating the Companys disclosure controls and procedures (as defined in
Securities Exchange Act of 1934 (the Exchange Act) Rules 13a-14c and 15-d as
of a date (the Evaluation Date) within 90 days before the filing date of this
Quarterly Report on Form 10Q have concluded that as of the Evaluation Date, the
Companys disclosure controls and procedures are effective to ensure that
information it is required to disclose in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.

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Part I  FINANCIAL INFORMATION  (continued)

(b) Changes in internal controls.

Subsequent to the Evaluation Date, there were no significant changes in the
Companys internal controls or in other factors that could significantly affect
its disclosure controls and procedures, nor were there any significant
deficiencies or material weaknesses identified in its internal controls. As a
result, no corrective actions were required or undertaken.




Part II  OTHER INFORMATION




Item 2  Changes in Securities and Use of Proceeds

In July, 2003 the Companys Board of Directors approved, and on October 29,
2003 proxy material was sent to shareholders regarding, a proposed reverse
stock split whereby each 1000 shares of the Companys common stock held by the
shareholder would be converted to one post-split share of common stock.
Shareholders owning less than 1000 shares of common stock would receive $0.70
per share for each share of pre-split common stock owned as of the effective
date of the reverse stock split. If the stock split is approved by
shareholders on November 21, 2003, the effective date of the reverse stock
split is expected to be November 24, 2003.

Upon consummation of the proposed stock split, the Company expects to have
fewer than 300 shareholders thus allowing it to deregister its shares under the
Securities Exchange Act of 1934 and cease being a reporting company with the
Securities and Exchange Commission.




Item 5  Other Information

Subsequent to the end of the quarter being reported on herein, the Company
terminated one of its largest distributors of the Companys swimming pool
heating systems located in San Diego, CA.

Although this may have a negative short-term effect on sales, the Company
expects to have alternative distribution set up in the San Diego territory by
the end of the year. The Company does not expect there to be any significant
effect on inventory, accounts receivable or bad debt as a result of this
termination.




Item 6  Exhibits and Reports on Form 8-K



|a. |  | Exhibits
|-- |  | --------

31.1
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002




|b. |  | Reports on Form 8-K
|-- |  | -------------------

No reports on Form 8-K were filed during the quarter ended September 30, 2003.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

FAFCO, Inc. (Registrant)DATE: November 12, 2003
    
    BY:
    
    /s/Freeman A. FordFreeman A. FordChairman of the Board, Presidentand Chief Executive Officer(Principal Executive Officer)DATE: November 12, 2003
    
    BY:
    
    /s/Nancy I. GarvinNancy I. Garvin,Vice President  Finance(Principal Financial and Accounting Officer)


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EXHIBIT INDEX

31.1
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002


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